DRAFT MAY 28, 1999--CONFIDENTIAL--NOT FOR DISTRIBUTION
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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.
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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
to the 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.
In this Annual Report, the terms "company","IMSCO", "we", "us" and "our"
refer to IMSCO Technologies, Inc., a Delaware corporation, and unless the
context otherwise requires, "common stock" refers to the common stock, $0.0001
par value per share of IMSCO.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
IMSCO is a development stage company. We develop and are 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 five years, we have developed several separation
technologies based on electrostatics combined with mechanical separation. This
technology was originally developed by us for the specific purpose of separating
viruses and viral particles from human plasma. In 1993, we designed an
electrostatic separation technology which removes on demand caffeine from brewed
liquids, such as coffee and tea. We call our decaffeination technology the
"DECAFFOMATIC" (herein "DECAFFOMATIC" or the "Decaffeination System"). We call
our 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, we began researching and
developing other uses for the technology. Based on our internal laboratory
testing and research conducted by us at outside research laboratories, we
believe that the DECAFFOMATIC is capable of removing substantial amounts of
caffeine from brewed beverages such as coffee and tea. In 1993, we filed
separate patent applications with the U.S. Office of Patents and Trademarks for
the PLASMA PURE and DECAFFOMATIC separation technologies. On August 22, l995 we
were 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". On April 2, 1996 the Company was granted a patent by the PTO , Patent
No. 5503724, for "A Process for Decaffeinating Caffeine Containing Liquid".
Previously in late 1996 and early 1997, IMSCO 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 in 1998, we believed that we 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. Our
management believes 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 and 1998, we
continued to develop and test a DECAFFOMATIC device contained within a
detachable coffee brew basket for the institutional
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commercial marketplace containing the IMSCO decaffeination technology. We
believe that we have substantiallly completed our scientific research for the
DECAFFOMATIC by demonstrating that our electrostatic separation technology can
remove caffeine from freshly brewed coffee and we hope to be able to develop and
incorporate our technology into our brew basket decaffeination product for the
commercial institutional coffee brewer market in 1999. Although no contracts
have been signed, we intend to license the DECAFFOMATIC technology to another
unrelated company for manufacture, marketing and distribution. See "Business
- -Marketing."
Our objective is to become a leader in the development of electrostatic
separation market by capitalizing on our proprietary technology. Our strategy is
to initially focus on commercializing and launching the DECAFFOMATIC products.
Although due to limited financial and human resources we have been unable to
conduct any significant research and development on our PLASMA PURE technology,
we intend to pursue further research and the development of the PLASMA PURE
technologies if funding becomes available. Although there can be no assurances,
we intend to implement our strategy by (i) establishing manufacturing contracts
with third party manufactures for our products, (ii) expanding our research and
development activities for additional uses and applications applying our
proprietary separation technologies, and (iii) establishing marketing
agreements, licensing agreements and distribution agreements with recognized
market leaders for marketing and distribution of our products once developed.
In December 1995, IMSCO 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 our core electrostatic separation technology. We have only
conducted limited basic research with respect to the PLASMA PURE electrostatic
separation technology and because of our limited financial resources we were not
able to conduct any significant research and development on our PLASMA PURE
technology in 1998. If adequate funding were available, we estimate that it
would take a minimum of 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 us and consequent delays in
conducting the necessary research and testing, the PLASMA PURE would not
possibly be submitted to the FDA, if at all, until funding were obtained. See
"Business -- Research and Development."
On September 20, 1996, we entered into a media purchase agreement ("Media
Purchase Agreement") and agreed to sell an aggregate of 1,136,364 shares of our
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 we received in exchange prepaid media credits in the amount of
$1,500,000 to be used at our direction. PML 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. Because the marketing and advertising
campaign for our commerical brew basket decaffeinator has not yet been
implemented, at December 31, 1998 we possessed approximately $1,378,496 of
prepaid media credits in our inventory to use for future public relations,
marketing and advertising. Since we currently plan to license our DECAFFOMATIC
technology for the commercial marketplace, we may attempt to sell our Media
Credits to a third party in order to raise additional working capital.
We were originally formed in 1986 under the laws of the State of Nevada. In
1987 we 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. Our name
at that time was IMSCO, Inc. In July 1996, we reincorporated in Delaware as
IMSCO Technologies, Inc. In order to effectuate this change, we proposed the
implementation of the following plan. In May 1996, we 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, Inc. As of the effective date of the
merger, each stockholder of the company held
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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.
PRODUCTS AND TECHNOLOGIES
We are in the development stage, and have 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 our 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 we believe that
we have substantiallly completed our scientific research for the DECAFFOMATIC by
demonstrating that our electrostatic separation technology can remove caffeine
from freshly brewed coffee, it has not been developed and incorporated into a
final commercial ready brew basket product. Most of 1998 was devoted to further
development, design and testing of the decaffeination device as a self contained
device within a detachable commercial brew basket market. There are a number of
challenges that we must successfully address to complete any of our development
efforts. With respect to PLASMA PURE, although the results of our initial basic
research were positive, it may be inconclusive and may not be indicative of
results that will be obtained in human clinical trials if conducted by us. If we
are able to obtain necessary funding and conduct clinical trials, as results of
particular preclinical studies and clinical trials are received, we may abandon
projects such as PLASMA PURE, which we might otherwise have believed to be
promising from early initial testing. We are presently 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 our 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 IMSCO 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 us will prove to be ineffective or any or all of our potential 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 us or our collaborators from marketing products utilizing our
technologies; or that other parties will market superior or equivalent products.
Accordingly, there can be no assurance that our 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 our electrostatic separation technology, we designed,
researched and developed a successfully working prototype of the DECAFFOMATIC
device. Since that time, have continued research and development in an effort to
integrate our scientific decaffeination technology into a commercial ready model
for the institutional coffee maker marketplace. Previously in late 1996 and
1997, we 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 in 1998, we determined that we 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. Our management believes 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 and 1998, we continued to develop and
test a DECAFFOMATIC device contained within a detachable coffee brew basket for
the
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institutional commercial marketplace containing the IMSCO decaffeination
technology. We believe that we have substantiallly completed our scientific
research for the DECAFFOMATIC by demonstrating that our electrostatic separation
technology can remove caffeine from freshly brewed coffee and we hope to be able
to develop and incorporate our technology into a brew basket decaffeination
product for the commercial institutional coffee brewer market in 1999. The
Company is currently conducting research and development at Arthur D. Little &
Company ("ADL") in Cambridge, Massachusetts pursuant to an agreement which
commenced in October 1998 (the "ADL Agreement"). Under the ADL Agreement, ADL
will (i) conduct tests to determine levels of caffeine in other major brands of
"deccafeinated" coffee beans to establish a baseline against which our
DECAFFOMATIC device shall be evaluated, (ii) evaluate our prototype devices with
respect to rates of decaffeination, and flavor, color and aroma of the
decaffeinated brew, and (iii) assist the Company in developing a commercial
device that will have the appropriate attributes to maximaize decaffeination,
while minimizing the impact on flavor, color and aroma. We agreed to pay ADL
$110,000 for the contract research and development services. If we are
successful in developing a commercial ready model, we intend to license our
DECAFFOMATIC technology to another unrelated company for manufacture, marketing
and distribution; however, we have not yet negotiated or signed any such
agreements. See "Business -Marketing."
MARKET
Our separation technology has enabled us to build a prototype stand-alone
decaffeinator which may be used immediately after brewing coffee to remove
caffeine from coffee. We anticipate that 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. We believe that this will result
in considerable cost saving for the consumer. Although there can be no
assurance, in the institutional marketplace, we believe 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.
We aslo feel 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. We anticipate 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 our process.
Our management believes that removal of caffeine from coffee and tea is
recognized as a desirable goal for health and other reasons. Our 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 whole
coffee 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. We believe that the chemical extraction method by
soaking the whole beans in Methylene Chloride is not desirable because of the
harsh chemicals, the after-taste and health issues raised by their use. The use
of Methylene Chloride to decaffeinate beans became illegal in most European
nations last year. As consumers became more health conscious in the 1980's, the
use of decaffeinated products increased. A method more frequently used today
utilizes repetitive washes of the whole coffee beans with clean water known as
the "Swiss Water Treatment" method. Although this water treatment process is the
method of choice for most coffee roasters today, we believe that it is more
costly than our electrostatic process, it may not remove high levels of the
caffeine inside the whole beans and ultimately less convenient for the consumer.
We intend to focus our decaffeination technology development and marketing
on our internal decaffeinator for use with the automatic drip coffee maker for
both institutional and home consumer products. We are seeking to develop an
integrated system that 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.
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PLASMA PURE
TECHNOLOGY RESEARCH AND DEVELOPMENT
We have designed, prototyped and done promising initial basic research on
the PLASMA PURE electrostatic/mechanical separation device for the express
purpose of separating virus and viral DNA particles from human plasma. Due to
our very limited financial resources, no significant resarch and development was
conducted on the PLASMA PURE technology over the last three years. Based on our
initial research , although there can be no assurance, we believe 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. We estimate that if we were able to obtain adequate financing
to complete our research and development on the PLASMA PURE technology, we 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, we believe that PLASMA PURE, with its potential capability of
removing viruses and viral particles, if eventually developed and approved,which
cannot be assured, may significantly reduce the risk normally associated with
transfusion of plasma or plasma components. Although significant additional
research needs to be conducted, our management believes that the use of PLASMA
PURE to filter fresh frozen plasma may not significantly decrease yields of the
clotting components. We believe 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, which are targeted by the electrostatics.
The methods currently used to inactivate viruses in human 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
We believe the PLASMA PURE system and its electrostatic technology offer
various growth possibilities for us, 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, if possible at all. Earlier we
also designed and were 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. We intend that it would be used only for bulk plasma
fractionation and therefore be larger than PLASMA PURE and priced differently.
Another follow-up product that we would like to conduct research and development
on if adequate financing were available, which we do not currently have, is a
modified white blood cell filter. This device would utilize the same technology
as PLASMA-PURE, and therefore we believe its introduction could be more rapid
than it has been for the PLASMA PURE device. Our 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 we do 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. We have not
prepared or made application to the FDA or any governmental authority for
approval of our PLASMA PURE device or related products.
We believe that our 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 we do not currently possess, we believe that our electrostatic separation
technology may have applications 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).
Similar to DPI, in 1996 we established a new Delaware corporation
subsidiary, BioElectric Separating & Testing, Inc. ("BEST") to conduct the
continued research and development activities and pursue FDA
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application relating to the PLASMA PURE and related technologies. Due to lack of
funding, BEST has been inactive over the last three years.
MARKETING
Our current strategy is to license our 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. We
have limited experience in sales, marketing and distribution. To date, we have
one such agreement with NEWCO Enterprises, Inc.("NEWCO"), which is a manufactuer
and distributor of coffee brewers for the industrial market, based in St.
Charles, Missouri . There can be no assurance that we will be able to enter into
additional marketing agreements on terms favorable to us if at all, or that
current or future agreements will ultimately be beneficial to us.
THE NEWCO MANUFACTURING AND DISTRIBUTION AGREEMENT.
On September 20, 1996, we 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. We agreed that NEWCO will have the exclusive right to sell the
DECAFFOMATIC to the 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 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. Under the NEWCO Agreement, all of the technology and
final commercial model designs of the Decaffeination System will be our
property.
Under the NEWCO Agreement, we will sell units of the Decaffeination System
to NEWCO for a net price to us. NEWCO will take the Decaffeination System and in
turn incorporate it into its coffeemakers and re-sell 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.
We can terminate the NEWCO Agreement if NEWCO fails to make the specified
minimum number of Decaffeination System purchases.
We believe that our exclusive agreement with NEWCO in the areas covered will
allow us to establish a presence in the market more quickly and on a more
cost-effective basis than we could achieve by building our own manufacturing
facility or our own sales, marketing and service network in the relatively
fragmented OCS market, that consists primarily of small office users.
Our electrostatic separation devices will be manufactured from generally
available materials, and we do not anticipate that we or our licensee
manufacturing partners will be dependent upon any single supplier. We believe
that there are numerous third party contract manufacturers similar to NEWCO
available around the world who can manufacture our DECAFFOMATIC products on an
OEM basis. We currently have insufficient resources to establish and conduct our
own commercial manufacturing activities with respect to our proposed products.
In the future, if we decide to establish our own manufacturing facilities and
capabilities, at least for certain products, we would require substantial
additional funds and personnel.
Previously in 1996 and 1997, we and NEWCO anticipated that the decaffeinator
would be incorporated directly into the coffee brewer, utilizing the coffee
brewer electronics for power. In late 1997 and 1998, we estimated that we could
design the decaffeination device to be self contained within the brew basket,
which is removable from the brewer, with its own power source. We believe that
this independent 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
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completed for the institutional coffeemaker-brew basket that will be used for
large institutions and we are conducting research and development tests at ADL
in Cambridge, Massachusetts, to determine the optimum application of our
electrostatic separation technology science in pursuing a commercial ready
commercial brew basket. Our development for the commercial ready brew basket is
on-going and not yet complete. As a commercial ready model is being developed,
we are further testing that it has all the desired specifications, such as
brewing and decaffeination speed, appropriate taste, color and aroma and ease of
customer removal of the separation device and safety design.
To create a potential customer awareness of our DECAFFOMATIC system, we
intend to commence a public relations campaign as soon as we have developed a
commerical ready product. We 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.
MEDIA PURCHASE AGREEMENT
Under the Media Purchase Agreement, PML contractually agreed to provide $1.5
million of media for our public relations and advertising campaign through Grow
Marketing Services ("GROW"), an independent marketing company. In exchange for
IMSCO issuing 1,136,364 shares of our common stock, representing a price of
$1.32 per share, we acquired $1.5 million of prepaid, dedicated media credits
receivable (the "Media Credits") and certain media services. PML 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.
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, based on a media plan
developed by us, 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 PML has agreed to deliver
cash, media, media credit and/or other media-related assets to GROW as payment
for media extended to the Company. PML then delivers to us a pre-paid purchase
order acknowledging our payment of the media cost from GROW under the terms set
forth in the Agreement.
When we originally intended to directly market our DECAFOMATIC products in
North America, we planned to use the remaining $1,378,496 of prepaid Media
Credits to finance the introduction and initial product advertising and
marketing support for the DECAFFOMATIC products. However, since we do not
presently intend to pursue the direct marketing of our decaffeination products,
we are attempting to sell the prepaid Media Credits to a third party as a means
of generating additional needed working capital.
Given that we have conducted no independent market research or consumer
focus groups activities, there can be no assurance that the DECAFFOMATIC
technology, if developed into a commercial ready product, will be accepted by
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 us or a licensee of ours to continue supporting a marketing and
advertising program or that such efforts will ever be profitable.
We have only recently commenced limited marketing activities to potential
licensees of our decaffeination products. Achieving market acceptance for our
products will require substantial marketing efforts and the expenditure of
significant funds. There can be no assurance that we and our marketing
contractors and partners will be able to commercialize successfully or achieve
market acceptance of our products and technologies. There is no assurance that
we or our licensees will be able to create a successful marketing program, or
that our products can be sold in a manner that will permit us to achieve long
range profitability. Further, there can be no assurance that our competitors
will not develop competing technologies that are less expensive or otherwise
superior to our products. The failure to market successfully our products would
have a material adverse effect on our business and financial conditions.
We will be dependent for product sales revenues upon the success of its
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 our
control. There can be no assurance that such marketing partners will perform
their obligations as expected, pay any
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additional revenue or license fees beyond the stated minimums to us or market
any products under the marketing agreements, or that we will derive any revenue
from such arrangements. There can be no assurance that our interests will
coincide with those of our marketing partners or that the marketing partners
will not develop independently or with third parties products which could
compete with our products, or that disagreements over rights or technology or
other proprietary interests will not occur. To the extent that we choose not to
or are unable to enter into future agreements, we would experience substantially
increased capital requirements to undertake the marketing or sale of our current
and future products. There can be no assurance that we will be able to market or
sell our current or future products independently in the absence of such
agreements.
RESEARCH AND DEVELOPMENT
We conduct our research and development activities through its own staff and
facilities, as well as cuurently through a contractual arrangement with ADL.
However, at present we have only two full-time employees, one of whom is
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.
We believe that the use of outside research and laboratory facilities is the
most efficient method to have certain aspects of our technology further
researched and developed by experienced scientific and technical personnel while
minimizing the capital investment and company staffing such activities require
from us.
We have one agreement in effect with Arthur D. Little & Co. of Cambridge,
Massachusetts, for the use of its laboratory facilities and assistance of their
scientific and technical personnel. We believe that our research facilities and
arrangements necessary to continue our further research and development of our
electrostatic separation technologies are readily available. From July 1992 to
December 31, l998, we incurred a development stage deficit of $8,801,479. If we
are able to obtain needed additional financing, of which there can be no
assurance, we anticipate incurring significant research and development
expenditures in the future as we continue our efforts to develop further
applications and uses for our separation technologies and as we begin to
research other technologies.
MANUFACTURING
We currently do not own or operate manufacturing facilities for commercial
production of our DECAFFOMATIC or any other products. In addition, we have no
intention of acquiring or developing any manufacturing facilities, nor do we
have any financial capability to acquire any such facilities. Instead, we intend
to rely on licensee and third party contract manufacturers to manufacture our
products. There can be no assurance that such arrangements will be successful or
that any licensee or contract manufacturer will be able to develop or provide
adequate manufacturing capabilities for commercial scale production. Although we
have no plans or intentions of doing so, in the event we decide to establish a
commercial scale manufacturing facility, we would 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 we will be able to
develop adequate commercial manufacturing capabilities either on our own or
through third parties.
GOVERNMENT REGULATIONS
The production and marketing of some of our potential 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. Our PLASMA PURE system will be considered a medical device. As such,
the FDA would require us 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
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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 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.
We have only conducted very preliminary initial basic testing on our PLASMA
PURE technology and have 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 in 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. We 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 our proposed PLASMA PURE products, if
developed, will be subject to FDA regulation. Because of the extensive costs and
time involved, we currently intend to rely primarily on licensees and joint
venturers to obtain regulatory approvals and market our PLASMA PURE products,
when developed. No assurance can be given that we 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 us,
to a product are not in our control, and this can result in delays in clinical
testing, the
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preparation and prosecution of regulatory filings and commercialization efforts.
Even if we are successful in finding licensees for our 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 our proposed
products, cause us to undertake costly procedures and furnish a competitive
advantage to the more substantially capitalized companies with which we plan 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
Our success depends in large part on our ability to obtain patents, maintain
trade secret protection and operate without infringing on the proprietary rights
of third parties. We applied for U.S. patents covering our DECAFFOMATIC
separation technology and its PLASMA PURE separation technology in 1993. On
August 22, l995, we were 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 April 2, 1996 the Company was granted a
patent by the PTO , Patent No. 5,503,724, for "A Process for Decaffeinating
Caffeine Containing Liquid".
We believe that patent protection of our technologies, processes and
products are very important to our future operations. The success of our
proposed products may significantly depend upon our 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 us. If a patent is granted, the
cost of enforcing our patent rights in lawsuits, if necessary, may be
significant and could materially interfere with our operations.
Although we intend 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 us. In
addition, to anticipate the breadth or degree of protection that any such
patents may afford is impossible. To the extent that we rely on unpatented trade
secrets and 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 our trade secrets, that any obligation of
confidentiality will be honored or that we will be able to effectively protect
our rights to proprietary technology. Further, no assurance can be given that
any products developed by us 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
We compete 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 we do. 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
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that may be developed in the future are or could be the basis for competitive
products. No assurance can be given that our competitors will not succeed in
developing technologies and products that are more effective or less costly than
any that are being developed by us.
We expect products approved for sale, if any, to compete primarily on the
basis of product uniqueness, efficacy, safety, reliability, price and patent
position. Our competitive position will also depend on our 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 to finance these activities.
PRODUCT LIABILITY
The development, manufacture and sale of our products involve an inherent
risk of product liability claims and associated adverse publicity. We currently
do not maintain liability insurance and may need to acquire such insurance
coverage prior to the commercial introduction of some of our products. No
assurance can be given that we 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 insurance for the types of products to be
marketed by us, 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 us and were sustained for a sufficient amount, it could
have a material adverse affect on our business and financial condition.
EMPLOYEES
As of the date hereof, we have two full time employees, one in management,
one in research and development and two-part time employees in administration.
None of our employees is represented by a labor union. We consider our relations
with our current employees to be satisfactory. See "Management" and "Legal
Proceedings".
ENVIRONMENTAL QUALITY
We believe that we are now in compliance with all Federal, State and local
laws relating to the protection of the environment. We do not generate, store,
transport or dispose of any hazardous waste, and that management believes that
none of our products is regarded as a hazardous material by the applicable
regulations for the protection of the environment. We do not anticipate making
any capital expenditures in the current or succeeding fiscal year for
environmental control efforts regarding our products.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal offices are currently located at 40 Bayfield Drive, North
Andover, Massachusetts and consists of approximately 1,276 square feet. We
entered into a new three year lease effective April 1, 1997 at the annual rate
of $15,890. Our administrative and research and development facilities are
currently located therein. Upon the end of the current lease in North Andover,
Massachusetts, we expect 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. We believe that our property and equipment
are in good operating condition and are adequate for existing and immediately
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
We received a Summons and Complaint from BPV Enterprises, Inc., d/b/a
Universal Sales ("Universal Sales") on March 5, 1998 brought in the Supreme
Court of the State of New York, Suffolk County, alleging breach of contract due
to our termination of Universal Sales for cause and seeking damages under a
Placement Agreement dated September 1, 1996 entered into between Universal Sales
and IMSCO wherein Universal Sales is seeking damages of $337,000 plus attorneys
fees and 75,000 shares of common
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stock and 75,000 warrants. In a related second suit commenced in January 1999,
we received a Summons and Complaint from Universal Sales in the Supreme Court of
the State of New York, Suffolk County, alleging breach of contract for
termination of Universal Sales for cause and seeking damages under a Sales
Administartion and Servicing Agreement dated September 1, 1996 (the "Sales
Agreement") entered in between Universal Sales and IMSCO. Under the Sales
Agreement, which had a term of seven years, Universal Sales alleges that for its
sales administration and back-office servicing duties, it is entitled to a
commission equal to 2.5% of our sales in execss of $5 million per year, and a
standard sales commission equal to 2.5% per year of revenues from sales derived
from customers obtained through Universal Sales; efforts, which amount of
potential lost commissions Universal Sales estimates to be $25 million. Mr.
Alexander T. Hoffmann, the Chairman and Chief Executive Officer of IMSCO, is
named as an individual defendant in the second suit, and he is also a Director
and a 50% shareholder of Universal Sales. The causes of action against Mr.
Hoffmann, individually, are based on breaches of his roles and duties in
Universal Sales. In April 1997, IMSCO terminated all of its relationships with
Universal Sales for cause. We have only recently begun substantive discovery and
the ultimate outcome of this matter cannot yet be determined. We plan to
vigorously defend these lawsuits. No provision for any liability that may result
from these actions has been recognized in our consolidated financial statements.
In the opinion of our management, resolution of this litigation is not expected
to have a material adverse effect on our financial position. However, depending
on the amount and timing, an unfavorable resolution of these matters could
materially affect our future business and financial condition.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders in the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
There is currently a limited public trading market for our Common Stock.
There are currently five market-makers for our Common Stock. Our Common Stock
has traded on a limited basis on the OTC Bulletin Board under the symbol "IMSO"
since November 15, 1994. Our stock registrar and transfer agent 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
1998. 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, 1998 - March 31, 1998 $2.687 $1.375
April 1, 1998 - June 30, 1998 2.062 1.312
July 1, 1998 - September 30, 1998 1.656 0.906
October 1, 1998 - December 31, 1998 1.468 0.625
(b) Holders of Common Stock
APPROXIMATE NUMBER OF RECORD HOLDERS
TITLE OF CLASS (AS OF DECEMBER 31, L998)
-------------- ------------------------------------
Common Stock, $.001 par value 278
A number of shares are held of record by brokerage and other institutional firms
for their customers.
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(c) Dividends
We have never declared or paid a cash dividend on its common stock, and it
is anticipated that we will retain any future earnings for use in our business
and not pay cash dividends. Declaration and payment of dividends are within the
discretion of our 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
We are in the development stage and our 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 our success must also be considered in connection
with the rapidly and continually changing technology and the competitive
environment in which we will operate. There can be no assurance that our
operations will result in our becoming or remaining economically viable.
Potential investors in our common stock should be aware of the problems, delays,
expenses and difficulties encountered by any company in a developmental stage,
many of which may be beyond our control. These include, but are not limited to,
unanticipated regulatory compliance, marketing problems and intense competition
that may exceed current estimates. We have had no revenues from operations to
date and, because we are just beginning to enter the commercial stage, we will
likely sustain operating losses for an indeterminate time period. Since entering
the development phase in July 1992, we have devoted substantially all of our
resources to the research and development of our products and technology and
general and administrative expenses. Since entering the development stage in
July 1992, we have generated an accumulated deficit of $8,801,479 at December
31, 1998 and have a total accumulated deficit of $9,422,387.
We had no revenues from continuing operations in years ending December 31,
1996, December 31, 1997, or December 31, 1998. We have incurred net losses in
each year since our inception in 1986. Given the dormant level of business
activity from 1988 through 1991, we realized that we could not continue with our
earlier luminator technology product, we discontinued operations and were
reactivated and entered into a new development stage in July 1992.
Our losses incurred since inception have resulted principally from
expenditures under its research and development programs, and we expect 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 we will generate significant revenues or
become profitable on a sustained basis, if at all.
Our ability to achieve sales and revenue will depend upon our ability to
secure additional capital financing and licensees for our products, if any, and
successfully develop, test and sell our products. Our ability to generate
revenue and become profitable is dependent in large part on our commercializing
our lead product, the DECAFFOMATIC, expanding our manufacturing contracts with
third party manufacturers, entering into additional licensing, distribution and
marketing agreements and the ability of our marketing contractors to
commercialize successfully products incorporating our technologies. There can be
no assurance that our operations will generate 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.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Net losses decreased from $3,631,105 for the year ended December 31, 1997 to
$2,881,162 for the year ending December 31, 1998, a 20.6% decrease. We had no
revenues or operating income for years ended December 31, 1997 and December 31,
1998 from continuing operations. For the year ended December 31, 1998, we had no
interest income. $5,541 in interest was earned for the comparable period in
1997.
Total operating expenses were $2,656,431 for 1998 in comparison to
$3,592,574 for 1997, a decrease of 26%. The decrease in these costs from 1997 to
1998 was primarily due to a significant decrease in litigation settlement costs,
as well as decreased advertising and research and development expenses. All
research and development costs were expensed currently in the year incurred,
rather than capitalized. This resulted in a loss per share of $(.39) for the
year ended December 31, 1998, in comparison to a loss per share of $(.57) for
the year ended December 31, 1997.
At December 31, l998, the Company had total assets of $140,061. Total
liabilities of $911,405 and total stockholders' deficit of $(771,344).
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. We 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, we 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. 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 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, we had total assets of $58,940. Total liabilities of
$1,875,753 and total stockholders' deficit of $(1,816,813).
LIQUIDITY AND CAPITAL RESOURCES
We had negative working capital as of December 31, l997, of $1,860,973 in
comparison to a negative working capital position as of December 31, l998 of
$887,413. We had an accumulated deficit of $9,422,387 at the period ended
December 31, l998, in comparison to an accumulated deficit of $6,541,225 at the
period ended December 31, l997. The increase in the accumulated deficit is
primarily related to continuing operating costs during the development phase
without any operating income.
We have financed operations from entering the development phase in July 1992
(through December 31, 1998) primarily through the private placement of its stock
and, to a lesser extent, through borrowings from notes payable. For the year
ended December 31, l998, our cash requirements were satisfied primarily from the
cash reserves in its operating accounts, a private placement of $225,000 shares
of our Series A convertible preferred stock to one purchaser and $390,000 of
total borrowings from private lenders evidenced by 10% Senior Convertible Notes.
The outstanding principal balance of the 10% Senior Convertible Notes is
approximately $100,000 at March 31, 1999, which amount is currently due in 1999,
unless they are earlier converted by their holders into our Common Stock.
Additionally, in February 1999, the Company completed a $600,000 Convertible
Debenture private placement to one accredited investor,
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which resulted in net proceeds to the Company of $522,000 after payment of
placement fees and expenses. The $390,000 of 10% Senior Convertible Notes and
the $600,000 Convertible Debentures all were sold as non-public offerings and
all of the purchasers represented that they were "Accredited Investors" as
defined under SEC Regulation D. Additionally, the Company had $1,378,496 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 PML, which received 1,136,364
shares in consideration for $1,500,000 in prepaid Media Credits to be used at
our direction. PML 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. In the Media Purchase Agreement the purchaser of the shares
represented that it was an "Accredited Investor" as that term is defined under
Regulation D promulgated by the Commission pursuant to the Securities Act. We
currently intend to sell the Media Credits to a third party to raise additional
working capital for our operations and repayment of our indebtedness.
We do not currently possess a bank source of financing. Our negative working
capital (current assets less current liabilities) at December 31, 1998 was
$887,413. Our management believes that unless we are able to sell the $1,378,496
of Media Credits, obtain additional capital financing or license or sell our
products or technology, none of which can be assured, we cannot be certain that
our current capital will be adequate to continue as a going concern. We have
recently contracted operations by terminating the employment of three persons in
our North Andover, Massachusetts office and shifting more of the day-to-day
research and development of our decaffeination product to ADL in Cambridge,
Massachusetts. Should insufficient funds from these potential sources be
available, reducing our present rate of expenditures further might materially
adversely affect the ability of the Company to complete our research and
development on the commercial DECAFFOMATIC product, to produce competitive
products and services, and to market them effectively. Our ability to continue
in business as a going concern depends upon our ability to generate revenues and
royalties from the sale or licensing of our technology and products, to sell the
Media Credits, to conserve liquidity by setting marketing and other priorities
and reducing expenditures, to obtain additional funds through the placement of
our securities.
Our long term capital expenditure requirements will depend upon numerous
factors, including the progress of our research and development programs, the
resources that we devote to the development of self-funded products, proprietary
manufacturing methods and advanced technologies, our ability to obtain licensing
arrangements, and the demand for our products if and when developed and
approved.
We believe that our existing cash together with proceeds from the possible
sale of some or all of the $1.37 million of Media Credits, will be sufficient to
meet its operating expenses and capital expenditures requirements for the next 3
months. Our future capital requirements, however, will depend on numerous
factors, including (i) the progress of its research and product development
programs, (ii) the effectiveness of product commercialization activities and
marketing agreements, including the development and progress of sales and
marketing efforts and manufacturing operations, (iii) our ability to establish
new licensing and 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.
YEAR 2000 EFFECT ON COMPUTER SYSTEMS
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, in less than one year,
computer systems and/or software used by many companies in a very wide variety
of applications will experience operating difficulties unless they are modified
or upgraded to adequately process information involving, related to or dependent
upon the century change. Some businesses may be financially affected by such
computer problems.
We believe our existing product development, financial and accounting
systems are year 2000 compliant, meaning that they are capable of distinguishing
21st century dates from 20th century dates.
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We are in the process of testing our other internal systems, including
embedded control systems in our product development and information storage
equipment. We currently believe these systems are year 2000 compliant. We are
making inquiries of our suppliers to attempt to assess their readiness for the
year 2000. The failure of systems maintained by our suppliers and potential
licensees and customers could reduce our revenues, cause us to incur significant
expenses to remedy any problems, or otherwise seriously damage our business.
To date we have spent immaterial amounts to comply with accounting and
statutory requirements regarding the year 2000. We believe that we will spend
minimal additional amounts for year 2000 issues in the foreseeable future. These
assessments have not been independently verified.
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 us with the
Securities and Exchange Commission, in our 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. We wish 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 our actual results and could cause our actual financial and operating
performance to differ materially from that expressed in any forward-looking
statement:
WE ARE A DEVELOPMENT STAGE COMPANY AND OUR BUSINESS IS DIFFICULT TO EVALUATE
BECAUSE OUR OPERATING HISTORY IS LIMITED
We are in the development stage and our 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. It is difficult to evaluate our business and our prospects because
our revenue and income potential is unproven. The likelihood of our success must
also be considered in connection with the rapidly and continually changing
technology and the competitive environment in which we will operate. We cannot
assure you that our operations will result in us 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 our control. These include, but are not
limited to, unanticipated regulatory compliance, marketing problems and intense
competition that may exceed current estimates. We have had no revenues from
operations to date and, because we are just beginning to enter the commercial
stage, we will likely sustain operating losses for an indeterminate time period.
Our ability to generate significant revenue and become profitable is dependent
in large part on our commercializing our lead product, the DECAFFOMATIC,
expanding our manufacturing contracts with third party manufacturers, entering
into additional marketing agreements and the ability of our licensees and
marketing contractors to commercialize successfully products incorporating our
technologies
WE HAVE INCURRED LOSSES SINCE INCEPTION AND WE MAY NOT BE ABLE TO ACHIEVE
PROFITABILITY
We have incurred net losses in each year since inception and for each of the
years ended December 31, 1996, December 31, 1997 and December 31, 1998. As of
December 31, 1998 we had an accumulated deficit of approximately $9,422,387.
These losses have resulted primarily from expenses associated with our research
and development activities and general administrative expenses. Since inception
we have funded our business primarily from the sale of our stock and by
borrowing funds. We expect to continue to incur significant research and
development, marketing and general and administrative expenses as a result, we
may experience further losses and negative cash flows. The amount of future
expenses, corresponding further potential net losses and time required by us to
reach profitability, if ever, are
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uncertain. We cannot assure you that our operations will generate significant
revenue or will ever be profitable.
WE HAVE IMMEDIATE CAPITAL REQUIREMENTS AND OUR FUTURE FUNDING IS UNCERTAIN.
Our operations to date have consumed substantial amounts of cash. As we
continue the research and development of our electrostatic technologies in
various areas, we expect to continue spending substantial amounts over the
foreseeable future. At December 31, 1998, our current liabilities consisting
primarily of accounts payable, notes payable, accrued expenses, accrued salaries
were $911,405. At December 31, 1998 we had a negative working capital position
of $887,413. Therefore, we need to raise substantial additional funds through
the sale of our $1.37 million of Media Credits, the licensing or sale of our
products or technologies or through additional equity or debt financings. We
cannot assure you that any such additional funding will be available to us. In
the event we have insufficient working capital, and are unable to locate
additional capital on acceptable terms, we may be required to curtail operations
substantially or entirely, including our research and development activities.
Such lack of funds could seriously harm our business, financial condition and
results of operation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
EARLY STAGE OF PRODUCT COMMERCIALIZATION; TECHNOLOGICAL UNCERTAINTIES.
We are in the development stage, and have 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 our 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 we believe that
we have demonstrated in our DECAFFOMATIC scientific technology that caffeine can
be removed from freshly brewed coffee through the use of our electrostatic
technology, we must still complete the development and integration of our
technology into a commercial ready coffeemaker, which we hope to accomplish in
1999. There are a number of challenges that we 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 our initial
basic research was positive, it may be inconclusive and may not be indicative of
results that will be obtained in larger scale human clinical trials. If we were
able to obtain financing necessary to conduct further research, which cannot be
assured, as results of particular preclinical studies and clinical trials were
received by us, we may abandon projects such as PLASMA PURE, which we might
otherwise have believed to be promising. We are presently pursuing product
opportunities that will require extensive additional capital investment,
research, development, testing, regulatory clearance or approvals prior to
commercialization. Based on our currently limited financial resources, there can
be no assurance that our 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 us 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
us will prove to be ineffective or any or all of our 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 us or any
collaborators from marketing products utilizing our technologies; or that third
parties will market superior or equivalent products. We cannot assure you that
any medical products researched by us will be successfully developed or
commercially accepted. Accordingly, there can be no assurance that our research
and development activities will result in any commercially viable products. See
"Business -- "Research and Development" and "-- Competition."
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WE WILL BE SUBSTANTIALLY DEPENDENT ON LICENSEES AND DISTRIBUTION AND MARKETING
PARTNERS
We have limited experience in sales, marketing and distribution. Therefore,
our strategy for commercialization of our products includes entering into
agreements with other companies to license, distribute and market our products
incorporating our technology. To date, we have one such agreement with NEWCO. We
cannot assure you that we will be able to enter into additional licensing,
distribution and marketing agreements on terms favorable to us, if at all, or
that current or future agreements will ultimately be beneficial to us.
We will be dependent for product sales revenues upon the success of such
third party licensees, distributors and 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 our control. We cannot assure you that such marketing partners will
perform their obligations as expected, pay any additional revenue or license
fees beyond the stated minimums to us or market any products under the
licensing, distribution or marketing agreements, or that we will derive any
revenue from such arrangements. Moreover, certain of the agreements provide for
termination under certain circumstances. There can be no assurance that our
interests 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 our products, or that disagreements over
rights or technology or other proprietary interests will not occur. To the
extent that we choose not to or are unable to enter into future agreements, we
would need substantially additional capital to undertake the marketing or sale
of our current and future products. We cannot assure you that we 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.
We have no experience in, and currently lack the resources and capability
to, manufacture any of our proposed products on a commercial basis. Initially,
we anticipate that we will be dependent to a significant extent on licensees and
third party contract manufacturers or other entities for commercial scale
manufacturing of its products. Although we have no plans or intentions of doing
so, in the event we decide to establish a commercial scale manufacturing
facility, we would require substantial additional funds and personnel and will
be required to comply with extensive regulations applicable to such facility. We
cannot assure you that we will be able to develop adequate commercial
manufacturing capabilities either on our own or through third parties. In
addition, we do not anticipate establishing our own sales and marketing
capabilities in the foreseeable future. We cannot assure you that we will be
able to develop adequate marketing capabilities either on our own or through
third parties. See "Business -- Manufacturing; -- Marketing."
OUR MARKET MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND OUR PRODUCTS MAY BECOME
OBSOLETE.
We expect technological developments to continue at a rapid pace in the
electrostatic separation and biotechnology industries, and there can be no
assurance that technological developments will not cause our technology to be
rendered obsolete. To be successful, we must adapt to our rapidly changing
market to remain competitive with others involved in the development,
manufacture and marketing of similar products and technologies. We will have to
develop and introduce enhancements to our existing products and new products on
a timely basis to keep pace with technological developments, evolving industry
standards and changing customer requirements. As a result, our position in
potential existing markets or potential future markets could be eroded rapidly
by product advances. The life cycles of our future products are difficult to
estimate. We expect that our product development efforts will continue to
require substantial investments, which we do not currently have. Any of these
events could have a material adverse effect on our business, operating results
and financial condition.
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY RIGHTS WHICH OFFER ONLY LIMITED
PROTECTION AGAINST POTENTIAL INFRINGERS
Our success will be heavily dependent upon whether we can obtain patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. Patents have been granted to us for both
method and devise in the technology for the separation of caffeine from a brewed
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beverage. No other patents have, as yet, been issued but it is expected that
patents will be issued. We believe that patent protection of our technologies,
processes and products is very important to our future operations. The success
of our proposed products may significantly depend upon our ability to obtain
patent protection. When a patent is granted, the cost of enforcing our patent
rights in lawsuits, if necessary, may be significant and could interfere with
our operations.
Although we intend to file additional patent applications as we believe
appropriate with respect to any new products or technological developments, we
cannot assure you that any additional patents will be issued, or if issued, that
they will be of commercial benefit to us. Further, our ability to file such
additional patent applications may be reduced by our 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 we rely on
unpatented proprietary technology, we cannot assure you that that others will
not independently develop or obtain substantially equivalent or superior
technology or otherwise gain access to our trade secrets, that any obligation of
confidentiality will be honored or that we will be able to effectively protect
our rights to proprietary technology. Further, we cannot assure you that any
products developed by us 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. Our ability to compete effectively
with other companies will depend, in part, on our ability to maintain the
proprietary nature of its technologies. We intend to license and market our
products internationally, and the laws of some foreign countries may not protect
our proprietary rights to as great an extent as do the laws of the United
States. We cannot assure you that our competitors will not independently develop
comparable or superior technologies. See "Business -- Patents and License
Rights."
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL.
Our future depends upon the continued service of our key technology and
executive officers. In particular, we consider Mr. Hoffmann and Mr. Crose to be
key executives. If we lost the services of one or more of our key employees,
including if one or more of our key employees decided to join a competitor or
otherwise compete directly or indirectly with us, this could materially
adversely affect our business. We have not applied for key man life insurance on
the lives of Mr. Hoffmann or Mr. Crose and do not intend to. Because of the
nature of our business, our future success will likely depend in large part on
our ability to attract and retain technological qualified personnel. Competition
for such personnel is intense, including competition from companies with
substantially greater resources than ours, and we may not succeed in attracting
or retaining such personnel. We cannot assure you that we will successfully
recruit or retain personnel of the requisite expertise or in adequate numbers to
enable us to conduct our business as proposed.
ERRORS IN OUR PRODUCTS OR THE FAILURE OF OUR PRODUCTS TO CONFORM TO
SPECIFICATIONS COULD RESULT IN OUR CUSTOMERS DEMANDING REFUNDS FROM US OR
ASSERTING CLAIMS FOR DAMAGES AGAINST US.
We may be subject to demands for refunds or claims for damages related to
errors or problems associated with our products in the future. We do not carry
product liability insurance, and we anticipate that such insurance will be very
expensive to maintain, if obtainable at all. We will attempt to maintain
products liability coverage to protect us against such liabilities, but we
cannot assure you that such arrangements can be made, or if made, will be
effective to insulate our assets from such claims. We will attempt to maintain
insurance against such contingencies, in scope and amount which we believe to be
adequate. However, we cannot assure you 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 us and were sustained for a
sufficient amount, it could have a material adverse affect on our business and
financial conditionpany.
LIMITED PRIOR MARKET FOR THE COMMON STOCK
There has only been a limited public market for our Common Stock on the OTC
Bulletin Board. We cannot assure you that an active public market for the Common
Stock will develop or continue at any time in the future. At December 31, 1998
we had approximately 7,681,278 shares outstanding. Substantially all of these
shares are freely tradable without restriction or are eligible for resale under
Rule 144, subject to the
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limitations on sales by "affiliates" under Rule 144. As long as there is a
limited public market for our Common Stock, if our stockholders sell or attempt
to sell a significant number of shares in the public market at any one time, it
could be difficult to make the sale at then current market prices, and the
market price of our Common Stock could fall materially.
OUR STOCK WILL LIKELY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS
DUE TO A NUMBER OF FACTORS, CERTAIN OF WHICH ARE BEYOND OUR CONTROL
The market price and trading volume of our Common Stock, like that of the
common stock of many other technology companies, has been and is likely to be
highly volatile and fluctuate widely for reasons which may be unrelated to our
business prospects or results of operations, such as:
- the results of announcements of technological innovations or new
commercial products by us or our competitors;
- other evidence of the safety or efficacy of our or our competitors'
products;
- announcements relating to strategic relationships;
- government regulation;
- developments in our patent or other proprietary rights or our
competitors;
- fluctuations in our operating results;
- sales of large amounts of stock by shareholders;
- trading being conducted by limited, undercapitalized and less
experienced market makers.
- demand for our products and technology;
- actions taken by our competitors, including new product introductions;
- our ability to develop, introduce and market products on a timely basis;
- market readiness for our products;
- our success in developing indirect sales channels such as licensees,
distributors and marketing partners;
- our ability to control costs;
- technological changes in our markets;
- our ability to obtain financing ;
- general economic and market factors.
Any of these reasons could have a significant adverse effect on the market
price of our 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.
WE NEED TO MANAGE OUR CHANGING BUSINESS.
We are a development stage company and have primarily devoted all of our
activities to research and development. As we begin to emerge from the
development phase to a commercial operations, our ability to successfully
develop and offer products and implement our strategy requires an effective
planning and management process. In particular, if we are successful in entering
the commercial phase, we will need to hire additional key employees in licensing
and in technology development. There are a limited number of persons with the
requisite skills to serve in these positions, and it may become increasingly
difficult for us to hire such personnel. Further, we have limited capital
resources to attract and compensate such individuals. We believe that
improvements in management and operational controls, and financial and
management information systems will be needed to manage future emergence from
the development into
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the commercial operating phase, should it occur. The failure to implement such
changes could have a material adverse effect upon our business.
THE RELIABILITY OF OUR PRODUCTS IS UNCERTAIN.
Most applications incorporating our technologies are being still developed
or have only begun to be introduced to potential licensees and distributors. As
a result of the limited period of use and the controlled environment in which
most of our technologies have been tested to date, we cannot assure you that
they will meet their performance specifications under all conditions or for all
applications. If any of our technologies fail to meet such expectations, we may
be required to enhance or improve that technology, and there can be no assurance
that we would be able to do so on a timely basis, if at all. Any significant
reliability problems could have a material adverse effect on our business.
SOME OF OUR POTENTIAL PRODUCTS ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATIONS
The production and marketing of some of our 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 NDAs. The FDA also has the
authority to withdraw approval of instruments and devices in accordance with
statutory procedures.
If we have the financial resources to pursue its development, our PLASMA
PURE system will be considered a medical device. As such, the FDA would require
us 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. We 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. We cannot assure
you 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.
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We have 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 us to undertake costly procedures and furnish a
competitive advantage to the more substantially capitalized companies with which
we plan to compete. In addition, the extent of potentially adverse government
regulations which might arise from future administrative action or legislation
cannot be predicted.
WE FACE INTENSE COMPETITION AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY OUR
BUSINESS WILL BE SERIOUSLY HARMED.
We compete 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 we do. 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. We cannot assure you that our competitors
will not succeed in developing technologies and products that are more effective
or less costly than any that are being developed by us.
We expect products approved for sale, if any, to compete primarily on the
basis of product uniqueness, efficacy, safety, reliability, price and patent
position. Our 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."
THE ACCEPTANCE OF OUR PRODUCTS IN THE MARKET IS UNCERTAIN.
Our success will depend, in large part, on achieving market acceptance for
our products. Such acceptance will require substantial marketing efforts and the
expenditure of significant funds. There can be no assurance that we and our
licensees, marketing contractors and partners will be able to commercialize
successfully or achieve market acceptance of our products and technologies.
There is no assurance that we or our licensees and contract marketing partners
will be able to create a successful marketing program, or that our products can
be sold in a manner that will permit us to achieve long range profitability.
Further, there can be no assurance that our competitors will not develop
competing technologies that are less expensive or otherwise superior to our
products. We cannot assure you that we will be able to compete successfully
against current or future competitors, or that competitive pressures faced by us
will not materially adversely affect our business, financial condition and
results of operations.
WE CAN POTENTIALLY ISSUE ADDITIONAL SHARES WITHOUT SHAREHOLDER APPROVAL.
We are 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, 1998, there were
7,681,278 shares of Common Stock outstanding and 45,000 shares of Series A
convertible preferred stock outstanding.
Our 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
designations, preferences and relative, participating, optional or other rights
and restrictions thereof. Accordingly, we may further issue a series of
Preferred Stock in the future that will have preference over our Common Stock
with respect to the payment of dividends and proceeds from our 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.
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THERE ARE A SUBSTANTIAL NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE THAT MAY
ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK.
Sales of substantial amounts of our Common Stock in the public market by
shareholders could adversely affect the market price of the Common Stock and
adversely affect our ability to raise capital at a time and on terms favorable
to us. Although there are approximately five securities broker-dealers that are
making a market in our common stock as of the date hereof, our 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 drop. As of December 31, 1998, we had 7,681,278 shares of Common
Stock outstanding. Substantially all of these 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 two
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.
OUR STOCK IS A LOW PRICED SECURITIES WHICH IMPOSES CERTAIN REQUIREMENTS ON
BROKER-DEALERS EFFECTING A TRADE IN OUR SHARES.
If the price per share of our common stock is below $5.00, then unless we
satisfy certain net asset tests, our 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 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 our most recent
financial statement for the year ended December 31, 1998, our Common Stock is
subject to the "penny stock" rules. Consequently, owners of our common stock may
find it more difficult to sell their shares.
WE DO NOT INTEND TO PAY DIVIDENDS AND YOU MAY NOT EXPERIENCE A RETURN ON
INVESTMENT WITHOUT SELLING SHARES.
We have never declared or paid cash dividends on our Common Stock and do not
anticipate paying cash dividends in the foreseeable future. Therefore, you will
not experience a return on your investment in our Common Stock without selling
your shares since we currently intend to retain future earnings, if any, to fund
the development, operations and growth of our business.
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THE CONVERSION OF OUR 8% CONVERTIBLE DEBENTURES COULD HAVE A DILUTIVE EFFECT
The conversion of our $600,000 of 8% convertible debentures outstanding at a
25% discount to the then prevailing market price of our common stock would
result in the issuance of approximately 1,500,000 shares of common stock, or
approximately 16.7% of the outstanding shares (at an assumed conversion price of
$.40 per share). The conversion could have an immediate negative effect on the
market price of our common stock, and will have a dilutive impact on other
shareholders.
THE EXERCISE OF OUR OUTSTANDING WARRANTS COULD HAVE A DILUTIVE EFFECT
As of December 31, 1998, there were outstanding options and warrants to
purchase approximately 1,819,000 shares of our common stock. The exercise of
warrants or options and the sale of the underlying shares of common stock (or
even the potential of such exercise or sale) could have a negative effect on the
market price of our common stock, and will have a dilutive impact on other
shareholders. Moreover, the terms upon which we will be able to obtain
additional equity capital may be negatively affected since the holders of
outstanding warrants and options can be expected to exercise them, to the extent
they are able, at a time when we would, in all likelihood, be able to obtain any
needed capital on terms more favorable than those provided in such warrants or
options.
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS.
You should not rely on forward-looking statements in this annual report, or
in any other documents filed by us with the Commission, or in any oral
statements of our officers, directors and authorized representatives or in press
releases made by us. This annual report contains forward-looking statements that
involve risks and uncertainities. We use words such as "anticipates",
"believes", "hopes", "plans", "expects", "future", "intends", "estimates"
"projects" and similar expressions to identify forward-looking statements. You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this report. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including the risks described by us above and elsewhere in this report.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements for the fiscal years ending December 31,
1998, and 1997 are included herein and consist of:
Independent Auditor's Report F-1
Consolidated Balance Sheet F-2-F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5-F-7
Consolidated Statements of Cash Flows F-8-F-9
Notes to Consolidated Financial Statements F-10-F-22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's accountants are Moore Stevens, P.C. There have been no
disagreements with the accountants on any matter of accounting principles,
practices or financial statement disclosure.
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PART III
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 57 1997 Chairman & Chief Executive
Officer
Gary A. Graham 50 1997 Director
Scott Singer 45 1997 Director
Timothy J. Keating 35 1999 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 57 1997 Chief Executive Officer
James R. Crose 65 1992 Vice President
Scott Singer 45 1997 Secretary
Except for its agreements with Mr. Hoffmann and Mr. Crose there are no other
employment contracts with the executive officers. The Company had an employment
agreement with Sol L. Berg, its former President, who was terminated on March
10, 1999. Officers serve at the will of the Board of Directors.
(c) There are no other significant employees of the Company:
(d) Family Relationships
There are no family relationships.
(e) Business Experience
Alexander T. Hoffmann (age 57)
---------------------
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 and 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.
Hoffmann 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
25
<PAGE>
York which was discharged in 1998. From 1985 to the present he has served as a
consultant to the beverage industry. Mr. Hoffmann attended Long Island
University.
Gary A. Graham (age 50)
--------------
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.
Timothy J. Keating (age 35)
------------------
Mr. Keating became a Director of the Company in March 1999, when he was
elected to fill a vacancy on the Board of Directors. Mr. Keating operates his
own investment firm , Keating Investments, Inc., based in San Francisco,
California. Prior to forming his own firm, he was a principal and portfolio
manager in a private partnership investing in microcap companies. Prior to that
time, Mr. Keating founded and ran the Euopean Equity Derivative Products
Department for Nomura International plc, in London, England. Prior thereto he
was a proprietary arbitrage trader and head of European equity Trading
Department at Bear Stearns International Limited, London. Mr. Keating is a
graduate of Harvard College.
James R. Crose (age 65)
--------------
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.
Scott Singer (age 45)
------------
Mr. Singer is a Certified Public Accountant and serves as a Director and
Secretary of the Company 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.
26
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table set forth 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, 1996, 1997 and 1998, whose
total annual salary and bonus exceeded $100,000 in any of those fiscal years.
SUMMARY COMPENSATION TABLE
ADDITIONAL
NAME OF INDIVIDUAL CAPACITY YEAR SALARY COMPENSATION
- ------------------ -------- ---- ------ ------------
Alexander Hoffmann Executive Officer 1998 $150,000 $275,000(1)
1997 $ 25,962 $105,600
Sol. L. Berg Former President 1998 $125,000 $ 86,070(2)
1997 $115,625
1996 $100,000(2)
James A. Yurak Former Director 1998
1997 $100,000(3)
1996 $100,000
Alan D. Waldman Former Director 1998
1997
1996 $132,000(4)
(1) Amounts for 1998 represents accrual of entire salary due under employment
agreement and grant of 250,000 options to acquire the Company's common
stock at $1.50 per share. At the date of grant the stock had a fair market
value of $2.00 per share, and 100,000 shares of common stock issued for
past services. 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. 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) Amounts for 1998 represents accrual of entire salary due under employment
agreement and issuance of 57,380 shares of common stock issued for past
services. 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 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.
27
<PAGE>
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. 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. Mr. Berg's Employment Agreement
was terminated by the Company in March 1999.
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 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, BPV 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. 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. Mr. Alexander T. Hoffmann, the Chairman and Chief Executive Officer
of the Company, is also a director and a 50% shareholder of Universal Sales. In
1998, Mr. Hoffmann moved for a judicial dissolution of BPV Enterprises, Inc., in
New York State Supreme Court based on director and shareholder dead-lock and
irreconcilable differences. Universal Sales subsequently filed a second
Complaint against the Company and Alexander T. Hoffmann, individually, in
January 1999 alleging wrongful termination and breach of contract and seeking
damages in the amount of equal to 2.5% of the Company's gross revenues from
operations in excess of $5 million per annum and its potential lost commissions,
which Universal sales estimates to be $25 million in the aggregate, with respect
to the Company. The second Complaint alleges several claims directed solely
against Mr. Hoffmann in connection with his role as a director and shareholder
of Universal Sales, including among others breach of
28
<PAGE>
fiduciary duty. The Company is reviewing its position and has not filed an
answer to the second 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. 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.
(a) As of the December 31, l998, four 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, 1998, 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 as a group:
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- -------------------- ----------------
Hampton Tech Partners II, LLC
8400 East Prentice Avenue
Englewood, CO 80111 (1) 1,117,424 14.5%
Hampton Tech Partners, LLC
8400 East Prentice Avenue
Englewood, CO 80111 (2) 150,000 1.9%
Proxhill Marketing, Inc.(3) 1,312,362 17.1%
9250 E. Costilla Avenue
Englewood, CO 80112
Gary A. Graham (4) 1,399,635 18.2%
9250 E. Costilla Avenue
Englewood, CO 80112
Sol L. Berg (5) 442,380(5) 5.8%
11 Royal Crest Drive
North Andover, MA 01845
Gloria Berg 177,869(6) 2.3%
11 Royal Crest Drive
North Andover, MA 01845
29
<PAGE>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- -------------------- ----------------
Mrs. Alexander T. Hoffmann 369,900 4.8%
1660 Old Country Road
Plainview, NY 11803
Scott Singer 5,000 *
366 North Broadway
Jericho, NY 11753
Alexander T. Hoffmann (4)(7) 180,000 2.3%
c/o IMSCO
40 Bayfield Drive
North Andover, MA 01845
Timothy J. Keating(4) 25,000 *
220 Montgomery Street
San Francisco, CA 94104 ------
Sands Brothers & Co., Ltd (8) *
90 Park Avenue
New York, NY 10016
All Officers and Directors 1,609,635 21.0%
as a group (4 persons)
- ------------
(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
or the 9,000 shares issuable upon conversion of the Series A convertible
preferred stock.
(4) Denotes a director of the Company.
(5) Sol L. Berg is the former President of the Company. His shares do not
include either (i) 177,869 shares owned by his wife, Gloria Berg, or (ii)
166,110 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) 442,380
shares owned by her husband, Sol L. Berg, or (ii) 166,110 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. Hoffmann 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
30
<PAGE>
voting or investment power over these shares or the 250,000 shares issuable
upon exercise of common stock warrants.
(8) Does not include 600,000 shares issuable upon exercise of common stock
warrants.
* 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
(a) Except as described below, since January 1, l998, 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 1998, Gary Graham was
issued 136,000 shares of Common Stock for expense reimbursement and services
rendered to the Company. Additionally, PML received 48,727 shares of Common
Stock for expense reimbursement and services rendered to the Company. PML also
invested $225,000 in the Company for 45,000 shares of preferred stock of the
Company which are convertible into 9,000 shares of common stock, representing a
conversion price of $1.00 per share of common stock.
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 1998, Mr. Hoffmann was
issued 100,000 shares of common stock of the Company for services rendered.
Additionally, Mr. Hoffmann was granted 250,000 stock options exercisable at
$1.50 per share for a period of three years. See "Legal Proceedings."
In 1998, Mr. Sol L. Berg, a former director and former president of the
Company, was issued 57,380 shares of Common Stock for services rendered and
reimbursement of expenses.
(b) Except as above described, there have been no business relationships
with directors or nominees for director of the Company since January 1, l998.
(c) At December 31, l998, no officers or directors were indebted to the
Company.
ITEM 13. 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).
31
<PAGE>
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.)
(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).
(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,
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)
32
<PAGE>
(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).
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)
10.9(5)-- Form of 8% Convertible Debenture issued to Amro International, Ltd.
10.10(5)-- Note and Warrant Purchase Agreement dated February 9, 1999
between the Company and AMRO International, Ltd.
10.11(6)-- Registration Rights Agreement dated February 9, 1999 between the
Company and AMRO International, Ltd.
10.12(6)-- Warrant dated February 9, 1999 issued by the Company to AMRO
International, Ltd.
10.13(6)-- Agreement between the Company and Sands Brothers & Co., Ltd.
dated July 31, 1998
(b) Reports on Form 8-K.
The Company filed three reports on Form 8-K for the year ending December 31,
l998.
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 Exhibits to the Company's Form 10-KSB for the year ended
December 31, 1997, File Number 0-24520, and incorporated by reference herein.
(5) Filed as Exhibits to the Company's Form 8-K dated February 19, 1999, File
Number 0-25420, and incorporated by reference herein.
(6) Filed herewith.
33
<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: May 31, 1999
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.
/s/ Alexander T. Hoffmann
- ----------------------------------------
Alexander T. Hoffmann, Chairman
and Chief Executive Officer
Date: May 31, 1999
/s/ Scott Singer
- ----------------------------------------
Scott Singer, Director and Secretary
(Chief Financial and Accounting Officer)
Date: May 31, 1999
/s/ Gary A. Graham
- ----------------------------------------
Gary A. Graham, Director
Date: May 31, 1999
- ----------------------------------------
Timothy J. Keating, Director
Date: May , 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 -- -- -- --
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 -- -- (1,500,000) --
Issuance of
Shares for
Consulting
Services -- -- 130,000 13 -- 235,612 -- -- -- --
Private
Placement -- -- 62,611 6 -- 122,994 -- -- -- --
Advertising
Credits Used -- -- -- -- -- -- -- -- -- --
Net [Loss] -- -- -- -- -- (3,631,105) (1,062,758) -- --
-------------------------------------------------------------------------------------------------------
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] -- -- -- -- -- -- -- -- -- 225,000
270 Shares Issuable
Pursuant to Financing
Penalty [5F] -- -- -- -- -- 253 -- -- -- 253
Advertising Credits
Used -- -- -- -- -- -- -- -- -- 15,942
Net [Loss] -- -- -- -- -- -- (2,881,162) -- -- (2,881,162)
---------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 -
Forward -- $ 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 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 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.
EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of the 3rd day of February, 1999,
between AMRO International, S.A. ("Holders"), and IMSCO TECHNOLOGIES, INC., a
corporation incorporated under the laws of the State of Delaware (the
"Company").
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Holders are purchasing from the Company, pursuant to a
Convertible Debenture and Warrant Purchase Agreement dated the date hereof (the
"Purchase Agreement"), $600,000 principal amount of Convertible Debentures and
Warrants to purchase up to 120,000 shares of the Company's Common Stock (terms
not defined herein shall have the meanings ascribed to them in the Purchase
Agreement); and
WHEREAS, the Company desires to grant to the Holders the registration
rights set forth herein with respect to the shares of Common Stock issuable upon
conversion of the Convertible Debentures and shares of Common Stock issuable
upon exercise of the Warrants (hereinafter referred to as the "Stock" or
"Securities" of the Company).
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. REGISTRABLE SECURITIES. As used herein the term "Registrable
Security" means the Securities until (i) the Registration Statement has been
declared effective by the Commission, and all Securities have been disposed of
pursuant to the Registration Statement, (ii) all Securities have been sold under
circumstances under which all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("Rule 144") are met,
(iii) all Securities have been otherwise transferred to holders who may trade
such Securities without restriction under the Securities Act, and the Company
has delivered a new certificate or other evidence of ownership for such
Securities not bearing a restrictive legend or (iv) such time as, in the opinion
of counsel to the Company, all Securities may be sold without any time, volume
or manner limitations pursuant to Rule 144(k) (or any similar provision then in
effect) under the Securities Act. The term "Registrable Securities" means any
and/or all of the securities falling within the foregoing definition of a
"Registrable Security." In the event of any merger, reorganization,
consolidation, recapitalization or other change in corporate structure affecting
the Common Stock, such adjustment shall be deemed to be made in the definition
of "Registrable Security" as is appropriate in order to prevent any dilution or
enlargement of the rights granted pursuant to this Agreement.
Section 2. RESTRICTIONS ON TRANSFER. The Holder acknowledges and
understands that prior to the registration of the Securities as provided herein,
the Securities are "restricted securities" as defined in Rule 144 promulgated
under the Act. The Holder understands that no disposition or transfer of the
Securities may be made by Holder in the absence of (i) an opinion of counsel to
the Holder that such transfer may be made without registration under the
Securities Act or (ii) such registration.
With a view to making available to the Holder the benefits of Rule 144
under the Securities Act or any other similar rule or regulation of the
Commission that may at any time permit the Holder to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
1
<PAGE>
(a) comply with the provisions of paragraph (c)(1) of Rule 144;
and
(b) file with the Commission in a timely manner all reports and
other documents required to be filed by the Company pursuant to Section 13 or
15(d) under the Exchange Act; and, if at any time it is not required to file
such reports but in the past had been required to or did file such reports, it
will, upon the request of any Holder, make available other information as
required by, and so long as necessary to permit sales of, its Registrable
Securities pursuant to Rule 144.
Section 3. REGISTRATION RIGHTS WITH RESPECT TO THE SECURITIES.
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("Commission"), within thirty (30) days after
the Closing Date, a registration statement (on Form S-3, or other appropriate
registration statement if it is not eligible to use Form S-3) under the
Securities Act (the "Registration Statement"), at the sole expense of the
Company (except as provided in Section 3(c) hereof), in respect of all holders
of Securities, so as to permit a public offering and resale of the Securities
under the Act.
The Company shall use its best efforts to cause the Registration
Statement to become effective by June 15, 1999, or, if earlier, within five (5)
days of SEC clearance to request acceleration of effectiveness. The number of
shares designated in the Registration Statement to be registered shall include
all the Warrant Shares and 200% of the number of shares of Common Stock which
would be issued upon conversion of the Convertible Debentures assuming a Market
Price of $1.00 per share of Common Stock, and shall include appropriate language
regarding reliance upon Rule 416 to the extent permitted by the Commission.
Unless otherwise agreed to in writing by the holders, the Registration statement
shall include only (i) the Registrable Securities, and (ii) any or all of the
securities specifically listed on Exhibit 1 annexed hereto. The Company will
notify Holder of the effectiveness of the Registration Statement within one
Trading Day of such event. The Company agrees that it will not enter into any
sale of its securities for cash at a discount to Market Price, as defined in the
Purchase Agreement until the 120 days after the Registration Statement has
become effective, without the Holder's prior written consent, except (x)
pursuant to any (i) presently existing employee benefit plan which plan has been
approved by the Company's stockholders, (ii) compensatory plan for a full-time
employee or key consultant, or (iii) strategic partnership or other business
transaction, the principal purpose of which is not simply to raise money; or (y)
if the Market Price of the Common Stock is less than $1.00 for 30 out of 45
consecutive Trading Days, and the Holder does not agree in writing to provide
financing to the Company on terms offered by a bona fide third party within
three (3) Business Days of notice from the Company setting forth the terms of
such proposed financing
(b) The Company will maintain the Registration Statement or
post-effective amendment filed under this Section 3 hereof effective under the
Securities Act until the earlier of (i) the date that none of the Convertible
Debentures, the Warrants or the Securities are or may become issued and
outstanding, (ii) the date that all of the Securities have been sold pursuant to
the Registration Statement, (iii) the date the holders thereof receive an
opinion of counsel to the Company, which counsel shall be reasonably acceptable
to the Holder, that the Securities may be sold under the provisions of Rule 144
without limitation as to volume, (iv) all
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Securities have been otherwise transferred to holders who may trade such shares
without restriction under the Securities Act, and the Company has delivered a
new certificate or other evidence of ownership for such securities not bearing a
restrictive legend, or (v) all Securities may be sold without any time, volume
or manner limitations pursuant to Rule 144(k) or any similar provision then in
effect under the Securities Act in the opinion of counsel to the Company, which
counsel shall be reasonably acceptable to the Holders (the "Effectiveness
Period"). If necessary, the Company shall amend the Registration Statement or
file a subsequent new Registration Statement to register additional shares
necessary to have shares available for issuance upon Conversion of the
Debenture.
(c) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of the
Registration Statement under subparagraph 3(a) and in complying with applicable
securities and Blue Sky laws (including, without limitation, all attorneys' fees
of the Company) shall be borne by the Company. The Holder shall bear the cost of
underwriting and/or brokerage discounts, fees and commissions, if any,
applicable to the Securities being registered and the fees and expenses of its
counsel. The Holder and its counsel shall be provided with and shall have a
reasonable period, of at least three (3) Trading Days, to review the proposed
Registration Statement or any amendment thereto, prior to filing with the
Commission, and the Company shall provide each Holder with copies of any comment
letters received from the Commission with respect thereto within two (2) Trading
Days of receipt thereof. The Company will not file any statement or information
reasonably objected to by Holder or its counsel. The Company shall make
reasonably available for inspection by each Holder, any underwriter
participating in any disposition pursuant to the Registration Statement, and any
attorney, accountant or other agent retained by such Holder or any such
underwriter all relevant financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
Company's officers, directors and employees to supply all information reasonably
requested by such Holder or any such underwriter, attorney, accountant or agent
in connection with the Registration Statement, in each case, as is customary for
similar due diligence examinations; PROVIDED, HOWEVER, that all records,
information and documents that are designated in writing by the Company, in good
faith, as confidential, proprietary or containing any material non-public
information shall be kept confidential by such Holder and any such underwriter,
attorney, accountant or agent (pursuant to an appropriate confidentiality
agreement in the case of any such Holder or agent), unless such disclosure is
made pursuant to judicial process in a court proceeding (after first giving the
Company an opportunity promptly to seek a protective order or otherwise limit
the scope of the information sought to be disclosed) or is required by law, or
such records, information or documents become available to the public generally
or through a third party not in violation of an accompanying obligation of
confidentiality; and PROVIDED FURTHER that, if the foregoing inspection and
information gathering would otherwise disrupt the Company's conduct of its
business, such inspection and information gathering shall, to the maximum extent
possible, be coordinated on behalf of the Holders and the other parties entitled
thereto by one firm of counsel designed by and on behalf of the majority in
interest of Holders and other parties. The Company shall qualify any of the
securities for sale in such states as such Holder reasonably designates and
shall furnish indemnification in the manner provided in Section 6 hereof.
However, the Company shall not be required to qualify in any state which will
require an escrow or other restriction relating to the Company and/or the
sellers, or which will require the Company to qualify to do business in such
state or require the Company to file therein any general consent to service of
process. The Company at its expense will supply the Holders with copies of the
Registration Statement and
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the prospectus included therein and other related documents in such quantities
as may be reasonably requested by the Holders.
(d) The Company shall not be required by this Section 3 to include
a Holder's Securities in any Registration Statement which is to be filed if, in
the opinion of counsel for both the Holder and the Company (or, should they not
agree, in the opinion of another counsel experienced in securities law matters
acceptable to counsel for the Holder and the Company) the proposed offering or
other transfer as to which such registration is requested is exempt from
applicable federal and state securities laws and would result in all purchasers
or transferees obtaining securities which are not "restricted securities", as
defined in Rule 144 under the Securities Act.
(e) In the event that (i) the Registration Statement to be filed
by the Company pursuant to Section 3(a) above is not filed with the Commission
by April 15, 1999 ("Required Filing Date"), (ii) the Registration Statement is
not declared effective by the Commission by the earlier of (a) five days after
the SEC has indicated that it is prepared to accept a request for accelerated
effectiveness, or (b) June 15, 1999, subject to the suspensions described below
("Required Effective Date"), or (iii) the Registration Statement is not
maintained as effective by the Company for the period set forth in Section 3(b)
above (each a "Registration Default") then the Company will pay Holder (pro
rated on a daily basis), as liquidated damages for such failure and not as a
penalty the amount described below. Except during a Financial Update Period or
during a Suspension Period as such terms are defined below, if the Registration
Statement covering the Registrable Securities is not filed in proper form with
the SEC no later than the Required Filing Date, the Company will make payment to
the Holder in such amounts and at such times as shall be determined pursuant to
this Section. If the Registration Statement covering the Registrable Securities
is not effective by the relevant Required Effective Date or if the Holder is
restricted from making sales of Registrable Securities covered by a previously
effective Registration Statement at any time after the Effective Date (the date
such restriction commences, a "Restricted Sale Date"), then the Company will
make payments to the Holder in such amounts and at such times as shall be
determined pursuant to this Section .
The amount (the "Periodic Amount") to be paid by the Company to the
Holder shall be determined as of each Computation Date (as defined below) and
such amount shall be equal to (A) the Periodic Amount Percentage (as defined
below) of the purchase price paid by the Holder (the "Purchase Price") for all
Debentures purchased pursuant to the Securities Purchase Agreement for the
period from the date following the Required Filing Date or the Required
Effective Date, as the case may be, to the first relevant Computation Date, and
(B) the Periodic Amount Percentage of the Purchase Price to each Computation
Date thereafter. The "Periodic Amount Percentage" means one and one-half percent
(1.5%). After the Effective Date, the Purchase Price shall be deemed to refer to
the sum of (A) the principal amount of all Debentures not yet converted and (B)
the Held Shares Value (as defined below). The "Held Shares Value" means, for
shares acquired by the Holder upon a conversion within the thirty (30) days
preceding the Restricted Sale Date, but not yet sold by the Holder, the
principal amount of the Debentures converted into such Conversion Shares;
provided, however, that if the Holder effected more than one conversion during
such thirty (30) day period and sold less than all of such shares, the sold
shares shall be deemed to be derived first from the conversions in the sequence
of such conversions (that is, for example, until the number of shares from the
first of such conversions have been sold, all shares shall be deemed to be from
the first conversion; thereafter, from the
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second conversion until all such shares are sold). Notwithstanding anything to
the contrary contained herein, a failure to maintain the effectiveness of the
Registration Statement or the ability of a Holder to use the Registration
Statement to effect resales of Securities during the period after 45 days and
within 90 days from the end of the Company's fiscal year resulting solely from
the need to update the Company's financial statements contained or incorporated
by reference in the Registration Statement, or the earlier filing of the
Company's annual reports on Form 10-KSB for the preceding fiscal year (the
"Financial Update Period") shall not constitute a Registration Default and shall
not trigger the accrual of liquidated damages hereunder.
Each Periodic Amount will be payable by the Company in cash or other
immediately available funds to the Holder on the day after the Required Filing
Date or the Required Effective Date, as the case may be, and each thirtieth day
thereafter, without requiring demand therefor by the Holder.
"Computation Date" means (i) the date which is the earlier of (A)
thirty (30) days after the Required Filing Date, any relevant Required Effective
Date or a Restricted Sale Date, as the case may be, or (B) the date after the
Required Filing Date, such Required Effective Date or Restricted Sale Date on
which the Registration Statement is filed , respectively, as the case may be,
and (ii) each date which is the earlier of (A) thirty (30) days after the
Registration Statement is filed or is declared effective or has its restrictions
removed, as the case may be.
If the Company does not remit the damages to the Holder as set forth
above, the Company will pay the Holder reasonable costs of collection, including
attorneys fees, in addition to the liquidated damages. The registration of the
Securities pursuant to this provision shall not affect or limit Holder's other
rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company from
selling securities pursuant to any Registration Statement in which it is
required to include Securities pursuant to this Section 3.
(g) Notwithstanding the foregoing, if at any time or from time to
time after the date of effectiveness of the Registration Statement, the Company
notifies the Holders in writing of the existence of a Potential Material Event,
as defined below, the Holders shall not offer or sell any Registrable
Securities, or engage in any other transaction involving or relating to the
Registrable Securities, from the time of the giving of notice with respect to a
Potential Material Event until such Holder receives written notice from the
Company that such Potential Material Event either has been disclosed to the
public or no longer constitutes a Potential Material Event; provided, however,
that the Company may not so suspend the right to such holders of Registrable
Securities for more than two twenty (20) day periods in the aggregate during any
12 month period ("Suspension Period") with at least a ten (10) business day
interval between such periods, during the periods the Registration Statement is
required to be in effect;
(h) "Potential Material Event" means any of the following: (i) the
possession by the Company of material information not ripe for disclosure in a
registration statement, which shall be evidenced by determination in good faith
by the Board of Directors of the Company that disclosure of such information in
the registration statement would be detrimental to the business and affairs of
the Company; or (ii) any material engagement or activity by the Company which
would, in the good faith determination of the Board of Directors of the Company,
be adversely
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<PAGE>
affected by disclosure in a registration statement at such time and that the
registration statement would be materially misleading absent the inclusion of
such information.
Section 4. COOPERATION WITH COMPANY. Each Holder will cooperate with
the Company in all respects in connection with this Agreement, including timely
supplying all information reasonably requested by the Company (which shall
include all information regarding the Holder and proposed manner of sale of the
Registrable Securities required to be disclosed in the Registration Statement)
and executing and returning all documents reasonably requested in connection
with the registration and sale of the Registrable Securities and entering into
and performing its obligations under any underwriting agreement, if the offering
is an underwritten offering, in usual and customary form, with the managing
underwriter or underwriters of such underwritten offering. Nothing in this
Agreement shall obligate the Holder to consent to be named as an underwriter in
the Registration Statement. The obligation of the Company to register the
Registrable Securities shall be absolute and unconditional as to those
Securities which the Commission will permit to be registered without naming the
Holder as an underwriter, notwithstanding that such Registrable Securities may
be limited to only those Conversion Shares issuable upon conversion of the
Convertible Debentures.
Section 5. REGISTRATION PROCEDURES. If and whenever the Company is
required by any of the provisions of this Agreement to effect the registration
of any of the Registrable Securities under the Act, the Company shall (except as
otherwise provided in this Agreement), as expeditiously as possible, subject to
the Holders' assistance and cooperation as reasonably required:
(a)(i) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Act with respect to the sale or other
disposition of all securities covered by such registration statement whenever
the Holder of such Registrable Securities shall desire to sell or otherwise
dispose of the same (including prospectus supplements with respect to the sales
of securities from time to time in connection with a registration statement
pursuant to Rule 415 promulgated under the Act) and (ii) take all lawful action
such that each of (A) the Registration Statement and any amendment thereto does
not, when it becomes effective, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, not misleading and (B) the Prospectus forming part
of the Registration Statement, and any amendment or supplement thereto, does not
at any time during the Registration Period include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b)(i) prior to the filing with the Commission of any Registration
Statement (including any amendments thereto) and the distribution or delivery of
any prospectus (including any supplements thereto), provide draft copies thereof
to the Holders and reflect in such documents all such comments as the Holders
(and their counsel) reasonably may propose respecting the Selling Shareholders
and Plan of Distribution sections (or equivalents) and (ii) furnish to each
Holder such numbers of copies of a prospectus including a preliminary prospectus
or any amendment or supplement to any prospectus, as applicable, in conformity
with the requirements of the Act, and such other documents, as such Holder may
reasonably request in order to facilitate the public sale or other disposition
of the securities owned by such Holder;
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<PAGE>
(c) register and qualify the Registrable Securities covered by the
Registration Statement under such other securities or blue sky laws of such
jurisdictions as the Holders shall reasonably request (subject to the
limitations set forth in Section 3(d) above), and do any and all other acts and
things which may be necessary or advisable to enable each Holder to consummate
the public sale or other disposition in such jurisdiction of the securities
owned by such Holder, except that the Company shall not for any such purpose be
required to qualify to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified or to file therein any general consent to service
of process;
(d) list such Registrable Securities on the American Stock
Exchange, other national securities exchange, the NASDAQ National Market or the
NASDAQ Small-Cap Market, if the Common Stock of the Company is then listed on
such exchanges, if the listing of such Registrable Securities is then permitted
under the rules of such exchange or NASDAQ;
(e) notify each Holder of Registrable Securities covered by the
Registration Statement, at any time when a prospectus relating thereto covered
by the Registration Statement is required to be delivered under the Act, of the
happening of any event of which it has knowledge as a result of which the
prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing, and the Company
shall prepare and file a curative amendment under Section 5(a) as quickly as
commercially possible;
(f) as promptly as practicable after becoming aware of such event,
notify each Holder who holds Registrable Securities being sold (or, in the event
of an underwritten offering, the managing underwriters) of the issuance by the
Commission of any stop order or other suspension of the effectiveness of the
Registration Statement at the earliest possible time and take all lawful action
to effect the withdrawal, recession or removal of such stop order or other
suspension;
(g) cooperate with the Holders who hold Registrable Securities
being offered to facilitate the timely preparation and delivery of certificates
for the Registrable Securities to be offered pursuant to the Registration
Statement and enable such certificates for the Registrable Securities to be in
such denominations or amounts, as the case may be, as the Holders reasonably may
request and registered in such names as the Holders may request; and, within
three Trading Days after a Registration Statement which includes Registrable
Securities is declared effective by the Commission, deliver and cause legal
counsel selected by the Company to deliver to the transfer agent for the
Registrable Securities (with copies to the Holders whose Registrable Securities
are included in such Registration Statement) an appropriate instruction and, to
the extent necessary, an opinion of such counsel;
(h) take all such other lawful actions reasonably necessary to
expedite and facilitate the disposition by the Holders of their Registrable
Securities in accordance with the intended methods therefor provided in the
prospectus which are customary for issuers to perform under the circumstances;
(i) in the event of an underwritten offering, promptly include or
incorporate in a Prospectus supplement or post-effective amendment to the
Registration
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Statement such information as the managers reasonably agree should be included
therein and to which the Company does not reasonably object and make all
required filings of such Prospectus supplement or post-effective amendment as
soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment; and
(j) maintain a transfer agent and registrar for its Common Stock.
Section 6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Holder
and each person, if any, who controls such Holder within the meaning of the
Securities Act ("Distributing Holder") against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees), to which the Distributing
Holder may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, or any related
preliminary prospectus, final prospectus or amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
preliminary prospectus, final prospectus or amendment or supplement thereto in
reliance upon, and in conformity with, written information furnished to the
Company by the Distributing Holder, specifically for use in the preparation
thereof. This Section 6(a) shall not inure to the benefit of any Distributing
Holder with respect to any person asserting such loss, claim, damage or
liability who purchased the Registrable Securities which are the subject thereof
if the Distributing Holder failed to send or give (in violation of the
Securities Act or the rules and regulations promulgated thereunder) a copy of
the prospectus contained in such Registration Statement to such person at or
prior to the written confirmation to such person of the sale of such Registrable
Securities, where the Distributing Holder was obligated to do so under the
Securities Act or the rules and regulations promulgated thereunder. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all reasonable costs
of defense and investigation and all reasonable attorneys' fees) to which the
Company or any such officer, director or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, or any related preliminary prospectus, final
prospectus or amendment or supplement thereto, or arise out of or are based upon
the omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, preliminary prospectus, final prospectus or amendment
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<PAGE>
or supplement thereto in reliance upon, and in conformity with, written
information furnished to the Company by such Distributing Holder, specifically
for use in the preparation thereof. This indemnity agreement will be in addition
to any liability which the Distributing Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 6, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
except to the extent of actual prejudice demonstrated by the indemnifying party.
In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, assume the defense
thereof, subject to the provisions herein stated and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section 6 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless the indemnifying party shall not
pursue the action to its final conclusion. The indemnified party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall not be at the
expense of the indemnifying party if the indemnifying party has assumed the
defense of the action with counsel reasonably satisfactory to the indemnified
party; provided that if the indemnified party is the Distributing Holder, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party, or (ii) the named parties to any such action
(including any impleaded parties) include both the Distributing Holder and the
indemnifying party and the Distributing Holder shall have been advised by such
counsel that there may be one or more legal defenses available to the
indemnifying party different from or in conflict with any legal defenses which
may be available to the Distributing Holder (in which case the indemnifying
party shall not have the right to assume the defense of such action on behalf of
the Distributing Holder, it being understood, however, that the indemnifying
party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 7. CONTRIBUTION. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for indemnification pursuant to Section 6 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 6 hereof provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any indemnified party, then the Company and the
applicable Distributing Holder shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject
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(which shall, for all purposes of this Agreement, include, but not be limited
to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees), in either such case (after contribution from others) on the
basis of relative fault as well as any other relevant equitable considerations.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the applicable Distributing Holder on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Distributing Holder agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in this Section 7. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this Section 7
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Notwithstanding any other provision of this Section 7, in no event shall any (i)
Holder be required to undertake liability to any person under this Section 7 for
any amounts in excess of the dollar amount of the proceeds to be received by
such Holder from the sale of such Holder's Registrable Securities (after
deducting any fees, discounts and commissions applicable thereto) pursuant to
any Registration Statement under which such Registrable Securities are to be
registered under the Securities Act and (ii) underwriter be required to
undertake liability to any person hereunder for any amounts in excess of the
aggregate discount, commission or other compensation payable to such underwriter
with respect to the Registrable Securities underwritten by it and distributed
pursuant to the Registration Statement.
Section 8. NOTICES. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a Trading Day during normal business hours where such notice is to
be received), or the first Trading Day following such delivery (if delivered
other than on a Trading Day during normal business hours where such notice is to
be received) or (b) on the second Trading Day following the date of mailing by
reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company: IMSCO TECHNOLOGIES, INC.
40 Bayfield Drive
NorthAndover, MA 01845
Attention: Chief Executive Officer
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Telephone: (978) 689-2080
Fax: (978) 689-2585
with a copy to:
(shall not constitute notice) Epstein Becker & Green, P.C.
250 Park Avenue
New York, NY 10177
Attention: David E. Fleming, Esq.
Telephone: (212) 351-4500
Fax: (212) 661-0989
If to the Holder: AMRO International, S.A.
c/o Ultra Finance
Grossmunster Platz 26
Zurich CH 8022
Switzerland
Telephone: 011-
Facsimile: 011-411-262-5515
with a copy to: Sam Krieger, Esq.
(shall not constitute notice) Krieger & Prager
319 Fifth Avenue
New York, New York 10016
Telephone: (212) 689-3322
Fax: (212) 213-2077
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 8 by giving at least ten (10) days' prior written
notice of such changed address or facsimile number to the other party hereto.
Section 9. ASSIGNMENT. This Agreement is binding upon and inures to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns. The rights granted the Holders under this Agreement may be
assigned to any purchaser of substantially all of the Registrable Securities (or
the rights thereto) from a Holder, as otherwise permitted by the Purchase
Agreement. In the event of a transfer of the rights granted under this
Agreement, the Holder agrees that the Company may require that the transferee
comply with reasonable conditions as determined in the discretion of the
Company.
Section 10. ADDITIONAL COVENANTS OF THE COMPANY. The Company agrees
that at such time as it meets all the requirements for the use of Securities Act
Registration Statement on Form S-3 it shall file all reports and information
required to be filed by it with the Commission in a timely manner and take all
such other action so as to maintain such eligibility for the use of such form.
Section 11. COUNTERPARTS/FACSIMILE. This Agreement may be executed in
two or more counterparts, each of which shall constitute an original, but all of
which, when together shall constitute but one and the same instrument, and shall
become effective when one or more
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counterparts have been signed by each party hereto and delivered to the other
party. In lieu of the original, a facsimile transmission or copy of the original
shall be as effective and enforceable as the original.
Section 12. REMEDIES. The remedies provided in this Agreement are
cumulative and not exclusive of any remedies provided by law. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their best efforts to find and
employ an alternative means to achieve the same or substantially the same result
as that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
Section 13. CONFLICTING AGREEMENTS. The Company shall not enter into
any agreement with respect to its securities that is inconsistent with the
rights granted to the holders of Registrable Securities in this Agreement or
otherwise prevents the Company from complying with all of its obligations
hereunder.
Section 14. HEADINGS. The headings in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
Section 15. GOVERNING LAW, ARBITRATION. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to contracts made in New York by persons domiciled in New York City
and without regard to its principles of conflicts of laws. Any dispute under
this Agreement shall be submitted to arbitration under the American Arbitration
Association (the "AAA") in New York City, New York, and shall be finally and
conclusively determined by the decision of a board of arbitration consisting of
three (3) members (hereinafter referred to as the "Board of Arbitration")
selected as according to the rules governing the AAA. The Board of Arbitration
shall meet on consecutive Trading Days in New York City, New York, and shall
reach and render a decision in writing (concurred in by a majority of the
members of the Board of Arbitration) with respect to the amount, if any, which
the losing party is required to pay to the other party in respect of a claim
filed. In connection with rendering its decisions, the Board of Arbitration
shall adopt and follow the laws of the State of New York. To the extent
practical, decisions of the Board of Arbitration shall be rendered no more than
thirty (30) calendar days following commencement of proceedings with respect
thereto. The Board of Arbitration shall cause its written decision to be
delivered to all parties involved in the dispute. Any decision made by the Board
of Arbitration (either prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive on the parties to
the dispute, and entitled to be enforced to the fullest extent permitted by law
and entered in any court of competent jurisdiction. The non-prevailing party to
any arbitration (as determined by the Board of Arbitration) shall pay the
expenses of the prevailing party, including reasonable attorneys' fees, in
connection with such arbitration.
Section 16. SEVERABILITY. If any provision of this Agreement shall for
any reason be held invalid or unenforceable, such invalidity or unenforceablity
shall not affect any other
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provision hereof and this Agreement shall be construed as if such invalid or
unenforceable provision had never been contained herein.
Section 17. CAPITALIZED TERMS. All capitalized terms not otherwise
defined herein shall have the meaning assigned to them in the Purchase
Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, on the day and year first above written.
IMSCO TECHNOLOGIES, INC.
By:
-------------------------------------
Alexander T. Hoffmann,
Chairman and Chief Executive Officer
AMRO INTERNATIONAL, S.A.
By:
-------------------------------------
H. U. Bachofen,
Director
14
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"). NEITHER THIS WARRANT NOR THE SHARES
ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT
FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS.
STOCK PURCHASE WARRANT
To Purchase 120,000 Shares of Common Stock of
IMSCO TECHNOLOGIES, INC.
THIS CERTIFIES that, for value received, AMRO INTERNATIONAL, S.A. (the
"Holder"), is entitled, upon the terms and subject to the conditions hereinafter
set forth, at any time on or after the date of issuance of this Warrant (the
"Initial Exercise Date") and on or prior to the close of business on January 31,
2002 (the "Termination Date") but not thereafter, to subscribe for and purchase
from IMSCO TECHNOLOGIES, INC., a Delaware corporation (the "Company"), up to One
Hundred and Twenty Thousand (120,000) shares (the "Warrant Shares") of Common
Stock, no par value per share of the Company (the "Common Stock"). The purchase
price of one share of Common Stock (the "Exercise Price") under this Warrant
shall be One Dollar and Fifty Cents ($1.50). The Exercise Price and the number
of shares for which the Warrant is exercisable shall be subject to adjustment as
provided herein. This Warrant is being issued in connection with the Debenture
and Warrant Purchase Agreement between the Holder and the Company dated as of
February 3, 1999 (the "Agreement") and is subject to its terms and conditions.
In the event of any conflict between the terms of this Warrant and the
Agreement, the Agreement shall control. Capitalized terms used and not otherwise
defined herein shall have the meanings set forth for such terms in the
Agreement.
<PAGE>
1. TITLE OF WARRANT. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. AUTHORIZATION OF SHARES. The Company covenants that all shares of
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. EXERCISE OF WARRANT. Except as provided in Section 4 herein,
exercise of the purchase rights represented by this Warrant may be made at any
time or times on or after the Initial Exercise Date, and before the close of
business on the Termination Date, or such earlier date on which this Warrant may
terminate as provided elsewhere in this Warrant, by the surrender of this
Warrant and the Notice of Exercise Form annexed hereto duly executed, at the
office of the Company (or such other office or agency of the Company as it may
designate by notice in writing to the registered holder hereof at the address of
such holder appearing on the books of the Company) and upon payment of the
Exercise Price of the shares thereby purchased by wire transfer or cashier's
check drawn on a United States bank, the holder of this Warrant shall be
entitled to receive a certificate for the number of shares of Common Stock so
purchased. Certificates for shares purchased hereunder shall be delivered to the
holder hereof within three (3) business days after the date on which this
Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to
have been exercised and such certificate or certificates shall be deemed to have
been issued, and Holder or any other person so designated to be named therein
shall be deemed to have become a holder of record of such shares for all
purposes, as of the date the Warrant has been exercised by payment to the
Company of the Exercise Price and all taxes required to be paid by Holder, if
any, pursuant to Section 5 prior to the issuance of such shares, have been paid.
If this Warrant shall have been exercised in part, the Company shall, at the
time of delivery of the certificate or certificates representing Warrant Shares,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased shares of Common Stock called for by this Warrant, which new Warrant
shall in all other respects be identical with this Warrant. Notwithstanding the
provisions of the Debenture and Warrant Purchase Agreement or of the Warrants,
in no event other than upon a Mandatory Conversion, as defined in the Debenture,
or while there is outstanding a tender offer for any or all of the shares of the
Company's common stock shall the Holder be entitled, shall the Company have the
obligation, to permit exercise of this Warrant to the extent that, after such
exercise, the sum of (1) the number of shares of Common Stock beneficially owned
by the Holder and its Affiliates (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unconverted portion of
the Debentures or unexercised portion of the Warrants), and (2) the number of
shares of Common Stock issuable upon the conversion of the Debentures or
exercise of the Warrants with respect to which the determination of this proviso
is being made, would result in beneficial ownership by the Holder and its
affiliates of more than 9.99% of the outstanding shares of Common Stock (after
taking into account the shares to be issued to the
2
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Holder upon such conversion or exercise). For purposes of the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act") and Regulation 13D-G thereunder, except as otherwise provided in clause
(1) of such sentence. The Holder further agrees that if the Holder transfers or
assigns any of this Warrant to a party who or which would not be considered an
Affiliate, such transfer or assignment shall be made subject to the transferee's
or assignee's specific agreement to be bound the provisions of this paragraph as
if such transferee or assignee were a signatory to this Agreement.
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4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the Exercise Price.
5. CHARGES, TAXES AND EXPENSES. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involving the issuance or
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. CLOSING OF BOOKS. The Company will not close its shareholder books
or records in any manner which prevents the timely exercise of this Warrant.
7. TRANSFER, DIVISION AND COMBINATION. (a) Subject to compliance with
any applicable securities laws (including the provision to the Company of an
opinion of counsel for the assignor of this Warrant), transfer of this Warrant
and all rights hereunder, in whole or in part, shall be registered on the books
of the Company to be maintained for such purpose, upon surrender of this Warrant
at the principal office of the Company, together with a written assignment of
this Warrant substantially in the form attached hereto duly executed by Holder
or its agent or attorney and funds sufficient to pay any transfer taxes payable
upon the making of such transfer. Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants in the
name of the assignee or assignees and in the denomination specified in such
instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned, may be exercised by a
new Holder for the purchase of shares of Common Stock without having a new
Warrant issued.
(b) This Warrant may be divided or combined with other Warrants
upon presentation hereof at the aforesaid office of the Company, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued, signed by Holder or its agent or attorney. Subject to compliance
with Section 7(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
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<PAGE>
(c) The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 7.
(d) The Company agrees to maintain, at its aforesaid office, books
for the registration and the registration of transfer of the Warrants.
8. NO RIGHTS AS SHAREHOLDER UNTIL EXERCISE. This Warrant does not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise hereof. Upon the surrender of this Warrant
and the payment of the aggregate Exercise Price, the Warrant Shares so purchased
shall be and be deemed to be issued to such holder as the record owner of such
shares as of the close of business on the later of the date of such surrender or
payment.
9. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. The Company
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
certificate or any stock certificate relating to the Warrant Shares, and in case
of loss, theft or destruction, of indemnity or security reasonably satisfactory
to it, and upon surrender and cancellation of such Warrant or stock certificate,
if mutilated, the Company will make and deliver a new Warrant or stock
certificate of like tenor and dated as of such cancellation, in lieu of such
Warrant or stock certificate.
10. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
11. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. (a)
Stock Splits, etc. The number and kind of securities purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time upon the happening of any of the following. In case the
Company shall (i) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock to holders of its outstanding Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares of Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock or (iv) issue any shares
of its capital stock in a reclassification of the Common Stock, then the number
of Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the holder of this Warrant shall be entitled
to receive the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to receive had such
Warrant been exercised in advance thereof. Upon each such adjustment of the kind
and number of Warrant Shares or other securities of the Company which are
purchasable hereunder, the holder of this Warrant shall thereafter be entitled
to purchase the number of Warrant Shares or other securities resulting from such
adjustment at an Exercise Price per such Warrant Share or other security
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment and dividing by the number of Warrant
Shares or other securities of the Company resulting from such
5
<PAGE>
adjustment. An adjustment made pursuant to this paragraph shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(a)
(b) REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then the holder of this Warrant shall have the right thereafter
to receive, upon exercise of this Warrant, the number of shares of common stock
of the successor or acquiring corporation or of the Company, if it is the
surviving corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of assets
by a holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined by resolution of the Board of Directors of
the Company) in order to provide for adjustments of shares of Common Stock for
which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 11. For purposes of
this Section 11, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 11 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
12. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may at any time
during the term of this Warrant, reduce the then current Exercise Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.
13. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified
6
<PAGE>
mail, return receipt requested, to the holder of this Warrant notice of such
adjustment or adjustments setting forth the number of Warrant Shares (and other
securities or property) purchasable upon the exercise of this Warrant and the
Exercise Price of such Warrant Shares (and other securities or property) after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
Such notice, in absence of manifest error, shall be conclusive evidence of the
correctness of such adjustment.
14. NOTICE OF CORPORATE ACTION. If at any time:
(a) the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) there shall be any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation or,
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the record date for such dividend,
distribution or right or for determining rights to vote in respect of any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, liquidation or winding up, and (ii) in the case of any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up, at least 30 days' prior
written notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause also shall specify (i) the date on which
the holders of Common Stock shall be entitled to any such dividend, distribution
or right, and the amount and character thereof, and (ii) the date on which any
such reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up is to take place and the
time, if any such time is to be fixed, as of which the holders of Common Stock
shall be entitled to exchange their shares of Common Stock for securities or
other property deliverable upon such disposition, dissolution, liquidation or
winding up. Each such written notice shall be sufficiently given if addressed to
Holder at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 17(d).
15. AUTHORIZED SHARES. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the Warrant Shares upon the exercise of any purchase rights under this
Warrant. The Company further covenants that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
the Warrant Shares
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<PAGE>
upon the exercise of the purchase rights under this Warrant. The Company will
take all such reasonable action as may be necessary to assure that such Warrant
Shares may be issued as provided herein without violation of any applicable law
or regulation, or of any requirements of NASDAQ or any domestic securities
exchange upon which the Common Stock may be listed.
The Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Upon the request of Holder, the Company will at any time during the
period this Warrant is outstanding acknowledge in writing, in form reasonably
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
Before taking any action which would cause an adjustment reducing the
current Exercise Price below the then par value, if any, of the shares of Common
Stock issuable upon exercise of the Warrants, the Company shall take any
corporate action which may be necessary in order that the Company may validly
and legally issue fully paid and non-assessable shares of such Common Stock at
such adjusted Exercise Price.
16. MISCELLANEOUS.
(a) JURISDICTION. This Warrant shall be binding upon any
successors or assigns of the Company. This Warrant shall constitute a contract
under the laws of New York without regard to its conflict of law, principles or
rules, and be subject to arbitration pursuant to the terms set forth in the
Agreement.
(b) RESTRICTIONS. The holder hereof acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws and by the
Agreement.
(c) NONWAIVER AND EXPENSES. No course of dealing or any delay or
failure to exercise any right hereunder on the part of Holder shall operate as a
waiver of such right or otherwise prejudice Holder's rights, powers or remedies,
notwithstanding all rights
8
<PAGE>
hereunder terminate on the Termination Date. If the Company fails to make, when
due, any payments provided for hereunder, or fails to comply with any other
provision of this Warrant, the Company shall pay to Holder such amounts as shall
be sufficient to cover any costs and expenses including, but not limited to,
reasonable attorneys' fees, including those of appellate proceedings, incurred
by Holder in collecting any amounts due pursuant hereto or in otherwise
enforcing any of its rights, powers or remedies hereunder.
(d) NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof by the Company shall be
delivered in accordance with the notice provisions of the Agreement.
(e) LIMITATION OF LIABILITY. No provision hereof, in the absence
of affirmative action by Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of Holder hereof, shall give rise
to any liability of Holder for the purchase price of any Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
(f) REMEDIES. Holder, in addition to being entitled to exercise
all rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Warrant and hereby agrees to
waive the defense in any action for specific performance that a remedy at law
would be adequate.
(g) SUCCESSORS AND ASSIGNS. Subject to applicable securities laws,
this Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and permitted assigns of Holder. The provisions of this Warrant are intended to
be for the benefit of all Holders from time to time of this Warrant and shall be
enforceable by any such Holder or holder of Warrant Shares.
(h) COOPERATION. The Company shall cooperate with Holder in
supplying such information as may be reasonably necessary for Holder to complete
and file any information reporting forms presently or hereafter required by the
SEC as a condition to the availability of an exemption from the Securities Act
for the sale of any Warrant or any Warrant Shares.
(i) INDEMNIFICATION. The Company agrees to indemnify and hold
harmless Holder from and against any liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses
and disbursements of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any failure by the
Company to perform or observe in any material respect any of its covenants,
agreements, undertakings or obligations set forth in this Warrant; provided,
however, that the Company will not be liable hereunder to the extent that any
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, attorneys' fees, expenses or disbursements are found in a final
non-appealable judgment by a court to have resulted from
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Holder's negligence, bad faith or willful misconduct in its capacity as a
stockholder or warrantholder of the Company.
(j) AMENDMENT. This Warrant may be modified or amended or the
provisions hereof waived only with the written consent of the Company and the
Holder.
(k) SEVERABILITY. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.
(l) HEADINGS. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officer thereunto duly authorized.
Dated: February 3, 1999
IMSCO TECHNOLOGIES, INC.
By:
------------------------------------
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NOTICE OF EXERCISE
To: IMSCO TECHNOLOGIES, INC.
(1) The undersigned hereby elects to purchase shares of Common
--------
Stock (the "Common Stock"), of IMSCO TECHNOLOGIES, INC. pursuant to the terms of
the attached Warrant, and tenders herewith payment of the exercise price in
full, together with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
-------------------------------------
(Name)
-------------------------------------
(Address)
-------------------------------------
Dated:
----------------------------------
Signature
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
whose address is
- ----------------------------------------------
- ---------------------------------------------------------------.
- ---------------------------------------------------------------
Dated:
----------------, -------
Holder's Signature:
-----------------------------
Holder's Address:
-----------------------------
-----------------------------
Signature Guaranteed:
---------------------------------------------------
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
2
IMSCO Technologies, Inc.
40 Bayfield Drive
North Andover, MA 01845
July 31, 1998
Sands Brothers & Co., Ltd.
90 Park Avenue
New York, New York 10016
Gentlemen:
The undersigned, IMSCO Technologies, Inc., a Delaware
corporation (together with any of its subsidiaries, affiliates, successors or
assigns the "Company"), proposes to offer for sale to certain "accredited
investors", through Sands Brothers & Co., Ltd., as placement agent ("Sands
Brothers" or the "Placement Agent") in an "all-or-none" private placement, a
minimum of $500,000 (the "Minimum Amount") and a maximum of $10,000,000 (the
"Maximum Amount") of (a) the Company's capital stock (whether Common Stock,
Preferred Stock or any combination thereof) (collectively, the "Capital Stock"),
at a price to be mutually agreed upon and (b) capital lease, operating lease or
equipment lease financing on behalf of the Company or any form of commercial,
institutional or bank debt financing transactions (hereinafter, collectively
"Other Financing"). The Securities (as hereinafter defined) to be offered
pursuant to the Offering Documents (as hereinafter defined) and Other Financing
transactions to be consummated are sometimes hereinafter referred to
collectively as the "Financing" or the "Offering".
The closing (the "Closing") of the Financing shall not occur until the
Company has, in any combination, received and accepted subscriptions for the
purchase of Securities and/or consummated Other Financing transactions in
amounts equal to the Minimum Amount.
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The Securities will be offered pursuant to those terms and conditions
acceptable to you and your counsel as reflected in the final form of
Confidential Private Placement Memorandum of the Company and/or "long form"
subscription agreement for institutional investors only (together with the
exhibits and any supplements thereto, the "Memorandum"). The Securities will be
offered pursuant to the Memorandum in accordance with Regulation D promulgated
under the Securities Act of 1933, as amended (the "Securities Act").
Each prospective investor subscribing to purchase Securities
("Subscriber") will be required to deliver, among other things, a subscription
agreement ("Subscription Agreement") and an investment suitability questionnaire
("Questionnaire") in the forms to be provided, representing and warranting,
among other things, that such Subscriber is an "accredited investor" as such
term is defined in Regulation D.
The Memorandum and the form of proposed Subscription Agreement between
the Company and each Subscriber and the exhibits which are part of the
Memorandum (including, without limitation, the Registration Rights Agreement
between the Company and each of the Subscribers with respect to certain
registration rights under the Securities Act (the "Registration Rights
Agreement")) and/or the Subscription Agreement are referred to herein
collectively as the "Offering Documents."
The Securities will be offered for minimum subscription amounts of
$100,000 on a "best efforts", basis, exclusively by Sands Brothers; PROVIDED,
HOWEVER, that the Company and the Placement Agent may, in their discretion,
accept subscriptions for a lesser amount from a Subscriber.
The Company will prepare and deliver to the Placement Agent a
reasonable number of copies of the Offering Documents in form and substance
satisfactory to the Placement Agent and its counsel, which Offering Documents
shall include reviewed financial statements for such periods as may be required.
Capitalized terms used herein, unless otherwise defined or unless the
context otherwise indicates, shall have the same meanings provided in the
Memorandum.
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1. APPOINTMENT OF PLACEMENT AGENT. You are hereby appointed exclusive
Placement Agent of the Company during the offering period herein specified (the
"Offering Period") for the purposes of assisting the Company on a "best efforts"
basis in finding qualified Subscribers for the purchase of Securities and to
identify potential sources to engage in Other Financing transactions with the
Company in connection with the Offering. The Offering Period shall commence on
the date of delivery and acceptance by the Placement Agent of the Memorandum
("Commencement Date") and shall continue until the earlier to occur of (i) the
sale of the Minimum Amount; or (ii) 90 days from the Commencement Date (as the
same may be extended by the Placement Agent for an additional 60 days or another
period to be determined by mutual consent of the Placement Agent and the
Company). If the Minimum Amount is not sold prior to the end of the Offering
Period, the Offering will be terminated and all finds received from Subscribers
and held in a special non-interest bearing escrow account (the "Account") at
Republic National Bank, New York, New York (the "Bank") will be returned,
without deduction or accrued interest thereon. You hereby accept such agency and
agree to assist the Company in finding qualified Subscribers for the purchase of
Securities in connection with the Offering and to identify potential sources to
engage in Other Financing transactions with the Company in connection with the
Offering. Your agency hereunder is not terminable by the Company except upon
termination of the Offering.
As part of the Placement Agent's exclusive representation of the
Company with respect to the Offering, the Placement Agent shall assist the
Company in identifying potential investors and sources of Other Financing and
shall on behalf of the Company, contact such potential investors and other
potential investors as the Company may designate. In addition, the Placement
Agent shall assist the Company in structuring, negotiating and effecting the
Offering. The Company agrees that, during the course of the engagement
hereunder, neither it, nor any of its management, nor any of its affiliates,
shall initiate any discussions with third parties with respect to the Offering
and to the extent any of such persons receives an inquiry from any third parties
concerning the Offering or any other financing related to the Company, they will
promptly identify to the Placement Agent the name of such person and the date of
such initial contact.
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2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants as follows:
(a) SECURITIES LAW COMPLIANCE. The Offering Documents, upon
delivery, will conform in all respects with the requirements of the Securities
Act and Regulation D promulgated thereunder and with the requirements of all
other published rules and regulations of the United States Securities and
Exchange Commission (the "Commission") currently in effect relating to "private
offerings" and/or "accredited investors" of the type contemplated by the
Company. The Offering Documents will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The Offering Documents will not be amended or supplemented
and no amendment or supplement thereto will be made without the prior consent of
the Placement Agent.
(b) ORGANIZATION. The Company, and each of the companies under its
control (each a "Subsidiary", and collectively, the "Subsidiaries"), is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and has all requisite corporate power and
authority to own and lease its properties, to carry on its business as currently
conducted and as proposed to be conducted. The Company and each Subsidiary is
duly qualified to do business in the states or jurisdictions set forth on
Schedule 2(b). Except as set forth in Schedule 2(b), there is no jurisdiction in
which the conduct of the Company's or Subsidiary's business or ownership or
leasing of its properties requires it to be qualified to do business as a
foreign corporation, except where such qualifications have been obtained or the
failure to be so qualified would not have a material adverse effect on the
business, financial condition or prospects of the Company or such Subsidiary.
The Company has all requisite power and authority to execute and deliver this
Agreement and to carry out the transactions contemplated by this Agreement.
(c) CAPITALIZATION.
(i) The authorized, issued and outstanding capital stock of
the Company prior to the consummation of the Closing of
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the transactions contemplated by the Offering is set forth on Schedule 2 (c)(i)
hereto. Each such share is validly paid, fully paid and nonassessable. Except as
set forth on Schedule 2 (c)(i), there are no other classes of capital stock or
other securities authorized by the Company.
(ii) The authorized, issued and outstanding capital stock of
the Company immediately upon the consummation of the Closing shall be as set
forth on Schedule 2 (c)(ii) hereto, such Schedule to be recalibrated by the
Company to reflect the sale of Securities at the Closing.
(iii) The Company has no obligation (contingent or
otherwise) to pay any dividend or make any other distribution in respect of any
of its capital stock. The Company is not a party to and there exist no voting
trusts or agreements, stockholders' agreements, pledge agreements, buy-sell
agreements, rights of first refusal or proxies relating to any securities of the
Company (whether or not the Company is a party thereto). All of the outstanding
securities of the Company were issued, in all material respects, in compliance
with all applicable federal and state securities laws. The Company has no
obligation (contingent or otherwise) to repurchase, redeem or otherwise acquire
any shares of its capital stock.
(iv) The stockholders of record and the holders of
subscriptions, warrants, options, preemptive rights, convertible securities and
other rights (contingent or otherwise) to purchase or otherwise acquire equity
securities of the Company, and the number of shares of capital stock of the
Company and the number of such subscriptions, warrants, options, preemptive
rights, convertible securities and other such rights held by each, are as set
forth in Schedule 2(c)(iv) hereto. The designations, powers, preferences,
rights, privileges, qualifications, limitations and restrictions in respect of
each class and series of authorized capital stock of the Company are as set
forth in the Certificate of Incorporation and all such designations, powers,
preferences, rights, privileges, qualifications, limitations and restrictions
are valid, binding and enforceable in accordance with all applicable laws
(subject, as to enforcement, to the discretion of the courts in awarding
equitable relief and to applicable bankruptcy, reorganization, insolvency,
moratorium and similar laws affecting the rights of creditors generally). Except
as
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disclosed in Schedule 2 (c)(iv), no person owns of record, or is known to the
Company to own beneficially, any share of capital stock of the Company; no
subscription, warrant, option, preemptive right, convertible security, agreement
or other right (contingent or otherwise) to purchase or otherwise acquire equity
securities of the Company is authorized or outstanding; and there is no
commitment by the Company to issue shares, subscriptions, warrants, options,
preemptive rights, convertible securities or other such rights or to distribute
to holders of any of its equity securities any evidence of indebtedness or asset
other than the Placement Agent Warrants and the Investment Banking (each as
hereinafter defined and collectively the "Sands Warrants"). An appropriate
number of shares of the Common Stock have been reserved for issuance upon the
conversion or exercise, as the case may be, of any of the securities referred to
in this Section. All of the outstanding securities of the Company were issued,
in all material respects, in compliance with all applicable federal and state
securities laws. The Company has no obligation (contingent or otherwise) to
repurchase, redeem or otherwise acquire any shares of its capital stock.
(d) SUBSIDIARIES AND INVESTMENTS. Except as set forth in Schedule
2(d) hereto, the Company does not own, directly or indirectly, any capital
stock, or other equity ownership or proprietary interest, in any other
corporation, association, trust, partnership, joint venture or other entity.
Each Subsidiary is wholly owned by the Company.
(e) FINANCIAL STATEMENTS. The consolidated balance sheet of the
Company as of December 31, 1997 (the "1997 Balance Sheet") and the related
consolidated statements of operations, shareholders equity and statements of
cash flow for the fiscal year ended December 31, 1997 audited by Moore Stevens
LLP and the unaudited consolidated balance sheet (the "June Balance Sheet") of
the Company as of June 30, 1998 (the "Balance Sheet Date"), and the related
unaudited consolidated statements of operations, shareholders equity and
statements of cash flow for the three month period ending June 30, 1998
(collectively, the "Financial Statements"), have heretofore been delivered to
the Placement Agent. Except as may be otherwise indicated therein, the Financial
Statements have been prepared in conformity with Generally Accepted Accounting
Principles consistently applied and present fairly the financial position and
results of operations
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of the Company as of the dates and for the periods indicated. Except as may be
otherwise indicated herein, the Financial Statements of the Company as of the
dates indicated, and for the periods then ended, present fairly the financial
position and results of operations of the Company (and its Subsidiaries) as of
the dates and for the periods indicated.
(f) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company has
maintained and shall continue to maintain adequate records and books of account,
in which complete entries will be made in accordance with Generally Accepted
Accounting Principles, consistently applied, reflecting all financial
transactions of the Company and in which, for each fiscal year, all proper
reserves for depreciation, depletion, obsolescence, amortization, taxes, bad
debts and other purposes in connection with its business shall be made. The
records and books of account of the Company are in good order and have been
properly maintained in all material respects.
(g) ACCESS TO CORPORATE DOCUMENTS. The minute books of the Company
and of its Subsidiaries have been made available to the Placement Agent and
contain a complete summary of all meetings and actions of the directors and
stockholders of the Company or of its Subsidiaries, respectively, since the time
of their respective incorporation and reflect all transactions referred to in
such minutes accurately in all respects.
(h) ABSENCE OF UNDISCLOSED LIABILITIES. The Company has no
material outstanding claims, liabilities, obligations or indebtedness,
contingent or otherwise, whether asserted or unasserted, except as set forth in
the June Balance Sheet or referred to in any of the notes thereto. All
liabilities of the Company and its Subsidiaries incurred subsequent to the
Balance Sheet Date have been incurred in the ordinary course of business and do
not involve borrowings which individually exceed $50,000 and which do not exceed
$100,000 in the aggregate. Neither the Company nor its Subsidiaries is in
default in respect of the terms or conditions of any indebtedness.
(i) ABSENCE OF CHANGES. Since the Balance Sheet Date, the Company
and its Subsidiaries have operated in the ordinary course of business consistent
with past practice. Since the Balance Sheet Date, and except as set forth in
Schedule 2(i) hereto,
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there has not occurred (i) any change in the financial condition, results of
operations, assets, liabilities or business of the Company or any Subsidiary
which, in the aggregate, was materially adverse; (ii) to the best of the
Company's knowledge, any other event or condition of any character which can
reasonably be expected to materially and adversely affect the assets,
properties, financial condition, operating results or business of the Company or
of any Subsidiary (as such business is presently conducted and as it is proposed
to be conducted, as the same shall be described in the Memorandum); or (iii) any
commitment (contingent or otherwise) to do any of the foregoing.
(j) ACCOUNTS RECEIVABLE. The accounts receivable of the Company
reflected on the June Balance Sheet, and all accounts receivable of the Company
arising since the Balance Sheet Date, are not subject to discount (other than
discounts and allowances provided by normal trade terms), rebate or offset and
have arisen from bona fide transactions in the ordinary course of business.
(k) TITLE TO PROPERTIES; ENCUMBRANCES.
(i) Except for properties and assets reflected in the June
Balance Sheet or acquired since the Balance Sheet Date which have been sold or
otherwise disposed of in the ordinary course of business since such date, the
Company and each of its Subsidiaries has good, valid and marketable title to (A)
all of its properties and assets (personal, tangible and intangible), including,
without limitation, all the properties and assets reflected in the June Balance
Sheet, except as indicated in the notes thereto; and (B) all the properties and
assets purchased or otherwise acquired by the Company or by any Subsidiary since
the Balance Sheet Date; in each case clear of all encumbrances, liens, claims,
charges or other restrictions of whatever kind or character, except for (1)
liens reflected in the June Balance Sheet and (2) liens for current taxes,
assessments or governmental charges or levies on property not yet due and
delinquent.
(ii) The Company and its Subsidiaries own no real property.
To the best of the Company's knowledge after due inquiry, there are no
condemnation, environmental, zoning or other land use regulation proceedings,
either instituted or planned to be instituted, which would adversely affect the
use or
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operation of the Company's and its Subsidiaries; properties and assets for their
respective intended uses and purposes or the value of such properties, and the
Company and its Subsidiaries have not received notice of any special assessment
proceedings which would affect such properties and assets.
(l) CONDITION OF EQUIPMENT, MACHINERY AND FIXTURES. The equipment,
machinery and fixtures utilized by the Company and its Subsidiaries in the
conduct of their business are in good operating condition and are fit for their
intended purpose.
(m) LEASED PROPERTY. Each real property and personal property
lease or sublease to which the Company or any of its Subsidiaries is a party is
valid and binding and is in full force and effect; all rent and other sums, and
charges payable by the Company or by each Subsidiary as lessee or sublessee
thereunder, are current through the last day of the immediately preceding
calendar month; no notice of default or termination under any lease is
outstanding; no termination event or condition or uncured default on the part of
the Company or any Subsidiary, or the landlord, exists under any lease; the
Company and its Subsidiaries currently occupy or use the premises leased
pursuant to the real property leases; and no event has occurred and no condition
exists which with the giving of notice or the lapse of time or both, would
constitute such a default or termination event or condition. Neither the
Company, nor its Subsidiaries, nor any of the officers or directors of the
Company or of its Subsidiaries has any ownership, financial or other interest in
the landlord under any real property lease. Each lease was negotiated on an
arm's-length basis.
(n) INVENTORIES. All inventory reflected in the June Balance Sheet
of the Company and of its Subsidiaries and all inventory acquired by the Company
and by its Subsidiaries subsequent to the Balance Sheet Date, were acquired and
have been maintained in accordance with the regular business practices of the
relevant entity, consists of items of quality and quantity reasonably expected
to be useable or saleable in the ordinary course of business consistent with
past practice, are valued in accordance with United States Generally Accepted
Accounting Principles, and such inventory which is known or reasonably believed
to be obsolete or slow moving has been adequately reserved to reduce such
inventory to net realizable value.
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Subject to amounts reserved therefor on the Financial Statements, the values at
which all inventories of the Company and of its Subsidiaries (collectively, the
"Inventories") are carried on the Financial Statements reflect the historical
inventory valuation policy of the Company and of its Subsidiaries of stating
such Inventories. at the lower of cost (determined on the first-in, first-out
method) or market value and all Inventories are valued such that the Company and
its Subsidiaries will earn its/their customary gross margins thereon. The
Company has good and marketable title to the Inventories free and clear of all
encumbrances. The Inventories do not consist of any items held on consignment.
The Company is under no obligation or liability with respect to accepting
returns of items of Inventory or merchandise in the possession of its customers
other than in the ordinary course of business consistent with past practice. No
clearances or extraordinary sale of the Inventories has been conducted since the
Balance Sheet Date. Neither the Company or any of its Subsidiaries has
manufactured Inventory for sale which is not of a quality and quantity usable in
the ordinary course of business consistent with past practice and within a
reasonable period of time nor has the Company or any of its Subsidiaries changed
the price of any Inventory except (i) for reductions to reflect any reduction in
the cost thereof to the Company or to any of its Subsidiaries; (ii) for
reductions and increases responsive to normal competitive conditions and
consistent with the Company's or the Subsidiaries' past sales practices; and
(iii) to reflect any increase in the cost thereof to the Company or to the
Subsidiaries. The Inventories are in good and merchantable condition in all
material respects, are suitable and usable for the purposes for which they are
intended and are in a condition such that they can be sold in the ordinary
course of business consistent with past practice.
(o) PATENTS, TRADEMARKS AND COPYRIGHTS, ETC. The Company and its
Subsidiaries own or are licensed or otherwise entitled to use all patents,
trademarks, trade names, service marks, copyrights, technology, know-how,
processes and other intellectual property used in the conduct of its business as
currently conducted and as proposed to be conducted. The Company and its
Subsidiaries have received no notice of any claims, have no knowledge of any
threatened claims, and know of no facts which would form the basis of any claim,
asserted by any person, to the effect that the sale or use of any product or
process now used or
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offered by the Company or any Subsidiary infringes on any patents or infringes
upon the use of any such trademarks, trade names, service marks, copyrights,
technology, know-how, processes or other intellectual property of another person
or challenges or questions the validity or effectiveness of any such license or
agreement. The sale and use of any such products and processes by the Company
and its Subsidiaries, and the use of any such patents, trademarks, trade names,
service marks, copyrights, technology, know-how, processes or other intellectual
property by the Company and its Subsidiaries, does not infringe on the rights of
any person.
(p) LITIGATION. There is no action, suit, investigation, customer
complaint, claim or proceeding at law or in equity by or before any arbitrator,
governmental instrumentality or other agency now pending or threatened against
or affecting the Company or any Subsidiary, nor, to the best of the Company's
knowledge, does there exist any basis therefor. Neither the Company nor any
Subsidiary is subject to any judgment, order, writ, injunction or decree of any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign. The Company agrees to
promptly notify the Placement Agent of the commencement of any litigation or
proceedings against the Company or any Subsidiaries or any of its/their
respective officers or directors in connection with the sale of the transaction
contemplated in the Offering Documents.
(q) NON-DEFAULTS; NON-CONTRAVENTION. Except as set forth in
Schedule 2(q) hereto, neither the Company nor its Subsidiaries is in default in
the performance or observance of any obligation (i) under its Certificate of
Incorporation, as amended, or its By-laws, or any indenture, mortgage, contract,
purchase order or other agreement or instrument to which the Company is a party
or by which it or any of its property is bound or affected; or (ii) with respect
to any order, writ, injunction or decree of any court of any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign and there exists no condition, event or act
which constitutes, nor which after notice, the lapse of time or both, would
constitute, a default under any of the foregoing.
(r) EMPLOYMENT OF OFFICERS, EMPLOYEES AND CONSULTANTS. To the best
of the Company's knowledge, no third party may assert
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any valid claim against the Company or its Subsidiaries with respect to the (i)
continued employment by, or association with, the Company or its Subsidiaries of
any of its present officers, employees or consultants; or (ii) the use by the
Company or its Subsidiaries of any information which the Company or its
Subsidiaries would be prohibited from using under any prior agreements or
arrangements or any laws applicable to unfair competition, trade secrets or
proprietary information.
(s) TAXES. The Company and its Subsidiaries have filed all
federal, state, local and foreign tax returns which are required to be filed by
them, and all such returns are true and correct in all material respects. The
Company and its Subsidiaries have paid all taxes pursuant to such returns or
pursuant to any assessments received by them and have withheld all amounts which
they are obligated to withhold from amounts owing to any employee, creditor or
third party. The tax returns of the Company and of its Subsidiaries have never
been audited by any state, local or federal authorities. The Company and its
Subsidiaries have not waived any statute of limitations with respect to taxes or
agreed to any extension of time with respect to any tax assessment or
deficiency. All tax elections have been made by the Company and its Subsidiaries
in accordance with generally accepted practices. No deficiency assessment with
respect to or proposed adjustment of the Company's and its Subsidiaries federal,
state, county or local taxes is pending or, to the best of the Company's
knowledge, threatened. There is no tax lien, whether imposed by any federal,
state, county or local taxing authority, outstanding against the assets,
properties or business of the Company or of its Subsidiaries. Neither the
Company nor any of its Subsidiaries nor any of its/their respective present or
former stockholders has ever filed an election pursuant to Section 1362 of the
Internal Revenue Code of 1986, as amended (the "Code"), that the Company or any
of its Subsidiaries be taxed as an S corporation.
(t) AGREEMENTS. Except as set forth in Schedule 2(t) hereto,
neither the Company nor any Subsidiary is a party to any written or oral
contract not made in the ordinary course of business and, whether or not made in
the ordinary course business, neither the Company nor any Subsidiary is a party
to any written or oral contract, agreement, arrangement or understanding which
is material to the business of the Company or
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to the business of any Subsidiary or which is material to, and which a prudent
investor would need to review in order to make an informed investment decision
with respect to the purchase of the Securities offered pursuant to the Offering
Documents. Each material contract of the Company or of any of its Subsidiaries
is valid and binding on the Company or on such Subsidiary, and neither the
Company nor any of its Subsidiaries has received notice that any such contract
is not binding on any party thereto. The Company and its Subsidiaries have
performed in all material respects all obligations to have been performed on
such contracts through the date hereof, and neither the Company nor any
Subsidiary is in default in any material respect under any such contract. Each
material contract of the Company or of any of its Subsidiaries is valid and
binding on the Company or the respective Subsidiary and the Company or the
respective Subsidiary has not received notice that any such contract is not
binding on any party thereto. The Company and each of its Subsidiaries has
performed in all material respects all obligations to have been performed on
such contracts through the date hereof and the Company and each of its
Subsidiaries is not in default in any material respect under any such contract.
(u) COMPLIANCE WITH LAWS; ENVIRONMENTAL MATTERS, LICENSES, ETC.
The Company and its Subsidiaries have received no notice of any violation of, or
noncompliance with, any federal, state, local or foreign laws, ordinances,
regulations or orders (including, without limitation, those relating to
environmental protection, occupational safety and health and other labor laws,
ERISA, federal drug laws, federal securities laws, equal employment opportunity,
consumer protection, credit reporting, "truth-in-lending," and warranties and
trade practices) applicable to its business or the business of any Subsidiary,
the violation of, or noncompliance with which, would have a material adverse
effect on the Company's business or operations, or that of any Subsidiary, and
the Company knows of no facts or set of circumstances which would give rise to
such a notice. The Company and its Subsidiaries have all licenses and permits
and other governmental certificates, authorizations and permits and approvals
(collectively, "Licenses") required by every federal, state and local government
or regulatory body for the operation of their business and the use of their
properties. The Licenses are in full force and effect and no violations are or
have been recorded in respect of any License and no proceeding is pending
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or threatened to revoke or limit any thereof. The Company and its Subsidiaries
have not received any written opinion or memorandum from legal counsel providing
that it/they has taken any action which has resulted in, or is reasonably likely
to result in, the Company or any of its Subsidiaries incurring any liability
which may be material to its/their respective business, prospects, financial
condition, operations, property or affairs. The Company and its Subsidiaries
shall comply with all applicable laws, rules, regulations and orders, the
noncompliance with which could materially adversely affect its/their respective
business or condition, financial or otherwise.
(v) AUTHORIZATION OF AGREEMENT, ETC. Each of this Agreement, the
Offering Documents and all other agreements or documents required to be executed
and delivered by the Company in connection with the Offering (collectively the
"Ancillary Documents") has been or will be duly executed and delivered by the
Company and the execution, delivery and performance by the Company of this
Agreement and the Ancillary Documents has been duly authorized by all requisite
corporate action by the Company; and each constitutes, or will constitute, the
legal, valid and binding obligation of the Company, enforceable in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, usury or other similar laws affecting the
enforcement of creditors' rights generally. The execution, delivery and
performance of this Agreement and the issuance, sale and delivery of the
Securities, and the issuance and delivery of the Common Stock upon exercise of
the Sands Warrants (the "Reserved Shares"), will not (i) violate any provision
of law or statute or any order of any court or other agency of government
binding on the Company or its Subsidiaries; or (ii) conflict with or result in
any breach of any of the terms, conditions or provisions of, or constitute (with
due notice or lapse of time or both) a default under, or result in the creation
of any lien, security interest, charge or encumbrance upon any of the properties
or assets of the Company or of its Subsidiaries under the Certificate of
Incorporation, as amended, or By-Laws of the Company or of its Subsidiaries or
any indenture, mortgage, lease agreement or other agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which it or any of
its property is bound or affected, except for such conflict, breach or default
as to which requisite waivers or consents shall
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have been obtained by the Company or by its Subsidiaries and delivered to the
Subscribers by the time of Closing.
(w) AUTHORIZATION OF SECURITIES AND SANDS WARRANTS. The issuance,
sale and delivery of the Securities and the Sands Warrants have been duly
authorized by all requisite corporate action of the Company, and when so issued,
sold and delivered, (i) the shares of Common Stock and Reserved Shares will be
validly issued and outstanding, duly executed and delivered, fully paid and
nonassessable, free and clear of all liens, charges, claims, encumbrances,
restrictions or preemptive or any other similar rights and the Company shall
have paid all taxes, if any, in respect of the issuance thereof; (ii) the Sands
Warrants will be validly issued and outstanding, duly executed, issued and
delivered, fully paid and nonassessable, free and clear of all liens, charges,
claims, encumbrances, restrictions or preemptive or any other similar rights and
the Company shall have paid all taxes, if any, in respect of the issuance
thereof; and (iii) neither the shares of Common Stock, nor the Sands Warrants
will be subject to preemptive or any other similar rights of the shareholders of
the Company or others which rights shall not have been waived prior to the time
of acceptance by the Company of the first Subscriber's Subscription Agreement.
The offer and sale of the Securities is exempt from the registration
requirements of the Securities Act and the rules and regulations promulgated
thereunder and the Securities will be issued in compliance with all applicable
federal securities laws.
(ww) AUTHORIZATION OF RESERVED SHARES. The issuance, sale and
delivery by the Company of the Reserved Shares have been duly authorized by all
requisite corporate action of the Company, and the Reserved Shares have been
duly reserved for issuance upon exercise of all or any of the Securities and the
Sands Warrants and when so issued, sold and delivered, the Reserved Shares will
be validly issued and outstanding, duly executed, issued and delivered, fully
paid and nonassessable, free and clear of all liens, charges, claims,
encumbrances, restrictions or preemptive or any other similar rights and the
Company shall have paid all taxes, if any, in respect of the issuance thereof
and the Reserved Shares will not be subject to any preemptive or any other
similar rights of the shareholders of the Company or others which rights shall
not have been waived prior to the time of
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acceptance by the Company of the first Subscriber's Subscription Agreement.
(x) RELATED TRANSACTIONS. Except as set forth on Schedule
2(x)hereto, no current or former shareholder, director, officer or employee of
the Company, nor any affiliate of any such person, is presently, or since the
inception of the Company has been, directly or indirectly, through his, her or
its affiliation with any other person or entity, a party to any loan from the
Company or from any of its Subsidiaries.
(y) REGISTRATION RIGHTS. Except as may exist with respect to the
holders of the Securities and the Sands Warrants, (i) no person or entity has
any right to cause the Company to effect the registration under the Securities
Act of any securities of the Company and (ii) no person or entity holds any
anti-dilution or "piggy back" rights with respect to any securities of the
Company.
(z) SALARIES AND BONUSES. Schedule 2(z) hereto contains a true and
complete list of all current officers, directors and employees of the Company
and of its Subsidiaries who received during the fiscal year ended December 31,
1997 remuneration from the Company or from any of its Subsidiaries in excess of
$50,000, together with the current aggregate base salary rate for each such
person.
(AA) INSURANCE. All insurable assets and properties of the Company
and its Subsidiaries are insured, for the benefit of the Company and its
Subsidiaries, against all risks usually insured against by persons owning or
operating similar properties in the localities where such properties are
located, through insurance policies all of which are in full force and effect.
The Company and each Subsidiary are insured, for their benefit, against all
claims relating to their services to the same extent that the risks of such
claims are usually insured against by persons providing similar services. Each
of the insurance policies referred to in this Section is issued by an insurer of
recognized responsibility, and neither the Company nor its Subsidiaries has
received any notice or threat of the cancellation or nonrenewal of any such
policy. The Company will make available to the Placement Agent, upon its
request, a list of all insurance
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coverage carried by the Company or its Subsidiaries, the carrier and the terms
and amount of coverage.
(BB) EMPLOYEE BENEFIT PLANS.
(i) WELFARE PLANS. Each welfare plan of the Company and its
Subsidiaries is in compliance with the applicable provisions of ERISA
and the Internal Revenue Code of 1986, as amended (the "Code"). The
Company and each Subsidiary have no contingent, future or other
obligations or liabilities under or with respect to any welfare plan
which provides for the continuation of benefits at the expense of the
Company or any Subsidiary after retirement or other termination of
employment.
(ii) PENSION PLANS. Each pension plan of the Company and of each
Subsidiary is in compliance with the applicable provisions of ERISA and
the Code including, without limitation, any applicable minimum funding
requirements. There have been no reportable events within the meaning of
Section 4043 of ERISA with respect to any pension plan. In the event of
the termination of all pension plans, the Company and each Subsidiary
would have no liability under Sections 4062, 4063 or 4064 of ERISA.
(iii) EFFECT OF TRANSACTIONS. The execution and delivery of this
Agreement by the Company and the consummation of the transactions
contemplated hereby will not involve any prohibited transactions with
respect to the Company or any of its Subsidiaries within the meaning of
ERISA.
(CC) BROKERS. The Company has not, nor have any of its
Subsidiaries, or any of its/their respective officers, directors, employees or
shareholders, employed any broker or finder in connection with the transactions
contemplated by this Agreement, other than Sands Brothers.
(DD) NO MATERIAL CHANGES. Since the Balance Sheet Date, there has
not been any change in the condition, financial or otherwise, of the Company or
of any of its Subsidiaries, which could adversely affect the ability of the
Company or the ability of any of its Subsidiaries to conduct its operations to
be
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described in the Offering Documents and neither the Company nor any of its
Subsidiaries have incurred any material liabilities or obligations, direct or
contingent, not in the ordinary course of business since such Balance Sheet
Date.
(EE) ISSUANCE OF OTHER SECURITIES. Except as set forth in this
Agreement, there are no preemptive or other rights to subscribe for or purchase,
or any restriction upon the voting or transfer of, any shares of Common Stock or
any other securities of the Company, under the Certificate of Incorporation or
ByLaws, or any agreement or other outstanding instrument to which the Company or
any of its Subsidiaries is a party or by which it/they is bound. Except for the
Securities and the Sands Warrants or as set forth in this Agreement, neither the
Company nor any of its Subsidiaries has outstanding any option, warrant,
convertible security, or other right permitting or requiring it to issue, or
others to purchase or convert any obligation into, shares of Common Stock or any
other securities of the Company, and neither the Company nor any of its
Subsidiaries has agreed to issue or sell any shares of Common Stock or any other
securities of the Company.
(FF) NO CONSENTS. No permit, consent, approval, authorization,
order or filing with any court or governmental authority is required to
consummate the transactions contemplated by this Agreement, except that the
offer and sale of the Securities in certain jurisdictions may be subject to the
provisions of the securities or Blue Sky laws of such jurisdictions.
(GG) INFORMATION. The Company and its Subsidiaries shall provide
the holders of the Securities with the information, if any, specified in the
Memorandum.
(HH) RESTRICTIVE AGREEMENTS PROHIBITED. Neither the Company nor
any of its Subsidiaries shall become a party to any agreement which by its terms
restricts the Company's performance of this Agreement.
(II) CHANGE IN NATURE OF BUSINESS. The Company and its
Subsidiaries shall not, without the prior approval of a majority of their Board
of Directors, make any material change in the
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nature of its/their respective businesses as the same shall be set forth in the
Memorandum.
(JJ) CORPORATE EXISTENCE. The Company and its Subsidiaries shall
maintain their corporate existence, rights and franchises in full force and
effect.
(KK) TITLE TO SECURITIES. When certificates representing the
Securities shall have been duly delivered to the Subscribers, payment therefore
will become due, and to the extent such payment shall have been made therefor,
the several Subscribers shall have good and marketable title to the Securities
free and clear of all liens, encumbrances and claims whatsoever, and the Company
shall have paid all taxes, if any, in respect of the issuance thereof.
(LL) EMPLOYEE RELATIONS. Each of the Company and its Subsidiaries
has generally enjoyed a satisfactory employer-employee relationship with its
employees and is in compliance with all federal, state, local, and foreign laws
and regulations respecting employment and employment practices, terms and
conditions of employment and wages and hours. There are no pending
investigations involving the Company or any of its Subsidiaries by the U.S.
Department of Labor, or any other governmental agency responsible for the
enforcement of such federal, state, local, or foreign laws and regulations.
There is no unfair labor practice charge or complaint against the Company or its
Subsidiaries pending before the National Labor Relations Board or any strike,
picketing, boycott, dispute, slowdown or stoppage pending or threatened against
or involving the Company or its Subsidiaries, or any predecessor entity, and
none has ever occurred. No representation question exists respecting the
employees of the Company or the employees of any of its Subsidiaries, and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company or its Subsidiaries. No grievance or arbitration
proceeding is pending under any expired or existing collective bargaining
agreements of the Company or any of its Subsidiaries. No labor dispute with the
employees of the Company or its Subsidiaries exists, or, is imminent.
(MM) FOREIGN CORRUPT PRACTICES ACT. None of the Company, its
Subsidiaries nor to their knowledge any of their respective officers, employees,
agents or any other person acting on behalf
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of the Company or any of its Subsidiaries has, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any customer,
supplier, employee or agent of a customer or supplier, or official or employee
of any governmental agency (domestic or foreign) or instrumentality of any
government (domestic or foreign) or any political party or candidate for office
(domestic or foreign) or other person who was, is, or may be in a position to
help or hinder the business of the Company or the business of any of its
Subsidiaries (or to assist the Company or any of its Subsidiaries in connection
with any actual or proposed transaction) which (a) might subject the Company or
any of its Subsidiaries, or any other such person, to any damage or penalty in
any civil, criminal or governmental litigation or proceeding (domestic or
foreign); (b) if not given in the past, might have had a material adverse effect
on the assets, business or operations of the Company or of any of its
Subsidiaries; or (c) if not continued in the future, might adversely affect the
assets, business, operations or prospects of the Company and of its
Subsidiaries, taken as a whole. The Company believes that its and its
Subsidiaries' international accounting controls are sufficient to cause the
Company and its Subsidiaries to comply with the Foreign Corrupt Practices Act of
1977, as amended.
(NN) AFFILIATIONS. Except as set forth in Schedule 2(NN) hereto,
no officer, director or shareholder of the Company or officer, director or
shareholder of any of its Subsidiaries, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any such person or entity or of the Company or its Subsidiaries, has or has
had, either directly or indirectly (i) an interest in any person or entity which
(A) furnishes or sells services or products which are furnished or sold or are
proposed to be furnished or sold by the Company or its Subsidiaries; or (B)
purchases from or sells or furnishes to the Company or any of its Subsidiaries
any goods or services; or (ii) a beneficiary interest in any contract or
agreement to which the Company or any of its Subsidiaries is a party or by which
it may be bound or affected. Except as set forth in Schedule 2(OO) hereto, there
are no existing agreements, arrangements, understandings or transactions, or
proposed agreements, arrangements, understandings or transactions, between or
among the Company or
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any of its Subsidiaries, and any officer, director, or principal stockholder of
the Company or any of its Subsidiaries, or any affiliate or associate of any
such person or entity.
(OO) CORPORATE REPRESENTATIONS. Any certificate signed by any
officer of the Company or by an officer of any of the Company's Subsidiaries and
delivered to the Placement Agent or to the Placement Agent's counsel pursuant to
this Agreement, shall be deemed a representation and warranty by the Company and
by any of its Subsidiaries to the Placement Agent as to the matters covered
thereby.
(PP) ESCROW ARRANGEMENTS. Pursuant to paragraph 3(e)(i) hereof, if
the Closing does not take place before the termination of the Offering Period,
the Company will instruct the Bank to return the funds to the Subscribers
without any deduction or interest thereon.
(QQ) CONFIDENTIAL ARRANGEMENTS. The Company and its Subsidiaries
agree to take reasonable precautions in protecting the confidentiality, privacy
and security of the business contacts identified by the Placement Agent by
taking appropriate administrative and managerial action, and to use its/their
respective best efforts to prevent disclosure of such property information to
any all persons and entities. The Company and each of its Subsidiaries agree
that, without the expressed written consent of the Placement Agent, it/they will
not initiate, respond or otherwise abide any contract with any person, company,
institution, professional association, nor other entity to which it has been
introduced or with whom it has become acquainted in the course of doing business
with the other party. The Company and each of its Subsidiaries agrees to hold
completely confidential the name, address, telephone, telex, facsimile number,
account or other business number of such contact as may be introduced by the
Placement Agent. The above restrictions apply to any subsequent follow up,
repeated or extended or renegotiation transactions related to the Offering
regardless of the results of the Offering.
(RR) DISCLOSURE. Neither this Agreement nor any other document,
certificate or written statement to be furnished to the Subscribers by or on
behalf of the Company in connection with the transactions contemplated hereby,
including the Offering
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<PAGE>
Documents, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary in order to make the
statements contained herein and therein not misleading. There is no fact known
to the Company which adversely affects the business operations, affairs,
prospects, conditions, properties or assets of the Company or of its
Subsidiaries (hereinafter "Material Facts") which has not been set forth in this
Agreement. To the extent Material Facts become known to the Company subsequent
to the date hereof, such facts will be set forth in the Memorandum and/or in the
other documents, certificates or statements furnished to the Subscribers by or
on behalf of the Company pursuant hereto.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLACEMENT AGENT.
The Placement Agent represents, warrants and covenants as follows:
(a) AUTHORIZATION OF AGREEMENT, ETC. This Agreement has been duly
and validly authorized, executed and delivered by or on behalf of the Placement
Agent.
(b) COMPLIANCE WITH THE SECURITIES ACT. The Placement Agent will
not knowingly take any action which will result in the Securities being offered
or sold in a manner which does not comply with the provisions of Regulation D
under the Securities Act.
(c) COMPLIANCE WITH OFFERING DOCUMENTS. The Placement Agent will
offer the Securities in accordance with the Offering Documents and will deliver
the Offering Documents to each Subscriber before accepting a signed copy of the
Subscription Agreement or payment for any Securities.
(d) COMPLIANCE WITH LAWS OF JURISDICTIONS. The Placement Agent
will offer the Securities only in those jurisdictions in which it is permitted
to sell the Securities pursuant to the laws of said jurisdiction, and the
Placement Agent may arrange for the Securities to be offered by a broker/dealer
or offshore or domestic facilitator(s), in which event the Company shall be
responsible for fees of such facilitator(s) up to three (3%) of the gross
offering proceeds of investors arranged by such facilitator(s).
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<PAGE>
(e) ESCROW ARRANGEMENTS.
(i) The Placement Agent will promptly deposit funds received
from Subscribers in the Account with the Bank and hold the funds in accordance
with the terms of this Agreement and hold the Offering Documents for the benefit
of the Subscribers and the Company. The Bank shall release funds from such
Account only upon receipt of instruction executed by each of the Placement Agent
and the Company. If the Closing does not take place before the termination of
the Offering Period, the Placement Agent will instruct the Bank to return the
funds to the Subscribers without any deduction or interest thereon.
(ii) In the event the Placement Agent has deposited funds
from any Subscriber into the Account and the Company exercises its right to
reject such Subscriber's funds, in whole or in part, the Placement Agent shall
be entitled to payment by the Company of a sum equal to the fees and expenses
due by the terms of this Agreement and entitled to issuance by the Company of
the Placement Agent Warrants that the Placement Agent would have received
pursuant to sub-paragraphs 4(d) and 4(e) of this Agreement, respectively.
4. CLOSING; PLACEMENT AND FEES.
(a) CLOSING. The initial Closing of the Financing shall take place
at the offices of the Placement Agent, 90 Park Avenue, New York, New York 10016,
at a time and date agreed upon between the Placement Agent and the Company upon
the (i) receipt of Subscription Agreements and related documents in form and
substance satisfactory to the Company and the Placement Agent and (ii) delivery
of documentation evidencing the consummation of Other Financing transactions
which, in the cases of (i) or (ii) individually, or in the aggregate (in any
combination), are equal to or are in excess of the Minimum Amount. At the
initial and subsequent Closing(s), payment for the Securities shall be made
against delivery of certificates representing the Securities sold. All proceeds
received from the sale of the Securities sold after the initial Closing date
will continue to be deposited in the Account maintained with the Bank until the
occurrence of additional Closing(s).
(b) PROCEDURES AT CLOSING. At each Closing:
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(i) The Placement Agent on behalf of itself and the
Subscribers shall receive the opinion of [ ] ("Company Counsel"), in form and
substance acceptable to the Placement Agent.
(ii) At the Closing, the Placement Agent will have received a
signed letter from [ ], confirming that such firm is an independent public
accountant within the meaning of the Securities Act and stating that: (i)
insofar as reported on by such firm, in their opinion, the financial statements
of the Company included in the Memorandum (including, without limitation, the
Financial Statements) comply as to form in all material respects with the
applicable accounting requirements of the Securities Act; (ii) on the basis of
procedures and inquiries (not constituting an examination in accordance with
generally accepted auditing standards) consisting of a reading of the last
available financial statements of the Company, inquiries of officers of the
Company responsible for financial and accounting matters as to the transactions
and events subsequent to the Balance Sheet Date, and a reading of the minutes of
meetings of the shareholders, the Board of Directors of the Company and any
committees of the Board of Directors, as set forth in the minute books of the
Company, nothing has come to their attention which, in their judgment, would
indicate that (A) during the period from the Balance Sheet Date to a specified
date not more than five (5) business days prior to the date of such letter,
there have been any material decreases in net current assets or net assets as
compared with amounts shown in such Financial Statements or material decreases
in net sales or in total or per share net loss compared with the corresponding
period in the preceding year or any change in the capitalization or long-term
debt of the Company or of any of its Subsidiaries, except in all cases as set
forth in or contemplated by the Memorandum; and (B) the unaudited interim
financial statements of the Company, if any, appearing in the Memorandum, are
not presented in conformity with Generally Accepted Accounting Principles and
Practices on a basis substantially consistent with the audited financial
statements included in the Memorandum; and (iii) they have compared specific
dollar amounts, numbers of shares, numerical data, percentages of revenues and
earnings, and other financial information pertaining to the Company set forth in
the Memorandum (with respect to all dollar amounts, numbers of shares,
percentages and other
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<PAGE>
financial information contained in the Memorandum, to the extent that such
amounts, numbers, percentages and information may be derived from the general
accounting records of the Company, and excluding any questions requiring an
interpretation by legal counsel) with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter, and found them to be in
agreement.
(iii) Counsel for the Placement Agent and Company Counsel
shall receive certificates from the Company, signed by the President or a Vice
President thereof, certifying (A) that the representations and warranties
contained in Section 2 hereof are true and accurate at the Closing with the same
effect as though expressly made at the Closing; and (B) that attached thereto is
(1) a true and correct copy of resolutions adopted by the Company's Board of
Directors authorizing (i) the execution, delivery and performance of this
Agreement and the Ancillary Documents, and (ii) the issuance of the Securities
and the Sands Warrants and certifying that such resolutions have not been
modified, rescinded or amended and are in full force and effect; and (2) a true
and correct copy of a resolution adopted by the Company's Board of Directors and
by each of the Company's Subsidiaries, authorizing the execution, delivery and
performance of each document to which it is a party, and that such resolutions
have not been modified, rescinded or amended and are in full force and effect.
(iv) There shall be delivered on behalf of each Subscriber
one copy of the Subscription Agreement signed by each Subscriber and one copy of
the Questionnaire signed by each Subscriber.
(v) The Placement Agent shall have received certificates of
good standing of the Company, dated as of a recent date, from the Secretary of
State of the jurisdiction of its incorporation and certificates of good standing
of each of the Company's Subsidiaries, dated as of a recent date, by the
Secretary of State of the jurisdictions of incorporation of the Subsidiaries.
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(vi) At the Closing the Placement Agent shall instruct the
Bank to pay to the Company out of the funds on deposit in the Account, as such
funds are received from Subscribers whose Subscriptions have been accepted.
(c) BLUE SKY. Where appropriate, counsel for the Placement Agent
shall prepare a summary blue sky survey stating the extent to which and the
conditions upon which offers and sales of the Securities may be made in certain
jurisdictions. Blue Sky applications shall be made in such states and
jurisdictions as shall be requested by the Placement Agent. It is understood
that such survey may be based on or rely upon (i) the representations of each
Subscriber set forth in the Subscription Agreement delivered by such Subscriber;
(ii) the representations, warranties and agreements of the Company and of its
Subsidiaries set forth herein; (iii) the representations and warranties of the
Placement Agent set forth herein; and (iv) the representations of the Company
and of its Subsidiaries set forth in the certificate to be delivered at the
Closing pursuant to paragraph 4(b)(iii) hereof.
(d) PLACEMENT FEE AND EXPENSES.
(i) At each Closing, the Company shall pay to the Placement
Agent a commission equal to ten (10%) percent of the aggregate proceeds derived
from the Financing. In addition, the Company shall pay the Placement Agent a
non-accountable and non-refundable expense allowance, equal to three (3%)
percent of the aggregate proceeds derived from the Financing. Prior to or from
the proceeds of the Closing, the Company shall pay all Placement Agent's
expenses in connection with the proposed Offering, including, but not limited
to, reasonable counsel expenses and fees of counsel to the Company and of
counsel to the Placement Agent, disbursements and fees, reasonable accountant
expenses, disbursements and fees, filing fees, business and investigatory
expenses, printing costs, postage and mailing expenses with respect to the
transmission of the Offering and Ancillary Documents, registrar and transfer
agent fees, issue and transfer taxes, if any, and counsel fees of the Placement
Agent in connection with the qualification of the Securities under the
securities or blue sky laws of the states which the Placement Agent shall
designate. The Company also shall pay for the costs of placing "tombstone
advertisements" in any publications which
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<PAGE>
may be selected by the Placement Agent, all costs and expenses in connection
with the establishment and maintenance of the Account referred to in paragraph 1
of this Agreement, and all other costs and expenses incident to the performance
of its obligations hereunder which are not otherwise specifically provided for
in this paragraph 4(d), including the cost of transaction memorabilia determined
at the reasonable discretion of the Placement Agent.
(e) ISSUANCE OF PLACEMENT AGENT WARRANTS. At each Closing as
provided in paragraph 4(a) above, the Company shall issue to the Placement Agent
or its designee(s), warrants to purchase up to 100,000 shares of Common Stock
for each $1 million (or portion thereof) raised, at an exercise price of $1.50
per share (the "Placement Agent Warrants"). The Placement Agent Warrants shall
be exercisable for five (5) years, commencing upon the date of their issuance.
The Placement Agent Warrants shall be in the form attached hereto as Exhibit B,
and will be governed by the terms of the Warrant Agreement attached hereto as
Exhibit A. The certificates representing the Placement Agent Warrants will be in
such denominations and such names as the Placement Agent may request prior to
each closing.
(f) PLACEMENT AGENT'S DECISION NOT TO PROCEED, ETC. If the
Placement Agent decides not to proceed with the Offering because of a breach by
the Company or by its Subsidiaries of its/their representations, warranties, or
covenants in this Agreement, or as a result of adverse changes in the affairs of
the Company or of its Subsidiaries, the Company shall pay Sands Brothers the sum
of One Hundred and Fifty Thousand ($150,000) Dollars.
5. COVENANTS OF THE COMPANY.
(a) AMENDMENTS AND SUPPLEMENTS. The Company covenants and agrees
that, until the Offering contemplated by the Offering Documents has been
completed or terminated, if there shall occur any event relating to or
affecting, among other things, the Company, any of its Subsidiaries, or the
proposed operations of the Company or of any of its Subsidiaries as described in
the Offering Documents, as a result of which it is necessary, in the opinion of
the Placement Agent and its counsel or Company Counsel, to amend or supplement
the Offering Documents in order that the Offering Documents will not contain an
untrue statement
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<PAGE>
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, the Company shall immediately prepare and furnish to the
Placement Agent a reasonable number of copies of an appropriate amendment of or
supplement to the Offering Documents, in form and substance satisfactory to the
Placement Agent and its counsel.
(b) USE OF PROCEEDS. The net proceeds of the Offering of the
Securities will be used by the Company, as more fully described in the
Memorandum, for the purposes to be set forth in the Memorandum.
(c) EXPENSES OF OFFERING. The Company shall be responsible for,
and shall bear all expenses directly and necessarily incurred in connection with
the proposed financing, including, but not limited to, the costs of preparing,
printing and filing the Offering and Ancillary Documents to be used in
connection with the Offering contemplated hereby and all amendments and
supplements thereto; preparing, printing and delivering exhibits to the Offering
and Ancillary Documents; preparing, printing and delivering all Placement Agent
and selling documents, including, but not limited to, this Agreement and the
blue sky memorandum, the Share certificates, blue sky fees, filing fees and the
fees and disbursements of the Placement Agent's counsel and the other fees and
expenses set forth above. As promptly as practicable after the final Closing
date, the Company shall prepare, at its own expense, hard cover "bound volumes"
relating to the Offering and will distribute such volumes to the individuals
designated by counsel to the Placement Agent.
(d) RESERVATION OF COMMON STOCK. The Company will reserve and keep
available the maximum number of its authorized but unissued Reserved Shares
which are issuable upon exercise of the Sands Warrants.
(e) NO SENIOR SECURITIES. In the event any Securities are sold
hereunder, the Company shall not, without the approval of the holder(s) of at
least a majority-in-interest of such shares then outstanding, by vote or written
consent, authorize, issue or enter into any agreement providing for the issuance
(contingent or otherwise) of any equity securities (or any securities
convertible into or exchangeable for any equity securities) that
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<PAGE>
are senior to or on a parity with the Securities as to dividends or liquidation
rights.
(f) EARLY TERMINATION BY THE COMPANY. Anything contained herein to
the contrary notwithstanding, in the event that, following the date of this
Agreement until the termination of the Offering Period, the Company desires to
terminate this Agreement for any reason (which for purposes of this Agreement
shall include, but not be limited to, Sands Brothers being ready, willing and
able to proceed with the transactions contemplated hereunder, but the Company
being unwilling to proceed for any reason), Sands Brothers has the right, but
not the obligation, to agree to such early termination upon the payment by the
Company to Sands Brothers of a sum equal to the placement fees and expenses
(including its counsel fees and expenses) and Sands Warrants it would have
received under Sections 4(d) and 4(e) hereunder had the Maximum Amount been
sold.
(g) NO CLOSING. Anything set forth herein to the contrary
notwithstanding, in the event that, for any reason other than (i) termination
hereof by the Company in accordance with the terms of Section 5(f) above or (ii)
termination hereof by the Placement Agent in accordance with Section 4(f) above,
a Closing does not occur in accordance with the terms provided herein, no
amounts shall be payable further to Sands Brothers hereunder, except for that
contemplated by Section 3(e)(ii) hereof and the reimbursement of the reasonable
out-of-pocket expenses (including its counsel fees and expenses) incurred by
Sands Brothers prior to the expiration date of the Offering Period. In no event
shall Sands Brothers be responsible for any of the Company's fees, costs or
expenses and the Company shall pay all expenses of the Offering and the
preparation of the Offering and Ancillary Documents. The Company shall reimburse
Sands Brothers for any out-of-pocket expenses (including, but not limited to,
reasonable counsel fees and expenses) which Sands Brothers may incur in
connection with the enforcement of its rights hereunder.
(h) RATIFICATION AND CONFIRMATION OF INVESTMENT BANKING AGREEMENT.
The Company hereby confirms and ratifies the investment banking agreement
between the Company and the Placement Agent dated May 11, 1998, as amended
("Investment Banking Agreement"), including, without limitation, (i) the
retention of Sands Brothers as financial advisor to the Company
29
<PAGE>
pursuant to Section A thereof, (ii) the retention of Sands Brothers in
connection with merger and acquisition activities pursuant to Section B thereof,
(iii) the granting of the right of first refusal to Sands Brothers pursuant to
Section C thereof, (iv) the granting of the right to designate a board member or
observer to the board of directors of the Company pursuant to Section D thereof,
(v) the issuance of warrants to purchase 600,000 shares of Common Stock to Sands
Brothers and its designees (the "Investment Banking Warrants") pursuant to
Section E thereof and (vi) the expense reimbursement and indemnification
provisions thereof.
(i) FINANCING SOURCES. The Company will provide to the Placement
Agent a list of each of its present financing sources, with such list to be
amended for a period of one year from the date of termination of the Offering
if, and when, the Company is approached by, or has any contact with, any
potential financing sources ("Company Sources").
(j) PLACEMENT AGENT SOURCES. For a period of one year from the
date of this Agreement, the Placement Agent shall keep a list of the names of
all its sources of potential financing ("Placement Agent Sources" and together
with the Company Sources collectively, the "Sources") for the Company, which
list may be furnished to the Company and amended from time to time by the
Placement Agent at its discretion. The Company agrees, in the event it directly
or indirectly receives financing in any form or nature whatsoever from any
Source, that it will fully compensate the Placement Agent under the terms and
conditions of this Agreement to the same extent as if the Placement Agent itself
had obtained such financing from such Source.
(k) NO FINDER'S FEE. The Company represents and warrants to the
Placement Agent that it is not obligated to pay a finders' fee to any one in
connection with the introduction of the Company to Sands Brothers.
6. INDEMNIFICATION.
(a) TERMS OF INDEMNIFICATION. The Company agrees to indemnify and
hold harmless the Placement Agent and its agents, stockholders, officers and
directors, and each person, if any, who controls the Placement Agent, as
follows:
30
<PAGE>
(i) against any and all loss, liability, claim, damage and
expense whatsoever arising out of any untrue statement or alleged untrue
statement of a fact contained in the Offering Documents or the omission
or alleged omission therefrom of a fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, unless such untrue statement or omission was
made in the Offering or Ancillary Documents in reliance upon and in
conformity with information furnished in writing to the Company in
connection therewith by the Placement Agent expressly for use therein;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever to the extent of the aggregate amount paid in
settlement of any litigation, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission or any such
alleged untrue statement or omission; and
(iii) against any and all expense whatsoever incurred in
investigating, preparing or defending against any litigation, commenced
or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission,
to the extent that any such expense is not paid under clause (i) or (ii)
above.
(b) INDEMNITY UNDER SECURITIES LAWS. The Company agrees to
indemnify and hold harmless the Placement Agent and its agents, and each person,
if any, who controls the Placement Agent, to the same extent as the foregoing
Indemnity, against any and all loss, liability, claim, damage and expense
whatsoever directly arising out of the exercise by any person of any right under
the Securities Act or the Securities Exchange Act of 1934, as amended, or the
securities or blue sky laws of any state on account of violations of the
representations, warranties or agreements set forth herein.
(c) If any action is brought against the Placement Agent or any of
its officers, directors, stockholders, employees, agents, advisors, consultants
and counsel or any controlling persons of
31
<PAGE>
the Placement Agent (each, an "Indemnified Party" and collectively, "Indemnified
Parties"), in respect of which indemnity may be sought against the Company
pursuant to Sections 6(a) or 6(b) above, each such Indemnified Party shall
promptly notify the Company (the "Indemnifying Party") in writing of the
institution of such action (but the failure to so notify shall not relieve the
Indemnifying Party from any liability it may have under this Section 6 unless
such failure results in the imposition of a default judgment which cannot be
reopened) and the Indemnifying Party shall promptly assume the defense of such
action, including the employment of counsel reasonably satisfactory to each such
Indemnified Party and payment of expenses. Each such Indemnified Party shall
have the right to employ its own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of each such Indemnified Party
unless the employment of such counsel shall have been authorized in writing by
the Indemnifying Party in connection with the defense of such action or the
Indemnifying Party shall have not have promptly employed counsel reasonably
satisfactory to each such Indemnified Party to have charge of the defense of
such action or each such Indemnified Party shall have reasonably concluded that
there may be one or more legal defenses available to it or them or to other
Indemnified Parties which are different from or additional to those available to
one or more of the Indemnifying Parties and it would be inappropriate for the
same counsel to represent both parties due to actual or potential differing
interests between them, in any of which events such fees and expenses shall be
borne by the Indemnifying Party and the Indemnifying Party shall not have the
right to direct the defense of such action on behalf of each Indemnified Party.
Anything in this Section 6(c) to the contrary notwithstanding, the Indemnifying
Party shall not be liable for any settlement of any such claim or action
effected without its written consent, which consent shall not be unreasonably
withheld. The Company agrees to promptly notify the Placement Agent of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the sale of the Securities or the
Memorandum.
(d) CONTRIBUTION. In order to provide for just and equitable
contribution in any case in which (i) an indemnified party makes a claim for
indemnification pursuant to this Section 6, but it is judicially determined (by
the entry of a final
32
<PAGE>
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case; notwithstanding the fact that
the express provisions of this Section 6 provide for indemnification in such
case; or (ii) contribution under the Securities Act may be required on the part
of any indemnified party, then each indemnifying party shall contribute to the
amount paid as a result of such losses, claims, damages, expenses or liabilities
(or actions in respect thereof) (A) in such proportion as is appropriate to
reflect the relative benefits received by each of the contributing parties, on
the one hand, and the party to be indemnified on the other hand, from the
Offering of the Securities; or (B) if the allocation provided by clause (A)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of each of the contributing parties, on the one hand,
and the party to be indemnified on the other hand, in connection with the
statements or omissions that resulted in such losses, claims, damages, expenses
or liabilities, as well as any other relevant equitable considerations. In any
case where the Company is a contributing party and the Placement Agent is the
indemnified party, the relative benefits received by the Company on the one
hand, and the Placement Agent, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the Offering of the Securities (before
deducting expenses) bear to the total Placement Agent commissions received by
the Placement Agent hereunder, in each case as set forth in the table on the
cover page of the Memorandum. Relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, or by the Placement Agent, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
expenses or liabilities (or actions in respect thereof) referred to above in
this subsection (c), shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating,
preparing or defending any such action or claim. Notwithstanding the provisions
of this subsection (c), the Placement Agent shall not be required to
33
<PAGE>
contribute any amount in excess of the Placement Agent commissions applicable to
the Securities placed by the Placement Agent hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 6,
each person, if any, who controls the Company within the meaning of the
Securities Act, each officer of the Company who has signed the Memorandum, and
each director of the Company shall have the same rights to contribution as the
Company, subject in each case to this subsection (c). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this subsection
(c), notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have hereunder or otherwise than under this subsection (c), or to the extent
that such party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any liabilities
which any indemnifying party may have at common law or otherwise.
7. MISCELLANEOUS.
(a) GENERAL. The Company shall supply Sands Brothers' with such
financial statements, contracts and other corporate records and documents as may
be requested of it. In addition, Sands Brothers shall be fully informed by the
Company of any events which might have a material affect on the financial
condition of the Company or of any of its Subsidiaries. If, in the opinion of
Sands Brothers, the condition of the Company, or the condition of any of its
Subsidiaries, financial or otherwise, and its/their prospects are affected in a
material and/or adverse manner and do no fulfill the expectation of Sands
Brothers, it shall have the sole discretion to review and determine its
continued interest in the Offering.
(b) REPRESENTATIONS, WARRANTIES AND COVENANTS TO SURVIVE DELIVERY.
The respective representations, warranties,
34
<PAGE>
indemnities, agreements, covenants and other statements of the Company and its
Subsidiaries, and where appropriate, its/their respective principal
stockholders, shall survive execution of this Agreement and delivery of the
Securities and the termination of this Agreement. Notwithstanding anything
provided herein to the contrary, the provisions of Sections 4(d) and 4(e)hereof
shall survive the termination of the Offering Period and shall remain in full
force and effect with respect to all Sources who invest, or commit to invest, in
the Company at any time during the twelve month period commencing the day that
the Offering Period terminates. Additionally, the Placement Agent shall be
entitled to also retain its non-accountable and non-refundable expense allowance
to the extent it has been paid prior to the date of termination.
(c) NO OTHER BENEFICIARIES. This Agreement is intended for the
sole and exclusive benefit of the parties hereto and their respective successors
and controlling persons, and no other person, firm or corporation shall have any
third-party beneficiary or other rights hereunder.
(d) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the law of the State of New York. The parties
hereby agree: (i) in any legal proceeding brought in connection with this
Agreement or the transactions contemplated hereby, to irrevocably submit to the
nonexclusive IN PERSONAM jurisdiction of (A) any state or federal court of
competent jurisdiction sitting in the State of New York, County of New York; or
(B) in the event that any party is a defendant in any legal proceeding in which
it seeks to join the other as a third party defendant, then, any state or
federal court in which such proceeding has properly been brought, and consents
to suit therein; and (ii) to waive any objection they may now or hereafter have
to the venue of such proceeding in any such court or that such proceeding was
brought in an inconvenient court.
(e) NOTICES. All notices, requests, demands and other
communications which are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given when delivered
personally, receipt acknowledged, or five (5) days after being sent by
registered or certified mail, return receipt requested, postage prepaid. All
notices shall be made to the parties at the addresses designated above, or at
such
35
<PAGE>
other or different addresses which a party may subsequently provide with notice
thereof, and to their respective legal counsel, as follows:
(i) If to the Placement Agent, to:
Sands Brothers & Co., Ltd.
90 Park Avenue
New York, NY 10016
Attn: Mr. Mark G. Hollo
Managing Director
- with a copy to -
Littman Krooks Roth & Ball P.C.
655 Third Avenue 20th floor
New York, NY 10017
Attn: Mitchell C. Littman, Esq.
or to such other person or address as the Placement Agent shall furnish the
Company in writing.
(ii) If to the Company, to:
IMSCO Technologies, Inc.
162-06 92nd Street
Howard Beach, NY 11414
Attn: Alexander T. Hoffmann,
Chief Executive Officer
- with a copy to -
[
]
Attn: [ ].
36
<PAGE>
or to such other person or address as the Company shall furnish the Placement
Agent in writing.
(f) COUNTERPARTS. This Agreement may be signed in counterparts
with the same effect as if both parties had signed one and the same instrument.
(g) REIMBURSEMENT. Notwithstanding the non-occurrence of an
Closing, or any other condition, in no event shall the Placement Agent be
responsible for any of the Company's fees, costs or expenses; however, the
Company shall reimburse the Placement Agent for any out-of-pocket expenses
(including, but not limited to, reasonable counsel fees and expense) which the
Placement Agent may incur in connection with the enforcement of its rights
hereunder.
(h) FORM OF SIGNATURE. The parties hereto agree to accept a
facsimile transmission copy of their respective signatures as evidence of their
respective actual signatures to this Agreement; PROVIDED HOWEVER, that each
party who produces a facsimile signature agrees, by the express terms hereof, to
place, immediately after transmission of his or her signature by fax, a true and
correct original copy of his or her signature in overnight mail to the address
of the other party.
(i) MODIFICATION. This Agreement (i) may only be modified by a
written instrument which is executed by both parties thereto, (ii) constitutes
the entire agreement between the parties, and (iii) shall be binding upon and
inure to the benefit of both parties hereto and their respective successor and
assignees.
(j) NON-CIRCUMVENTION. Each of the Company and the Placement Agent
each agree that no effort shall be made to circumvent the terms and conditions
of this Agreement or gain a fee, commission, remuneration, consideration or
benefit whatsoever. With respect to any attempt at circumvention of this
Agreement, the injured party is entitled to seek any and all legal remedies,
fees or compensation equal to those received or committed or agreed to be paid
pursuant to the terms of this Agreement as the same are due and payable to the
circumvented party under the terms of this Agreement.
37
<PAGE>
(k) GOOD FAITH. Each of the Company and the Placement Agent
understand that this Agreement is a reciprocal and mutual one and both warrant,
covenant, and promise that it will act in good faith toward each other in the
performance of this Agreement and in other matters.
(l) FURTHER SERVICES. The Placement Agent shall, if requested by
the Company, testify in, and shall prepare and assist in the preparation of
testimony for, any judicial or administrative proceeding in respect of the
services performed by the Placement Agent hereunder. With respect thereto, the
Company shall pay, in addition to the fees and expenses payable to the Placement
Agent hereunder, for the time required to expend by the Placement Agent at its
standard hourly rates as then in effect, together with reasonable out-of-pocket
expenses, but not limited to, fees and expenses of its legal counsel.
(m) WAIVER OF BREACH. The waiver by either the Placement Agent or
the Company of any provision of this Agreement shall not be construed as a
waiver of any subsequent breach hereof.
If you find the foregoing is in accordance with our understanding,
kindly sign and return to us a counterpart hereof, whereupon this instrument
along with all counterparts will become a binding agreement between us.
Very truly yours,
IMSCO Technologies, Inc.
By: /s/ Alexander T. Hoffmann
---------------------------------
Name: Alexander T. Hoffmann
Title: Chairman & CEO
Agreed:
SANDS BROTHERS & CO., LTD.
By: /s/ Mark G. Hollo
-------------------------------
Name: Mark G. Hollo
Title: Senior Managing Director
38
<PAGE>
LIST OF SCHEDULES
SCHEDULE 2(b) Organization
SCHEDULE 2(c) Capitalization
SCHEDULE 2(d) Subsidiaries and Investments
SCHEDULE 2(i) Absence of Changes
SCHEDULE 2(q) Non Defaults; Non Contravention
SCHEDULE 2(t) Agreements
SCHEDULE 2(x) Related Transactions
SCHEDULE 2(z) Salaries and Bonuses
SCHEDULE 2(NN) Affiliations
39
<PAGE>
EXHIBITS
Exhibit A - Placement Agent Warrant Agreement
40
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the consolidated
balance sheet and the consolidated statement of operations and is qualified in
its entirety by reference to such statements
</LEGEND>
<CIK> 0000924396
<NAME> IMSCO TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 22,992
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,992
<PP&E> 128,911
<DEPRECIATION> 98,918
<TOTAL-ASSETS> 140,061
<CURRENT-LIABILITIES> 911,405
<BONDS> 0
0
5
<COMMON> 769
<OTHER-SE> 772,118
<TOTAL-LIABILITY-AND-EQUITY> 140,061
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,656,431
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224,731
<INCOME-PRETAX> 2,881,162
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,881,162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,881,162
<EPS-BASIC> .39
<EPS-DILUTED> .39
</TABLE>
