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, 1998 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
incorporation or organization) Identification Number)
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, l998: (a) 7,681,278 Common Shares, $.0001 par value, of
the registrant were outstanding; (b) approximately 6,071,643 Common Shares were
held by non-affiliates; and (c) the aggregate market value of the Common Shares
held by non-affiliates was $5,689,129 based on the closing bid price of $.937
per share on December 31, 1998. 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>
EXPLANATORY NOTE
This Amendment to Form 10-KSB is being filed by the Issuer in order to amend
certain information contained in the Financial Statements of the Issuer
included in the Form 10-KSB in response to Item 7.
<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: June 9, 1999
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 [a development stage company] as of December
31, 1998, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for each of the years ended December 31, 1998 and 1997.
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audits
provide 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 [a development stage company] as of
December 31, 1998, the results of their operations and their cash flows for each
of the years ended December 31, 1998 and 1997, 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 discussed in Note
8 to the consolidated financial statements, the Company has suffered recurring
losses since its inception primarily resulting from no revenues, has accumulated
deficits at December 31, 1998 of $9,422,387, has utilized $768,184 in cash for
operations for the year ended December 31, 1998, and is in default on certain
promissory notes. 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 8. 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
<PAGE>
April 28, 1999, except as to Note 16D
for which the date is May 25, 1999 and
Note 16E for which the date is May 26, 1999
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998.
<TABLE>
<CAPTION>
Assets:
Current Assets:
<S> <C>
Cash $ 22,992
Other Current Assets 1,000
-----
Total Current Assets 23,992
Property and Equipment:
Property and Equipment 123,066
Leasehold Improvements 5,845
Total - At Cost 128,911
Less: Accumulated Depreciation and Amortization (98,918)
------
Property and Equipment - Net 29,993
------
Other Assets:
Deposits 3,499
Deferred Financing Costs[15] 82,577
Total Other Assets 86,076
------
Total Assets $140,061
========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998.
<TABLE>
<CAPTION>
Liabilities and Stockholders' [Deficit]:
Current Liabilities:
<S> <C>
Notes Payable[15][16D] $390,000
Accounts Payable 161,982
Accrued Salaries 153,190
Accrued Expenses 24,472
Accrued Payroll Taxes 48,006
Accrued Marketing Fees 53,000
Accrued Legal Fees 50,955
Due to Stockholders 29,800
------
Total Current Liabilities 911,405
-------
Commitments and Contingencies [7] [12] --
------
Stockholders' [Deficit]:
Series A Preferred Stock - Authorized 1,000,0000 Shares
at $.0001 Par Value; 45,000 Convertible Shares, Issued and
Outstanding [5F] 5
Common Stock - Authorized 15,000,000 Shares at $.0001 Par Value;
7,681,278 Shares Issued and Outstanding 769
Additional Paid-in Capital - Series A Convertible Preferred Stock 224,995
Additional Paid-in Capital - Common Stock 9,803,770
Less: Prepaid Advertising Credits (1,378,496)
Deficit Accumulated During Development Stage (8,801,479)
Accumulated Deficit - Discontinued Operations (620,908)
--------
Total Stockholders' [Deficit] (771,344)
-------
Total Liabilities and Stockholders' [Deficit] $ 140,061
============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
Amounts
from
July 9, 1992
[Inception of
the Current
Development
Years ended Stage] to
December 31, December 31,
1 9 9 8 1 9 9 7 1 9 9 8
---------------------------------------
General, Administrative and Development Expense:
<S> <C> <C> <C>
Research and Development Expense $ 29,900 $ 66,251 $ 293,014
Salaries and Wages 266,511 189,794 702,154
Officer Salaries 661,070 190,714 1,184,853
Payroll Taxes 55,846 29,756 140,872
Outside Labor 36,596 34,190 191,136
Professional and Consulting Fees 161,490 276,547 908,020
Professional and Consulting Fees - Non-Cash [5C][11] 1,126,158 735,249 2,074,969
Rent 17,804 58,217 156,019
Rent - Related Party 3,750 -- 3,750
Insurance 73,642 34,763 163,243
Travel and Business Meeting 59,390 51,997 177,929
Auto Expense 20,230 16,247 60,769
Telephone and Utilities 11,329 16,376 61,402
Office Expense 10,366 80,195 130,843
Equipment Rental 8,474 16,480 33,299
Corporate Fees 9,808 19,568 69,981
Advertising 92,942 223,961 318,703
Depreciation and Amortization 10,669 13,258 23,927
Litigation Settlement -- 1,538,392 1,538,392
Franchise Tax 456 619 1,987
-----------------------------------------
General, Administrative and Development
Expense 2,656,431 3,592,574 8,235,262
-----------------------------------------
Other Income [Expense]:
Dividend and Interest Income -- 5,541 11,633
Interest Expense [15] (224,731) -- (533,778)
Loss on Sale of Fixed Assets -- (44,072) (44,072)
----- ------ ------
Other [Expense] - Net (224,731) (38,531) (566,217)
-------- ------- --------
[Loss] Before Income Taxes (2,881,162) (3,631,105) (8,801,479)
Provision for Income Tax -- -- --
------------------------------------------
Net [Loss] (2,881,162) $ (3,631,105) $ (8,801,479)
---------- ============ ============
[Loss] Per Share $ (.39) $ (0.57)
============== ===========
Weighted Average Shares Outstanding 7,370,026 6,318,281
=========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
<TABLE>
<CAPTION>
Deficit
Series A Convertible Paid-in Accumulated Accumulated Total
Preferred Stock Common Stock Capital During Deficit Prepaid Stockholders'
Number of Number of Preferred Paid-in Development Discontinued Advertising Equity
Shares Amount Shares Amount Stock Capital Stage Operations Credit [Deficit]
--------------------------------------------------------------------------------------------------------------
Balance at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995 -- $ -- 2,995,425 $ 299 $ -- $1,796,700 $(1,226,454) $ (620,908) $ -- $(50,363)
Private Placement -- -- 10,000 1 -- 19,999 -- -- -- 20,000
Issuance of
Subsidiary Stock -- -- -- -- -- 10,000 -- -- -- 10,000
Issuance of
Shares -- -- 47,000 5 -- (5) -- -- -- --
Issuance of
Shares for
Consulting
Services -- -- 284,000 28 -- 213,534 -- -- -- 213,562
Issuance of
Shares in
Payment of
Loan -- -- 227,000 23 -- 299,977 -- -- -- 300,000
Issuance of
Shares for
Advertising
Credits -- -- 1,136,000 114 -- 1,499,886 -- -- (1,500,000) --
Issuance of
Shares for
Settlement
of Debt -- -- 775,000 77 -- 943,543 -- -- -- 943,620
Issuance of
Shares for
Subsidiary
Stock -- -- 468,000 47 -- (47) -- -- -- --
Private
Placement -- -- 150,000 15 -- 299,985 -- -- -- 300,000
Net [Loss] -- -- -- -- -- (1,062,758) -- -- (1,062,758)
---------------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 -- -- 6,092,425 609 -- 5,083,572 (2,289,212) (620,908) (1,500,000) 674,061
Warrants Issued for
Cost of
Advertising
Credits -
Restatement -- -- -- -- -- 108,170 -- -- (108,170)
---------------------------------------------------------------------------------------------------------
Adjusted Balance at
December 31, 1996 -
Forward -- $ -- 6,092,425 $ 609 $ -- $ 5,191,742 $ (2,289,212) $ (620,908) $(1,608,170 $ 674,061
==========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
<TABLE>
<CAPTION>
Deficit
Series A Convertible Paid-in Accumulated Accumulated Total
Preferred Stock Common Stock Capital During Deficit Prepaid Stockholders'
Number of Number of Preferred Paid-in Development Discontinued Advertising Equity
Shares Amount Shares Amount Stock Capital Stage Operations Credit [Deficit]
--------------------------------------------------------------------------------------------------------------
Adjusted Balance at
December 31, 1996 -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Forwarded -- $ -- 6,092,425 $ 609 $ -- $5,191,742 $(2,289,212) $(620,908) $(1,608,170) $674,061
Issuance of
Shares for
Consulting
Services -- -- 100,000 10 -- 274,990 -- -- -- 275,000
Issuance of
Shares on Consulting
Services -- -- 75,000 8 -- 196,867 -- -- -- 196,875
Private
Placement -- -- 23,000 2 -- 34,498 -- -- -- 34,500
Issuance of
Shares for
Professional
Services -- -- 18,500 2 -- 27,747 -- -- -- 27,749
Private
Placement -- -- 15,000 2 -- 33,748 -- -- -- 33,750
Issuance of
Shares for
Consulting
Services -- -- 130,000 13 -- 235,612 -- -- -- 235,625
Private
Placement -- -- 62,611 6 -- 122,994 -- -- -- 123,000
Advertising
Credits Used -- -- -- -- -- -- -- -- 213,732 213,732
Net [Loss] -- -- -- -- -- (3,631,105) -- -- (3,631,105)
-------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 -
Forward -- $ -- 6,516,536 652 -- 6,118,198 $(5,920,317) $(620,908) (1,394,438) (1,816,813)
===========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
<TABLE>
<CAPTION>
Deficit
Series A Convertible Paid-in Accumulated Accumulated Total
Preferred Stock Common Stock Capital During Deficit Prepaid Stockholders'
Number of Number of Preferred Paid-in Development Discontinued Advertising Equity
Shares Amount Shares Amount Stock Capital Stage Operations Credit [Deficit]
--------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Forwarded -- $ -- 6,516,536 $ 652 $ -- $6,118,198 $(5,920,317) $(620,908) $(1,394,438) $(1,816,813)
Exercise of
Stock Warrants
[5A][11] -- -- 66,000 7 -- 59,393 -- -- -- 59,400
Issuance of
Shares in Settlement
of Litigation [5B] -- -- 399,081 39 -- 1,538,353 -- -- -- 1,538,392
Issuance of
Shares for
Services [5C] -- -- 612,911 62 -- 903,838 -- -- -- 903,900
Issuance of
Stock Warrants
for 600,000 Shares
of Common Stock
for Consulting
Services [11] -- -- -- -- -- 656,284 -- -- -- 656,284
Granting of Stock
Options for 266,750
Shares of Common
Stock to Employees [11] -- -- -- -- -- 133,375 -- -- -- 133,375
Private Placement of
Common Stock [5D] -- -- 70,000 7 -- 69,993 -- -- -- 70,000
Exercise of
Stock Options [5E][11] -- -- 16,750 2 -- 24,998 -- -- -- 25,000
Issuance of Stock
Warrants for
390,000 Shares of
Common Stock for Notes
Payable [15][11] -- -- -- -- -- 299,085 -- -- -- 299,085
Private Placement of
Series A Convertible
Preferred Stock [5F] 45,000 5 -- -- 224,995 -- -- -- -- 225,000
270 Shares Issuable
Pursuant to Financing
Penalty [5F] -- -- -- -- -- 253 -- -- -- 253
Advertising Credits
Used -- -- -- -- -- -- -- -- 15,942 15,942
Net [Loss] -- -- -- -- -- -- (2,881,162) -- -- (2,881,162)
----------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 -
45,000 $5 $7,681,278 $769 $224,995 $9,803,770 $(8,801,479) $(620,908) (1,378,496) $(771,344)
==========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
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 8 1 9 9 7 1 9 9 8
---------------------------------------
Operating Activities:
<S> <C> <C> <C>
Net [Loss] $ (2,881,162) $ (3,631,105) $ (8,801,479)
------------- ------------ ------------
Adjustments to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Decrease [Increase] in Due from Officers -- -- (120)
Depreciation and Amortization 10,668 13,258 26,539
Contract Services Paid with Common Stock [5C] 903,900 729,970 2,070,915
Interest Paid with Common Stock 253 -- 300,253
Interest Expense - Deferred Finance Costs [15] 216,508 -- 216,508
Grant of Stock Options and Warrants for
Past Services [11] 789,659 -- 789,659
Amortization of Prepaid Advertising Credits 15,942 213,732 229,674
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 --
Other Assets -- 100 20,200
Security Deposits -- 18,149 1,176
Accounts Receivable -- -- 2,998
Increase [Decrease] in:
Accounts Payable (3,973) 137,078 97,531
Accrued Expenses (59,748) 1,584,156 1,562,864
Accrued Salaries 104,504 48,686 153,190
Accrued Payroll Taxes 31,310 6,146 48,006
Accrued Marketing Fees 53,000 -- 53,000
Accrued Legal Fees 50,955 -- 50,955
--------------------------------------
Total Adjustments 2,112,978 2,994,347 5,666,420
-----------------------------------------
Net Cash - Operating Activities - Forward (768,184) (636,758) (3,135,059)
-------- -------- ----------
Investing Activities:
Purchase of Fixed Assets -- (39,674) (118,212)
Prepaid Research Testing -- -- (7,734)
Proceeds from Sale of Fixed Assets -- 21,000 21,000
----------------------------------
Net Cash - Investing Activities - Forward $ - $ (18,674) $ (104,946)
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
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 8 1 9 9 7 1 9 9 8
---------------------------------------
<S> <C> <C> <C>
Net Cash - Operating Activities - Forwarded $ (768,184) $ (636,758) $ (3,135,059)
------------- ------------ ------------
Net Cash - Investing Activities - Forwarded -- (18,674) (104,946)
------------------ --------
Financing Activities:
Cash Overdraft (18,804) 18,804 --
Proceeds from Notes Payable 390,000 -- 775,000
Proceeds from Issuance of Common Stock
[5A][5D][5E] 154,400 196,528 2,247,304
Proceeds from Preferred Stock Subscriptions [5F] 225,000 -- 225,000
Loans from Stockholders 38,300 3,000 41,300
Payment on Loans from Stockholders (11,500) -- (11,500)
------- ------------------
Net Cash - Financing Activities 777,396 218,332 3,277,104
---------------------------------------
Net Increase [Decrease] in Cash 9,212 (437,100) 37,099
Cash - Beginning of Periods 13,780 450,880 (327)
--------------------------------------
Cash - End of Periods $ 22,992 $ 13,780 $ 36,772
=============================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ -- $ -- $ 9,047
Income Taxes $ -- $ -- $ --
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During 1998, the Company entered into a financing transaction by settling an
accrued expense of $1,538,392 with the issuance of 399,081 shares of common
stock [See Note 5B].
During 1998, the Company entered into financing transactions by granting stock
warrants in connection with total financing costs of $299,085. The unamortized
balance of deferred financing costs at December 31, 1998 amounted to $82,577
[See Note 15].
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
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, 1998, 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"] and
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 expensed as incurred. Depreciation is provided
on the straight-line method over the estimated useful lives of the assets
ranging from three to five 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, 1998, 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.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[1] Summary of Significant Accounting Policies [Continued]
EARNINGS [LOSS] PER SHARE - 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.
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 earnings 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.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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. 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.
RECLASSIFICATIONS - Certain amounts in the prior year consolidated financial
statements have been reclassified to conform to the current year's presentation.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[2] Income Taxes
Income taxes have been recorded under SFAS No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net tax effects of (i) operating loss
carryforwards, and (ii) temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The tax effects of significant items comprising the
Company's net deferred tax asset as of December 31, 1998 is as follows:
Deferred Tax Asset:
Net Operating Loss Carryforward $ 3,768,000
Valuation Allowance for Deferred Tax Asset 3,768,000
---------
Net Deferred Tax Asset $ --
-------------------------------------------------------------=============
The valuation allowance of $3,768,000 at December 31, 1998, represents an
increase of $1,152,000 over the preceding year.
The Company has approximately $9,421,000 of net operating losses as of December
31, 1998 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
2013. 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 net operating loss carryforwards of approximately $9,421,000
which expire as follows:
Years ended
December 31, Amount
2001 $ 4,000
2002 181,000
2003 233,000
2004 88,000
2005 71,000
2009 863,000
2010 406,000
2011 1,063,000
2012 3,631,000
2013 2,881,000
---------
Total $ 9,421,000
----- ==============
A reconciliation of the federal statutory income tax rate to the Company's
effective income tax rate for the years ended December 31, 1998 and 1997
follows:
1 9 9 8 1 9 9 7
------------------------
Federal Statutory Income Tax Rate (34)% (34)%
Change in Valuation Allowance 34 34
------------------
Effective Income Tax Rate -- --
------------------------- ==================
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[3] 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 former 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
13]. 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.
In 1996, Mr. Sol L. Berg, a former Director and former 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
former Director and former 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, then a member of Epstein, Becker & Green, P.C., which was 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 former director of the
Company, is President and a 50% shareholder, received cash compensation in the
amount of $31,500 for services rendered to the Company, including the
recruitment of the services of Mr. Abramson for the Company.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[3] Related Party Transactions [Continued]
The balance of $29,800 Due to Stockholders relates to short-term loans to the
Company in 1998. The loans are non-interesting bearing and are due on demand.
During 1998, the Company received $38,300 in loans from the stockholders and
repaid $11,500 of loans.
During 1998, the Company commenced leasing office space on a month-to-month
basis from one of the stockholders of the Company. During the year ended
December 31, 1998, the Company incurred $3,750 of rent expense under this lease.
[4] Research and Development Costs
During the years ended December 31, 1998 and 1997, the Company charged $29,900
and $66,251, respectively to research and development expense.
[5] Equity Transactions
Equity transactions during the year ended December 31, 1998 are as follows:
[A] Common stock issued pursuant to the exercise of stock warrants was as
follows:
Date Number of Shares Par Value Paid-in Capital Total
January 8 66,000 $ 7 $ 59,393 $ 59,400
=======================================================
[B] Common stock issued in settlement of litigation was as follows:
Date Number of Shares Par Value Paid-in Capital Total
January 13 150,000 $ 15 $ 591,674 $ 591,689
March 30 249,081 24 946,679 946,703
---------------------------------------------------------
Totals 399,081 $ 39 $1,538,353 $ 1,538,392
------ =========================================================
The Company will issue another 39,239 shares of common stock to one of the
plaintiffs in this settlement upon resolution of plaintiff's tax lien. There
will be no effect on total equity upon resolution of this matter. In addition,
the settlement also called for the issuance of warrants for 400,000 shares of
the Company's common stock [See Note 12].
[C] Common stock issued for services was as follows:
Date Number of Shares Par Value Paid-in Capital Total
February 25 125,000 $ 13 $ 203,111 $ 203,124
March 31 48,727 5 66,995 67,000
May 7 339,184 34 508,742 508,776
August 6 100,000 10 124,990 125,000
--------------------------------------------------------
Totals 612,911 $ 62 $ 903,838 $ 903,900
------ ========================================================
[D] Common stock issued in private placement was as follows:
Date Number of Shares Par Value Paid-in Capital Total
May 26 70,000 $ 7 $ 69,993 $ 70,000
=======================================================
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[5] Equity Transactions [Continued]
[E] Common stock issued pursuant to the exercise of stock options as follows:
Date Number of Shares Par Value Paid-in Capital Total
May 28 16,750 $ 2 $ 24,998 $ 25,000
=======================================================
[F] Series A convertible preferred stock issued in private placement as follows:
Date Number of Shares Par Value Paid-in Capital Total
August 25 45,000 $ 5 $ 224,995 $ 225,000
=======================================================
The Series A convertible preferred stock is convertible at the option of the
holder into one share of the Company's common stock for every five shares of
convertible preferred stock commencing three months after the date subscribed. A
registration statement was to be filed and declared effective by November 30,
1998, registering the common shares available for conversion, or incur a penalty
at the rate of 3% per month for the common shares to be registered. At December
31, 1998, the registration statement was not declared effective. Therefore,
paid-in capital includes $253 for the obligation to issue 270 shares of the
Company's common stock as of December 31, 1998. The registration statement has
not become effective as of April 28, 1999 [See Note 16E].
[6] Fair Value of Financial Instruments
In assessing the fair value of financial instruments, the Company has used a
variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For all financial instruments,
including cash, due to stockholders and debt maturing within one year, it was
estimated that the carrying amount approximated fair value for these financial
instruments because of their short maturities.
[7] Commitments
Leases - The Company leases office space under an operating lease which expires
in March of 2000. In addition to the minimum rentals, the Company is liable for
contingent rentals based on its proportionate share of operating expenses, as
defined.
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 New York lease was $24,367
for the year ended December 31, 1997.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[7] Commitments [Continued]
Leases [Continued] - Minimum annual rentals under non-cancelable operating
leases having a term of more than one year are as follows:
Year ending
December 31,
1999 $ 15,890
2000 3,973
-----
Total $ 19,863
----- ===========
Total rental expense was $17,804 and $40,257 for the years ended December 31,
1998 and 1997, respectively.
PREPAID ADVERTISING CREDITS - 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.
SALES AGREEMENT - 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
DECAFFOMATIC 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.
EMPLOYMENT AGREEMENTS - 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 in 1998
provides for the granting of 250,000 warrants as amended to purchase the
Company's stock at $1.50 per share from $2.00 per share. Compensation expense of
$125,000 was recorded for this amendment to the warrants. The options expire May
30, 2003.
[8] 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.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[8] Going Concern [Continued]
As shown in the accompanying financial statements, the Company incurred a net
loss of $2,881,162 primarily resulting from no revenues and utilized $768,184 in
cash for operations during the year ended December 31, 1998. The significant
operating losses as well as the uncertain sources of financing, create an
uncertainty about the Company's ability to continue as a going concern. During
1999, the Company has reduced their monthly expenditures from approximately
$65,000 to approximately $22,000. 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 debt and equity financing [See Note 16B].
Additionally, the Company is negotiating to sell the prepaid advertising credits
on an as needed basis at a discount of approximately 50%. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
The continuation of the Company as a going concern is dependent upon the success
of these plans.
There can be no assurances 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.
[9] Development Stage Enterprise
On July 7, 1992, the Company discontinued 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. The Company is considered 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 $8,801,226 for the period July 7, 1992
through December 31, 1998.
[10] Advertising
The Company expenses advertising costs as incurred. For the years ended December
31, 1998 and 1997, advertising expense was $92,942 and $223,961, respectively.
[11] 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. 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 exercisable 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 option 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.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[11] Stock Based Compensation [Continued]
The following table summarizes the activity in common shares subject to options.
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
-----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C> <C>
Outstanding - Beginning of Years 110,000 $ 1.45 110,000 $ 1.45
Granted or Sold During the Years 266,750 $ 1.50 -- $ --
Canceled During the Years -- $ -- -- $ --
Expired During the Years -- $ -- -- $ --
Exercised During the Years (16,750) $ 1.50 -- $ --
------- --------
Outstanding - End of Years 360,000 $ 1.48 110,000 $ 1.45
========== ========
Exercisable - End of Years 360,000 $ 1.48 110,000 $ 1.45
========== ========
</TABLE>
The following table summarizes stock options information as of December 31,
1998:
Options Outstanding
Weighted-
Average Weighted-
Remaining Average
Number Contractual Exercise
Exercise Price Outstanding Life Price
$.90 10,000 1.0 $ .90
$1.50 350,000 5.3 $ 1.50
----------------------------------
Totals 360,000 5.2 $ 1.48
------ ==================================
The exercise prices of the options outstanding at December 31, 1998, range
between $.90 and $1.50 with a weighted average contractual life of 5.2 years.
The following table summarizes the activity in common shares subject to
warrants:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
-----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding - Beginning of Years 785,645 $ 1.59 485,534 $ 1.28
Granted or Sold During the Years 990,000 $ 1.30 300,111 $ 2.08
Canceled During the Years (250,000) $ 2.00 -- $ --
Expired During the Years -- $ -- -- $ --
Exercised During the Years (66,000) $ .90 -- $ --
------- --------
Outstanding - End of Years 1,459,645 $ 1.35 785,645 $ 1.59
============ ========
Exercisable - End of Years 1,459,645 $ 1.35 785,645 $ 1.59
============ ========
</TABLE>
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[11] Stock Based Compensation [Continued]
The following table summarizes stock warrants information as of December 31,
1998:
Weighted-
Average Weighted-
Remaining Average
Number Contractual Exercise
Exercise Prices Outstanding Life Price
$.90 - $1.00 440,000 3.8 $ .99
$1.32 to $1.50 969,534 3.7 $ 1.46
$2.50 50,111 4.0 $ 2.50
------------------------------------
Totals 1,459,645 3.7 $ 1.35
------ ====================================
The Company applies Accounting Principles Board Opinion No. 25 ["APB No. 25"],
Accounting for Stock Issued to Employees, and related interpretations, for stock
options issued to employees in accounting for its stock options plans. For the
year ended December 31, 1998, stock compensation of $133,375 was recognized for
stock-based employee amounts.
The exercise prices of the warrants outstanding at December 31, 1998 range
between $.90 and $2.50 with a weighted average contractual life of 3.7 years.
Had compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, net loss and loss per share would have been recorded as
follows:
December 31,
1 9 9 8 1 9 9 7
Net Loss as Reported $ (2,881,162) $(3,631,105)
============= ===========
Pro Forma Net Loss $ (2,881,162) $(3,916,105)
============= ===========
Net Loss Per Share as Reported $ (0.39) $ (0.57)
============= ===========
Pro Forma Net Loss Per Share $ (0.39) $ (0.62)
============= ============
The weighted average grant date fair value of options and warrants granted in
1998 and 1997 was $1.34 and $1.14, respectively.
The fair value of each option and warrant granted is estimated on the grant date
using an option pricing model which takes into account, as of the grant date,
the exercise price and the expected life of the option or warrant, the current
price of the underlying stock and its expected volatility, expected dividends on
the stock and the risk-free interest rate for the expected term of the option or
warrant. The following is the average of the data used for the following items:
1 9 9 8 1 9 9 7
-----------------------
Expected Life [Years] 5 5
Risk-Free Interest Rate 5 % 6 %
Expected Dividends -- --
Expected Volatility 76 % 74 %
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[12] 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 438,320 shares of common stock and 400,000
warrants to purchase common stock at $1.32 and $2.00. $1,538,392 was included in
accrued expenses at December 31, 1997 [See Note 5B].
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 the Enterprise 75,000 shares of the Company's
common stock and 75,000 warrants to purchase the Company's common stock for
recruitment services that were performed for the Company during 1996. The
Company's counsel cannot predict the outcome of this matter although it believes
it has meritorious defenses and will vigorously defend the action. Therefore, no
accrual has been made at December 31, 1998. However, if such defenses are
unsuccessful, it may have a material adverse impact on the results of operations
and financial condition of the Company. The chairman of the Company, is a 50%
shareholder of the Plaintiff [See Note 3].
On December 24, 1998, a second action was commenced against the Company and the
Chairman and Chief Executive Officer of the Company by BPV Enterprises, Inc.
doing business as Universal Sales, and Victor Bauer in the Supreme Court of the
State of New York, County of Suffolk. The plaintiff alleges breach of contract
under a sales and service administration agreement claiming a commission equal
to 2.5% of the Company's sales in excess of $5,000,000 per year, and a standard
sales commission equal to 2.5% per year of revenues derived from customers
obtained by the plaintiff. The plaintiff also alleges the amount of potential
lost commissions to be $25,000,000. Additional causes of action, against the
Chairman and Chief Executive Officer of the Company include breaches of his
roles and duties for the plaintiff and unjust enrichment. The Company's counsel
cannot predict the outcome of this matter although it believes it has
meritorious defenses and will vigorously defend the action. Therefore, no
accrual has been made at December 31, 1998. However, if such defenses are
unsuccessful, it may have a material adverse impact on the results of operations
and financial condition of the Company.
[13] 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 3]. 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 prepaid advertising credits and additional
paid-in capital. Such restatement had no affect on the statement of operations.
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
[14] New Authoritative Accounting Pronouncements
The Financial Accounting Standard Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it its designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
[15] Notes Payable
Notes payable at December 31, 1998 consisted of the following:
Senior secured promissory notes payable,
due January 31, 1999, including interest
at 10%, collateralized by all of the assets
of the Company. $ 100,000
Senior secured convertible promissory notes
payable due January 31, 1999 including
interest at 10%, collateralized by all of the
asset of the Company. 290,000
Total $ 390,000
===========
The holders of the senior secured promissory notes payable of $100,000 received
warrants to purchase 100,000 shares of the Company's common stock at $1.00 per
share. The Company recorded paid-in capital and deferred finance costs of
$80,505 to be amortized over four months. During the year ended December 31,
1998, $60,379 was amortized as interest expense. The warrants expire in
September 2003. The notes were paid in 1999.
The senior secured convertible promissory notes payable of $290,000 are
convertible into shares of the Company's common stock at any time prior to the
due date of the notes. The notes may be converted into shares of the Company's
common stock at the rate equal to the lessor of (a) $1.00 per share of common
stock, or (b) eighty percent at the average closing "bid" price of the Company's
publicly traded common stock for the five trading days immediately preceding the
conversion. Additionally, the notes included warrants to purchase 290,000 shares
of the Company's common stock at $1.00 per share. The Company recorded paid-in
capital and deferred finance costs of $218,580 to be amortized over three and a
half months. During the year ended December 31, 1998, $156,129 was amortized as
interest expense. The warrants expire in October 2003 [See Note 16D].
<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
[16] Subsequent Event
[A] Issuance of Common Stock - On January 15, 1999, the Board of Directors of
the Company authorized the issuance of 80,000 shares of the Company's common
stock to satisfy accrued expenses at December 31, 1998 of $63,000 and for
services to be performed January through April 1999 in the amount of $12,000.
[B] Financing - On February 9, 1999, the Company completed a private offering of
$600,000 of 8% convertible debentures due January 31, 2002 and 120,000 warrants
to purchase the Company's common stock at $1.50 per share until January 31,
2002. Interest is payable quarterly in cash or common stock at the option of the
Company. The debentures are convertible in $5,000 multiples into shares of the
Company's common stock at a conversion price for each share of common stock
equal to 75% of the market price at the conversion date, but no more than $1.00
per share. The 25% fair market value adjustment at date of issue will be an
additional cost to the Company in the year exercised.
[C] Termination of Officer - On March 22, 1999, the Company terminated the
employment contract of the president of the Company, for cause, as he violated
the terms of his employment agreement which was to expire in October 1999.
[D] Defaults on Convertible Promissory Notes - Two of the senior secured
convertible promissory notes payable due January 31, 1999 were extended until
May 25, 1999 and in consideration of the extension the exercise price of the
warrants was decreased to $.40 per share. This will result in a financing cost
in 1999 of $21,000. The Company did not pay these notes on May 25, 1999. The
Company has not received any notices of default, however, all five of the senior
secured convertible promissory notes are deemed to be in default in the total
amount of $118,355 plus interest because of failure to receive extension or pay
timely.
[E] Waiver of Penalty - On May 26, 1999, the holder of the Series A Convertible
Preferred Stock agreed that the penalty for the related registration rights
shall apply and accrue up and until April 30, 1999, however, thereafter the
penalty for failure to achieve the required registration shall cease.
