SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number 0-24520
IMSCO TECHNOLOGIES, INC.
(Name of small business issuer as specified in its charter)
DELAWARE 04-3021770
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
40 Bayfield Drive, North Andover, MA 01845
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (978) 689-2080
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.0001 par value
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 ___
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].
State Issuer's revenues for its most recent fiscal year:$0.
As of December 31, l997: (a) 6,516,536 Common Shares, $.0001 par value, of
the registrant were outstanding; (b) approximately 3,135,327 Common Shares were
held by non-affiliates; and (c) the aggregate market value of the Common Shares
held by non-affiliates was $8,230,233 based on the closing bid price of $2.625
per share on December 31, 1997. Shares of Common Stock held by each officer,
director and holder of 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed affiliates. The determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
<PAGE>
PART I
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
Section 21 E of the Securities Exchange Act of 1934, as amended, or subsequent
expansions or replacements of such sections, including information with respect
tothe Company's plans and strategy for its business. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "estimates", "feels", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause actual events or the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth below under the caption "Factors That May Affect Future Results" included
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Part II of this Annual Report on Form 10-KSB.
Item 1. DESCRIPTION OF BUSINESS
General
IMSCO Technologies, Inc., a Delaware corporation ("IMSCO" or the "Company")
is a development stage company. The Company develops and is attempting to
commercialize, market and license electrostatic separation products based on its
proprietary technologies. Electrostatic separation takes advantage of the
fundamental electrical properties of attraction, wherein unlike or opposite
charges attract each other, and repulsion, wherein like or the same charges
repel each other, and uses charged materials to selectively separate other
substances. In the last four years, the Company has developed several separation
technologies based on electrostatics combined with mechanical separation. This
technology was originally developed by the Company for the specific purpose of
separating viruses and viral particles from human plasma. In 1993, the Company
successfully designed an electrostatic separation technology which removes on
demand caffeine from brewed liquids, such as coffee and tea. The Company calls
its decaffeination technology the "DECAFFOMATIC" (herein "DECAFFOMATIC" or the
"Decaffeination System"). The Company calls its plasma separation technology the
"PLASMA PURE".
Having achieved separation of viral DNA and virus from plasma using the
PLASMA PURE in research and testing performed by the Company at the
Massachusetts General Hospital and the Mayo Clinic, the Company began
researching and developing other uses for the technology. Based on the Company's
internal laboratory testing and research conducted by the Company at the
University of Massachusetts in 1994 and 1995 and at the University of Akron in
1996 and 1997, the Company believes that the DECAFFOMATIC is capable of removing
in excess of 95% of the caffeine from brewed beverages such as coffee and tea.
In 1993, separate patent applications were filed by the Company with the U.S.
Office of Patents and Trademarks for the PLASMA PURE and DECAFFOMATIC separation
technologies. On August 22, l995 the Company was granted a patent by the United
States Patents and Trademarks Office, Patent No. 5,443,709 for "Apparatus for
Separating Caffeine From a Liquid Containing the Same".
<PAGE>
Previously in late 1996 and early 1997, the Company anticipated that the
decaffeinator would be incorporated into a commercial coffee brewer suitable for
the institutional user marketplace utilizing the coffee brewer electronics for
power to the decaffeinator. In late 1997 and early 1998, the Company determined
that it could design the decaffeination device to be self contained within the
brew basket, which is removable from the brewer, with its own independent power
source. It is believed by management that this design is superior to the earlier
version, more universal and interchangeable with different institutional coffee
brewer models and will be easier for the consumer to use and, hopefully, lead to
increased sales once the product is commercialized. Consequently, during 1997,
the Company continued to develop and test a DECAFFOMATIC device contained within
a detachable coffee brew basket for the institutional commercial marketplace.
The Company believes that it has substantially completed its research and
development of the DECAFFOMATIC technology and is ready to introduce its brew
basket decaffeination product to the commercial institutional coffee brewer
market in 1998.
The Company's objective is to become a leader in the development of
electrostatic separation market by capitalizing on its proprietary technology.
The Company's strategy is to initially focus on commercializing and launching
the DECAFFOMATIC products. Although due to limited financial and human resources
the Company was unable to conduct any significant research and development on
its PLASMA PURE technology, the the Company intends to pursue further research
and the development of the PLASMA PURE technologies when funding becomes
available. Although there can be no assurances, the Company intends to implement
its strategy by (i) continuing to establish manufacturing contracts with third
party manufactures for its products, (ii) expanding its research and development
activities for additional uses and applications applying its proprietary
technologies, and (iii) establishing marketing agreements, licensing agreements
and distribution agreements with recognized market leaders for marketing and
distribution of its products once developed.
In l995, the Company formally established a new subsidiary called Decaf
Products, Inc. ("DPI"), which was incorporated in the State of Delaware on April
5, l995, that will manufacture and directly market the DECAFFOMATIC technology
and products in North America. On September 20, 1996, DPI entered into a
Manufacturing and Distribution Agreement with NEWCO Enterprises, Inc. ("NEWCO"),
of St. Charles, Missouri to manufacture a coffee brew basket, incorporating the
decaffeination technology, for DPI's sales to the institutional coffee maker
marketplace in North America (the "NEWCO Agreement"). Under the NEWCO Agreement,
NEWCO was granted the exclusive right to market and distribute the products
incorporating the Company's decaffeination technology to the so-called "office
coffee supply" market segment in North America for a period of three years. Over
1997, the Company has been working with NEWCO to develop, design and test
working models, and assist in the design of molds for the production of the
decaffeination device. Although there are no assurance, it is anticipated that
sales under the NEWCO Agreement will occur in 1998. See "Business -Marketing and
- - Manufacturing."
On July 11, 1997, due to a refocus of the core business of Hughes, Edwards
& Price, Inc. ("Hughes") the Company and Hughes mutually discontinued a
Marketing Agreement wherein Hughes had been appointed the exclusive
representative to market the Company's decaffeination technology and products to
the institutional coffee maker marketplace, such
<PAGE>
as restaurants and hotels, excluding the office coffee supply market, in North
America for a period of three years (the "Hughes Marketing Agreement"). Although
there can be no assurance that it will be successful, the Company is currently
negotiating with new third parties to cover the institutionsl sales market
previously assigned to Hughes. Further, although there can be no assurances, the
Company intends to license the DECAFFOMATIC technology to another unrelated
company for manufacture, marketing and distribution in the rest of the world.
See "Business -Marketing."
In December 1995, the Company established another subsidiary, BioElectric
Separation and Testing, Inc. ("BEST"), a Delaware corporation, to further
conduct research and development on the PLASMA PURE and all related medical
applications of the Company's core electrostatic separation technology. The
Company has only considered limited basic research with respect to the PLASMA
PURE electrostatic separation technology and because of its limited financial
resources it was not able to conduct any significant research and development on
its PLASMA PURE technology in 1997. If adequate funding were available, it is
estimated that it would take approximately 18 months in order to conduct the
necessary clinical trials and research to submit the PLASMA PURE for approval by
the United States Food and Drug Administration ("FDA"). The PLASMA PURE has not
been submitted to the FDA for approval and, if submitted, there is no assurance
that it will be approved. Given the limited funds available to the Company and
consequent delays in conducting the necessary research and testing, the PLASMA
PURE would not possibly be submitted to the FDA, if at all after considering
further research results, until at least the second half of 1999 if funding were
obtained. See "Business - Research and Development."
On September 20, 1996, the Company entered into a media purchase agreement
("Media Purchase Agreement") and agreed to sell an aggregate of 1,136,364 shares
of its common stock, par value $.0001, to Proxhill Marketing, Ltd., a private
media and advertising company based in Colorado ("PML"), for the sales price of
$1.32 per share and received in consideration therefor prepaid media credits in
the amount of $1,500,000 to be used at the Company's direction by PML. Because
the marketing and advertising campaign for the Company's commerical brew basket
decaffeinator has not yet been implemented, at December 31, 1997 the Company
possessed $1,300,643 of prepaid media credits in its inventory to use for future
public relations, marketing and advertising.
The Company was originally formed in 1986 under the laws of the State of
Nevada. In 1987 the Company changed its corporate domicile from Nevada to
Massachusetts since the corporate operations were located in Massachusetts,
which was accomplished through action by the shareholders and the Board of
Directors in 1987. The Company's name at that time was IMSCO, Inc. In July 1996,
the Company was reincorporated in Delaware as IMSCO Technologies, Inc. In order
to effectuate this change, the Company proposed the implementation of the
following plan. In May 1996, the Company filed a Certificate of Incorporation in
Delaware incorporating a new wholly-owned subsidiary, IMSCO Technologies, Inc.
The Board of Directors of the Company at a meeting held in May 1996 voted,
subject to the adoption by the stockholders, to merge into its wholly-owned
subsidiary, IMSCO Technologies, Inc., a Delaware corporation. On July 9, 1996,
the stockholders of IMSCO, Inc., voted to approve the change of corporate
domicile from Massachusetts to Delaware. Therefore, on July 18, 1996, there
remained one surviving corporation and the name of this surviving corporation
became IMSCO Technologies,
<PAGE>
Inc. As of the effective date of the merger, each stockholder of the
Company held one share of common stock, par value $.0001 per share, of IMSCO
Technologies, Inc. for each one share of common stock, par value $.001 per
share, of IMSCO, Inc. previously held by him. Unless the context otherwise
requires, "IMSCO" and the "Company" refer to IMSCO Technologies, Inc., a
Delaware corporation.
PRODUCTS AND TECHNOLOGIES
The Company is in the development stage, and has only recently begun to
enter the early stage of product commercialization with its DECAFFOMATIC
products. The development of any products will require significant further
research, development, testing and regulatory approvals and additional
investment prior to commercialization. Substantially all of the Company's
resources have been, and for the foreseeable future will continue to be,
dedicated to the discovery, development and commercialization of electrostatic
separation technologies, most of which are still in the early stages of
development and testing. While the Company believes that the development of the
DECAFFOMATIC technology is substantially complete, most of 1997 was devoted to
further development, design and testing of the decaffeination device as a self
contained device within a detachable commercial brew basket market. The detail
engineering necessary for the manufacture of production molds was recently
completed and it is anticipated that the Company will be able to introduce the
DECAFFOMATIC commercial brew basket market in 1998. However, there are a number
of challenges that the Company must successfully address to complete any of its
development efforts. With respect to PLASMA PURE, although the results of
initial basic research by the Company and/or its collaborators was positive, it
may be inconclusive and may not be indicative of results that will be obtained
in human clinical trials if conducted by the Company. If the Company is able to
obtain necessary funding and conducts clinical trials, as results of particular
preclinical studies and clinical trials are received by the Company, the Company
may abandon projects such as PLASMA PURE, which it might otherwise have believed
to be promising. The Company presently is pursuing product opportunities that
will require extensive additional capital investment, research, development,
testing, regulatory clearance or approvals prior to commercialization. There can
be no assurance that the Company's development programs will ever obtain
necessary capital funding, will be successfully completed, or that required
regulatory clearance or approvals will be obtained on a timely basis, if at all.
In addition, the product development programs conducted by the Company and
its collaborators are subject to risks of failure inherent in the development of
product candidates based on new technologies. These risks include the
possibility that the technologies used by the Company will prove to be
ineffective or any or all of the Company's products or technologies needing FDA
clearance will prove to be unsafe or toxic or otherwise fail to receive
necessary regulatory approvals; that the product candidates, if safe and
effective, will be difficult to manufacture on a large scale or uneconomical to
market; that the proprietary rights of third parties will preclude the Company
or its collaborators from marketing products utilizing the Company's
technologies; or that third parties will market superior or equivalent products.
Accordingly,
<PAGE>
there can be no assurance that the Company's research and development activities
will result in any commercially viable products. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business -
"Research and Development" and "- Competition."
DECAFFOMATIC
TECHNOLOGY RESEARCH AND DEVELOPMENT
In 1993, using its electrostatic separation technology, the Company
designed, researched and developed a successfully working prototype of the
DECAFFOMATIC device. Throughout 1994 and 1995 the Company continued to further
research and develop the DECAFFOMATIC device. To facilitate this development, in
October 1994, the Company entered into a Memorandum of Understanding with the
University of Massachusetts whereunder the Company would use the University's
facilities and engage certain of the University's professors and students to
perform further research and development on the DECAFFOMATIC device as directed
by the Company. Throughout l995, the Company continued to utilize the services
of the University of Massachusetts to conduct its research and development
activities. In 1996, the Company entered into a collaborative Research Agreement
with the Polymer Sciences Division of the University of Akron, for further
development of the electrostatic decaffeination technology. The Company paid
$10,000 per month for the use of the University of Akron's facilities and the
dedication of certain professors to the Company's project which continued into
1997. The specific focus of the Akron Research Agreement was to select the
polymers to be utilized in the decaffeination device. Under the Akron Research
Agreement, the Company believes that it has substantially completed the research
and development of its decaffeination technology.
MARKET
The IMSCO separation technology has enabled the Company to build a stand-alone
decaffeinator which may be used immediately after brewing to customize the
product to individual taste and need. Throughout l995, the Company continued to
further develop and refine the DECAFFOMATIC technology in several working
prototypes that are used for demonstration and testing purposes. Previously in
late 1996 and early 1997, the Company and NEWCO anticipated that the
decaffeinator would be incorporated into the coffee brewer, utilizing the coffee
brewer electronics for power, and had designed the commercial decaffeinator in
such manner. In late 1997 and early 1998, the Company determined that it could
design the decaffeination device to be self contained within the brew basket,
which is removable from the brewer, with its own power source. It is believed by
management that this design is superior to the earlier version, more adaptable
and interchangeable with different institutional coffee brewer models and will
be easier for the consumer to use and, hopefully, lead to increased sales. Thus,
in late 1997 and early 1998, the Company continued to develop, refine and test
its commercial brew basket decaffeinator. The detail engineering necessary for
the manufacture of production molds for the brew basket decaffeinator was
recently completed. The commercial customer-user will need to only buy regular
coffee or tea and decaffeinate the brewed beverage on demand for those who want
the decaffeinated product. The Company anticipates that this will result in
considerable cost saving for the consumer. Although there can be no assurance,
<PAGE>
in the institutional marketplace, the Company believes that such an integrated
decaffeinator will produce more significant cost savings, given the difference
in price of decaffeinated ground coffee beans over regular ground coffee beans.
The Company believes that this benefit is of primary concern to senior citizens
who are on a fixed income and at the same time, are the largest growing segment
of the population. The Company feels that this group is also the one that is
most health conscious and concerned about chemical treatment of coffee in most
other decaffeination processes. There is no chemical treatment in the Company's
process.
Management believes that removal of caffeine from coffee and tea is
recognized as a desirable goal for health and other reasons. The Company's
research has revealed that no technology now exists for removal of caffeine from
hot freshly brewed liquids; rather, the current technology removes caffeine from
the beans prior to brewing.
The decaffeination process of coffee and tea has been popular since the mid
1930's. It was initially started by General Foods and then adapted by Nestle's
and other multi-national companies. The first decaffeination process was a
chemical method that used Methylene Chloride. This method is still employed
today, however, not as widely. The Company believes that the chemical extraction
method is not desirable because of the harsh chemicals and health issues raised
by their use. As consumers became more health conscious in the 1980's, the use
of decaffeinated products increased. A method more frequently used utilizes
repetitive washes of the coffee beans with clean water. Although this water
treatment process is the method of choice for most coffee roasters today, the
Company believes that it is more costly and ultimately less convenient for the
consumer.
The Company is planning to market the DECAFFOMATIC devices directly in the
United States through its DPI subsidiary. The Company intends to have NEWCO
contract manufacture the DECAFFOMATIC device on an OEM basis for the Company's
North American sales.
The Company intends to focus its decaffeination technology marketing on its
internal decaffeinator for use with the automatic drip coffee maker for both
institutional and home consumer products. This integrated system has the
DECAFFOMATIC separation device directly incorporated into the coffee maker, such
that the decaffeination occurs as the consumer directs on demand as a normal
step in the coffee maker brewing process.
PLASMA PURE
TECHNOLOGY RESEARCH AND DEVELOPMENT
The Company has designed, prototyped and done promising basic research on
the PLASMA PURE electrostatic/mechanical separation device for the express
purpose of separating virus and viral particles from human plasma. Due to
limited financial resources, no significant resarch and development was
conducted on the PLASMA PURE technology in 1997. Based on its initial research ,
although there can be no assurance, the Company believes that the PLASMA-PURE
has the capacity to remove a substantial amount of the viral population from a
unit of contaminated plasma without adversely affecting the clotting factors.
Because of the high cost of conducting medical research and development testing
on the PLASMA PURE and the Company's limited financial
<PAGE>
resources, the Company was only able to conduct very limited research on the
PLASMA PURE over the past year. It is estimated by the Company that if it is
able to obtain adequate financing to complete its research and development on
the PLASMA PURE technology, of which there can be no assurance, it would take
approximately 18 months of testing before making application to the FDA for
approval, which cannot be assured. Although significant amounts of research need
to be conducted, the Company believes that PLASMA PURE, with its capability of
removing viruses and viral particles, if eventually developed and approved, may
significantly reduce the risk normally associated with transfusion of plasma or
plasma components. Although significant additional research needs to be
conducted, management believes that the use of PLASMA PURE to filter fresh
frozen plasma may not significantly decrease yields of the clotting components.
This is achieved because of the unique electrostatic internal matrix which
enables the plasma and its clotting components to flow freely through the
device, but still remove significant amounts of virus and viral particles. The
methods currently used to inactivate viruses in plasma such as the use of
detergents or extreme heat all have the possible adverse effect of limiting the
yield of final desired procoagulant products.
MARKETS
The Company believes the PLASMA PURE system and its electrostatic technology
offer various growth possibilities for the Company; however, each of these areas
will require significant further research and development, the financing of such
efforts and FDA approval before they can be commercialized. The Company has also
designed and is in the earliest research and development stage for a new product
that is an extension of the PLASMA PURE separator appropriately called PLASMA
PURE PLUS. It would be used only for bulk plasma fractionation and therefore be
larger than PLASMA PURE and priced differently. Another follow-up product that
the Company would like to conduct research and development on if adequate
financing were available, which the Company does not currently possess, is a
modified white blood cell filter. This device would utilize the same technology
as PLASMA-PURE, and therefore management believes its introduction could be more
rapid than it has been for the PLASMA PURE device. Management feels a second
version of the white blood cell filter could then be marketed to the diagnostic
reagent market. However, given the numerous uncertainties and risk inherent with
medical research in general, and blood research in particular, the needed
financing involved to conduct such research which the Company currently does not
possess, there can be no assurance that any of these plasma products and devices
will ever be finally developed, or if completed that they will receive approval
from the FDA or the comparable regulatory authority of any foreign jurisdiction.
The Company has not prepared or made application to the FDA or any governmental
authority for approval of its PLASMA PURE device or related products.
The Company believes that the core electrostatic separation technology
lends itself to other markets as well, particularly air filtration for
hospitals, convention centers and airplanes. Although it needs significant
amounts of additional research and testing and the financial resources to
conduct such activities, which the Company does not currently possess, the
Company believes that its electrostatic separation technology can be applied to
extra corporeally based immunotherapies which involve an improved system for
drug administration and improved systems for removal and/or treatment of cells
or other circulating materials (including byproducts of metabolism).
<PAGE>
Similar to DPI, in 1996, the Company established a new Delaware corporation
subsidiary, BioElectric Separating & Testing, Inc. ("BEST") to conduct the
continued research and development activities and pursue FDA application
relating to the PLASMA PURE and related technologies.
MARKETING
Except for the marketing of the DECAFFOMATIC products in North America
through DPI, the Company's current strategy is to license its products and
technologies to other companies which have pre-existing industry presence in
their respective fields and to enter into collaborative arrangements with such
companies to develop new applications for the technology with the contract
partner's own products. The Company has limited experience in sales, marketing
and distribution. Therefore, the Company's strategy for commercialization of its
products includes entering into agreements with other companies to market
current and certain future products incorporating the Company's technology. To
date, the Company has one such agreement with NEWCO. There can be no assurance
that the Company will be able to enter into additional marketing agreements on
terms favorable to the Company, if at all, or that current or future agreements
will ultimately be beneficial to the Company.
The large institutional marketplace brew basket decaffeinator will be
manufactured by NEWCO. Previously in 1996 and early 1997, the Company and NEWCO
anticipated that the decaffeinator would be incorporated into the coffee brewer,
utilizing the coffee brewer electronics for power. In late 1997 and early 1998,
the Company determined that it could design the decaffeination device to be self
contained within the brew basket, which is removable from the brewer, with its
own power source. It is believed that this design is superior to the earlier
version, more interchangeable with different coffee brewer models and will be
easier for the consumer to use. As of this date, the detail engineering for the
production molds has been completed for the institutional coffeemaker-brew
basket that will be used for large institutions. After that model is assembled,
it will be further tested and developed to confirm that it has all the desired
specifications, such as brewing and decaffeination speed, ease of customer
removal of the separation device and safety design. Although there can be no
assurances, it is anticipated that such final design refinements to the working
model will be completed in 1998 and that sales orders could commence thereafter.
To create a potential customer awareness of the Company's Decaffeination
System, the Company intends to commence a public relations and advertising
campaign in 1998. The Company will attempt to employ lower cost public relations
at trade shows, in trade publications and at other appropriate food or kitchen
appliance shows and events. Initially, the advertising employed by the Company
will be print media consisting of magazines, newspapers and point of purchase
signage. To finance this public relations and advertising, the Company has the
prepaid Media Credits from PML. At December 31, 1997 the Company had $1,300,643
of prepaid media credits available for such marketing and advertising.
<PAGE>
Media Purchase Agreement
Under the Media Purchase Agreement with PML, it contractually agreed to
finance $1.5 million of media for the Company's public relations and advertising
campaign through Grow Marketing Services ("GROW"), an independent marketing
company. In exchange for the Company issuing 1,136,363 shares of its common
stock, representing a price of $1.32 per share, the Company acquired the $1.5
million of prepaid, dedicated media credits (the "Media Credits") and certain
media services.
The media advertising services provided by GROW include conducting market
research services for the purpose of formulating a media plan to optimize the
benefits of the media advertising campaign. Then, GROW secures suitable
advertising time on television, radio, or cable systems, or advertising space in
newspapers, magazines, or other publications of mass appeal.
At the closing of a media purchase transaction Proxhill will deliver cash,
media, media credit and/or other media-related assets to GROW as payment for
media credit extended to the Company. Proxhill then delivers to the Company a
pre-paid purchase order acknowledging the Company's right to purchase media from
GROW under the terms set forth in the Agreement.
The Company intends to use the remaining $1,300,643 of prepaid Media
Credits to finance the introduction and initial product advertising and
marketing support for the DECAFFOMATIC products in the United States and Canada.
Given that DPI is newly formed and has conducted no independent market
research or consumer focus groups activities, there can be no assurance that DPI
will be successful in introducing the DECAFFOMATIC technology to the consumer
public, that it will have any commercial level of acceptance by the public or
that if there is some level of commercial acceptance, that it will be sufficient
for the Company of DPI to continue supporting a marketing and advertising
program or that such efforts will ever be profitable.
The Company has only recently commenced limited marketing activities.
Achieving market acceptance for the Company's products will require substantial
marketing efforts and the expenditure of significant funds. There can be no
assurance that the Company and its marketing contractors and partners will be
able to commercialize successfully or achieve market acceptance of the Company's
products and technologies. There is no assurance that the Company will be able
to create a successful marketing program, or that the Company's products can be
sold in a manner that will permit the Company to achieve long range
profitability. Further, there can be no assurance that the Company's competitors
will not develop competing technologies that are less expensive or otherwise
superior to the products of the Company. The failure to market successfully the
Company's products would have a material adverse effect on the Company's results
of operations and financial conditions.
The Company is dependent for product sales revenues upon the success of its
third party marketing partners in performing their responsibilities. The amount
and timing of
<PAGE>
resources which may be devoted to the performance of their contractual
responsibilities by its marketing partners are not within the control of the
Company. There can be no assurance that such marketing partners will perform
their obligations as expected, pay any additional revenue or license fees beyond
the stated minimums to the Company or market any products under the marketing
agreements, or that the Company will derive any revenue from such arrangements.
Moreover, certain of the agreements provide for termination under certain
circumstances. There can be no assurance that the interests of the Company will
coincide with those of its marketing partners or that the marketing partners
will not develop independently or with third parties products which could
compete with the Company's products, or that disagreements over rights or
technology or other proprietary interests will not occur. To the extent that the
Company chooses not to or is unable to enter into future agreements, it would
experience increased capital requirements to undertake the marketing or sale of
its current and future products. There can be no assurance that the Company will
be able to market or sell its current or future products independently in the
absence of such agreements.
Research and Development; Collaborative Arrangements
The Company conducts its research and development activities through its own
staff and facilities, as well as through collaborative arrangements with
universities, and independent consultants. However, at present the Company has
only four full-time employees, two of whom are devoted to research and
development, and, accordingly is dependent upon third parties to conduct
significant research and development, laboratory testing, clinical studies, and
the procedures and processes necessary to apply for and, if possible, obtain FDA
and other regulatory approvals and manufacture and market a finished product.
As is the case with the University of Massachusetts and the University of Akron,
it is believed by the Company that the use of outside collaborative research
agreements is the most efficient method to have certain aspects of its
technology further researched and developed while minimizing the capital
investment such ventures require from the Company.
Although the Company had entered into an agreement with the Massachusetts
General Hospital to conduct collaborative research on the initial PLASMA PURE
separation technology, that agreement expired in June 1993. To facilitate the
development of its DECAFFOMATIC technology, in October 1994 the Company entered
into a Memorandum of Understanding with the University of Massachusetts
whereunder the Company would use the University's facilities and engage certain
of the University's professors and students to perform further research and
development on the DECAFFOMATIC device as directed by the Company. The Company
conducted various research and development activities, primarily pertaining to
the DECAFFOMATIC technology, at the University of Massachusetts facilities
during 1994 and l995.
In 1996, the Company entered into a collaborative Research Agreement with the
University of Akron to further develop and finalize the polymer that the Company
will be using for the DECAFFOMATIC separator. Under the University of AKRON
Research Agreement,
<PAGE>
which was in effect through the first quarter of 1997, the Company paid $10,000
per month to the University for the services enumerated in the Agreement.
The Company believes that research facilities and arrangements necessary to
continue its further research and development of its electrostatic separation
technologies are readily available. From July 1992 to December 31, l997, the
Company incurred a development stage deficit of $5,920,317. Provided that it is
able to obtain financing, of which there can be no assurance, the Company
anticipates incurring significant research and development expenditures in the
future as the Company continues its efforts to develop further applications and
uses for its present separation technologies and as it begins to research other
technologies.
MANUFACTURING
The Company currently does not own or operate manufacturing facilities for
commercial production of its DECAFFOMATIC or any other products. In addition,
the Company has no intention of acquiring or developing any manufacturing
facilities. Instead, the Company intends to rely on third party contract
manufacturers to manufacture its products. There can be no assurance that such
arrangements will be successful or that the contract manufacturer will be able
to develop or provide adequate manufacturing capabilities for commercial scale
production. Although it has no plans or intentions of doing so, in the event the
Company decides to establish a commercial scale manufacturing facility, the
Company will require substantial additional funds and personnel and will be
required to comply with extensive regulations applicable to such facility. There
can be no assurance that the Company will be able to develop adequate commercial
manufacturing capabilities either on its own or through third parties.
The NEWCO Manufacturing and Distribution Agreement.
On September 20, 1996, the Company entered into the NEWCO Agreement for
certain institutional manufacturing and marketing of the Decaffeination System.
NEWCO is a privately held corporation based in St. Charles, Missouri, and is one
of the larger manufacturers and distributors of institutional coffeemaking
equipment in North America. The Company agreed that NEWCO will have the
exclusive right to sell the DECAFFOMATIC to so-called "Office Coffee Supply"
("OCS") subsection of the institutional coffeemaker market and will be the
manufacturer of the DECAFFOMATIC for the institutional marketplace in North
American for a period of three years. NEWCO further agreed to sell or purchase
from the Company for the OCS market a minimum of 25,000 units of the product for
the first year, 50,000 units for the second year and 100,000 units the third
year. In consideration and on account of the exclusive arrangement under the
NEWCO Agreement, NEWCO has also agreed to pay the costs and expenses of all
materials and services which NEWCO shall incur in the development of the
DECAFFOMATIC device for the institutional coffeemaker marketplace. All of the
technology and final commercial model designs of the Decaffeination System will
be the property of the Company.
<PAGE>
Under the NEWCO Agreement, the Company will sell units of the
Decaffeination System to NEWCO for a net price to the Company. NEWCO will take
the Decaffeination System and in turn incorporates it into its coffeemakers and
re-sells it to a variety of end users in the OCS marketplace. The terms of the
minimum purchase by NEWCO are mandatory and are not subject to, or conditioned
upon, NEWCO's ability to sell the units acquired. All servicing and customer
calls will be performed by NEWCO. The Company can terminate the NEWCO Agreement
if NEWCO fails to make the specified minimum number of Decaffeination System
purchases.
The Company believes that its exclusive agreement with NEWCO in the areas
covered will allow it to establish a presence in the market more quickly and on
a more cost-effective basis than it could achieve by building its own
manufacturing facility or its own sales, marketing and service network in the
relatively fragmented OCS market, that consists primarily of small office users.
The Company's electrostatic separation devices are manufactured from
generally available materials, and the Company is not dependent upon any single
supplier. The Company believes that there are numerous third party contract
manufacturers similar to NEWCO available around the world who can manufacture
its DECAFFOMATIC products on an OEM basis. The Company currently has
insufficient resources to establish and conduct its own commercial manufacturing
activities with respect to its proposed products. If the Company, in the future,
decides to establish its own manufacturing facilities and capabilities, at least
for certain products, it would require substantial additional funds and
personnel.
GOVERNMENT REGULATIONS
The production and marketing of some of the Company's products, including the
PLASMA PURE, will be subject to regulation for safety and efficacy by numerous
federal, state and local agencies, and comparable agencies in foreign countries.
The Company's PLASMA PURE system will be considered a medical device. As such,
the FDA would require the Company to apply for and obtain either a premarket
notification clearance under Section 510(k), or a PMA prior to sales and
marketing of the device in the United States. The 510(k) premarket notification
may be obtained if the medical device manufacturer can establish that the newly
developed product is substantially equivalent to another legally marketed
device. The FDA may also require clinical data or other evidence of safety and
effectiveness. In the United States, the FDA Act, govern or influence the
testing, manufacture, safety, labeling, storage, record keeping, approval,
advertising and promotion of the Company's proposed products and technologies.
Under the FDA Act, the FDA regulates the preclinical and clinical testing,
manufacturing labeling, distribution, sale and promotion of medical devices in
the United States. The FDA prohibits a device, whether or not cleared under a
510(k) premarket notification or approved under a PMA, from being marketed for
unapproved clinical uses.
Non-compliance with applicable requirements can result in fines and other
judicially imposed sanctions including the initiation of product seizures,
injunction actions, mandatory recalls and criminal prosecutions based on
products, promotional
<PAGE>
practices, or manufacturing practices that violate statutory requirements. In
addition, administrative remedies can involve voluntary recalls or cessation of
sale of products, administrative detention, public notice, voluntary changes in
labeling, manufacturing or promotional practices. The FDA also has the authority
to withdraw approval of instruments and devices in accordance with statutory
procedures.
The Company has not prepared or made application to the FDA or any
governmental authority for approval of the PLASMA PURE device or related
products. The FDA approval procedure involves completion of pre-clinical studies
and the submission of the results of these studies to the FDA an application.
Preclinical studies involve laboratory evaluation of product characteristics and
animal studies to assess the efficacy and safety of the product. Human clinical
trials are typically conducted in three sequential phases, but the phases may
overlap. Phase I trials consist of testing the product in a small number of
volunteers primarily for safety. In Phase II, in addition to safety, the
efficacy of the product is evaluated in a small patient population. Phase III
trials typically involve additional multi-center testing for safety and clinical
efficacy in an expanded population of patients at geographically dispersed test
sites. A clinical plan, or "protocol," accompanied by the approval of the
institutions participating in the trials, must be submitted to the FDA prior to
commencement of each clinical trial. The FDA may order the temporary or
permanent discontinuation of a clinical trial at any time if adverse safety
effects are observed in volunteers or patients. In addition, the FDA may request
Phase IV trials after approval to resolve any lingering questions.
The results of the pre-clinical and clinical studies on new medical devices
are then submitted to the FDA for approval to commence commercial sales.
Following extensive review, the FDA may grant marketing approval, require
additional testing or information or deny the application. Continued compliance
with all FDA requirements and the conditions in an approved application,
including product specifications, manufacturing process, labeling and
promotional material and record keeping and reporting requirements, is necessary
for all products. Failure to comply, or the occurrence of unanticipated adverse
effects during commercial marketing, could lead to the need for labeling
changes, product recall, seizure, injunctions against distribution or other
FDA-initiated action, which could delay further marketing until the products are
brought into compliance.
The preparation of required applications and subsequent FDA and foreign
regulatory approval process is expensive, lengthy and uncertain. If the
manufacturer cannot establish equivalence or if the FDA determines that the
device requires more extensive review, the FDA will require the submission of
PMA. The PMA must contain nonclinical and clinical investigation results, a
description of the methods, facilities and controls used for manufacturing, and
the proposed labeling for the device. The Company must receive FDA approval for
Phase I, II, and III trials to test the PLASMA PURE device. FDA review of a PMA
would take at least nine months to a year following submission of Phase III test
results, and may take longer. If ever submitted, no assurance can be given that
approval of the PLASMA PURE PMA would be granted.
The packaging and labeling of all the Company's proposed PLASMA PURE
products, if developed, will be subject to FDA regulation. Because of the
extensive costs and time involved, the Company currently intends to rely
primarily on licensees and joint
<PAGE>
venturers to obtain regulatory approvals and market its PLASMA PURE products,
when developed. No assurance can be given that the Company will reach agreement
with any proposed licensees for such products. Licensees will generally have the
right to terminate funding a product at any time for any reason without
significant penalty. The resources and attention devoted by a licensee, if
obtained by the Company, to a product are not in the Company's control, and this
can result in delays in clinical testing, the preparation and prosecution of
regulatory filings and commercialization efforts. Even if the Company is
successful in finding licensees for its products, these delays would cause the
payment of any royalties to be delayed.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities must be obtained in any foreign country prior
to the commencement of marketing of the product in that country. The approval
procedure varies from country to country, can involve additional testing, and
the time required may differ from that required for FDA approval. Although some
procedures for unified filings exist for certain European countries, in general
each country has its own procedures and requirements, many of which are time
consuming and expensive. Thus, substantial delays in obtaining required
approvals from both the FDA and foreign regulatory authorities can result after
the relevant applications are filed. After such approvals are obtained, further
delays may be encountered before the products become commercially available.
No assurance can be given that any required FDA or other governmental
approval will be granted, or if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products, cause the Company to undertake costly procedures and furnish
a competitive advantage to the more substantially capitalized companies with
which the Company plans to compete. In addition, the extent of potentially
adverse government regulations which might arise from future administrative
action or legislation cannot be predicted.
PATENTS AND LICENSE RIGHTS
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company applied for U.S. patents
covering its DECAFFOMATIC separation technology and its PLASMA PURE separation
technology in 1993. On August 22, l995, the Company was issued a patent by the
U.S. Commissioner of Patents and Trademarks, Patent Number 5,443,709, for its
"Apparatus For Separating Caffeine From A Liquid Containing the Same." On
December 11, 1996, the Company received notice from the U.S. Patent Office that
its core patent application for the electrostatic separation technology for
removing substances from a fluid had been allowed. The granting and issuance of
the patent is expected in the near future.
The Company believes that patent protection of its technologies, processes
and products is very important to its future operations. The success of the
Company's proposed products may significantly depend upon the Company's ability
to obtain patent protection. No assurance can be given that any patents will be
issued or if issued that they will have commercial value to the Company. If a
patent is granted, the cost of
<PAGE>
enforcing the Company's patent rights in lawsuits, if necessary, may be
significant and could interfere with the Company's operations.
Although the Company intends to file additional patent applications as
management believes appropriate with respect to any new products or
technological developments, no assurance can be given that any additional
patents will be issued, or if issued, that they will be of commercial benefit to
the Company. In addition, to anticipate the breadth or degree of protection that
any such patents may afford is impossible. To the extent that the Company relies
on unpatented proprietary technology, no assurance can be given that others will
not independently develop or obtain substantially equivalent or superior
technology or otherwise gain access to the Company's trade secrets, that any
obligation of confidentiality will be honored or that the Company will be able
to effectively protect its rights to proprietary technology. Further, no
assurance can be given that any products developed by the Company will not
infringe patents held by third parties or that, in such case, licenses form such
third parties would be available on commercially acceptable terms, if at all.
COMPETITION
The Company competes with numerous firms, many of which are large,
multi-national organizations with worldwide distribution. These firms have
substantially greater capital resources, research and development and technical
staffs, facilities and experience in obtaining regulatory approvals, as well as
in the manufacturing, marketing and distribution of products, than the Company.
Academic institutions, hospitals, governmental agencies and other public and
private research organizations are also conducting research and seeking patent
protection and may develop competing products or technologies on their own or
through joint ventures or other arrangements. In addition, recently developed
technologies or technologies that may be developed in the future are or could be
the basis for competitive products. No assurance can be given that the Company's
competitors will not succeed in developing technologies and products that are
more effective or less costly than any that are being developed by the Company.
The Company expects products approved for sale, if any, to compete
primarily on the basis of product uniqueness, efficacy, safety, reliability,
price and patent position. The Company's competitive position will also depend
on its ability to attract and retain qualified scientific and other personnel,
develop effective proprietary products, implement production and marketing
plans, obtain patent protection and secure adequate capital resources.
PRODUCT LIABILITY
The development, manufacture and sale of the Company's products involve an
inherent risk of product liability claims and associated adverse publicity. The
Company currently does not maintain liability insurance and may need to acquire
such insurance coverage prior to the commercial introduction of some of its
products. No assurance can be given that the Company will be able to obtain
product liability insurance or, if obtainable, that it will be on financially
reasonable terms. It is anticipated that the liability
<PAGE>
insurance for the types of products to be marketed by the Company, if available,
will be very expensive. If such insurance is not obtained and maintained at
sufficient levels, or if any product liability claim were brought against the
Company and were sustained for a sufficient amount, it could have a material
adverse affect on the business or financial condition of the Company.
EMPLOYEES
As of the date hereof, the Company has four full time employees, one in
management, two in research and development and one in administration. None of
the Company's employees is represented by a labor union. The Company considers
its relations with its employees to be satisfactory. See "Management".
ENVIRONMENTAL QUALITY
The Company believes that it is now in compliance with all Federal, State
and local laws relating to the protection of the environment. The Company does
not generate, store, transport or dispose of any hazardous waste, and that
management believes that none of the Company's products is regarded as a
hazardous material by the applicable regulations for the protection of the
environment. The Company does not anticipate making any capital expenditures in
the current or succeeding fiscal year for environmental control efforts
regarding its products.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal offices are currently located at 40 Bayfield Drive,
North Andover, Massachusetts and consists of approximately 1,276 square feet.
The Company had an initial three year lease which commenced on August 12, 1993
and ended on August 11, 1996. The Company extended this lease for one additional
year. The Company entered into a new three year lease effective April 1, 1997 at
the annual rate of $15,890. The Company's headquarters, and research and
development facilities are located therein.
In October 1996, the Company established an office at 950 Third Avenue, New
York, New York, consisting of approximately 2,500 square feet of space, with the
intention of conducting its sales, marketing and finance related activities. The
lease at 950 Third Avenue, New York, New York, is for a term of five years at an
annual base rental of $32 per square foot. The Company determined in the Spring
of 1997 that it is more efficient and cost effective to run all of its
activities from the North Andover office for the near future and on May 1, 1997
terminated and surrendered the lease at 950 Third Avenue. The landlord found a
replacement tenant for the 950 Third Avenue space and the Company has no further
liability on the 950 Third Avenue lease.
Upon the end of the current lease in North Andover, Massachusetts, the
Company expects to be able to either negotiate a new lease with the current
landlord or locate suitable premises elsewhere for comparable fair market rent
to that now being paid. The Company believes that its property and equipment are
in good operating condition and are adequate for existing and immediately
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
<PAGE>
The Company received a Summons and Complaint from BPV Enterprises, Inc.,
d/b/a Universal Sales ("Universal Sales") on April 12, 1998 brought in the
Supreme Court of the state of New York, Suffolk County, alleging breach of
contract and seeking damages under a Placement Agreement dated September 1, 1996
entered into between Universal Sales and the Company wherein Universal Sales is
seeking damages of $334,000. In April 1997, the Company terminated all of its
relationships with Universal Sales for cause. The Company has not yet engaged in
substantive discovery and the ultimate outcome of this matter cannot yet be
determined. The Company plans to vigorously defend this lawsuit. No provision
for any liability that may result from the action has been recognized in the
consolidated financial statements. In the opinion of management, resolution of
this litigation is not expected to have a material adverse effect on the
financial position of the Company. However, depending on the amount and timing,
an unfavorable resolution of this matter could materially affect the Company's
future results or expense in a particular period. The Company has not formulated
a response or answered the lawsuit filed by Universal Sales. Mr. Alexander T.
Hoffman, the Chairman and Chief executive Officer of the Company, is also a
Director and a 50% shareholder of Universal Sales.
In June 1997, Edmund Abramson ("Abramson") brought a civil action against
the Company in the Circuit Court of the Eleventh Judicial District in Dade
County, Florida, alleging breach of contract under his Consulting Agreement
entered into with the Company in August 1996. The Company answered the Complaint
and brought a counter-claim against Abramson alleging breach by Abramson and
seeking recission of the Consulting Agreement. The Company and Abramson entered
into a Settlement Agreement and Mutual Release on January 16, 1998, whereby the
action brought by Abramson and the counter-claims brought by the Company against
Abramson were withdrawn and the litigation terminated, with prejudice. In
consideration of the termination of the Abramson Consulting Agreement and the
execution of the Settlement Agreement by Abramson and the mutual releases
contained herein, the Company withdrew its counter-claim and action for
recission of the unexecuted stock options issued to Abramson in September, 1996.
In June 1997, WRA Consulting, Inc. ("WRA") brought a civil action against
the Company in the Circuit Court of the Eleventh Judicial District in Dade
County, Florida, alleging breach of contract under its Financial Consulting
Agreement entered into with the Company in August 1996. The Company answered the
Complaint and brought a counter-claim against WRA alleging breach by WRA and
seeking recission of the WRA Consulting Agreement. The Company and WRA entered
into a Settlement Agreement and Mutual Release on January 16, 1998, whereby the
action brought by WRA and the counter-claims brought by the Company were
withdrawn and the litigation terminated, with prejudice. In consideration of the
consulting services performed by WRA in 1996 assisting in the arranging of $3
million private placement by the Company, the termination of the WRA Consulting
Agreement and the execution of a Settlement Agreement and Mutual Release by WRA,
the Company agreed to issue to WRA and aggregate of (a) 150,000 shares of
IMSCO's unregistered common stock, $.0001 par value per share, (b) 200,000
options to purchase IMSCO's common stock over a period ending December 31, 2000
for the exercise price of $1.32 per share, and (c) 100,000 options to purchase
common stock over a period ending December 31, 2000 for the exercise price of
$2.00 per share.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
By an action taken by a majority of the shareholders by written consent in lieu
of a shareholders' meeting, Gary Graham, Frank Lubrano and Alexander Hoffmann
were elected Directors for the Company on October 1, 1997 as permitted under the
Company's By-laws and the Delaware General Corporation Law. There were no other
matters submitted to a vote of the security holders in the fourth quarter of
1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
There is currently a limited public trading market for the Company's Common
Stock. There are currently five market-makers for the Company's Common Stock.
The Common Stock has traded on a limited basis on the OTC Bulletin Board under
the symbol "IMSO" since November 15, 1994. The stock registrar and transfer
agent for the Company is Progressive Transfer Company, Salt Lake City, Utah.
The following table sets forth the high and low closing quotations for the
Common Stock, as reported by NASDAQ for each fiscal quarterly period during
1997. The quotations as reported reflect inter-dealer quotations without retail
markup, markdown or commission and do not necessarily represent actual
transactions.
High Low
---- ---
January 1, 1997 - March 31, 1997 $3.00 $1.81
April 1, 1997 - June 30, 1997 $2.69 1.81
July 1, 1997 - September 30, 1997 2.44 1.50
October 1, 1997 - December 31, 1997 3.06 1.81
<PAGE>
(b) Holders of Common Stock
Approximate Number of Record Holders
Title of Class (as of December 31, l997)
-------------- -------------------------
Common Stock, $.001 par value 258
A number of shares are held of record by brokerage and other institutional firms
for their customers.
(c) Dividends
The Company has never declared or paid a cash dividend on its common stock,
and it is anticipated that the Company will continue to retain its earnings for
use in its business and not pay cash dividends. Declaration and payment of
dividends are within the discretion of the Company's Board of Directors, which
will review such dividend policy from time to time.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company is in the development stage and its operations are subject to
all the problems, expenses, delays and other risks inherent in the establishment
of a new business enterprise, as well as the problems inherent in developing and
marketing a new product/service and in establishing a name and business
reputation. The likelihood of the success of the Company must also be considered
in connection with the rapidly and continually changing technology and the
competitive environment in which the Company will operate. There can be no
assurance that the Company's operations will result in its becoming or remaining
economically viable. Potential investors should be aware of the problems,
delays, expenses and difficulties encountered by any company in a developmental
stage, many of which may be beyond the Company's control. These include, but are
not limited to, unanticipated regulatory compliance, marketing problems and
intense competition that may exceed current estimates. The Company has had no
revenues from operations to date and, because it is just beginning to enter the
commercial stage, it will likely sustain operating losses for an indeterminate
time period. Since entering the development phase in July, 1992, the Company has
devoted substantially all of its resources to the research and development of
its products and technology and general and administrative expenses. Since
entering the development stage in July, 1992, the Company has generated an
accumulated deficit of $5,920,317 at December 31, 1997 and has a total
accumulated deficit of $6,541,225.
The Company had no revenues from continuing operations in years ending
December 31, 1995, December 31, 1996, or December 31, 1997. The Company has
incurred net losses in each year since its inception in 1986. Given the dormant
level of business activity from 1988 through 1991, the Company realized that it
could not continue with its luminator technology
<PAGE>
product, discontinue operations and was reactivated and entered into a new
development stage in July 1992.
The Company's losses incurred since inception have resulted principally
from expenditures under its research and development programs, and the Company
expects to incur significant operating costs and possible losses therefrom over
the next several years due primarily to expanded research and development
efforts in the PLASMA PURE area and related medical products, preclinical and
clinical testing of its product candidates and the performance of
commercialization activities. There can be no assurance of when and whether the
Company will generate significant revenues or become profitable on a sustained
basis, if at all. Although the Company believes it has substantially completed
the research and development of its decaffeination technology and is
anticipating sales thereof to commence in 1998, the Company's results of
operations may vary significantly from quarter to quarter due to timing of
payments and other factors. The timing of the Company's revenues may not match
the timing of associated product development of other expenses. The amount of
revenues in any given period is not necessarily indicative of expected revenues
for future periods.
The Company's ability to achieve sales and increase its levels of revenue
will depend upon its ability to secure additional financing and future
licensees, if any, and successfully develop, test and sell the Company's
products. The Company's ability to generate significant revenue and become
profitable is dependent in large part on its commercializing the Company's lead
product, the DECAFFOMATIC, expanding its manufacturing contracts with third
party manufacturers, entering into additional marketing agreements and the
ability of its marketing contractors to commercialize successfully products
incorporating the Company's technologies. There can be no assurance that the
operations of the Company will generate significant revenue or will ever be
profitable. The following discussion and analysis should be read in conjunction
with the Financial Statements and notes thereto appearing elsewhere in this
report.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Net losses increased to $3,631,105 for the year ended December 31, 1997
from $1,062,758 for the year ending December 31, 1996, a 242% increase. The
Company had no revenues or operating income for years ended December 31, 1996
and December 31, 1997 from continuing operations. For the year ended December
31, 1997, the Company earned $5,541 in interest on its interest bearing
investment account. $3,022 in interest was earned for the comparable period in
1996.
Total operating expenses were $3,592,574 for 1997 in comparison to $758,280
for 1996, an increase of 374%. The increase in these costs from 1996 to 1997 was
primarily due to increased outside consultants' and professional fees,
litigation settlement costs, higher costs under research agreements with outside
institutions, and more staffing and wages and salaries for research and
development being performed in 1997 than those incurred in 1996 as the Company
continues further product research, development and refinement on its
Decaffomatic and other separation technologies. All research and development
costs were expensed currently in the year
<PAGE>
incurred, rather than capitalized. This resulted in a loss per share of $(.33)
for the year ended December 31, 1996, in comparison to a loss per share of
$(.57) for the year ended December 31, 1997.
At December 31, l997, the Company had total assets of $58,940. Total
liabilities of $1,875,753 and total stockholders' deficit of $(1,816,813).
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Net losses increased from $406,086 for the year ended December 31, 1995 to
$1,062,758 for the year ending December 31, 1996, a 162% increase. The Company
had no revenues or operating income for years ended December 31, 1995 and
December 31, 1996 from continuing operations. For the year ended December 31,
1995, the Company earned $3,070 in interest on its interest bearing investment
account. $3,022 in interest was earned for the comparable period in 1996.
Total operating expenses were $408,700 for 1995 in comparison to $758,280
for 1996, an increase of 86%. The increase in these costs from 1995 to 1996 was
primarily due to increased outside consultants' fees, higher costs under
research agreements with outside institutions, and more staffing and wages and
salaries for research and development being performed in 1996 than those
incurred in 1995 as the Company continues further product research, development
and refinement on its Decaffomatic and other separation technologies. All
research and development costs were expensed currently in the year incurred,
rather than capitalized. This resulted in a loss per share of $(.33) for the
year ended December 31, 1996, in comparison to a loss per share of $(.14) for
the comparable year in 1995.
At December 31, l995, the Company had total assets of $12,980. Total
liabilities of $63,343 and total stockholders' deficit of $(50,363). At December
31, l996, the Company had total assets of $751,944, an increase of $738,964 from
the comparable period in l995, total liabilities of $77,883 an increase of
$14,540 from l995, and a total stockholders' equity of $674,861, in comparison
to a stockholders' deficit of $(50,363) in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company had negative working capital as of December 31, l997, of
$1,860,973 in comparison to a positive working capital position as of December
31, l996 of $572,997. The Company had an accumulated deficit of $2,910,120 at
December 31, l996, in comparison to an accumulated deficit of $6,541,225
December 31, l997. The increase in the accumulated deficit is primarily related
to continuing operating costs during the development phase without any operating
income.
<PAGE>
The Company has financed operations from entering the development phase in
July 1992 (through December 31, 1997) primarily through the private placement of
its stock and, to a lesser extent, through borrowings from notes payable. For
the year ended December 31, l997, the Company's cash requirements were satisfied
primarily from the cash reserves in its operating accounts, a private placement
consisting of shares of the Company's Common Stock. Additionally, the Company
had $1,300,643 of remaining prepaid media credits available for execution of its
public relations, advertising and marketing campaign for its decaffeination
technology. The Prepaid Media Credits were obtained by the Company on September
20, 1996, when it entered into the Media Purchase Agreement with Proxhill
Marketing, Ltd., a private company based in Colorado ("PML"), which received
1,136,364 shares in consideration for $1,500,000 in prepaid media credits
("Media Credits") to be used at the Company's direction . The Company intends to
use the Media Credits during the next 12 months to market its DECAFFOMATIC
products. In the Media Purchase Agreement the purchaser of the shares
represented that it was an "Accredited Investors" as that term is defined under
Regulation D promulgated by the Commission pursuant to the Securities Act.
The Company does not currently possess a bank source of financing. Although
the Company has the $1,300,643 of Prepaid Media Credits which management
believes will be adequate to introduce its decaffeination technology, the
Company's negative working capital at December 31, 1997 was $1,860,973.
Management believes that the above financing will be adequate to cover its
liquidity requirements over the next 3 months and thereafter it cannot be
certain that its capital will be adequate. Should insufficient funds be
available from the foregoing sources, reducing the Company's present rate of
expenditures which might materially adversely affect the ability of the Company
to produce competitive products and services and to market them effectively.
The Company's ability to continue in business as a going concern depends
upon its ability to generate revenues and royalties from the sale of its
technology and products, to conserve liquidity by setting marketing and other
priorities and reducing expenditures, to obtain bank financing and to obtain
additional funds through the placement of its common stock. The Company's
ability to obtain bank financing will require significantly improved operating
results over the Company's results for its past twelve months, the likelihood of
which the Company presently cannot assure.
The Company's long term capital expenditure requirements will depend upon
numerous factors, including the progress of the Company's research and
development programs, the resources that the Company devotes to the development
of self-funded products, proprietary manufacturing methods and advanced
technologies, the ability of the Company to obtain licensing arrangements, and
the demand for its products if and when approved.
The Company believes that its research and development of its
decaffeination technology is substantially complete and it is ready to introduce
its decaffeination products to the commercial institutional user market in 1998.
On September 20, 1996, DPI entered into the Manufacturing and Distribution
Agreement with NEWCO Enterprises, Inc., of St. Charles, Missouri to manufacture
a coffee brew basket, incorporating the decaffeination technology, for DPI's
sales to the institutional coffee maker marketplace in North America
<PAGE>
(the "NEWCO Agreement"). Under the NEWCO Agreement, NEWCO was granted the
exclusive right to market and distribute the products incorporating the
Company's decaffeination technology to the so-called "office coffee supply"
market segment in North America for a period of three years. Over the past
seventeen months, the Company has been working with NEWCO to develop, design and
test working models, and assist in the design of molds for the production of the
decaffeination device. Although there are no assurance, based on the progress in
completing detail drawings for manufacture of production molds is anticipated
that sales under the NEWCO Agreement should occur in the second half of 1998.
The Company believes that its existing cash and cash equivalents, the $1.3
million of Prepaid Media Credits, together with anticipated cash flow from
operations in the latter part of 1998 will be sufficient to meet its operating
expenses and capital expenditures requirements for the next 3 months. The
Company's future capital requirements, however, will depend on numerous factors,
including (i) the progress of its research and product development programs,
including clinical studies, (ii) the effectiveness of product commercialization
activities and marketing agreements, including the development and progress of
sales and marketing efforts and manufacturing operations, (iii) the ability of
the Company to maintain existing marketing agreements and establish and maintain
new marketing agreements, (iv) the costs involved in preparing, filing,
prosecuting, defending and enforcing intellectual property rights and complying
with regulatory requirements, and (v) the effect of competing technological and
market developments. However, if operating expenses are higher than expected or
if cash flow from operations is lower than anticipated, there can be no
assurance that the Company will have sufficient capital resources to be able to
continue as a going concern.
Factors That May Affect Future Results
Statements included in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" Section, in other sections of this Annual
Report on Form 10-KSB including, without limitation the "Description of
Business" Section in Part I, and in prior and future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive which are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial and operating performance to differ materially from that expressed in
any expressed in any forward-looking statement:
Development Stage Company - History of Operating Losses and Accumulated Deficit.
The Company is in the development stage and its operations are subject to
all the problems, expenses, delays and other risks inherent in the establishment
of a new business enterprise, as well as the problems inherent in developing and
marketing a new
<PAGE>
product/service and in establishing a name and business reputation. The
likelihood of the success of the Company must also be considered in connection
with the rapidly and continually changing technology and the competitive
environment in which the Company will operate. There can be no assurance that
the Company's operations will result in its becoming or remaining economically
viable. Potential investors should be aware of the problems, delays, expenses
and difficulties encountered by any company in a developmental stage, many of
which may be beyond the Company's control. These include, but are not limited
to, unanticipated regulatory compliance, marketing problems and intense
competition that may exceed current estimates. The Company has had no revenues
from operations to date and, because it is just beginning to enter the
commercial stage, it will likely sustain operating losses for an indeterminate
time period. The Company has incurred net losses in each year since inception.
These losses have resulted primarily from expenses associated with the Company's
research and development activities and general administrative expenses. The
Company anticipates that its expenses will increase in the future. The amount of
future expenses, corresponding further potential net losses and time required by
the Company to reach profitability, if ever, are uncertain. The Company's
ability to generate significant revenue and become profitable is dependent in
large part on its commercializing the Company's lead product, the DECAFFOMATIC,
expanding its manufacturing contracts with third party manufacturers, entering
into additional marketing agreements and the ability of its marketing
contractors to commercialize successfully products incorporating the Company's
technologies. There can be no assurance that the operations of the Company will
generate significant revenue or will ever be profitable.
Future Capital Requirements; Uncertainty of Future Funding.
IMSCO'S operations to date have consumed substantial amounts of cash. As
the Company continues its research and development of its electrostatic
technologies in various areas, it expects to continue spending substantial
amounts over the foreseeable future. The Company anticipates that its existing
capital resources will be adequate to satisfy its current working capital
requirements for the next 3 months. Thereafter, the Company will need to raise
substantial additional funds through equity or debt financings, or sale or
licensing of its technology and products. There can be no assurance that any
such additional funding will be available to the Company or that the Company
will have sales of its products. In the event the Company has insufficient
working capital, and is unable to locate additional capital on acceptable terms,
the Company may be required to curtail its operations substantially, including
its research and development activities.
Early Stage of Product Commercialization; Technological Uncertainties.
The Company is in the development stage, and has only recently begun to
enter the early stage of product commercialization with its DECAFFOMATIC
products. The development of any products will require significant further
research, development, testing and regulatory approvals and additional
investment prior to commercialization. Substantially all of the Company's
resources have been, and for the foreseeable future will continue to be,
dedicated to the discovery, development and commercialization of electrostatic
separation technologies, most of which are still in the early stages of
<PAGE>
development and testing. While the Company believes that the development of the
DECAFFOMATIC technology is substantially complete and plans are being made to
introduce the DECAFFOMATIC product to the market in 1998, there are a number of
challenges that the Company must successfully address to complete any of its
development efforts and meet this anticipated product introduction. With respect
to PLASMA PURE, although the results of initial basic research by the Company
and/or its collaborators was positive, it may be inconclusive and may not be
indicative of results that will be obtained in human clinical trials. As results
of particular preclinical studies and clinical trials are received by the
Company, the Company may abandon projects such as PLASMA PURE, which it might
otherwise have believed to be promising. The Company presently is pursuing
product opportunities that will require extensive additional capital investment,
research, development, testing, regulatory clearance or approvals prior to
commercialization. Based on the Company's currently limited financial resources,
there can be no assurance that the Company's development programs will have
necessary capital funding, will be successfully completed, or that required
regulatory clearance or approvals will be obtained on a timely basis, if at all.
In addition, the product development programs conducted by the Company and
its collaborators are subject to risks of failure inherent in the development of
product candidates based on new technologies. These risks include the
possibility that the technologies used by the Company will prove to be
ineffective or any or all of the Company's products or technologies needing FDA
clearance will prove to be unsafe or toxic or otherwise fail to receive
necessary regulatory approvals; that the product candidates, if safe and
effective, will be difficult to manufacture on a large scale or uneconomical to
market; that the proprietary rights of third parties will preclude the Company
or its collaborators from marketing products utilizing the Company's
technologies; or that third parties will market superior or equivalent products.
There can be no assurance that any medical products being developed by the
Company or others will be successfully developed or commercially accepted.
Accordingly, there can be no assurance that the Company's research and
development activities will result in any commercially viable products. See
"Business - "Research and Development" and "- Competition."
Government Regulations.
The production and marketing of some of the Company's products, including
the PLASMA PURE, are subject to regulation for safety and efficacy by numerous
federal, state and local agencies, and comparable agencies in foreign countries.
In the United States, the Federal Food, Drug and Cosmetic Act, the Public Health
Service Act, the Controlled Substances Act and other federal statutes and
regulations govern or influence the testing, manufacture, safety, labelling,
storage, recordkeeping, approval, advertising and promotion of the Company's
proposed products and technologies. Non-compliance with applicable requirements
can result in fines and other judicially imposed sanctions including the
initiation of product seizures, injunction actions, mandatory recalls and
criminal prosecutions based on products, promotional practices, or manufacturing
practices that violate statutory requirements. In addition, administrative
remedies can involve voluntary recalls or cessation of sale of products,
administrative detention, public notice, voluntary changes in labeling,
manufacturing or promotional practices, as well as the refusal of the government
to enter into supply contracts or to approve
<PAGE>
NDAs. The FDA also has the authority to withdraw approval of instruments and
devices in accordance with statutory procedures.
The Company's PLASMA PURE system will be considered a medical device. As
such, the FDA would require the Company to obtain either a premarket
notification clearance under Section 510(k) of the Federal, Food, Drug, and
Cosmetic Act ("510(k)"), or an approved premarket application ("PMA") prior to
sales and marketing of the device in the United States. The 510(k) premarket
notification may be obtained if the medical device manufacturer can establish
that the newly developed product is substantially equivalent to another legally
marketed device. The FDA may also require clinical data or other evidence of
safety and effectiveness.
If the manufacturer cannot establish equivalence or if the FDA determines
that the device requires more extensive review, the FDA will require the
submission of PMA. The PMA must contain nonclinical and clinical investigation
results, a description of the methods, facilities and controls used for
manufacturing, and the proposed labeling for the device. The Company must
receive FDA approval for trials to test the PLASMA PURE device. FDA review of a
PMA would take at least six months following submission of Phase III test
results, and may take longer. (See "Business -- Government Regulation" for
details on the various phases) It is currently estimated by the Company that
with adequate funding, it would take approximately two years to receive FDA
clearance. No assurance can be given that approval of the PLASMA PURE PMA would
be granted.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities must be obtained in any foreign country prior
to the commencement of marketing of the product in that country. The approval
procedure varies from country to country, can involve additional testing, and
the time required may differ from that required for FDA approval. Although some
procedures for unified filings exist for certain European countries, in general
each country has its own procedures and requirements, many of which are time
consuming and expensive. Thus, substantial delays in obtaining required
approvals from both the FDA and foreign regulatory authorities can result after
the relevant applications are filed. After such approvals are obtained, further
delays may be encountered before the products become commercially available.
The Company has not prepared or filed any applications with the FDA or any
governmental authority for approval of the PLASMA PURE device or any related
product. No assurance can be given that any required FDA or other governmental
approval will be granted, or if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products, cause the Company to undertake costly procedures and furnish
a competitive advantage to the more substantially capitalized companies with
which the Company plans to compete. In addition, the extent of potentially
adverse government regulations which might arise from future administrative
action or legislation cannot be predicted.
Competition.
<PAGE>
The Company competes with numerous firms, many of which are large,
multi-national organizations with worldwide distribution. These firms have
substantially greater capital resources, research and development and technical
staffs, facilities and experience in obtaining regulatory approvals, as well as
in the manufacturing, marketing and distribution of products, than the Company.
Academic institutions, hospitals, governmental agencies and other public and
private research organizations are also conducting research and seeking patent
protection and may develop competing products or technologies on their own or
through joint ventures or other arrangements. In addition, recently developed
technologies or technologies that may be developed in the future are or could be
the basis for competitive products. No assurance can be given that the Company's
competitors will not succeed in developing technologies and products that are
more effective or less costly than any that are being developed by the Company.
The Company expects products approved for sale, if any, to compete
primarily on the basis of product uniqueness, efficacy, safety, reliability,
price and patent position. The Company's competitive position will also depend
on its ability to attract and retain qualified scientific and other personnel,
develop effective proprietary products, implement production and marketing
plans, obtain patent protection and secure adequate capital resources. See
"Business - Competition."
Uncertainty of Market Acceptance.
The Company has only recently commenced limited marketing activities.
Achieving market acceptance for the Company's products will require substantial
marketing efforts and the expenditure of significant funds. There can be no
assurance that the Company and its marketing contractors and partners will be
able to commercialize successfully or achieve market acceptance of the Company's
products and technologies. There is no assurance that the Company will be able
to create a successful marketing program, or that the Company's products can be
sold in a manner that will permit the Company to achieve long range
profitability. Further, there can be no assurance that the Company's competitors
will not develop competing technologies that are less expensive or otherwise
superior to the products of the Company. The failure to market successfully the
Company's products would have a material adverse effect on the Company's results
of operations and financial conditions.
Dependence on Marketing Partners.
The Company has limited experience in sales, marketing and distribution.
Therefore, the Company's strategy for commercialization of its products includes
entering into agreements with other companies to market current and certain
future products incorporating the Company's technology. To date, the Company has
entered into two such agreements with Hughes and NEWCO. There can be no
assurance that the Company will be able to enter into additional marketing
agreements on terms favorable to the Company, if at all, or that current or
future agreements will ultimately be beneficial to the Company.
The Company will be dependent for product sales revenues upon the success
of such third party marketing partners in performing their responsibilities. The
amount and timing of resources which may be devoted to the performance of their
contractual responsibilities by its marketing partners are not within the
control of the Company. There can be no
<PAGE>
assurance that such marketing partners will perform their obligations as
expected, pay any additional revenue or license fees beyond the stated minimums
to the Company or market any products under the marketing agreements, or that
the Company will derive any revenue from such arrangements. Moreover, certain of
the agreements provide for termination under certain circumstances. There can be
no assurance that the interests of the Company will continue to coincide with
those of its marketing partners or that the marketing partners will not develop
independently or with third parties products which could compete with the
Company's products, or that disagreements over rights or technology or other
proprietary interests will not occur. To the extent that the Company chooses not
to or is unable to enter into future agreements, it would experience increased
capital requirements to undertake the marketing or sale of its current and
future products. There can be no assurance that the Company will be able to
market or sell its current or future products independently in the absence of
such agreements. See "Business - Marketing."
Lack of Manufacturing and Sales and Marketing Experience.
The Company has no experience in, and currently lacks the resources and
capability to, manufacture any of its proposed products on a commercial basis.
Initially, the Company anticipates that it will be dependent to a significant
extent on third party contract manufacturers or other entities for commercial
scale manufacturing of its products. Although it has no plans or intentions of
doing so, in the event the Company decides to establish a commercial scale
manufacturing facility, the Company will require substantial additional funds
and personnel and will be required to comply with extensive regulations
applicable to such facility. There can be no assurance that the Company will be
able to develop adequate commercial manufacturing capabilities either on its own
or through third parties. In addition, the Company does not anticipate
establishing its own sales and marketing capabilities in the foreseeable future.
There can be no assurance that the Company will be able to develop adequate
marketing capabilities either on its own or through third parties. See "Business
- - Manufacturing; - Marketing."
Possible Product Obsolescence.
The Company expects technological developments to continue at a rapid pace
in the electrostatic separation industries, and there can be no assurance that
technological developments will not cause the Company's technology to be
rendered obsolete. The Company's future success, if any, will be dependent upon
its ability to remain competitive with others involved in the development,
manufacture and marketing of similar products and technologies through its
continued capability to design high quality products in a cost efficient and
timely manner, of which there can be no assurance.
No Assurance as to Protection of Intellectual Property; Dependence on
Intellectual Property.
The Company's success depends in large part on whether it can obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties.
Patents have been granted to the Company for both method and devise in the
technology for the separation of caffeine from a brewed beverage. No other
patents
<PAGE>
have, as yet, been issued but it is expected that patents will be issued. The
Company believes that patent protection of its technologies, processes and
products is very important to its future operations. The success of the
Company's proposed products may significantly depend upon the Company's ability
to obtain patent protection. No assurance can be given that any additional
patents will be issued or if issued that they will have commercial value to the
Company. When a patent is granted, the cost of enforcing the Company's patent
rights in lawsuits, if necessary, may be significant and could interfere with
the Company's operations.
Although the Company intends to file additional patent applications as
management believes appropriate with respect to any new products or
technological developments, no assurance can be given that any additional
patents will be issued, or if issued, that they will be of commercial benefit to
the Company. Further, the Company's ability to file such additional patent
applications may be reduced by the Company's limited financial resources. In
addition, to anticipate the breadth or degree of protection that any such
patents may afford is impossible. To the extent that the Company relies on
unpatented proprietary technology, no assurance can be given that others will
not independently develop or obtain substantially equivalent or superior
technology or otherwise gain access to the Company's trade secrets, that any
obligation of confidentiality will be honored or that the Company will be able
to effectively protect its rights to proprietary technology. Further, no
assurance can be given that any products developed by the Company will not
infringe patents held by third parties or that, in such case, licenses from such
third parties would be available on commercially acceptable terms, if at all.
The Company's ability to compete effectively with other companies will depend,
in part, on its ability to maintain the proprietary nature of its technologies.
The Company intends to market its products internationally, and the laws of some
foreign countries may not protect the Company's proprietary rights to as great
an extent as do the laws of the United States. There can be no assurance that
the Company's competitors will not independently develop comparable or superior
technologies. See "Business - Patents and License Rights."
Dependence Upon Key Management Personnel.
The success of the Company is substantially dependent upon existing
management. The Company considers Mr. Berg and Mr. Crose to be key executives.
The loss of the services of Mr. Berg or Mr. Crose, as well as other key
personnel, or any inability to attract and retain qualified personnel to replace
them in the event of their leaving the Company for any reason, may adversely
affect the Company's business. The Company has not applied for key man life
insurance on the lives of Mr. Berg or Mr. Crose and does not intend to. Because
of the nature of its business, the Company will be dependent upon its ability to
attract and retain technological qualified personnel, including competition from
companies with substantially greater resources than the Company. There is no
assurance that the Company will successfully recruit or retain personnel of the
requisite expertise or in adequate numbers to enable it to conduct its business
as proposed.
Rapid Technological Change.
The market for biotechnology products has been characterized by rapid
technological change, frequent product introductions and evolving industry
<PAGE>
requirements. The Company believes that these trends will continue into the
foreseeable future. The Company's success will depend, among other matters, upon
its ability to enhance its existing products and to successfully develop new
products that meet increasing customer requirements and gain market acceptance.
Achieving these goals will require continued substantial investment by the
Company in product development and marketing. There can be no assurance that the
Company will have sufficient resources to make these investments, that the
Company will be successful in developing product enhancements or new products on
a timely basis, if at all, or that the Company will be able to successfully
market these enhancements and new products once developed. Further, there can be
no assurance that the Company's products will not be rendered obsolete by new
industry standards or changing technology.
Products Liability and Other Claims.
The Company may be subject to substantial products liability costs if
claims arise out of problems associated with the products by the Company. The
Company currently has no product liability insurance; however, it is anticipated
that such insurance will be very expensive to maintain, if obtainable at all.
The Company will seek to maintain products liability coverage for the benefit of
the Company to protect the Company against such liabilities, but there can be no
assurance that such arrangements can be made, or if made, will be effective to
insulate the assets of the Company from such claims. The Company will attempt to
maintain insurance against such contingencies, in scope and amount which it
believes to be adequate. However, there can be no assurance that such product
liability insurance will be available, or if available, that it will adequately
insure against such claim. If such insurance is not obtained and maintained at
sufficient levels, or if any product liability claim were brought against the
Company and were sustained for a sufficient amount, it could have a material
adverse affect on the business or financial condition of the Company.
Limited Prior Market for the Common Stock.
There has only been a limited public market for the shares of the Company
on the OTC Bulletin Board. There is no assurance that an active public market
for the Common Stock will develop or continue at any time in the future. At
December 31, 1997 the Company had approximately 6,516,536 shares outstanding. Of
these shares, approximately 4,987,442 outstanding shares will be freely tradable
without restriction or are eligible for resale under Rule 144. As long as there
is a limited public market for the Company's Common Stock, the sale or placement
by a shareholder of a significant number of shares for sale in the market at any
one time could be difficult to achieve at then current market prices, and could
cause a material decline in the market price of the Common Stock.
Volatility of Stock Price.
The market price of the shares of Common Stock, like that of the common
stock of many other technology companies, has been and is likely to be highly
volatile. Factors such as the results of clinical trials by the Company or its
competitors, other evidence of the safety or efficacy of the Company's or
competitors products, announcements of technological innovations or new
commercial products by the Company or its
<PAGE>
competitors, government regulation, developments in patent or other proprietary
rights of the Company or its competitors, fluctuations in the Company's
operating results, sales of large amounts of stock by shareholders, and limited,
undercapitalized and less experienced market makers are among the many reasons
which could have a significant effect on the market price of the Common Stock.
In addition, the stock market has experienced and continues to experience
extreme price and volume fluctuations which have affected the market price of
many technology and biotechnology companies.
Management of Changing Business.
The Company is a development stage company which has primarily devoted its
activities to research and development. As the Company begins to emerge from the
development phase to a commercial operations place, given the level of technical
and marketing expertise necessary to support its anticipated new products and
customers, the Company must attract and retain highly qualified and well-trained
personnel in those areas. There are a limited number of persons with the
requisite skills to serve in these positions, and it may become increasingly
difficult for the Company to hire such personnel. Moreover, the Company has
limited capital resources to attract and compensate such individuals. The
Company's emergence from the development phase will also significantly strain
the Company's management, financial and other resources. The Company believes
that improvements in management and operational controls and operations,
financial and management information systems will be needed to manage future
emergence from the development and commercial operating phase, should it occur.
The failure to implement such changes could have a material adverse effect upon
the Company.
Products Reliability.
Most applications incorporating the Company's technologies are being still
developed or have only begun to be introduced to the market. As a result of the
limited period of use and the controlled environment in which most of the
Company's technologies have been tested and used to date, there can be no
assurance that they will meet their performance specifications under all
conditions or for all applications. If any of the Company's technologies fail to
meet such expectations, the Company may be required to enhance or improve that
technology, and there can be no assurance that the Company would be able to do
so on a timely basis, if at all. Any significant reliability problems could have
a material adverse effect on the Company's business and prospects.
Potential Issuance of Additional Shares.
The Company is currently authorized to issue up to a total of 15,000,000
shares of Common Stock, $.0001 par value, and 1,000,000 shares of preferred
stock,$.0001 par value per share (the "Preferred Stock"). At December 31, 1997,
there were 6,516,536 shares of Common Stock outstanding.
The Company's Board of Directors is authorized, without stockholder
approval, to issue Preferred Stock in one or more series and to fix the voting
powers and the
<PAGE>
designations, preferences and relative, participating, optional or other rights
and restrictions thereof. Accordingly, the Company may further issue a series of
Preferred Stock in the future that will have preference over the Common Stock
with respect to the payment of dividends and proceeds from the Company's
liquidation, dissolution or winding up or have voting or conversion rights which
could adversely affect the voting power and percentage ownership of the holders
of the Common Stock. The Company currently has no plans, commitments,
arrangements or understandings to issue any Preferred Stock.
Shares Eligible for Future Sale; Potential Adverse Impact on Market Price From
Sales of Shares.
Sales of substantial amounts of Common Stock in the public market by
shareholders could adversely affect the market price of the Common Stock and
adversely affect the Company's ability to raise capital at a time and on terms
favorable to the Company. Although the Company has approximately five
broker-dealers that are making a market in its common stock as of the date
hereof, the Company shares are thinly traded on a limited basis. Consequently,
if substantial amounts of Common Stock are sold into the public market by
shareholders, the prevailing market price will likely be adversely affected. As
of December 31, 1997, the Company had 6,516,536 shares of Common Stock
outstanding. Of these shares, approximately 4,987,422 shares, are freely
tradable without restriction or are eligible for resale under Rule 144 under the
Securities Act, except for any shares held by an "affiliate" of the Company (as
defined in the Securities Act and the rules and regulations thereunder) which
will be subject to the limitations of Rule 144.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person (or persons whose shares are
aggregated under the terms of Rule 144), including an affiliate of the Company,
who has owned restricted shares of Common Stock beneficially for at least one
year, is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the total number of outstanding shares
of the same class, or the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the sale, as reported by all national
securities exchanges on which the Common Stock is traded and/or the automated
quotation system of a registered securities association, or an approved
consolidated transaction reporting system. A person who has not been an
affiliate of the Company for at least the three months immediately preceding the
sale and who has beneficially owned shares of Common Stock for at least three
years is entitled to sell such shares under Rule 144 without regard to the
volume limitations described above. No prediction can be made as to the effect,
if any, that sales of shares of Common Stock or the availability of shares for
sale will have on the market prices prevailing from time to time.
Risks of Low Priced Securities.
If the price per share of the Company's common stock is below $5.00, then
unless the Company satisfied certain net asset tests, the Company's securities
would become subject to certain "penny stock" rules promulgated by the
Commission. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the Commission that
<PAGE>
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from such rules, the broker-dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. These disclosure requirements may have the effect of reducing
the level of trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. Based on the Company's most recent financial
statement for the year ended December 31, 1997, the Company is a "penny stock".
Consequently, because it is subject to the penny stock rules, owners of the
Company's common stock may find it more difficult to sell their shares.
Absence of Dividends.
The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future. The
Company currently intends to retain future earnings, if any, to fund the
development and growth of its business.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements for the fiscal years ending December 31,
1997, and 1996 are included herein and consist of:
Consolidated Balance Sheet (1997 and 1996) F-2
Consolidated Statement of Operations F-3
Consolidated Statement of Stockholders' Equity (Deficit) F-4
Consolidated Statement of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The Company changed accountants in 1997 from Gordon Harrington & Osborn,
P.C. to Moore Stevens, P.C. There have been no disagreements with the
accountants on any matter of accounting principles, practices or financial
statement disclosure.
PART III
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth information concerning the executive
officers, directors and key employees of the Company:
(a) The current directors of the Company are set forth in the following table:
YEAR FIRST
ELECTED AS OFFICE WITH
NAME AGE DIRECTOR COMPANY
- --------------------------------------------------------------------------------
Alexander Hoffmann 56 1997 Chairman & Chief Executive Officer
Gary A. Graham 49 1997 Director
Frank Lubrano 1997 Director
Each Director is elected for a period of one year and thereafter serves
until his successor is duly elected by the stockholders.
The Directors of the Company are not currently compensated as Directors,
but the Board of Directors may in the future determine to pay directors' fees
and reimburse directors for expenses related to their activities.
(b) The current executive officers of the Company are set forth in the
following table:
YEAR
FIRST ELECTED OFFICE
NAME AGE INTO OFFICE WITH COMPANY
- --------------------------------------------------------------------------------
Alexander T. Hoffmann 56 1997 Chief Executive Officer
Sol L. Berg 63 1986 President and Director
James R. Crose 63 1992 Vice President
Gloria Berg 59 1986 Secretary
Scott Singer 44 1997 Assistant Secretary & Treasurer
Except for its agreements with Mr. Sol Berg, Mr. Hoffmann and Mr. Crose there
are no other employment contracts with the executive officers. Officers serve at
the will of the Board of Directors.
<PAGE>
(c) There are no other significant employees of the Company:
(d) Family Relationships
Sol L. Berg, the President, and Gloria Berg, the Secretary, are husband
and wife.
(e) Business Experience
Alexander T. Hoffmann (age 56)
Mr. Hoffmann was elected a Director and became Chairman and Chief executive
Officer of the Company in October 1997. From 1963 to 1975 he served in the
United States Army and the U.S. Army Reserves and retired with the rank of Major
in the Infantry. From 1970 to 1976 he was the Vice President -Marketing & sales
of Lepel high frequency Laboratories, where he was instrumental in developing
and marketing "Under the Cap seals" with 3M Corporation and worked on new
methods of producing semi-conductors. From 1976 to 1986 he owned an operated a
beverage manufacturers representative company based in New York. In 1981 he
organized and served as director and president of a company which acquired the
Yoo Hoo Chocolate Beverage Company from Iroquois Brands, Inc. In 1984 Mr.
Hoffman sold his interest in Yoo Hoo Chocolate Beverage Company. In 1986 he
started the Spritzer Wine Company which developed wine coolers and converted
soft drink bottling plants to produce wine coolers for Seagrams, Inc. In April
1996 he filed an uncontested petition for bankrupty in the Eastern District of
New York. From 1985 to the present he has served as a consultant to the beverage
industry. Mr. Hoffman attended Long Island University.
Gary A. Graham (age 49)
Mr. Graham became a Director of the Company in October 1997. He is the president
of First Capital financial services Corporation, which is an investment advisor
to the Company, Proxhill Marketing, Ltd., and First Capital Investments, Inc., a
registered broker dealer and member of the National Association of Securities
Dealers, Inc. In 1996, First Capital Investments, Inc., served as a placement
agent for the Company in connection with its private placement of $1.5 million
of common stock and its purchase of $1.5 million of Prepaid Media Credits from
Proxhill Marketing, Ltd. Mr. Graham also serves as a member of the Board of
Directors of Proxhill Marketing, Ltd., First Capital Financial Services
Corporation and First Capital Investments, Inc. He received a Bachelor of
Science in Business administration from Dyke College.
Frank Lubrano (age __)
Mr. Lubrano, a certified public accountant, has been involved in several high
tech, start-up ventures which developed into leading companies in their
particular industry segment. He has over twenty-five years of operating and
financial management experience in both service and manufacturing industries.
Sol L. Berg (age 62)
<PAGE>
Since the latter part of 1984, Mr. Berg has devoted his full-time efforts
to the business of the Company. From 1982 to 1984, Mr. Berg was the Project
Director and Product Manager for United Technologies Packard in Chicago,
Illinois. This Company is a manufacturer of precision instrumentation. From 1980
to 1982, Mr. Berg was Product Manager for the Hamilton Company in Reno, Nevada.
Hamilton Company is a manufacturer of precision scientific equipment. From 1974
to 1980, Mr. Berg, was the National Accounts Manager for Bio-Rad Laboratories in
Richmond, California. This Company manufactures diagnostic materials and
equipment. Sol L. Berg is the husband of Gloria Berg.
James R. Crose ( age 63)
Mr. Crose has been Director of Engineering for the Company since 1992 and
Vice President-Engineering since 1996. Mr. Crose earned a Bachelor of Science
degree in Mechanical Engineering from Northeastern University. His areas of
expertise include: Fluidics, Vacuum Process Control, Heat Transfer in
Electronics and AutoCad 1-4. He has 3 patents assigned to him with several other
pending. He has held key engineering positions with Raytheon, Martin Marietta,
Corning Glass, Sanders Assoc. and Sweetheart Cup Corp.
Gloria Berg (age 59)
Gloria Berg has served as Secretary for the Company since late 1984. From
1982 to 1984, she was a bookkeeper and accountant for Hidden Lake Village
Condominiums, Illinois. From 1975 to 1982, she was a department manager for 4
departments for Famous Barr department stores. Gloria Berg is the wife of Sol L.
Berg.
Scott Singer (age 44)
Mr. Singer is a Certified Public Accountant and serves as and has been in
private accounting practice for over ten years in the New York Metropolitan
area. He received a bachelor of Business Administration from Adelphi University.
Directors do not receive any compensation for services as directors. During
fiscal year 1997, the Company's Board of Directors performed the functions of a
compensation committee of the Board in reviewing the compensation paid to
employees, and of an audit committee in reviewing financial statements,
management and internal audits. IMSCO does not have a separate Nominating or
Compensation Committee.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets for the annual and long-term compensation of the chief
executive officer and other executive officers for services in all capacities
for the fiscal years ended December 31, 1995, 1996 and 1997, whose total annual
salary and bonus exceeded $100,000 in any of those fiscal years.
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name of Individual Capacity Year Salary Additional
Compensation
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alexander Hoffmann Executive Officer 1997 $25,962 $105,600(1)
Sol. L. Berg President 1997 $115,625
1996 $100,000(2)
1995 $75,300
James A. Yurak Former Director 1997 $100,000(3)
1996 $100,000
1995
Alan D. Waldman Former Director 1997
1996 $132,000(4)
1995
</TABLE>
(1) In connection with the signing of his employment agreement in October 1997,
Mr. Hoffmann was granted 80,000 shares of unregistered common stock of the
Company. He also The value of shares shown use the same $1.32 price per
share that shares were sold to Hampton Tech Partners II, LLC in October
1996. He is also entitled to an annual salary of $150,000.
(2) Consist of 150,000 shares of the Company received by Mr. Berg pursuant to
the general exchange of the Company's shares for shares of DPI conducted in
May 1996. In November of 1995, Mr. Berg had received 250,000 shares of DPI
for assigning his patent to the decaffeination technology and for other
services rendered. When all of the shares of DPI not owned by the Company
were exchanged by the respective DPI shareholders in May 1996 for Company
shares on a 0.6 Company shares to DPI share basis, Mr.Berg received the
150,000 shares of the Company.
(3) In connection with the signing of his amended employment agreement in
September 1996, Mr. Yurak was granted 75,000 shares of unregistered common
stock of the Company. He also received 75,000 shares of unregistered common
stock of the Company in March 1997. The value of shares shown use the same
$1.32 price per share that shares were sold to Hampton Tech Partners II,
LLC in October 1996.
(4) For his services the Company agreed to issue Dr. Waldman 100,000 shares of
common stock in October 1996 which shares did not vest and were not
delivered until January
<PAGE>
1997. The value of shares shown use the same $1.32 price per share that
shares were sold to Hampton Tech Partners II, LLC in October 1996.
There are no arrangements known to the Company which may at a subsequent
date result in a change in control of the Company.
The Company currently provides medical insurance to all its employees.
Employment Arrangements
Effective as of October 1, 1997, the Company entered into an employment
agreement with Alexander T. Hoffmann providing for Mr. Hoffmann's employment as
the Company's Chief executive Officer and Chairman for a three year term. Mr.
Hoffmann's salary under this agreement is $150,000 per year. The agreement also
provides that Mr. Hoffmann shall be provided with a car by the Company and be
reimbursed for automobile insurance. Mr. Hoffmann shall also be entitled to
medical insurance, vacation and other benefits provided to the Company's
employees generally. In the event that Mr. Hoffmann's employment with the
Company is terminated by the Company other than for cause, Mr. Hoffmann shall
receive one year's base salary
Effective as of October 1, 1997, the Company entered into an employment
agreement with Sol L. Berg providing for Mr. Berg's employment as the Company's
President for a three year term. Mr. Berg's salary under this agreement is
$125,000 per year. Mr. Berg is also eligible to receive an annual bonus equal to
3.5% of the "Net Earnings" in excess of $1 million per year from the Company's
"Heal & Seal" Division. The term "Net Earnings" shall mean the earnings of the
Company's "Heal & Seal" Division before taxes for each given fiscal year and
shall be conclusively determined to be those shown on the income statement for
such fiscal year by the Company in its Annual Report on Form 10-KSB as filed
with the Commission; or, if the Company shall not be subject to the reporting
requirements of Sections 13 or 15 of the Securities Exchange Act of l934, as
shown on the Company's income statement audited and certified by an independent
certified public accountant. The annual bonus shall be paid within 90 days after
the end of the Company's fiscal year end. For purposes of calculating the bonus,
the Company shall be charged in the aggregate no more than 10% of its gross
revenues by Company for royalties on licenses from Company to the Division and
for administration and management fees. The agreement also provides that Mr.
Berg shall be provided with a car by the Company and be reimbursed for
automobile insurance. Mr. Berg shall also be entitled to medical insurance,
vacation and other benefits provided to the Company's employees generally. In
the event that Mr. Berg's employment with the Company is terminated by the
Company other than for cause, Mr. Berg shall receive six months' base salary. In
connection with the exchange of his DPI stock for the Company's Common Stock,
Mr. Berg received 150,000 shares of the Company's Common Stock.
As of February 26, 1997, DPI entered into a consulting agreement with Mr.
James G. Yurak to provide marketing and sales consulting services and advice to
DPI through December 31, 1999. Under Mr. Yurak's agreement, he is paid a base
retainer of $12,000 per year and will be paid a per diem fee of $1,000 when
specific services are expressly requested by DPI. From February 23, 1996 through
February 26, 1997 Mr. Yurak served
<PAGE>
as a Director of the Company and was President and Chief Executive Officer of
DPI. As total compensation for such services Mr. Yurak was also granted 75,000
shares of the Company's Common Stock upon signing his employment agreement and
75,000 shares after one full year of employment.
Effective as of October 1, 1997, the Company entered into an employment
agreement with James Crose providing for Mr.Crose's employment as the Company's
Vice President of Engineering for a two year term. Mr. Crose's salary under this
agreement is $85,000 per year. Mr. Crose shall also be entitled to medical
insurance, vacation and other benefits provided to the Company's employees
generally.
Effective as of September 1, 1996, BVP Enterprises, Inc. D/b/a "Universal
Sales" entered into a Sales Administration and Servicing Agreement ("Universal
Agreement") with the Company for a seven year term, providing a broad scope of
sales administration and services to the Company. As compensation for its
services, Universal shall receive an amount equal to 2.5% of the Company's gross
revenues from operations in excess of $5 million per annum. Mr. Alexander T.
Hoffmann, the Chairman and Chief Executive Officer of the Company, is also the
President and a 50% shareholder of Universal Sales. Additionally, under the
Universal Agreement, Universal shall be entitled to a sales commission equal to
2.5% of the gross revenues resulting from all sales generated through the
efforts of Universal. Universal received $31,500 for services rendered to the
Company in 1996. The Company terminated the Universal Sales Agreement for cause
in April 1997. Universal Sales filed a Complaint against the Company on April
12, 1998 alleging breach of contract and seeking 75,000 shares of common stock
as damages. The Company is reviewing its position and has not filed an answer to
the Universal Sales lawsuit. See "Legal Proceedings".
Except as described above, there are presently no pension or other plans or
arrangements pursuant to which remuneration is proposed to be paid in the future
to any of the officers or directors of the Company other than as set forth
above. At the present time, the directors do not receive compensation of any
form. Non-Cash Compensation for all of the executive officers of the Company as
a group (3 persons) did not exceed the lesser of $25,000.00 per person or Ten
(10%) Percent of such person's cash compensation. The Company does not provide
life, health or medical plans to officers that are not available to all
employees. Except as provided above, the Company has no other employment
contracts with any executive officers or other employees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table identifies each person known to the Company to be the
beneficial owner of more than five percent of the Company's Common Stock, each
director of the Company and all directors and officers of the Company as a
group, and sets forth the number of shares of the Company's Common Stock
beneficially owned by each such person and such group and the percentage of the
shares of the Company's outstanding Common Stock owned by each such person and
such group. In all cases, the named person individually or together with his
spouse has sole voting power and sole investment power over the securities.
<PAGE>
(a) As of the December 31, l997, five persons owned of record or were known
by the Company to own beneficially more than five percent (5%) of the Common
Stock outstanding.
(b) The following table sets forth certain information regarding the
beneficial ownership (determined in accordance with Securities and Exchange
Commission Rule 13d-3 Securities Exchange Act of 1934) of common stock of the
Company as of December 31, 1997, by: (i) each person who is known by the Company
to own beneficially more than 5% of the outstanding shares of common stock; (ii)
each of the Company's directors; and (iii) all officers and directors of the
Company's as a group:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Class
- ---------------- -------------------- ----------------
<S> <C> <C>
Hampton Tech Partners II, LLC
8400 East Prentice Avenue
Englewood, CO 80111 (1) 1,117,424 18.3%
Hampton Tech Partners, LLC
8400 East Prentice Avenue
Englewood, CO 80111 (2) 150,000 2.5%
Proxhill Marketing, Inc.(3) 1,263,635 20.7%
9250 E. Costilla Avenue
Englewood, CO 80112
Gary A. Graham (4) 1,263,635 20.7%
9250 E. Costilla Avenue
Englewood, CO 80112
Sol L. Berg (4) 385,000(5) 6.3%
11 Royal Crest Drive
North Andover, MA 01845
Gloria Berg 165,250(6) 2.7%
11 Royal Crest Drive
North Andover, MA 01845
Dr. Alan Waldman (4) 170,000 2.8%
184 Seiffert Court
Oceanside, NY 11572
Mrs. Alexander T. Hoffman 369,900 6.0%
1660 Old Country Road
Plainview, NY 11803
Alexander T. Hoffmann (4)(7) 80,000 1.22%
c/o IMSCO
40 Bayfield Drive
North Andover, MA 01845
James Yurak (4)(8)
c/o IMSCO
40 Bayfield Drive
North Andover, MA 01845 150,000 2.4%
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Dr. Alan D. Waldman (4)(8)
c/o IMSCO
40 Bayfield Drive
North Andover, MA 01845 180,000 2.8%
Frank Lubrano (9)
c/o IMSCO
40 Bayfield Drive
North Andover, MA 01845 0 0
All Officers and Directors 1,893,885 29.1%
as a group (5 persons)
</TABLE>
- ---------------
(1) The members of Hampton Tech Partners II, LLC who indirectly and
beneficially own these shares of the Company are:
Steven Demby, Equitrust Mortgage Corporation, David McCall, Scott Robinson,
Kent Lovelace, Bennett Aisenberg, Gerald Gray, Tyler Runnels, Andrew
Telsey, Bravely Morton, Grant Street Joint Venture, Andrew Telsey, SEP/IRA,
David Sprang, James Curtis, Mark Rosenberg, Charles McKenney, Michael
Geller, Hampton Partners Investments, LLC, 181 Realty, Inc., Capital Market
Solutions, Inc. Clifford Greenbaum, Jolie Robinson, Henrik Oerbekker,
Russell Scott, Joseph Scott, Suzanne Robinson, Doug Hickok, Bob Sanderman,
Mark Bradford, Stanley Cohen, and Mark Lampirski.
(2) The natural persons who are the Hampton Tech Partners, LLC are:
Hampton Partners Investments, Inc., Kent Lovelace, David McCall, Scott
Robinson, Jack Robinson, Wexler & Burkhart, Del Morton, David Strang, and
Henrik Oerbekker.
(3) Does not include 127,272 Shares issuable to Proxhill Marketing, Ltd., upon
exercise of the Class D Warrants for the exercise price of $1.32 per Share.
(4) Denotes a director of the Company.
(5) The shares shown as owned by Sol L. Berg do not include either (i) 165,250
shares owned by his wife, Gloria Berg, or (ii) 150,000 shares owned
directly by Sol L. Berg's three adult children, since Mr. Berg has
disclaimed any interest and may not be deemed to have voting or investment
power over these shares.
(6) The shares shown as owned by Gloria Berg do not include either (i) 235,000
shares owned by her husband, Sol L. Berg, or (ii) 150,000 shares owned
directly by Sol L. Berg's three adult children, since Mrs. Berg may not be
deemed to have shares voting or investment power over these shares.
(7) The shares shown as owned by Alexander T. Hoffman do not include 369,900
owned by his wife Rosemary Hoffmann, since Mr. Hoffmann has disclaimed any
interest and may not be deemed to have voting or investment power over
these shares.
(8) Was a director of the Company until October 1997.
* Less than 1%
There are no arrangements known to the Company which may, at a subsequent
date, result in a further change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
<PAGE>
(a) Except as described below, since January 1, l997, there have been no
transactions with any officer, director or five percent (5%) or more
shareholders of the Company in which the amount involved exceeded $60,000.
On September 20, 1996, the Company entered into the Media Purchase
Agreement with PML, wherein PML agreed to sell $1,500,000 of media credits to
the Company in consideration for the Company issuing 1,136,363 shares of Common
Stock, representing a price of $1.32 per share. In connection with the private
placement of the Shares to HTP, HTP-II and PML, First Capital Investments, Inc.,
a broker-dealer which is a member of the National Association of Securities
Dealers, Inc. ("NASD"), received the 242,273 Class A Warrants entitling it to
acquire Common Stock for the price of $1.45 per Share exercisable over a period
ending July 31, 2001. First Capital Investments, Inc., also received a placement
fee equal to 10% of the $1.5 million received under the Stock Purchase
Agreement, a non-accountable expense allowance equal to 3% of the amount raised
under the Stock Purchase Agreement. As Media Credits are used by the Media
Purchase Agreement, First Capital Investments, Inc., shall also receive a
placement fee of 10% of the amount of Media Credit used. For advertising and
marketing services rendered to the Company in 1996 and 1997, PML also received
the 127,272 Class D Warrants, entitling it to acquire Common Stock for the price
of $1.32 per Share for a period ending July 31, 2001. Mr. Gary A. Graham who was
elected a Director of the Company in October 1997 is also the President and a
Director of PML and First Capital Investments , Inc.
In 1997, Mr. Alexander T. Hoffmann, a Director and Chief Executive Officer
of the Company, received 80,000 shares of Common Stock as compensation for
services rendered under his Employment Agreement. In 1997, Mr. James G. Yurak, a
Director of the Company until October 1997 and formerly President of the DPI
subsidiary, received 75,000 shares of Common Stock for services rendered in 1996
and 75,000 shares of Common Stock for services rendered in 1997. In January
1997, Dr. Alan Waldman received 100,000 shares of Common Stock representing
payment for services due him under his consulting agreement through December 31,
1996, with the shares vesting and being issued on January 1, 1997. David E.
Fleming, a member of Epstein, Becker & Green, P.C., corporate counsel to the
Company, was granted 90,000 shares of the Company's Common Stock for various
legal services rendered to the Company over the prior two years, with the shares
vesting and deemed earned on January 1, 1997. In 1996, Mr. Vernon Oberholtzer, a
former Director of the Company who resigned in February 1997, received stock
options to acquire 10,000 Shares for a price of $1.32, exercisable over a period
ending December 31, 1999. In 1996, Universal Sales, Inc. ("Universal"), a sales
and marketing company of which Mr. Alexander T. Hoffmann, a Director and the
Chief Executive Officer of the Company, is Director and a 50% shareholder,
received cash compensation in the amount of $31,500 for services rendered to the
Company. See "Legal Proceedings."
(b) Except as above described, there have been no business relationships
with directors or nominees for director of the Company since January 1, l997.
(c) At December 31, l997, no officers or directors were indebted to the
Company.
<PAGE>
(d) See 7(b) above.
ITEM 8. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits.
The Exhibits listed below are either filed or are deemed to be filed as
part of this Report.
2.0 -- Agreement and Plan of Reorganization dated August 11, 1986 (filed
as Exhibit C-1 to Form 8-K, File Number 2-98084-D and
incorporated herein by reference).
3.0 -- Articles of Incorporation and By-Laws (filed as Exhibits 4 and 5
to the Company's Registration Statement on Form S-18, File Number
2- 98084-D and incorporated herein by reference).
3.1 -- Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.1 to the Company's Registration Statement on Form SB-2,
File Number 333-19707 and incorporated herein by reference.)
3.2 -- Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form SB-2, File Number 333-19707 and
incorporated herein by reference.)
4.1 -- Form of Common Stock Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Form SB-2, File Number
333-19707 and incorporated herein by reference.)
4.2 -- Form of Class A Common Stock Purchase Warrant (filed as Exhibit
4.2 to the Company's Registration Statement on Form SB-2, File
Number 333-19707 and incorporated herein by reference.)
4.3 -- Form of Class B Common Stock Purchase Warrant (filed as Exhibit
4.3 to the Company's Registration Statement on Form SB-2, File
Number 333-19707 and incorporated herein by reference.)
4.4 -- Form of Class C Common Stock Purchase Warrant (filed as Exhibit
4.4 to the Company's Registration Statement on Form SB-2, File
Number 333-19707 and incorporated herein by reference.)
4.5 -- Form of Class D Common Stock Purchase Warrant (filed as Exhibit
4.51 to the Company's Registration Statement on Form SB-2, File
Number 333-19707 and incorporated herein by reference.)
<PAGE>
(6)(A) -- Note and Security Agreement dated October 3, 1986 between Company
and Naper Bank, N.A. (filed as Exhibit 10(A) to Annual Report on
Form 10-K, File Number 2-98084-D and incorporated herein by
reference).
<PAGE>
(6)(B) -- Agreement dated October 22, 1986 between Company and LKB
Diagnostics, Inc. regarding exclusive right and authority to
market, sell and distribute certain LKB products (filed as
Exhibit 10(B) to Annual Report on Form 10-K, File Number
2-98084-D and incorporated herein by reference).
(6)(C) -- Outside Director's Stock Option Plan dated May 21, 1987 (filed as
Exhibit (10) (c) to Annual Report on Form 10-K, File Number
2-98084-D and incorporated herein by reference).
(6)(D) -- Placement Letter dated April 11, 1994 between D.H.
Vermogensverwaltungs-und Beteiligungsgesellschaft mbH and the
Company.(1)
(6)(E) -- Promissory Note dated April 12, 1994 made by the Company to the
order of D.H.Vermogensverwaltungs-und Beteiligungsgesellschaft
mbH.(1)
(6)(F) -- Common Stock Purchase Warrant dated April 12, 1994 issued by the
Company to D.H. Vermogensverwaltungs-und Beteiligungsgesellschaft
mbH.(1)
(6)(G) -- Amendment Dated August 29, 1994 to Placement Letter dated April
11, 1994 between D.H. Vermogensverwaltungs- und
Beteiligungsgesellschaft mbH. and the Company.(1)
(6)(H) -- Consulting Agreement dated July 1, 1992 between IMSCO, Inc. and
Waldman Biomedical, Inc., and Addendum thereto Dated July 1,
1994.(1)
(6)(I) -- Escrowed Common Stock Agreement made as of September 30, l995
between Decaf Products, Inc. and James G. Yurak.(2)
(6)(J) -- Employment Agreement effective as of January 1, 1996 between
Decaf Products, Inc. and James G. Yurak.(2)
(6)(K) -- License Agreement dated February 23, 1996 between IMSCO, Inc. and
Decaf Products.(2)
10.1.-- Stock Purchase Agreement between the Company and Hampton Tech
Partners II, LLC dated September 20, 1996 (Filed on Form 8-K
dated October 1, 1996 -- Commission No. 0-24520).
10.2.-- Media Purchase Agreement between the Company and Proxhill
Marketing, Ltd., dated September 20, 1996 (Filed on Form 8-K
dated October 1, 1996 -- Commission No. 0- 24520).
<PAGE>
10.3.-- Manufacturing and Distribution Agreement between the Company and
NEWCO Enterprises, Inc., dated September 20, 1996 (Filed on Form
8-K dated October 1, 1996 -- Commission No. 0-24520).
10.4.-- Marketing Agreement between the Company and Huhes Edwards &
Price, Inc., dated September 20, 1996 (Filed on Form 8-K dated
October 1, 1996 -- Commission No. 0- 24520).
10.5.-- Consulting Agreement between the Company and Edmund Abramson
dated August 13, 1996.(3)
10.6.-- Consulting Agreement between the Company and WRA Consulting,
Inc., dated August 13, 1996.(3)
10.7 -- Agreement between the Company and Universal Sales dated as of
September 1, 1996.(3)
10.8 -- Employment Agreement dated as of October 1, 1997 between
Alexander T. Hoffmann and the Company.(4)
(b) Reports on Form 8-K.
The Company filed two reports on Form 8-K for the year ending December 31,
l997.
Footnotes
(1) Filed as Exhibits to the Company's Form 10-KSB dated July 14, 1994, File
Number 0-24520, and incorporated herein by reference.
(2) Filed as Exhibits to the Company's Form 10-KSB for the year ended December
31, 1995, File Number 0-24520, and incorporated by reference herein.
(3) Filed as Exhibits to the Company's Form 10-KSB for the year ended December
31, 1996, File Number 0-24520, and incorporated by reference herein.
(4) Filed as an Exhibit to the Company's Form 10-KSB for the year ended December
31, 1997, File Number 0-24520, and incorporated by reference herein.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
IMSCO Technologies, Inc.
We have audited the accompanying consolidated balance sheet of IMSCO
Technologies, Inc. ( a development stage enterprise) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations and deficit and cash flows for the years ended December 31, 1996 and
1995 and the cumulative amounts from July 9, 1992 (inception of the current
development stage) to December 31, 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Imsco Technologies,
Inc. (a development stage enterprise) and subsidiaries as of December 31, 1996
and 1995 and the cumulative amounts from July 2, 1992 (inception of the current
development stage) to December 1996 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 consolidated financial
statements the Company incurred a net loss of $1,062,758 during the year ended
December 31, 1996. As discussed in Notes 1, 8 and 9, the Company had suffered
continuing losses from now discontinued losses and development stage operations.
The continuing losses raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As described in Note 14 to the financial statements, the Company has restated
its financial statements to reflect the additional costs of media credits for
the year ended December 31, 1996.
GORDON, HARRINGTON & OSBORN, P.C.
North Andover, MA
April 2, 1997
Except as to Note 14 which is as of April 3, 1998
F-1
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We conssent to the incorporation by reference of our report dated April 2, 1997
which includes an explanatory paragraph regarding the Company's ability to
continue as a going concern, on our audits of the consolidated finanical
statements of Imsco Technologies, Inc. as of December 31, 1996 and 1995 which
report is included in this Annual Report on Form 10-KSB.
GORDON, HARRINGTON & OSBORN, P.C.
North Andover, MA
April 2, 1997
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
IMSCO Technologies, Inc.
North Andover, Massachusetts
We have audited the accompanying consolidated balance sheet of IMSCO
Technologies, Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
IMSCO Technologies, Inc. and Subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for each of the year then
ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements and as discussed in Note 9 to the consolidated
financial statements, the Company has suffered recurring losses since its
inception and has an accumulated deficit at December 31, 1997 of $6,541,225.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 9. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
April 3, 1998
F-1
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Current Assets:
Cash $ 13,780
Other Current Assets 1,000
-----------
Total Current Assets 14,780
-----------
Property and Equipment:
Property and Equipment 123,066
Leasehold Improvements 5,845
-----------
Total - At Cost 128,911
Less: Accumulated Depreciation and Amortization (88,250)
-----------
Property and Equipment - Net 40,661
-----------
Other Assets:
Deposits 3,499
-----------
Total Assets $ 58,940
===========
Liabilities and Stockholders' [Deficit]:
Current Liabilities:
Cash Overdraft $ 18,804
Accounts Payable 165,955
Due to Officer 3,000
Accrued Salaries 48,686
Accrued Expenses 1,622,612
Accrued Payroll Taxes 16,696
-----------
Total Current Liabilities 1,875,753
-----------
Commitments and Contingencies [8] [13] --
-----------
Stockholders' [Deficit]:
Preferred Stock - Authorized 1,000,0000 Shares at $.0001 Par Value;
0 and 0 Shares, Issued and Outstanding --
Common Stock - Authorized 15,000,000 Shares at $.0001 Par Value;
6,516,536 Shares Issued and Outstanding 652
Additional Paid-in Capital 6,118,198
Less: Prepaid Advertising Credits Receivable (1,394,438)
Deficit Accumulated:
Developments Stage (5,920,317)
Discontinued Operations (620,908)
-----------
Total Stockholders' [Deficit] (1,816,813)
-----------
Total Liabilities and Stockholders' [Deficit] $ 58,940
===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-2
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Amounts
from
July 9, 1992
[Inception of
the Current
Development
Years ended Stage] to
December 31, December 31,
1 9 9 7 1 9 9 6 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
General, Administrative and Development Expense:
Research and Development Expense $ 66,251 $ 53,838 $ 263,114
Salaries and Wages 189,794 42,087 435,643
Officer Salaries 190,714 61,375 523,783
Payroll Taxes 29,756 10,006 85,026
Outside Labor 34,190 -- 154,540
Professional Services and Consulting Fees 1,011,796 458,483 1,695,341
Rent and Fees 85,421 22,470 165,419
Insurance 34,763 22,344 89,601
Travel and Business Meeting 51,997 35,222 118,539
Auto Expense 16,247 3,716 40,539
Telephone and Utilities 16,376 9,199 50,073
Office Expense 52,991 25,905 93,273
Equipment Rental 16,480 4,883 24,825
Corporate Fees 19,568 6,496 60,173
Advertising 223,961 1,800 225,761
Depreciation and Amortization 13,258 -- 13,258
Consulting Fees and Litigation Settlement 1,538,392 -- 1,538,392
Franchise Tax 619 456 1,531
----------- ----------- -----------
General, Administrative and Development Expense 3,592,574 758,280 5,578,831
----------- ----------- -----------
Other Income [Expense]:
Dividend and Interest Income 5,541 3,022 11,633
Interest Expense -- (307,500) (309,047)
Loss on Sale of Fixed Assets (44,072) -- (44,072)
----------- ----------- -----------
Other Income [Expense] - Net (38,531) (304,478) (341,486)
----------- ----------- -----------
[Loss] Before Income Taxes (3,631,105) (1,062,758) (5,920,317)
Provision for Income Tax -- -- --
----------- ----------- -----------
Net [Loss] $(3,631,105 $(1,062,758) $(5,920,317)
=========== =========== ===========
[Loss] Per Share $ (0.57) $ (0.33)
=========== ===========
Weighted Average Shares Outstanding 6,318,281 3,274,954
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-3
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock '
Number of Paid-in Accumulated
Shares Amount Capital Deficit
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 2,995,425 $ 299 $ 1,796,700 $(1,847,362)
Private Placement 10,000 1 19,999 --
Issuance of Subsidiary Stock -- -- 10,000 --
Issuance of Shares 47,000 5 (5) --
Issuance of Shares for Consulting Services 284,000 28 213,534 --
Issuance of Shares in Payment of Loan 227,000 23 299,977 --
Issuance of Shares for Advertising Credits 1,136,000 114 1,499,886 --
Issuance of Shares for Settlement of Debt 775,000 77 943,543 --
Issuance of Shares for Subsidiary Stock 468,000 47 (47) --
Private Placement 150,000 15 299,985 --
Net [Loss] for the year ended December 31, 1996 -- -- -- (1,062,758)
----------- ----------- ----------- -----------
Balance at December 31, 1996 6,092,425 609 5,083,572 (2,910,120)
Warrants Issued for Cost of Advertising Credits - Restatement -- -- 108,170 --
----------- ----------- ----------- -----------
Adjusted Balance at December 31, 1996 6,092,425 609 5,191,742 (2,910,120)
Issuance of Shares for Consulting Services 100,000 10 274,990 --
Issuance of Shares on Consulting Services 75,000 8 196,867 --
Private Placement 23,000 2 34,498 --
Issuance of Shares for Professional Services 18,500 2 27,747 --
Private Placement 15,000 2 33,748 --
Issuance of Shares for Consulting Services 130,000 13 235,612 --
Private Placement 62,611 6 122,994 --
Advertising Credits Used -- -- -- --
Net [Loss] for the year ended December 31, 1997 -- -- -- (3,631,105)
----------- ----------- ----------- -----------
Balance at December 31, 1997 6,516,536 $ 652 $ 6,118,198 $(6,541,225)
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Prepaid Total
Advertising Stockholders'
Credits Equity
Receivable [Deficit]
<S> <C> <C>
Balance at December 31, 1995 $ -- $ (50,363)
Private Placement -- 20,000
Issuance of Subsidiary Stock -- 10,000
Issuance of Shares -- --
Issuance of Shares for Consulting Services -- 213,562
Issuance of Shares in Payment of Loan -- 300,000
Issuance of Shares for Advertising Credits (1,500,000) --
Issuance of Shares for Settlement of Debt -- 943,620
Issuance of Shares for Subsidiary Stock -- --
Private Placement -- 300,000
Net [Loss] for the year ended December 31, 1996 -- (1,062,758)
----------- -----------
Balance at December 31, 1996 (1,500,000) 674,061
Warrants Issued for Cost of Advertising Credits - Restatement (108,170) --
----------- -----------
Adjusted Balance at December 31, 1996 (1,608,170) 674,061
Issuance of Shares for Consulting Services -- 275,000
Issuance of Shares on Consulting Services -- 196,875
Private Placement -- 34,500
Issuance of Shares for Professional Services -- 27,749
Private Placement -- 33,750
Issuance of Shares for Consulting Services -- 235,625
Private Placement -- 123,000
Advertising Credits Used 213,732 213,732
Net [Loss] for the year ended December 31, 1997 -- (3,631,105)
----------- -----------
Balance at December 31, 1997 $(1,394,438) $(1,816,813)
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-4
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Amounts
from
July 9, 1992
[Inception of
the Current
Development
Years ended Stage] to
December 31, December 31,
1 9 9 7 1 9 9 6 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Net [Loss] $(3,631,105) $(1,062,758) $(5,920,317)
----------- ----------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Decrease [Increase] in Due from Officers -- 530 (120)
Depreciation and Amortization 13,258 -- 15,871
Contract Services Paid with Common Stock 729,970 213,562 1,167,015
Interest Paid with Common Stock -- 300,000 300,000
Amortization of Advertising Credits 213,732 -- 213,732
Loss on Disposal of Property and Equipment 44,072 -- 44,072
Changes in Assets and Liabilities:
[Increase] Decrease in:
Other Current Assets (1,000) -- (1,000)
Miscellaneous Receivables 200,000 (200,000) --
Other Assets 100 -- 20,200
Security Deposits 18,149 (21,258) 1,176
Accounts Receivable -- -- 2,998
Increase [Decrease] in:
Accounts Payable 137,078 (24,050) 101,504
Accrued Expenses 1,584,156 30,084 1,622,612
Accrued Salaries 48,686 -- 48,686
Accrued Payroll Taxes 6,146 8,506 16,696
Cash Overdraft 18,804 -- 18,804
Due to Officer 3,000 -- 3,000
----------- ----------- -----------
Total Adjustments 3,016,151 307,374 3,575,246
----------- ----------- -----------
Net Cash - Operating Activities - Forward (614,954) (755,384) (2,345,071)
----------- ----------- -----------
Investing Activities:
Purchase of Fixed Assets (39,674) (75,990) (118,212)
Prepaid Research Testing -- -- (7,734)
Proceeds from Sale of Fixed Assets 21,000 -- 21,000
----------- ----------- -----------
Net Cash - Investing Activities - Forward $ (18,674) $ (75,990) $ (104,946)
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-5
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Amounts
from
July 9, 1992
[Inception of
the Current
Development
Years ended Stage] to
December 31, December 31,
1 9 9 7 1 9 9 6 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
Net Cash - Operating Activities - Forwarded $ (614,954) $ (755,384) $(2,345,071)
----------- ----------- -----------
Net Cash - Investing Activities - Forwarded (18,674) (75,990) (104,946)
----------- ----------- -----------
Financing Activities:
Interim Loan Financing -- 300,000 385,000
Proceeds from Issuance of Common Stock 196,528 973,620 2,092,904
----------- ----------- -----------
Net Cash - Financing Activities 196,528 1,273,620 2,477,904
----------- ----------- -----------
Net [Decrease] Increase in Cash and Cash
Equivalents (437,100) 442,246 27,887
Cash and Cash Equivalents - Beginning of Periods 450,880 8,634 (14,107)
----------- ----------- -----------
Cash and Cash Equivalents - End of Periods $ 13,780 $ 450,880 $ 13,780
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ -- $ 7,500 $ 9,047
Income Taxes $ -- $ -- $ --
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-6
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
Organization - In July 1996, IMSCO, Inc. was reincorporated in Delaware as IMSCO
Technologies, Inc. The Company filed a Certificate of Incorporation in Delaware
incorporating a new wholly-owned subsidiary, IMSCO Technologies, Inc. The Board
of Directors of the Company at a meeting held in May 1996 voted, subject to the
adoption by the stockholders, to merge into its wholly-owned subsidiary, IMSCO
Technologies, Inc., a Delaware corporation. On July 9, 1996, the stockholders of
IMSCO, Inc., voted to approve the change of corporate domicile from
Massachusetts to Delaware. Therefore, on July 18, 1996, there remained one
surviving corporation and the name surviving corporation became IMSCO
Technologies, Inc. As of the effective date of the merger, each stockholder of
the Company held one share of common stock, par value $.0001 per share, of IMSCO
Technologies, Inc. for each one share of common stock, par value $.001 per
share, of IMSCO, Inc. previously held by him.
Imsco Technologies, Inc., a Delaware corporation, is currently a development
stage enterprise which has developed a core technology that achieves molecular
separation with innovative applications of electrostatics. Until July 7, 1992,
the Company was engaged in the sale of an automated luminometer and an
accompanying reagent system that measures raw material for microbiological
contamination. The Company discontinued operations and liquidated the remaining
inventory of reagents on April 16, 1993. Due to a lack of demand for the
technology developed, the Company changed its focus and began applying its
engineering and medical talents to the development of a separation system. No
revenue has been received from current products to date. The technology
developed has two prototypes. Tests of the Company's decaffeination technology
have successfully removed caffeine from coffee. In addition, The Plasma Pure has
been tested and can remove viruses from plasma.
The Company's subsidiaries, Decaf Products, Inc. ["DPI"] and BioElectric
Separation and Testing, Inc. ["BEST"] [the subsidiaries] were formed in 1995.
DPI was formed to market a unique proprietary technologies to decaffeinate
coffee. BEST was founded to create systems to improve human therapy, by
developing new diagnostics and improved methods for production and use of drugs,
biologics, and extracorporeal devices. As of December 31, 1997, the subsidiaries
had minimal activity, did not own any assets and are not liable for any
liabilities.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its subsidiaries Decaf Products, Inc. ["DPI"] an
BioElectric Separation and Testing, Inc. ["BEST"]. All significant inter-company
accounts and transactions have been eliminated in consolidation.
Property and Equipment - Property and equipment are stated at cost. Significant
additions or improvements extending asset lives are capitalized; normal
maintenance and repair costs are expended as incurred. Depreciation is provided
on the straight-line method over the estimated useful lives of the assets
ranging from five to ten years.
Cash Equivalents - The Company considers all highly liquid investments with an
original maturity of less than three months to be cash equivalents. At December
31, 1997, the Company had no cash equivalents.
Income Taxes - The Company accounts for income taxes under Statement of
Financial Accounting Standards ["SFAS"] No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, the asset and liability method is used to determine deferred
tax assets and liabilities based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
F-7
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
Earnings [Loss] Per Share - Earnings per share of common stock reflects the
weighted average number of shares outstanding for each period. The Financial
Accounting Standards Board ["FASB"], has issued Statement of Financial
Accounting Standards ["SFAS"] No. 128, "earning per share", which is effective
for financial statements issued for periods ending after December 15, 1997.
Accordingly, earnings per share data in the financial statements for the year
ended December 31, 1997, have been calculated in accordance with SFAS No. 128.
Prior period earnings per share data have been recalculated as necessary to
conform prior years data to SFAS No. 128.
SFAS No. 128 supercedes Accounting Principles Board Opinion No. 15, "earning per
share," and replaces its primary earnings per share with a new basic earning per
share representing the amount of earnings for the period available to each share
of common stock outstanding during the reporting period. SFAS No. 128 also
requires a dual presentation of basic and diluted earnings per share on the face
of the statement of operations for all companies with complex capital
structures. Diluted earnings per share reflects the amount of earning for the
period available to each share of common stock outstanding during the reporting
period, while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise or contingent issuance of securities that would have an antidulutive
effect on earnings per share [i.e., increasing earnings per share or reducing
loss per share]. The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon the exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
Estimates - Management uses estimates and assumptions in preparing financial
statements in accordance with general accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were assumed in
preparing the financial statements.
Stock Options and Similar Equity Instruments - On January 1, 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation," for stock
options and similar equity instruments [collectively "Options"] issued to
employees and directors, however, the Company will continue to apply the
intrinsic value based method of accounting for options issued to employees
prescribed by Accounting Principles Board ["APB"] Opinion No. 25, "Accounting
for Stock Issued to Employees" rather than the fair value based method of
accounting prescribed by SFAS No. 123 also applies to transactions in which an
entity issues its equity instruments to acquire goods and services from
non-employees. Those transactions must be accounted for based on the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
[2] Leases
In 1997, the Company entered into an operating lease for office space which
expires in March 2000. Rental expense for the operating lease was $15,890 and
$22,470 for the year ended December 31, 1997 and 1996, respectively. Under the
terms of the lease the Company is responsible for all utilities.
F-8
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[2] Leases [Continued]
In September 1996, the Company established an office at 950 Third Avenue, New
York, New York, consisting of approximately 2,500 square feet of space, with the
intention of conducting its sales, marketing and finance related activities. The
Company has decided that it will be more efficient and cost effective to run all
of its activities from the North Andover office for the near future. The lease
at 950 Third Avenue, New York, was for a term of five years at an annual base
rental of $32 per square foot. The 950 Third Avenue lease was terminated on July
10, 1997. The Company forfeited its security deposit and paid other fees due to
the termination of the lease. Rental expense for the above lease was $24,367 for
the year ended December 31.
The Company entered into various leases for equipment during the year ended
December 31, 1996.
Minimum annual rentals under non-cancelable operating leases having term of more
than one year are as follows:
Year ending
December 31,
1998 $ 30,566
1999 $ 26,935
2000 $ 3,973
Rental expense for the above leases was $16,706 for the year ended December 31,
1997.
[3] Income Taxes
Due to loses incurred for the years ended December 31, 1997 and 1996, the
Company recorded no tax provisions. The Company provided $619 and $456 for state
and local franchise and capital taxes for the year ended December 31, 1997 and
1996. These expenses have been included in selling, general and administrative
expenses for each of the years presented.
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
Federal Statutory rate (34)% (34)%
Increase in Valuation Allowance 34 34
------- -------
Effective Tax Rate -- --
======= =======
The Company has approximately $6,540,000 of net operating losses as of December
31, 1997 which may reduce taxable income and income taxes in future years. The
utilization of these losses to reduce future income taxes will depend on
generating sufficient taxable income prior to their expiration through the year
2012. In addition, the Internal Revenue Code of 1986 includes provisions which
may limit the net operating loss carryforwards available for uses in any given
year if certain events occur including significant changes in stock ownership.
The Company has recorded a deferred tax asset of approximately $2,616,000 at
December 31, 1997, principally related to its net operating loss carryforwards.
Such deferred tax asset has been completely offset by a valuation allowance in
the same amount due to the uncertainty of its ultimate realization. The
valuation allowance increased by federal $1,452,000 in 1997.
F-9
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[3] Federal and State Income Taxes [Continued]
The following summarizes the operating loss carryforwards by year of expiration:
Expiration Date Amount
--------------- ------
December 31, 2001 $ 4,000
December 31, 2002 $ 181,000
December 31, 2003 $ 233,000
December 31, 2004 $ 88,000
December 31, 2005 $ 71,000
December 31, 2009 $ 863,000
December 31, 2010 $ 406,000
December 31, 2011 $ 1,063,000
December 31, 2012 $ 3,631,000
[4] Related Party Transactions
In August 1996, Hampton Tech Partners, LLC acquired $300,000 in promissory notes
from the Company and 150,000 shares of Common Stock for the total consideration
of $300,000. On September 20, 1996, the Company entered into a Purchase
Agreement with Hampton Tech Partners II, LLC wherein Hampton Tech Partners II,
LLC acquired 761,000 shares of Common Stock for $1,004,520 in cash or $1.32 per
share. Private placement expenses of $77,400 were incurred during this
transaction, reducing net cash proceeds to $927,120. Hampton Partners II
received 227,273 shares in repayment of the $300,000 promissory notes with
Hampton Tech Partners, LLC and 129, 151 shares in payment of private placement
fees. Mr. Scott Robinson, a recently elected director of the Company, is a
member of Hampton Tech Partners and Hampton Tech Partners II, LLC. Mr.
Robinson's brother, Mr. Jeffrey Robinson is the sole shareholder of Hampton
Partners Investments, Inc., the Managing Member of Hampton Tech Partners and
Hampton Tech Partners II, LLC.
On September 20, 1996, the Company entered into the Media Purchase Agreement
with Proxhill Marketing Ltd., wherein Proxhill Marketing Ltd. agreed to sell
$1,500,000 of media credits to the Company in consideration for the Company
issuing 1,136,364 shares of Common Stock, representing a price of $1.32 per
share. The total cost of such transaction was $1,608,170 including the value of
the 127,262 warrants issued by the Company to Proxhill Marketing Ltd [See Note
14]. In connection with the private placement of the Shares of Hampton Tech
Partners II, LLC, Hampton Tech Partners and Proxhill Marketing Ltd., First
Capital Investments, Inc. a broker-dealer which is a member of the National
Association of Securities Dealers, Inc. ["NASD"], received 242,272 Class A
Warrants entitling it to acquire Common Stock for the price of $1.45 per share
exercisable over a period ending July 31, 2001. For advertising and marketing
services rendered to the Company in 1996 and 1997, Proxhill marketing Ltd. Also
received 127,262 Class D Warrants, entitling it to acquire Common Stock for the
price of $1.32 per share for a period ending July 31, 2001. As of December 31,
1996, the registration statement for the Class A Warrant Common Stock and Class
D Warrant Common Stock had not been declared effective.
F-10
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[4] Related Party Transactions [Continued]
In 1996, Mr. Sol L. Berg, a Director and President of the Company, received
150,000 shares of Common Stock in exchange for shares of common stock in Decaf
Products, Inc. ["DPI"] based on a conversion of .60 IMSCO Technologies, Inc.
shares for 1.00 Decaf products, Inc. shares. In 1996, Mr. James G. Yurak, a
Director and President of the DPI subsidiary, received 75,000 shares of Common
Stock in exchange for shares of common stock in Decaf Products, Inc. ["DPI"]
based on a conversion of .60 IMSCO Technologies, Inc. share for 1.00 Decaf
Products, Inc. share. Mr. Yurak received another 75,000 shares of Common Stock
in February 1997 upon the one year Anniversary of his employment agreement with
DPI. In 1996, Dr. Alan Waldman entered into an understanding that he shall
receive 100,000 shares of Common Stock representing payment for services due him
under his consulting agreement through December 31,1996, with the shares vesting
and being issued on January 1, 1997. In 1996, David E. Fleming, a member of
Epstein, Becker & Green, P.C., counsel to the Company, was granted 90,000 shares
of the Company's Common Stock in exchange for shares of Common Stock in Decaf
Products, Inc. ["DPI"] based on a conversion of .60 IMSCO Technologies, Inc.
shares for 1.00 DecafProducts, Inc. shares, which shares will vest on January 1,
1997. In 1996, Mr. Vernon Oberholtzer, a former Director of the Company who
resigned in February 1997, received stock options to acquire 10,000 shares for a
price of $1.32, exercisable over a period ending December 31, 1999. In 1996,
Universal Sales, Inc. ["Universal"], a sales and marketing company of which Mr.
Victor Bauer, a director of the Company, is President and a 50% shareholder,
received cash compensation in the amount of $31,500 and 75,000 shares of Common
Stock for services rendered to the Company, including the recruitment of the
services of Mr. Abramson for the Company.
The balance of $3,000 Due to Officer relates to a short-term loan to the Company
in 1997 which was paid in January 1998.
[5] Research and Development Costs
During the year ended December 31, 1997 and 1996, the Company charged $66,251
and $53,838, respectively to research and development expense.
[6] Stockholders' Equity
For the year ended December 31,1997 and 1996, respectively, 323,500 shares and
284,000 shares were issued by the Company for consulting and professional
services rendered to the Company. Such services were valued at common stock
price on the date such shares issued. The following expenses were charged to the
value of such services rendered:
Years ended
December 31,
-------------------------
1 9 9 7 1 9 9 6
------- -------
Consulting $ 305,000 $ 284,000
Professional Services 18,500 --
--------- ---------
Totals $ 323,500 $ 284,000
========= =========
[7] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 107, which requires disclosing fair value to
the extent practicable for financial instruments which are recognized or
unrecognized in the balance sheet. The fair value of the financial instruments
disclosed therein is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences or realization or settlement. For cash, trade payables and
short-term debt, the carrying amount approximated fair value because the near
term maturities of items.
F-11
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[8] Commitments
Under a media Purchase Agreement with Proxhill Marketing Ltd., it contractually
agreed to finance $1.5 million of media for the Company's public relations and
advertising campaign through Grow Marketing Services ["GROW"], an independent
marketing company. In exchange for the Company issuing 1,136,363 shares of its
common stock, representing a price of $1.32 per share, the Company acquired the
$1.5 million of prepaid, dedicated media credits [the "Media Credits"] and
certain media services. The media Purchase Agreement expires at the end of sixty
[60] months or upon the depletion of the prepaid media credits.
On September 20, 1996, the Company entered into an agreement with NEWCO a
privately held corporation based in St. Charles, Missouri for certain
institutional manufacturing and marketing of the Decaffeination System. The
Company agreed that NEWCO will have the exclusive right to sell the DECAFFOMATIC
to so-called "Office Coffee Supply" ["OCS"] subsection of the institutional
coffee-maker market and will be the manufacturer of the DEFAFFOMATIC for the
institutional marketplace in North American for a period of three years. Under
the NEWCO Agreement, NEWCO has also agreed to pay the costs of making final
working models, and the cost of creating moulds and related parts for the
DECAFFOMATIC device for the institutional coffee-maker marketplace. All of the
technology and final commercial model designs of the Decaffeination System will
be the property of the Company.
In October 1997, the company entered into employment agreement with three
officers of the Company. Such agreements provide for total annual compensation
of $385,000. Two of the agreements expire in 1999, the third expires in the year
2000. The agreement with one of the officers provide for the granting of 250,000
warrant to purchase the Company's stock at $2.00 per share, for a period of five
year from the date that they vest. Such options vest at the rate of 20,833
warrants quarterly over a three year period.
[9] Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business.
As shown in the accompanying financial statements, the Company incurred a net
Loss of $3,631,105 during the year ended December 31, 1997. The significant
operating loss as well as the uncertain sources of financing, create an
uncertainty about the Company's ability to continue as a going concern.
Management of the Company has developed a business plan to finance the Company
through licensing of its technology and individual patent rights and sell its
products to manufacturers. The Company will also seek financing through a public
offering. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
There can be no assurance that management's plans to reduce operating losses and
obtain additional financing to fund operations will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
F-12
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[10] Development Stage Enterprise
On July 7, 1992, the Company discontinued regular operations relating to the
sale of an automated luminometer. On July 22, 1992, the company and The General
Hospital Corporation, doing business as Massachusetts General Hospital, entered
a research agreement for $45,100, to perform the research and evaluation using
the Company's electro-static filter. As defined by the Financial Accounting
Standards board Statement No. 7, the Company is now a development stage
enterprise and it has been devoting substantially all of its efforts to
developing, engineering and obtaining patents for new technologies relating to
separation technologies for the medical and consumer product sectors. The
Company applied for United States Patents covering its decaffeination and Plasma
Pure separation technologies in 1993. With a prototype, marketing of this
product began in December, 1993. Although no income has been received, letters
of interest and royalty agreement negotiations have begun. The cumulative
deficit during the development stage is $5,920,317 for the period July 7, 1992
through December 31, 1997.
[11] Advertising
The costs of advertising are expensed the first time the advertising takes
place. For the year ended December 31, 1997 and 1996, the advertising expense
was $223,961 and $1,800, respectively.
[12] Stock Based Compensation
On May 21, 1996, the Board of Directors adopted the Employee Incentive Stock
Option Program [the "Option Program"], which provides for the issuance of up to
the lesser of 24% of the issued and outstanding Common Stock or 1,500,000 shares
of Common Stock through the grant of incentive and non-qualified stock options.
Stock options will be issued by action of the Board of Directors or its
Compensation Committee [the "Administrator"] to key employees of the Company as
a long-term incentive. Key employees will be designated by the Administrator in
its sole discretion; there are currently three employees so designated. Stock
Options under the Option Program will provide for an exercise price per share
determined by the Administrator [but not less than the par value of $.0001],
subject to tax requirements in connection with incentive stock options. No
payment will be required from participants in connection with grants. The
options will be execisable as specified by the Administrator at the time of
grant, although the tax benefits of incentive stock options described below will
be unavailable if the options is exercised less than one year after grant.
Options will be exercisable for a period determined by the Administrator but not
in excess of 10 years after grant.
A summary of the activity under the Company's stock option plan is as follows:
1 9 9 7 1 9 9 6
---------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- ---- ------- ----
Outstanding - Beginning of Years 110,000 1.45 10,000 .90
Granted or Sold During the Years -- -- 100,000 1.50
Canceled During the Years -- -- -- --
Expired During the Years -- -- -- --
Exercised During the Years -- -- -- --
------- ---- ------- ----
Outstanding - End of Years 110,000 1.45 110,000 1.45
======= ==== ======= ====
Exercisable - End of Years 110,000 1.45 100,000 1.45
======= ==== ======= ====
F-13
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- --------------------------------------------------------------------------------
[12] Stock Based Compensation [Continued]
The following table summarizes stock options information as of December 31,
1997:
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Stock Price Shares Life Price
--------- ---------- ---------
$.90 10,000 2.0 .90
$1.50 100,000 8.7 1.50
--------- ---------- ---------
Totals 110,000 8.1 1.45
------ ========= ========== =========
During 1996, the Company issued warrants to First Capital Investments and
Proxhill Marketing Ltd. [See Note 8]. In 1997, the Company issued 50,111 Class B
Warrants to purchase the Company's common shares at $2.50 per share in a private
placement transaction.
A summary of warrant activity is as follows:
1 9 9 7 1 9 9 6
------------------ -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ----- -------- -----
Outstanding - Beginning of Years 485,534 1.28 116,000 .90
Granted or Sold During the Years 300,111 2.08 369,534 1.40
Canceled During the Years -- -- -- --
Expired During the Years -- -- -- --
Exercised During the Years (66,000) .90 -- --
-------- ---- -------- ----
Outstanding - End of Years 719,645 1.65 485,534 1.28
======== ==== ======== ====
Exercisable - End of Years 719,645 1.65 485,534 1.28
======== ==== ======== ====
The following table summarizes stock options information as of December 31,
1997:
Weighted Weighted
Average Average
Remaining Exercise
Range of Exercise Prices Shares Life Price
------ ---- -----
$ .90 50,000 1.70 .90
$1.32 to $1.40 369,534 3.70 1.40
$2.00 250,000 5.00 2.00
$2.50 50,111 5.00 2.50
------- ---- ----
Totals 719,645 4.10 1.65
======= ==== ====
The Company applies accounting principles Board Options No. 25, Accounting for
Stock Issued to Employees, and related interpretations, for stock options issued
to employees in accounting for its stock options plans.
F-14
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------
[12] Stock Based Compensation [Continued]
If the Company had accounted for the issuance of all options and compensation
based warrants pursuant to the fair value based method of SFAS No. 123, the
Company would have recorded additional compensation expenses totaling $285,000
and $123,000 for the years ended December 31, 1997 and 1996, respectively, and
the Company's net loss and net loss per share would have been as follows:
December 31,
1 9 9 7 1 9 9 6
------------- -------------
Net Loss as Reported $ (3,631,105) $ (1,062,758)
============= =============
Pro Forma Net Loss $ (3,916,105) $ (1,185,758)
============= =============
Net Loss Per Share as Reported $ (0.57) $ (.32)
============= =============
Pro Forma Net Loss Per Share $ (0.62) $ (.35)
============= =============
The fair value of options and warrants at date of grant was estimated using the
Black-Scholes fair value based method with the following weighted average
assumptions for the years ended December 31,1997 and 1996:
1 9 9 7 1 9 9 6
------- -------
Expected Life [Years] 5 10
Interest Rate 6% 6%
Annual Rate of Dividends -- --
Volatility 74% 74%
The weighted average fair value of options at date of grant using the fair value
based method during 1996 was $1.14 and $1.23, respectively.
No stock compensation cost was recognized for stock-based employee amounts.
[13] Litigation
In June 1997, an action was commenced against the Company by Edmund Abramson and
by WRA Consulting, Inc. in the Eleventh Judicial Circuit of Dade County,
Florida. Abramson alleged breach of contract, claims damages of $1,400,000, plus
attorneys fee. WRA alleged breach of contract, failure of the Company to deliver
150,000 registered shares of common stock and 150,000 warrants to purchase
common stock to WRA Consulting, Inc. and claims damages in the amount of
$800,000, plus attorneys fees. In January 1998, the action was settled by the
Company agreeing to issue a total of 438,410 shares of common stock and 400,000
warrants to purchase common stock at $1.32 and $2.00. Included in the amount
shown were warrants valued at approximately $650,000 pursuant to the fair value
based method of SFAS #123.
On March 5, 1998, an action was commenced against the Company by BPV
Enterprises, Inc. doing business as Universal sales in the Supreme Court of the
State of New York, County of Suffolk. The plaintiff alleges breach of contract,
claiming damages of $337,000 plus attorney's fees. In addition, plaintiff also
claims that the Company owes it 75,000 shares of common stock and 75,000
warrants to purchase common stock for recruitment services that it performed for
the Company during 1996. The Company cannot predict the outcome of this matter
although it believes it has meritorious defenses and will vigorously defend the
action. However, if such actions is unsuccessful, it may have a material adverse
impact on the results of operations and financial condition of the Company.
Alexander T. Hoffman, chairman of the Company, is a 50% shareholder of BPV
Enterprises.
F-15
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- --------------------------------------------------------------------------------
[14] Restatement
The Company's statement of stockholders' deficit has been restated to record the
effect of the additional cost of media credits obtained from Proxhill Marketing,
Ltd. in 1996 [See Note 4]. Such amount was $108,170, and represents the cost of
warrants issued to Proxhill Marketing Ltd. The effect of such restatement of the
1996 financials was to increase deferred compensation and additional paid-in
capital. Such restatement had no affect on the statement of operations.
[15] New Authoritative Accounting Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.
. . . . . . . . . . . . . . .
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IMSCO TECHNOLOGIES, INC.
By: /s/ ALEXANDER T. HOFFMANN
-----------------------------
Alexander T. Hoffmann,
Chief Executive Officer
Date: April 28, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ ALEXANDER T. HOFFMANN
- -------------------------------
Alexander T. Hoffmann, Chairman
and Chief Executive Officer
Date: April 28, 1998
/s/ SCOTT SINGER
- -------------------------------
Scott Singer, Treasurer and Assistant Secretary
(Chief Financial and Accounting Officer)
Date: April 28, 1998
/s/ GARY A. GRAHAM
- -------------------------------
Gary A. Graham, Director
Date: April 28, 1998
- -------------------------------
Frank Lubrano, Director
Date: _________, 1998
