SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-24378
First Scientific, Inc.
(Name of small business issuer in its charter)
DELAWARE 33-0611745
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1877 West 2800 South, Suite 200 84401
Ogden, Utah (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 393-5781
Securities to be registered under Section 12(g) of the Act:
Name of each exchange
Title of each Class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not 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. [ ]
Registrant's revenues for its most recent fiscal year were $83,149.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of December 3, 1997:
Not applicable, shares not traded.
As of December 31, 1998, Registrant had outstanding 20,169,770 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
FIRST SCIENTIFIC, INC.
INDEX-FORM 10-KSB
PART I
Page
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters. . . 8
Item 6. Management's Discussion and Analysis or Plan of Operations. . . .11
Item 7. Financial Statements. . . . . . . . . . . . . . . . . . . . . . .14
Item 8. Changes in and disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . .14
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act . . . . . . . . .14
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . .16
Item 11. Security Ownership of Certain Beneficial Owners and Management .17
Item 12. Certain Relationships and Related Transactions . . . . . . . . .18
PART IV
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Index to Financial Statements and Schedules. . . . . . . . . . . . . . . .20
PART I
ITEM 1. Description of Business
Forward Looking Statements and Information May Prove Inaccurate
When used in this Form 10-KSB and in other filings by the Company
with the SEC, in the Company's press releases or in other public or
stockholder communications or oral statements made with the approval of an
authorized executive officer of the Company, the words or phrases "would
be," "will allow," "intends to," "believes," "plans," "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar expressions are intended to identify "forward
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward looking statements, which speak only as of the date made, are
based on certain assumptions and expectations which may or may not be
valid or actually occur, and which involve risks of product demand, market
acceptance, economic conditions, competitive products and pricing,
difficulties in product development, commercialization, and technology,
and other risks. In addition, sales and other revenues may not commence
and /or continue as anticipated due to delays or otherwise. As a result,
the Company's actual results for future periods could differ materially
from those anticipated or projected.
The Company does not intend to update the forward looking statements
contained in this report, except as may occur as part of its ongoing
periodic reports filed with the Securities and Exchange Commission.
Organization and General Development
Whenever in this discussion the term"Company" is used, it should be
understood to refer to First Scientific, Inc. ("First Scientific") and its
wholly owned subsidiary, First Scientific Corporation, on a consolidated
basis, except where the context clearly indicates otherwise.
First Scientific, Inc. is a Delaware corporation organized on June
11, 1992 under the name of SPPS Financial Corporation ("SPPS"). SPPS was
a corporation without operations until September 15,1998 when it entered
into a reorganization with Linco Industries, Inc.
First Scientific Corporation was incorporated as a Utah corporation
on April 30, 1990 under the name of Linco Industries, Inc. ("Linco").
Linco was formed to take advantage of a linseed oil based soap formula.
After limited success with this product, Linco began to focus its
resources on developing a rash treatment and prevention baby wipe
solution. This product was marketed through a private label agreement with
a national distributor. In 1994, Linco recruited Dr. Edward Walker, a
chemistry professor at nearby Weber State University and director of the
Utah State Center for Excellence for Chemical Technology at Weber State
University, as a shareholder and director. In March of 1998, at Dr.
Walker's request, he relinquished his stock ownership in Linco in
exchange for a royalty agreement. This royalty agreement was subsequently
acquired by the Company during the reorganization with SPPS, as described
below. Through the acquisition of his technology, Dr. Walker became a
major shareholder in the Company and now serves as Director of research
and development and as a member of the Board of Directors of the Company.
On September 15, 1998, Linco entered into and completed an agreement
with SPPS pursuant to which SPPS issued 8,798,080 shares of its common
stock in exchange for 100% of the issued and outstanding common stock of
Linco. Concurrently, SPPS changed its name to First Scientific, Inc.
In connection with the agreement, First Scientific issued 5,201,920 shares
of common stock to Dr. Edward Walker for the cancellation of a royalty
agreement and for rights to technology relating to an instant chemical
skin sanitizer formulation and issued or received subscriptions for
2,666,659 shares of common stock in exchange for approximately $2,000,000
of cash and marketable securities. The agreement between Linco and SPPS
has been accounted for as the reorganization of Linco and the issuance of
shares to the SPPS shareholders at historical cost. Concurrent with the
reorganization Linco changed its name to First Scientific Corporation.
Linco developed a proprietary formula for an antibacterial cleansing
and moisturizing solution in 1996. Products from this formulation can be
produced in the form of wipes or bottle sprays. In 1996, Linco also
invented a second proprietary formulation, a Dimethicone-based solution
that can be delivered to the incontinent/geriatric market in wipe form.
In 1998, Linco developed a third proprietary formula, a lotion/ soap
antibacterial cleansing and moisturizing solution that can be dispensed in
tubes or bottles. These products were developed with market
differentiating characteristics. First, neither the antibacterial nor the
dimethicone formulations contained alcohol and therefore could be used
repetitively without damaging or drying the skin. Second, the formulas
combine FDA approved active chemical agents with natural botanical oils,
preservative, and fragrance ingredients. Benzethonium Chloride is used in
the antibacterial cleansing and moisturizing formulas, and Dimethicone, a
proven drug for treating and preventing diaper rash, is used in the rash
product. To the knowledge of management, no competitor has been able to
develop such combinations.
Testing, Research, and Product Development
First Scientific's relationship with the State of Utah's Center of
Excellence for Chemical Technology at Weber State University allows
convenient access for testing of the ingredients and chemical solutions it
formulates. Chemical testing expenses are paid for by the Company to the
university on a fee-for-service basis. This kind of agreement is similar
to those that the Center enters into with other companies. The university
has no proprietary rights in the Company's products. This relationship
enables the Company to conduct mandated tests for good manufacturing
practice ("GMP") and to test incoming raw materials to determine if they
meet the strict specifications demanded for Food and Drug Administration
("FDA") registered products. Without this arrangement, the Company would
need to invest a large amount for testing equipment. It is anticipated
that the Company will maintain its relationship with Weber State
University. The Company is also in the process of negotiations to lease
lab/testing space from the university to meet its increasing needs.
Efficacy tests, which are particularly mandated by the FDA,
Environmental Protection Agency ("EPA") and Occupational Safety and Health
Administration ("OSHA") and required by the sellers of the Company's
products, are performed by independent certified labs which adhere to
government established protocols. The Company will also continue to test
its own products, or to have them tested by outside FDA approved labs, to
determine new uses, such as showing efficacy in combating HIV, hepatitis,
the flu, and athletic rashes. Independent certified labs have tested the
Company's products regarding time kill and skin irritation, with favorable
results.
The three formulations the Company has invented are unique and are
used to produce distinct products. It licenses another company's chemical
formulation for a fourth product. The Company's three formulations are
FDA registered and proprietary, while the forth formulation, an
antimicrobial hard-surface disinfectant cleaner, is EPA registered.
Formulations/Products
Antibacterial Wipes and Spray Formulation
The Company's antibacterial formulation for use in wipes and sprays
was discovered after more than two years of rigorous development. Linco
overcame the problem of mixing the active agent, Benzethonium Chloride, an
FDA-registered antibacterial chemical, with unique surfacants, botanical
oils and preservative ingredients. Although the Company will focus on
marketing this product on a private label basis, its trademarked brand
names for this antibacterial product are "Fresh Cleanse(R)" in the
over-the-counter retail market and "MediCleanse(TM)" in the health care
market. FDA regulations have been complied with for both usage and
claims. The botanical oils and fragrance ingredients provide a soothing,
skin-conditioning effect. And, since it contains no alcohol, this product
can be used repeatedly by health care professionals, food processors and
preparers and individuals. Furthermore, tests reveal that its shelf life
is in excess of two years, which is critical for successfully marketing
of the product and that its has superior moisturizing capabilities.
Antibacterial Lotion/Soap for Hands and Skin
The Company has also developed a new, unique antibacterial
lotion/soap. This product is applied directly to the skin and imparts the
same antibacterial activity as the antibacterial wipe product, allowing
its registration with the FDA. The lotion/soap is unique, in that it may
be used as an antibacterial sanitizer and skin-conditioning lotion,
without the need for rinsing, or it may be used as an antibacterial
hand-soap for washing hands under running water protocols. This
dual-action property opens several markets for this product. The
lotion/soap has been specifically tested by an independent laboratory for
efficacy mandated by the FDA and meets the requirements for
over-the-counter and medical professional use registrations.
Diaper Rash Prevention and Treatment Formulation
The Dimethicone-based diaper rash product is unique because the
Dimethicone oil-in-water emulsion is extremely stable for periods in
excess of two years. The solution also remains homogeneous with the
addition of Company's botanical oils, fragrances, and preservative
ingredients. Again, First Scientific has been able to formulate a
distinctive product that meets all FDA requirements as an over-the-counter
drug product, such as maintaining greater than 1% Dimethicone coverage,
when applied in wipe form, while incorporating specific value added
ingredients to enhance market penetration. As a result of this FDA
registration, this unique product meets the medical health claim:"Treats
and Prevents Diaper Rash."
Historically, based on consultation with patent and intellectual
property attorneys, the Company has not patented its proprietary
formulations, but instead has maintained them as 'trade secrets.' However,
the Company is presently reviewing this strategy and may file appropriate
patent applications. The Company has felt secure in its 'trade secret'
position because of the proprietary methods used in the mixing of
ingredients, particularly the timing and sequence of adding such
ingredients, the amounts used, and the temperature and speeds when mixing.
The sharing of these formulas with manufacturers on an 'as needed basis'
has been and will only be done with strict confidentiality agreements in
place.
Antibacterial Hard Surface Cleaner
First Scientific's other antimicrobial product, which is not
proprietary, is a one-step, no-rinse hard-surface cleaner used in a
variety of markets ranging from commercial uses in medical institutions
and food services to over-the-counter sales for home use. Its broad
spectrum antimicrobial activity disinfects and protects against a wide
variety of microorganisms including bacteria, viruses, molds and fungus.
Since all such hard-surface cleaner formulations, labels, and expensive
testing results are registered with the EPA, the Company decided to
register an existing EPA-registered formulation. This product is
complementary to the Company's own antibacterial formulated products, but
fills a separate market niche. First Scientific has acquired the right to
use this product with its own trademarked label, "Fresh Protect(TM)," as
well as under private label agreements.
Markets and Marketing
The antibacterial market, even though very substantial for many
years, is growing. This is a result of new strains of bacteria that, once
they infiltrate the body, are in many cases resistant to, or even totally
unaffected by, existing drugs. FDA and EPA requirements for cleanliness
are becoming more of an issue each day in the industries affected by
bacteria. This is reflected by more stringent and regular inspections.
Therefore, health care providers at every level, food processors and
handlers, and even in-home personal hygiene users are now demanding more
effective, user-friendly products. These products must protect not only
one's own personal health, but also work places to reduce legal liability
for bacteria related illnesses and deaths. Newspapers, magazines, web
sites, and frequent TV shows are chronicling these cases on a regular
basis. These media are warning and educating people regarding the spread
of bacteria and that being antibacterial conscious is no longer an option,
but a genuine necessity. The FDA, EPA and other national and
international public regulatory agencies, along with private watchdog
groups, are also demanding higher standards to fight the bacteria that
threaten the world's population.
Sales potential for the Company's Dimethcone-based wipes, targeted
mainly to incontinent and geriatric markets, is quite substantial. With
people living longer and family in-home care becoming more prevalent, due
to skyrocketing health care costs, predictable market growth is
anticipated. However, there can be no assurance as to future levels of
sales. First Scientific also may pursue the infant diaper rash and
prevention market where there is substantive competition, but also
multimillions of dollar in sales potential.
Market Breakdowns
Antibacterial-based product markets, including the hard-surface
cleaner, are over-the-counter, medical/health care, food processing and
handling and various specialty niches. These markets include both private
and public as follows:
Over-the-Counter: drug and grocery chains to smaller "mom and pop"
stores, discount chains, convenience stores and any other retail
point of purchase outlets.
Health Care/Medical: hospitals, clinics, labs, nursing/rest homes
and home health care provider where repeated patient body cleansing
is required.
Food processors/preparers/servers: food processing plants,
restaurants, school kitchens and service providers and patrons.
Multilevel Marketing: MLMs such as Amway and Rexall and smaller,
high-end cosmetic groups.
Specialties: Money handlers (such as financial institutions and
casinos), barbers/beauticians, garbage collectors and custodians.
International: All of the same markets as indicated above.
Dimethicone-based wipes can also be sold into the baby wipe market.
However, at present, the Company has chosen not to enter this market
because it is highly competitive, with numerous water-based
non-FDA-registered products. The Company intends, therefore, to focus its
current marketing efforts in the following incontinent and geriatric
markets:
Over-the-counter: drug and grocery stores chains, other suppliers
for personal or home-bound use and large distribution companies.
Health Care/Medical: hospitals, clinics, nursing/rest homes and
in-home health care providers
MLM: network marketing organizations.
Marketing
Through December 31,1998, the Company has only marketed product
through three customers; two have been private label transactions, while
the other has been to a small distributor for branded products. The
Company does not expect to continue one of the private label
relationships, while the other one is expected to increase substantially
in volume throughout 1999. The Company's relationship with the branded
product distributor will be more fully defined in early 1999; however,
significant growth through this market channel can not anticipated.
Negotiation with a Fortune 100 multinational private labeler were
conducted during the last quarter of 1998 and are expected to conclude in
the first quarter of 1999.
The marketing plan for the Company focuses on the development of
private label distribution agreements, where manufacturing is outsourced.
However, in selective cases, the buying habits of certain large retail
chains and health care providers may lead to marketing the Company's
branded products directly to the retailers or providers. Certain private
label situations may be such that the Company relinquishes its outsourced
manufacturing role and works on a royalty and fee for testing basis to
provide its formulations. The Company intends to use caution in the
selection of its relationships, choosing distributors who are highly
knowledgeable of their markets and capable of establishing, or who have
already established, substantial market presence.
The Company's plan to concentrate in the private label arena is a
function of initial positive response in this market channel and the large
cash investment normally required to launch branded products. The Company
can offer distinct customized private label products to potential
customers because the mix of certain botanicals, fragrances, and
preservatives in its formulations can be altered to meet customer
objectives, while still maintaining all necessary FDA drug requirements
related to the active antibacterial or diaper rash agents.
The Company's marketing rationale is also driven by its business
commitment to leanness at the corporate level and to limit staffing as
much as possible through outsourcing. This will carry over to the
marketing staff, while still allowing the Company to fix resources on
accomplishing its objective of developing and providing unique products on
a "first to market" basis. "First to market" will be the Company's primary
product aim, with "new and improved" to follow in a strategic course as
it markets its own proprietary products through private label
relationships. However, when the Company identifies a market need that it
cannot fill with one of its own formulations, but for which it can
contract with an outside source, it will not hesitate to do so. This
approach is the case with the Company's hard-surface antibacterial cleaner
product.
For the foreseeable future, the Company will rely on a small number
of customers to provide revenue to the Company. It appears probable over
the next twelve months that one or two of these customers may provide the
majority of such revenue. Should the Company lose one of these
relationships, there could be a significant adverse impact on sales
revenues and profits. In order to combat these circumstances, the Company
is in the process of identifying outside market research consultants who
will provide more definitive market analysis to the Company. These
consultants will identify potential customers and recommend a plan, and
the strategy for accomplishing such plan, that will hopefully produce the
highest probability for success in establishing and retaining
relationships.
Competition
According to the Company's research, First Scientific's proprietary
antibacterial and Dimethicone-based products are unique in the marketplace
and, therefore, can provide superior alternatives to existing competition.
However, this competition is significant and very well established in the
markets the Company intends to penetrate. Products that provide
antibacterial competition rely mostly on alcohol as their active agent.
Per Federal regulatory mandate, alcohol content must be at least 60% of
the total solution in these products. The Company's antibacterial
solution products contain no alcohol. This is because the Company has
discovered how to combine Benzethonium Chloride, a powerful FDA-approved
Category 1 antibacterial agent, with natural botanicals, fragrance and
preservatives to make solutions that can be applied to the skin in
various forms and are totally effective. These competitive
advantages, together with the facts that the Company's products are
moisturizing and contain no stinging, skin-irritating and flammable
alcohol, while being priced to compete with alcohol-based competitors,
provide opportunity for First Scientific to enter selective markets.
Major competitors, however, like Purell(R) in the personal skin
sanitizing market, and others in the medical/health care arena, like
Hibiclens(R), are offered by much larger by well financed companies, who
are entrenched in the marketplace. First Scientific's Dimethicone
formulation products have similar competition from mostly aqueous wipes
products whose producers are also large and very well entrenched in the
market. However, the Company has an FDA compliant formulation and can
claim 'treats and prevents diaper rash,' which competition cannot claim.
This, coupled with testing superiority regarding the formulation's
moisturizing effects, should provide opportunities for penetration into
existing markets. Overall, even with superior product offerings, the
Company realizes competition will be formidable and significant resources
will need to be expended to penetrate these markets and to grow market
share.
Manufacturing
The Company outsources the manufacture of its products to FDA
compliant facilities. These manufacturers, which are in the business of
manufacturing for various customers who require FDA compliant facilities
for their products, are experienced in performing according to FDA
standards. Under normal procedures, the Company mixes the concentrate of
its antibacterial formulation at its own facility, or at a nearby contract
facility, both under FDA protocols. The concentrate is then shipped to the
manufacturer for production according to their customer product
specifications. This procedure helps to protect the trade secret status of
this formulation; however, in the future, should customer agreements
necessitate disclosing formulations and/or manufacturing products at the
customer's facility or at their designee, strict confidentiality will be
imposed to protect the Company's interests. The Company's mixing
facilities (see Item 2 of this document for detailed description) have the
capacity to meet projected mixing needs for the foreseeable future. The
Company does not normally use this procedure in the mixing of its rash
prevention and treatment formulation because of the economics in mixing
concentrate for this formulation at its own facility. For the time being,
mixing of this formulation will be done at the Company's contract
manufacturer or at a contract mixer. Confidentiality agreements are in
place with the Company's manufacturers to protect the trade secret status
of this product formulation.
The two contract manufacturers with whom the Company has established
relationships have state-of-the- art facilities that are capable of
meeting projected manufacturing requirements. Good relationships with
these manufactures have been established; however, as a matter of prudent
business practice, the Company will be investigating the establishment of
additional relationships with other FDA compliant manufactures.
Overview
The Company is considered a development stage company for financial
reporting purposes and, since inception, has incurred losses from
operations. As of December 31, 1998, the Company has had cumulative net
losses since inception totaling $4,762,745, with $3,989,550 of this total
attributable to research and development expense. The Company is
primarily engaged in the development of scientific chemical formulations
and is currently marketing its products to private label companies that
are major distributors in the over-the-counter, medical, health care and
multi-level arenas, with nominal sales being made by a small distributor
of branded products. Future development of its own brands, especially in
medical markets, will be pursued on a case-by-case basis as profitable
opportunities arise. The Company has developed unique formulations; two
are moisturizing antibacterial sanitizing formulations that remove 99.69%
to 99.99% of bacteria from the skin without the harsh effects of alcohol
or iodine (these products can be delivered in wipes, spray, lotion and
lotion-soap forms) and the third, a topical rash prevention and treatment
formulation that cleanses and moisturizes the skin for treatment against
skin rashes caused by incontinence and other irritations (in wipe form).
The worldwide market for such products has grown significantly in
recent years and is projected to continue growing at an aggressive rate.
Regarding the Company's antibacterial formulation, this growth is due to
the increase in bacteria related disease, sickness and death from
methicillin-resistant and other bacteria, the demands of government and
health care agencies/providers to create healthier treatment environment
and the insistence of the public in general for healthier living and
working conditions. Increasing market growth for the Company's diaper and
other rash formulation is primarily a function of the tremendous growth
rate of the incontinent geriatric population, as baby boomers grow older,
and the product's application for the infant market. The Company also
markets a fourth complimentary product, an antibacterial hard-surface
cleaner that it registers for use.
Management believes the markets for its products will continue to
expand and that the potential for becoming a significant participant in
such markets is a reasonable expectation; however, the Company has not
generated significant sales during its history. The $2,000,000 funding
First Scientific received in the third quarter of 1998 provides a strong
base for expanded and focused marketing and sales efforts. These efforts
are backed up by additional management and staff, new executive offices,
the upgrading of existing research and development, mixing and storage
facilities and expanded testing accommodations. The Company also maintains
its own web page, which can be found at 'www.antibacteria.com.'
ITEM 2. Description of Property
General
The Company currently occupies space at two different locations. The
Company's executive offices are located at 1877 West 2800 South, Suite
200, Ogden, Utah 84401. This location is comprised of 2012 square feet of
office space on the second level of a three-year-old office warehouse
building in the Ogden Industrial Park. Executive, finance, operations and
sales/marketing are housed in this facility. The second facility is
located at 2711 Midland Drive, Ogden, Utah 84401 (approximately one-half
mile from the executive offices). Research and development, warehousing,
mixing and records storage are performed at this FDA compliant facility,
which consists of 2200 square feet in a small office warehouse complex.
The Company also has a written agreement for the use of laboratory and
testing facilities at Weber State University in Ogden, Utah and is in the
process of leasing its own dedicated space at the university for expanded
operations.
The Company believes the facilities described above are adequate to
meet its projected operating needs for the next twelve to thirty-six
months. Should growth objectives be exceeded during this time period,
additional space may need to be occupied. Currently, an additional 2200
square feet is available immediately adjacent to its executive offices,
which could be leased on terms similar to the existing space.
ITEM 3. Legal Proceedings
The Company is not involved in, nor has it been involved in, any
legal proceedings. On January 5, 1999, the Company was advised of an
unasserted claim against it as a result of a 1991 Agreement in Principle
(the "Agreement"). The Agreement purported to promise stock in Linco
Industries, Inc. to an individual if certain conditions were met in
representing the Company to potential customers. No legal proceeding has
been filed with respect to this claim and the Company has entered into
negotiations to resolve the matter. However, management of the Company
maintains the Agreement is no longer valid because the conditions in the
Agreement were not met within a reasonable time and because of the failure
of other terms. Additionally, due to an indemnification clause in the
reorganization agreement with SPPS, the former shareholders of Linco are
required to satisfy obligations of Linco incurred prior to the
reorganization. Consequently, the Company will require the responsibility
of any settlement resulting from the Agreement to be satisfied by former
shareholders of Linco.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
Securities of the Company
The reorganization completed in the reporting year left the Company
with 20,169,770 shares of common stock outstanding on December 31, 1998.
The Company also has 1,000,000 preferred shares authorized. There is
currently no public market for any of the Company's shares.
There are approximately 93 shareholders of record of the Company's
common stock as of December 31, 1998.
Sale of Unregistered Securities
During the past year, the Company (or its predecessor) has conducted
one private offering of common stock in connection with the acquisition
of 100% of the issued and outstanding Linco common stock. Concurrently
therewith, the Company also issued common stock to one individual as
consideration for the acquisition of technology rights and the
cancellation of a related royalty agreement.
On September 15, 1998, Linco entered into and completed an agreement
with SPPS pursuant to which SPPS issued 8,798,080 shares of its common
stock in exchange for 100% of the issued and outstanding common stock of
Linco to 3 accredited and 7 non-accredited Linco shareholders in reliance
upon Section 4(2) of the Securities Act of 1933. Simultaneously, SPPS
changed its name to First Scientific, Inc. In connection with the
agreement, First Scientific issued 5,201,920 shares of common stock to
Dr. Edward Walker in reliance on Section 4(6) of the Securities Act of 1933
for the cancellation of a royalty agreement and for rights to technology
relating to an instant chemical skin sanitizer formulation.
In connection with said agreement, the Company also issued or
received subscriptions in a private offering to 30 accredited and 8
non-accredited investors for a total of 2,666,659 shares of the
Company's common stock for $0.75 per share in cash and/or securities
in reliance upon Section 4(2) of the Securities Act of 1933. SPPS,
through its former officers, acted as its own Selling Agent in that
offering. All prospective investors were given a private placement
memorandum that included a complete disclosure of the Company, its
financial results, its business and various risks of the investment.
Investors were required to sign a Subscription Agreement in which the
investor represented, among other things, that he or she was acquiring
the shares for his or her own account, and not for resale, and that
the investor was experienced in financial matters and could bear the
economic risk of an investment in the Company.
Following is a list of investors in the offering:
SECURITIES SOLD CONSIDERATION
Shares of Company
Common Stock Investors Cash
------------ -------------------- -------------
<TABLE>
<S> <C> <C>
40,000 Reza John Azimi $ 30,000.00
66,667 Roy W. Parker, Jr. 50,000.00
66,667 Parker Boat Co., Inc. 50,000.00
100,000 John Prevatt 75,000.00
121,667 John Ben Bartholomew 91,250.00
Thomas G. Chapman and
100,000 Marci R. Chapman 75,000.00
David N. Johnson and
40,000 Rachael Johnson 30,000.00
133,333 The Achieve Fund, L.P. 100,000.00
133,333 Morrison Family Trust 100,000.00
133,333 The Kristan Sundell Family Trust 100,000.00
133,333 The Kenneth Stewart Family Trust 100,000.00
The John M. Kinker Revocable
133,333 Trust dated 12/23/96 100,000.00
40,000 Kevin and Michelle Miller Trust 30,000.00
40,000 Heath Johnston 30,000.00
36,000 Leo T. Neilsen & Judy F. Neilsen 27,000.00
64,469 Marcus L. Peterson 48,351.50
24,000 Lurlen A. Knight 18,000.00
13,333 Richard M. Knudson 10,000.00
35,333 Rick Jackson 26,500.00
Avenue Dental Pension Trust Fund,
100,000 Ed J. Pinegar, Trustee 75,000.00
26,700 Robert W. Bennie 20,025.00
Jacob C. Fish
160,702 Chris M. Allison 120,526.50
78,000 John Paskett 58,500.00
40,000 SJR Projects, LLC 30,000.00
Shares of
Micropoint, Inc.
Common Stock
44,866 Patricia Fish 5,000
68,559 Gregory M. Fish 7,500
68,559 Ryan A. Fish 7,500
67,225 Marci L. Fish 7,357
68,559 David & Julia F. Thompson 7,500
68,559 Heath and Lori F. Birchall 7,500
68,559 Keri F. Burrows 7,500
68,559 Marshall S. Blackham 7,500
68,559 Todd K. Hewlett 7,500
35,893 Lori F. Birchall C/F Candace Fish 4,000
35,893 Lori F. Birchall C/F Kevin Fish 4,000
33,333 Douglas M. Odom 5,000
33,333 Thomas E. Danielson 5,000
9,333 Jacob C. Fish 1,000
Shares of
Linco
Common Stock
2,371,450 Douglas R. and Linda Warren 1,000
2,371,450 Charles L. and Ruth Crittenden 1,000
The Darrell J. and Mary Arlene
2,371,450 Saunders Family Trust 1,000
592,862 Edward B. and Cheri F. Walker 250
284,574 Barry L. Johnson 120
514,605 DeVerl Byington Family Trust 217
182,602 E. Robert and J. Joann Rauzi 77
21,343 David Johnson 9
87,744 Dennis Charlton 37
169,781 Richard F. Riesenfeld $58,049 in
convertible debt
66,667 Patricia B. Fish $50,000 in
conversion of
short-term
___________
11,634,520 TOTAL SHARES OF COMPANY COMMON STOCK SOLD
===========
</TABLE>
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Selected Financial Data
The following selected financial data of the Company as of December
31,1998 and 1997 and cumulative from April 30, 1990 (Date of Inception)
are derived from, and are qualified by reference to, the financial
statements of the Company, included elsewhere in this Form 10-KSB. The
information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," the Financial Statements and Notes thereto and other
financial information included elsewhere in this Form 10-KSB.
Cumulative from
April 30, 1990
The Years Ended (Date of Inception)
December 31, Through
------------------------- December 31,
1998 1997 1998
----------- ----------- -----------
Revenue $ 83,149 $ 12,907 $ 235,996
Net Income (Loss) (4,280,512) (96,181) (4,762,745)
Basic and Diluted Earnings
(Loss) Per Share (0.33) (0.01) (0.46)
Weighted Average Shares 12,800,937 10,467,581 10,312,299
Cash Dividends Declared Per
Common Share - - -
Summary Consolidated Balance Sheet Data
Working Capital $ 1,348,846 $ (248,896)
Total Assets 1,788,818 49,796
Stockholder's Equity (Deficit) 1,595,208 (322,878)
Accumulated (Deficit) (4,762,745) (482,233)
Financial Position
The following discussion and analysis provides information
which management believes is relevant to an assessment and understanding
of the Company's consolidated results of operations and financial
condition. The discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere
herein.
The reorganization that First Scientific completed in September of
the reporting year, and the related private placement offering, had
significant impact on the financial position of the Company. The Company
is now in a position to access the public equity market to raise
additional funds, if needed in the future, and to use its shares for
prudent acquisition purposes. The cash position of the Company, due to
the private placement, is much improved.
The Company had $1,286,299 in cash as of December 31, 1998. This
represents an increase of $1,278,361 from December 31, 1997. Working
capital as of December 31,1998, increased to $1,348,846, as compared to
negative working capital of $248,896 at December 31,1997. These increases
were largely due to funding from a private placement of securities by the
Company, as more fully described elsewhere in this document. Total assets
amounted to $1,788,818 as of December 31,1998 and $49,796 as of December
31, 1997, while total liabilities were $193,610 as of December 31,1998 and
$372,674 as of December 31, 1997. The Company had an accumulated deficit
of $4,762,745 as of December 31,1998 and $482,233 as of December 31, 1997.
Of the $4,280,512 loss attributable to the current year, $3,766,440 was
for acquired research and development.
Results of Operations
During the twelve months ended December 31, 1998, the Company had
only nominal operating revenues of $83,149, comprised primarily of
product sales, compared with total operating revenues of $12,907 for the
comparable period from the prior year, comprised also primarily of product
sales. Cumulative operating revenue since inception (April 30, 1990)
totaled $235,996. Gross profits for 1998 and 1997 were $28,152 and $4,585,
respectively. However, as of year end 1998, management believes the
Company is in a position, both financially and operationally, to
aggressively generate additional revenues. Its products are FDA compliant
and have been tested to prove they are effective, meet shelf life
requirements and enhance the skin. Since the Company's formulas are
unique and in expanding markets, it anticipates revenues to increase
several fold in 1999.
Prior to June 1998, Company revenues were generated from sporadic
sales of a Linseed oil based soap product and a rash prevention product
created for a distributor who sells this product under a private label to
an over-the-counter customer. First Scientific may continue to sell
product to this distributor, but does not expect the revenue to be
significant. In June 1998,the Company entered into a private label supply
agreement with a multinational distributor of medical and health care
products. This private label transaction is for individual antibacterial
wipes that the customer intends to market globally. The manufacturing of
this product has not been completed as of December 31, 1998, but is
scheduled for March 1999. However, the customer has paid $33,750 down
according to the terms of the transaction. Upon shipment of this order,
this customer has indicated that a larger follow-on order would be
forthcoming. Private label negotiations were completed with a division of
a major U.S. drug company in the first quarter of 1999 for approximately
$750,000 of the Company's dimethicone-based concentrate and related
testing over the following 12 months. More preliminary discussions with
other potentially substantial customers are in process, including a large
international trading company. Management believes gross margin
objectives will be achieved with such sales; however, there is no
guarantee that these negotiations will result in firm sales contracts, or
that potential sales will provide sufficient cash flows necessary to
sustain operations
The Company's usual payment terms for private label customers is 50%
down with an order and the remaining 50% paid before shipment, and net 30
days with customers who purchase its branded products.
Private label agreements, such as those discussed above, create
certain risks for the Company, including (i) reliance on other parties for
sales of products, and, therefore, reliance on the other parties' marketing
ability, marketing plans and credit-worthiness; (ii) if the Company's
products are marketed under other parties' labels, goodwill associated
with use of the products would inure to the benefit of the other parties
rather than the Company; (iii) the Company may have only limited
protection from changes in manufacturing costs and raw materials costs;
and (iv) if the Company is reliant on other parties for all or
substantially all of its sales, the Company may be limited in its ability
to negotiate with such other parties upon any renewals of their
agreements. Management believes these risks are mitigated by initial
market demands, the apparent uniqueness of First Scientific's
formulations, the large existing and expanding markets for its products
and the caliber of customers with which it is negotiating currently.
The Company uses approximately twenty different chemical and
botanical ingredients to formulate its products. Supplies of these
ingredients remain readily available from multiple sources. The Company
currently maintains very good relationships with its suppliers and does
not anticipate problems that would cause the interruption, delay or
unavailability of such ingredients.
General and administrative expenses were $550,449 for the twelve
months ended December 31, 1998, compared with $54,546 for the comparable
period form the prior year. The increase in expenditures between the 1998
and 1997 periods was due to the transition the Company experienced from a
one-person product development entity, with minimal sales, to an
adequately staffed operation of five employees capable of administrating
anticipated growth. Cumulative general and administrative expenses since
inception were $837,332. In September 1998, the Company moved into new
executive office space which appears adequate to meet growth needs for the
foreseeable future. The space previously occupied will be remodeled and
kept for research and development, testing, mixing, record retention and
warehousing.
Research and development expenses were $47,368 for the twelve months
ended December 31, 1998, before acquired research and development costs in
the amount of $3,766,440, compared with $21,029 for the comparable period
from the prior year. The acquired research and development was for the
transfer of all rights and ownership of technology relating to three
scientific formulations. The increase in expenditures between the 1998 and
1997 periods resulted from the refinement of such formulations and
development of new formulations. Net of technology acquisition costs
incurred in previous periods, management expects an increase in research
and development expenses for future periods, as the Company expands and
refines its product offerings and customer base.
Liquidity and Capital Resources
Throughout its existence, the Company has relied principally on cash
from financing activities to provide the funds required for research,
development, marketing and operating activities. Such net cash has been
used principally to fund cumulative net losses of approximately $4,763,000.
Prior to the reorganization on September 15, 1998, the Company had
financed its operations principally through founder loans, private
placements of equity securities and product sales. The Company generated
$1,695,668 in net proceeds through financing activities from inception
through December 31, 1998 of which $1,347,441 was generated during the
twelve months ended December 31, 1998, while $44,020 was generated in
1997. The Company used net cash in operating activities of $284,987
during the year ended December 31, 1998 and $624,555 since inception,
while $63,394 was used in 1997. Investing activities provided $215,907
net cash during the year ended December 31, 1998, primarily from the sale
of marketable securities, while $721 was used in 1997 and a net of
$215,186 cumulatively was provided since inception. The mentioned
securities were received in exchange for common stock and a portion of
these securities were sold immediately upon their receipt. Of the
securities received for the issuance of common stock, the Company has
retained as an investment marketable securities valued at $194,784 and
non-marketable investment securities with a cost basis of $50,000. As of
December 31, 1998, the Company's liabilities totaled $193,610 compared to
$372,674 at December 31,1997. The Company had working capital as of
December 31, 1998 of $1,348,846 compared to a negative working capital on
December 31, 1997 of $248,896.
The Company's working capital and other capital requirements for the
foreseeable future will vary based upon a number of factors, including
expenditures related to continuing research and development, FDA testing
requirements, market development, facilities enhancement, additional
personnel, travel and other costs related to projected growth. Management
is presently projecting cash requirements of approximately $116,000 per
month for the next twelve months. Since the Company lacks experience at
its projected level of activity, this number could change substantially.
Management believes, however, that cash on hand, together with funds
generated from sales, the Company is now in the process of negotiating,
will be sufficient to meet projected operating requirements over the next
twelve months. Should these sales not materialize as anticipated, the
Company may need revenue from sales to customers that have not yet been
identified, bank credit, and/or additional equity capital to meet its
projected capital needs over the next twelve months. There is no
assurance that any sales, presently or yet to be identified, will come to
fruition or that any debt or equity funding will be available to the
Company.
YEAR 2000 (Y2K issues)
The Company uses computers principally for scientific modeling and
calculation, product market research and administrative functions such as
communications, word processing, accounting and management and financial
reporting. The Company's computer system was purchased in September, 1998.
The software utilized by the Company is generally standard "off the shelf"
software, typically available from a number of vendors. While the Company
believes it has taken all appropriate steps to assure year 2000
compliance, it is dependent substantially on vendor compliance. Should
vendor assurances that the Company's systems are 2000 compliant be
incorrect, management believes systems failures would not have a material
adverse impact on its operations. In addition to its own computer
systems, in connection with its business activities, the Company interacts
with suppliers, customers, creditors and financial services organizations
domestically and globally who use computer systems. It is impossible for
the Company to monitor all such systems and there can be no assurances the
failure of such systems would not have a material adverse impact on the
Company's business and operations. Management is currently evaluating
what contingency plans it may adopt in the event the Company, or parties
with whom the Company does business, should experience year 2000 problems.
ITEM 7. Financial Statements
The financial statements are set forth immediately following the
signature page.
ITEM 8. Changes in and disagreements with Accountants on Accounting and
Financial Disclosure
The Company and its auditors have not disagreed on any items of
accounting treatment or financial disclosure.
PART III
ITEM 9. Management and Certain Security Holders
Directors and Executive Officers
The table below sets forth the name, age and positions or offices
of each director and executive officer of First Scientific, Inc. and its
wholly owned subsidiary, First Scientific Corporation. The Board of
Directors and officers of First Scientific, Inc. also serve as the Board
of Directors and Officers of First Scientific Corporation.
Name Age Position
---------------- ---- ----------------------
Douglas R. Warren 65 President and Director
Edward B. Walker 46 Director
Jerral R. Pulley 64 Director
Peter J. Sundwall Jr., M.D. 34 Director
Darrell J. Saunders, D.D.S. 65 Director
Gordon M. Davis 53 Vice President Adm./CFO
Reed Tanner 43 Vice President Operations
Douglas R. Warren has been President of the Company since its
acquisition of Linco Industries, Inc., of which he was one of the
founders. As President of Linco, he directed all aspects of operations
including manufacturing, distribution and sales. Prior to the acquisition
of Linco by the Company, Mr. Warren developed several important business
relationships with suppliers and potential customers.
Edward B. Walker is a native of Ogden, Utah. He graduated from Weber
State University and obtained his PhD in chemistry from Texas Tech
University. After completing a post-doctoral fellowship in the Stanford
University Department of Biochemical Pharmacology, Dr. Walker returned to
Weber State University in 1981, where he is currently a professor of
chemistry and Director of the Utah Center of Excellence for Chemical
Technology. Dr. Walker's basic research interests over the years have
focused on the biochemistry of natural products and their effects on
living systems. In addition, he spends a significant portion of his time
in applied research, helping Utah inventors and corporations develop new
and enhanced products, refine their quality assurance programs, and
improve manufacturing methods. Dr. Walker has been issued various U.S. and
foreign patents for his inventions, ranging from novel drugs derived from
plants to flow cells used in spectrophotometers. Dr. Walker has received
the Utah Governor's Medal for Science and Technology, Weber State
University's Master Teacher Award, and is a Cortez Professor in the Honors
Program at WSU. He has authored many scientific publications and two
university-level chemistry textbooks.
Jerral R. Pulley is an experienced executive skilled at providing
strategic direction, innovative marketing solutions and creating new
streams of business revenue. Mr. Pulley is a partner in the consulting
firm, The Client Synergy Group, and immediately prior to that while in
Boston, he served as Senior Vice President and General Manager of S.C.
Publishing 1995-1997 and 1990-1994 as CEO of Polymerics, a leading
art/craft company with $90 million in revenue. Mr. Pulley's background
includes serving in senior executive roles at several prominent
corporations including: Binnery & Smith (Crayola), as VP Corporate
Development; Ryder, as Senior VP Strategic Planning/Corporate Development;
Bordon, Group VP (Consumer Products Division); Life Savers, EVP; Pepsico,
VP Marketing Planning. Mr. Pulley also spent twelve years at Procter &
Gamble where his last assignment was starting up a Toilet Goods Division
in the United Kingdom.
Mr. Pulley has served on several Boards of Directors and presently is
a Director of The Thorsden Group, Ltd., a software provider in Salt lake
City, and Vice Chairman of the Henry's Fork Foundation, a non-profit
organization concerned with proper watershed stewardship. Mr. Pulley holds
a B.S. from the University of Utah and an MBA from UCLA.
Dr. Peter V. Sundwall Jr., M.D. graduated Cum Laude from the
University of Utah with a degree in Psychology. He went on to earn a
Masters degree in Educational Psychology from the University of Utah. Dr.
Sundwall received his Doctor of Medicine degree from the University of
Utah Medical School where he graduated with Honors in Family Medicine and
received the Golden Cane award for excellence in patient care. Dr.
Sundwal1 completed his Family Practice Residency at St. Peters Hospital in
O1ympia, Washington. Currently he is practicing Family Medicine at
Intermountain Health Care in Highland, Utah.
Dr. Darrel J. Saunders is a native of Ogden, Utah. He graduated
from the University of Nebraska with a D.D.S. degree in 1961. Dr. Saunders
has practiced dentistry in Ogden, Utah since the 1960s. He was a L.C.D.R.
in the Navy Reserve, serving as the Dental Officer for 12 years. Dr.
Saunders was a member of the Ogden City Public Works Advisory Committee
and served twice as a District Chairman for the Boy Scouts. He was a
member of the Executive Committee for the Lake Bonneville Council of the
BSA. He served on the Ogden City Council for 18 years, serving one term as
Assistant Mayor and another as Chairman of the City Council. Dr. Saunders
also was on the Board of Directors for the Utah League of Cities and Towns
and was a member and Chairman of the Board for the Central Weber Sewer
District. He was recently appointed by the mayor of Ogden to serve on the
Sesquicentennial Advisory Committee to help plan the activities for
Ogden's sesquicentennial celebration in 2001.
Gordon M. Davis is Vice President Administration/CFO of the Company.
He received a bachelor of science degree in business management from the
University of Utah and has spent his career in banking, finance and
management consulting. Over the past five years Mr. Davis was president
of Satellite Image Systems, Salt Lake City, Utah in 1992 and 1993 and
President of EE Multimedia, Inc., Salt Lake City, Utah in 1995. During
1996, Mr. Davis was part owner of a solarium company in Salt Lake City,
Utah. During 1997 and 1998, he was a consultant to a real estate development
project in South America and served as an independent business and financial
consultant to other early stage development ventures, including the Company,
which hired him as a full-time employee in August, 1998.
Reed J. Tanner is Vice President of Operations for the Company. From
1993 to May 1996, he was supervisor of US Air Force Ammunition Control
Point, responsible for inventory, location, and logistical support of Air
Force non-nuclear munitions stockpile. Mr. Tanner was employed from June
1996 to September 1996 by BDM Corporation, identifying ozone depleting
chemicals in Air Force maintenance manuals as specified by EPA. From
October 1996 to May 1998, Mr. Tanner was subject matter expert for
technical writing of US Air Force munitions technical manuals for Sverdrup
Technology, ASG. From May 1998 to present, Mr. Tanner has overseen
distribution and regulatory compliance at the Company.
ITEM 10. Executive Compensation
Summary Compensation Table. The following table sets forth, for the
three fiscal years ended December 31, 1998, the compensation paid to the
Company's Chief Executive Officer. No executive officer of the Company
received salary and bonus compensation in excess of $100,000. In December
1998, the Board granted a stock option to the Company's CEO for 120,000
shares of common stock.
Long-term
Annual Compensation Compensation:
----------------------------------
Other Securities
Name and Annual Underlying
Principal Position Year Salary Bonus Compensation Options
------------------ ---- ------- ------ ------------ ----------
Douglas R. Warren 1998 $29,298 $ - $ - 120,000
President, CEO 1997 - - - -
1996 - - - -
Options Grants in the Last Fiscal Year
The following table sets forth the options granted to named executive
officers in the last fiscal year.
% of Options
Granted to
Name and Employees
Principal Options in Exercise Expiration
Position Granted Fiscal Year Price Date
----------------- ---------- ---------- --------- ---------------
Douglas R. Warren 120,000 45% $0.75 December 2003
Aggregated Option Exercises in Last Fiscal Year and Year End Option Values
The following table sets forth the aggregate value of options to acquire
shares on the common stock held by the Chief Executive Officer on December
31, 1998.
Total Number Value of Unexercised
of Options In-the-Money Options at
as of December 31, 1998 December 31, 1998
Name Unexercisable/Exercisable Unexercisable/Exercisable
----------------- ------------------------- -------------------------
Douglas R. Warren 72,000 / 48,000 $ 54,000 / 36,000
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table lists the number of shares of Common Stock
beneficially owned as of December 31, 1998, by each person known by the
Company to be the beneficial owner of more the five percent (5%) of the
Common Stock, by each director of the Company, by the Chief Executive
Officer, and by all officers and directors of the Company as a group.
Unless noted otherwise, each person named has sole voting and investment
power with respect to the shares indicated.
Percentage
Number of of Class
Names of Beneficial Owners Shares Outstanding
-------------------------- ----------- ---------------
Edward B. Walker 5,794,782 28.0%
Douglas R. Warren (1) 2,419,450 11.7%
Darrell J. Saunders 2,374,450 11.5%
Charles L. Crittenden 2,371,450 11.5%
Jehu Hand 1,660,330 8.0%
Jerry Pulley (2) 400,000 1.9%
Peter Sundwall (3) 50,000 .2%
All officers and directors as
a group (7 persons) (4) 11,083,682 53.5%
The percentages set forth above have been computed based on
20,714,770 shares, which is the number of shares of the Common Stock
outstanding and exercisable options held by officers and directors
outstanding as of December 31, 1998.
(1) Includes 48,000 shares issuable upon presently exercisable options
(2) Includes 400,000 share issuable upon presently exercisable options and
options which become exercisable in the next 60 days.
(3) Includes 50,000 shares issuable upon presently exercisable options and
options which become exercisable in the next 60 days.
(4) Includes 546,000 shares issuable upon presently exercisable options and
options which become exercisable in the next 60 days.
ITEM 12. Certain Relationships and Related Transactions
One-year renewable agreements were entered into with two directors of
the Company, one for $10,000 per month, effective August 1, 1998 for
marketing and sales consulting, and one for $7,000 per month, effective
August 1, 1998, for consulting on product research, development and testing.
A note payable with a director/shareholder in the amount of $40,173,
was paid, and notes payable together with accrued interest to shareholders
in the amount of $90,000 were converted to equity without additional
issuance of common stock.
On September 14, 1998, $91,877 of deferred salary payable to the
President/CEO was converted into additional paid in capital without the
issuance of additional common shares.
PART IV
EXHIBITS AND REPORTS
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
Exhibit # Description
2.1 Agreement and Plan of Reorganization, dated August 10, 1998,
between the Registrant, Linco, Linco Acquisition Corp. and
Edward Walker*
3.1 Articles of Incorporation**
3.2 Bylaws**
3.3 Amendment to articles of Incorporation changing name to First
Scientific, Inc. and effecting a forward stock split.*
10.1 Non-qualified Stock Option Agreement with Jerral R. Pulley***
10.2 Non-qualified Stock Option Agreement with Peter Sundwall, M.D.***
10.3 1998 Stock Incentive Plan****
27 Financial data schedule****
______________________
* Incorporated by reference to the same-numbered exhibit to the
form 8-K filed October 2, 1998 by the Company with the
Securities and Exchange Commission.
** Incorporated by reference to the same-numbered exhibit to the
Company's Registration Statement on Form 10-SB, file No. 0-24378.
*** Incorporated by reference to the same-numbered exhibit to the
Form 10-QSB filed November 16,1998 with the Securities and
Exchange Commission.
**** Filed herewith
(b) Reports on Form 8-K
The Company has not filed any report on Form 8-K during the fourth
quarter of 1998; however, it did file a Form 8-K October 2, 1998 and a
Form 8-K/A on October 28, 1998.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
REGISTRANT
FIRST SCIENTIFIC, INC.
Registrant
DATED: March 24, 1999
By: /s/ Douglas R. Warren
________________________________________
Douglas R. Warren, President
DATED: March 24, 1999
By: /s/ Gordon M. Davis
________________________________________
Gordon M. Davis, Vice President
Administration/CFO (Principal
Financial and Accounting Officer)
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants . . . . . . . . F-1
Consolidated Balance Sheets - December 31, 1998 and 1997 . . . . . F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 and for the Cumulative
Period from April 30, 1990 (Date of Inception) through
December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity (Deficit)
for teh Period from April 30, 1990 (Date of Inception)
through December 31, 1996 and for the Years Ended
December 31, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997, and for the Cumulative period
from April 30, 1990 (Date of Inception) through December
31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . F-7
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East 300 South, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
First Scientific, Inc.
We have audited the accompanying consolidated balance sheets of First
Scientific, Inc. and Subsidiary, a development stage enterprise, as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years
ended December 31, 1998 and 1997 and for the cumulative period from April
30, 1990 (date of inception) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Scientific, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended
December 31, 1998 and 1997 and for the cumulative period from April 30,
1990 (date of inception) through December 31, 1998, in conformity with
generally accepted accounting principles.
/S/ Hansen, Barnett & Maxwell
------------------------------
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
January 15, 1999
F-1
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------
1998 1997
---------- ---------
ASSETS
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . $1,286,299 $ 7,938
Investment in securities available-for-sale. . . . 194,784 -
Trade receivables. . . . . . . . . . . . . . . . . 614 8,425
Inventory. . . . . . . . . . . . . . . . . . . . . 26,619 29,881
Prepaid expenses . . . . . . . . . . . . . . . . . 29,356 2,934
---------- ---------
Total Current Assets. . . . . . . . . . . . . . 1,537,672 49,178
---------- ---------
Property and Equipment . . . . . . . . . . . . . . . 95,378 721
Less: accumulated depreciation . . . . . . . . . . (2,982) (103)
---------- ---------
Net Property and Equipment. . . . . . . . . . . 92,396 618
---------- ---------
Purchased Technology, Net. . . . . . . . . . . . . . 108,750 -
Long-Term Investments. . . . . . . . . . . . . . . . 50,000 -
---------- ---------
Total Assets . . . . . . . . . . . . . . . . . . . . $1,788,818 $ 49,796
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . $ 54,334 $ 2,399
Customer deposits. . . . . . . . . . . . . . . . . 33,750 -
Accrued liabilities. . . . . . . . . . . . . . . . 75,979 107,048
Capital lease obligation - current portion . . . . 2,070 81,688
Related party notes payable. . . . . . . . . . . . 22,693 106,939
---------- ---------
Total Current Liabilities . . . . . . . . . . . 188,826 298,074
---------- ---------
Notes Payable . . . . . . . . . . . . . . . . . . . - 74,600
Capital Lease Obligation . . . . . . . . . . . . . . 4,784 -
---------- ---------
Total Long-Term Liabilities . . . . . . . . . . 4,784 74,600
---------- ---------
Stockholders' Equity (Deficit)
Preferred stock - $0.001 par value;
1,000,000 shares authorized;
no shares issued or outstanding . . . . . . . . . - -
Common stock - $0.001 par value; 50,000,000
shares authorized; issued and outstanding:
1998 - 20,169,770 shares, 1997 - 10,467,581
shares. . . . . . . . . . . . . . . . . . . . . . 20,170 10,468
Additional paid-in capital . . . . . . . . . . . . 6,429,114 148,887
Unearned compensation. . . . . . . . . . . . . . . (84,056) -
Accumulated other comprehensive loss . . . . . . . (7,275) -
Deficit accumulated during the
development stage . . . . . . . . . . . . . . . . (4,762,745) (482,233)
---------- ---------
Total Stockholders' Equity (Deficit). . . . . . 1,595,208 (322,878)
---------- ---------
Total Liabilities and Stockholders'
Equity (Deficit). . . . . . . . . . . . . . . . . $1,788,818 $ 49,796
========== =========
The accompanying notes are an integral part of these financial statements.
F-2
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative from
April 30, 1990
(Date of
For the Years Ended Inception)
December 31, Through
----------------------- December 31,
1998 1997 1998
----------- ---------- -----------
Sales $ 83,149 $ 12,907 $ 235,996
Cost of Sales. . . . . . . . . . . . . 54,997 8,322 154,653
----------- ---------- -----------
Gross Profit . . . . . . . . . . . . . 28,152 4,585 81,343
----------- ---------- -----------
Operating Expenses
General and administrative expense. . 550,449 54,546 837,332
Research and development expense. . . 3,813,808 21,029 3,989,550
----------- ---------- -----------
Total Operating Expenses . . . . . 4,364,257 75,575 4,826,882
----------- ---------- -----------
Loss from Operations . . . . . . . . . (4,336,105) (70,990) (4,745,539)
Other Income and (Expense)
Interest income . . . . . . . . . . . 14,682 - 14,682
Interest expense. . . . . . . . . . . (20,970) (25,191) (93,769)
----------- ---------- -----------
Loss Before Income Taxes . . . . . . . (4,342,393) (96,181) (4,824,626)
Benefit from Income Taxes. . . . . . . 61,881 - 61,881
----------- ---------- -----------
Net Loss . . . . . . . . . . . . . . . $(4,280,512) $ (96,181) $(4,762,745)
=========== ========== ===========
Basic and Diluted Loss Per Common
Share. . . . . . . . . . . . . . . . $ (0.33) $ (0.01) $ (0.46)
=========== ========== ===========
Weighted Average Number of Shares
Used in Per-Share Calculation. . . 12,800,937 10,467,581 10,312,299
=========== ========== ===========
Net Loss . . . . . . . . . . . . . . . $(4,280,512) $ (96,181) $(4,762,745)
=========== ========== ===========
Other Comprehensive Loss
Unrealized loss on investment in
securities available-for-sale. . . . (7,275) - (7,275)
----------- ---------- -----------
Comprehensive Loss . . . . . . . . . . $(4,287,787) $ (96,181) $(4,770,020)
=========== ========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION> Deficit
Accumulated
Common Stock Additional Receivable During the Total
------------------------- Paid-In From Development Stockholders'
Shares Amount Capital Shareholders Stage Deficit
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance - April 30, 1990
(Date of Inception) . . . . . . . . - $ - $ - $ - $ - $ -
Issuance for receivable from
shareholder, April 30, 1990,
$0.00 per share . . . . . . . . . . 7,114,350 7,114 7,886 (15,000) - -
Issuance for services:
April 30, 1990, $0.00 per share. . . 2,371,450 2,371 2,629 - - 5,000
January 1993, $0.07 per share. . . . 284,574 285 19,070 - - 19,355
January 1995, $0.02 per share. . . . 2,371,450 2,371 47,629 - - 50,000
Issuance for cash:
October 7, 1993, $0.07 per share . . 514,605 515 34,485 - - 35,000
March 27, 1996, $0.12 per share . . . 83,001 83 9,917 - - 10,000
October 10, 1996, $0.25 per share . . 99,601 100 24,900 - - 25,000
Set off notes receivable from
shareholders against loans
payable to shareholders,
December 31, 1993 . . . . . . . . . . - - - 15,000 - 15,000
Shares redeemed in exchange for
release of personal guarantee
of Company debt, December 31,
1994, $0.00 per share . . . . . . . . (2,371,450) (2,371) 2,371 - - -
Net loss for the period from
April 30, 1990 (Date of
Inception) through December
31, 1996. . . . . . . . . . . . . . . - - - - (386,052) (386,052)
Balance - December 31, 1996. . . . . . 10,467,581 10,468 148,887 - (386,052) (226,697)
Net loss . . . . . . . . . . . . . . . - - - - (96,181) (96,181)
------------ ----------- ----------- ----------- ----------- -----------
Balance - December 31, 1997. . . . . . 10,467,581 10,468 148,887 - (482,233) (322,878)
Stock redeemed in exchange for
release of personal guarantee
of Company debt and upon execution
of license and royalty agreement,
June 1, 1998, $0.00 per share . . . . (1,778,588) (1,779) 1,779 - - -
Issuance for cash:
May 7, 1998, $0.29 per share . . . . 21,343 21 6,229 - - 6,250
July 9, 1998, $0.34 per share. . . . . 87,744 88 29,912 - - 30,000
September through December
1998, $0.75 per share . . . . . . . . 1,860,203 1,860 1,393,293 - - 1,395,153
Conversion of shareholder loans
and a liability for deferred
salaries, September 14, 1998
to capital without issuance
of additional shares . . . . . . . . . - - 181,877 - - 181,877
Issuance to acquire SPPS,
September 15, 1998,
$0.00 per share . . . . . . . . . . . . 3,333,330 3,333 (3,333) - - -
(continued)
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-4
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION> Deficit
Accumulated
Common Stock Additional Receivable During the Total
------------------------- Paid-In From Development Stockholders'
Shares Amount Capital Shareholders Stage Deficit
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance upon conversion of debt:
September 17, 1998, $0.75
per share . . . . . . . . . . . . 66,667 $ 67 $ 49,933 $ - $ - 50,000
September 30, 1998, $0.34
per share . . . . . . . . . . . . 169,781 170 57,880 - - 58,050
Issuance in exchange for
available-for-sale securities,
(less $48,460 deferred income
tax) September 17, and November 18,
1998, $0.75 per share before tax. . . 673,123 673 455,713 - - 456,386
Issuance for cancellation of
royalty agreement and
contribution of technology
(less $13,421 deferred
income tax) September 17,
1998, $0.75 per share . . . . . . . 5,201,920 5,202 3,882,817 - - 3,888,019
Compensation related to
grant of stock options,
September 17, 1998. . . . . . . . . - - 174,194 (174,194) - -
Issuance for restricted
equity securities, November
18, 1998, $0.75 per share . . . . . 66,666 67 49,933 - - 50,000
Amortization of deferred
compensation. . . . . . . . . . . . - - - 90,138 - 90,138
Net Loss . . . . . . . . . . . . . . - - - - (4,280,512) (4,280,512)
Unrealized loss on securities
available-for-sale. . . . . . . . . - - - (7,275) - (7,275)
------------ ----------- ----------- ----------- ----------- -----------
Balance - December 31, 1998. . . . . 20,169,770 $ 20,170 $ 6,429,114 $ (91,331) $(4,762,745) $ 1,595,208
============ =========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-5
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative From
April 30, 1990
(Date of
For the Years Ended Inception)
December 31, Through
---------------------- December 31,
1998 1997 1998
---------- ---------- ----------
Cash Flows From Operating Activities
Net loss. . . . . . . . . . . . . . . . $(4,280,512) $ (96,181) $(4,762,745)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization . . . . 29,129 103 29,232
Shares issued for services. . . . . . - - 74,355
Purchased research & development. . . 3,766,440 - 3,766,440
Amortization of unearned
compensation . . . . . . . . . . . . 90,138 - 90,138
Deferred tax benefit. . . . . . . . . (61,881) - (61,881)
Changes in operating assets and
liabilities:
Accounts receivable. . . . . . . . 7,811 9,656 (614)
Inventory. . . . . . . . . . . . . 3,262 1,491 (26,619)
Prepaid expenses . . . . . . . . . (26,422) 5,670 (29,356)
Accounts payable . . . . . . . . . 52,035 (594) 54,334
Accrued liabilities. . . . . . . . 101,263 16,461 208,411
Customer deposits. . . . . . . . . 33,750 - 33,750
----------- ---------- -----------
Net Cash Used in Operating Activities . (284,987) (63,394) (624,555)
----------- ---------- -----------
Cash Flows From Investing Activities
Payments for equipment. . . . . . . . . (86,940) (721) (87,661)
Proceeds from sale of securities
available-for-sale . . . . . . . . . . 302,847 - 302,847
---------- ----------- -----------
Net Cash Used in Investing Activities . 215,907 (721) 215,186
---------- ----------- -----------
Cash Flows From Financing Activities
Proceeds from borrowing . . . . . . . . 61,050 50,000 255,975
Principal payments on notes payable . . (117,338) (31,050) (155,975)
Proceeds from loans from stockholders . 19,930 25,070 158,934
Principal payments on loans from
stockholders . . . . . . . . . . . . . (46,742) - (63,807)
Principal payment under capital
lease obligation . . . . . . . . . . . (862) - (862)
Proceeds from issuance of
common stock . . . . . . . . . . . . . 1,431,403 - 1,501,403
---------- ----------- -----------
Net Cash Provided by Financing
Activities . . . . . . . . . . . . . . 1,347,441 44,020 1,695,668
---------- ----------- -----------
Net Increase (Decrease) in Cash. . . . . 1,278,361 (20,095) 1,286,299
Cash at Beginning of Period. . . . . . . 7,938 28,033 -
---------- ----------- -----------
Cash at End of Period. . . . . . . . . . $1,286,299 $ 7,938 $ 1,286,299
========== =========== ===========
Supplemental Cash Flow Information - See Note 9
The accompanying notes are an integral part of these financial statements.
F-6
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - On April 30, 1990, Linco Industries, Inc.
(Linco) was incorporated under the laws of the State of Utah. Linco
has developed, manufactured, and distributed a linseed oil
based soap on a very limited basis. More recently, Linco developed
and acquired two scientific formulations: a non-alcohol
based antibacterial sanitizing formulation that removes bacteria
while moisturizing the skin and a topical rash prevention and
treatment formulation that cleanses and moisturizes the skin for
use with incontinent and other skin rash situations.
Reorganization - On September 15, 1998, Linco entered into a
reorganization agreement with SPPS Financial Corporation ("SPPS"),
a publicly held Delaware corporation, whereby a newly-formed,
wholly-owned subsidiary of SPPS was merged into Linco. Under the
terms of the agreement, the Linco shareholders exchanged all of
the 3,710 issued and outstanding shares of common stock of Linco
for 8,798,080 shares of SPPS common stock. SPPS had no assets,
liabilities or operations and had 3,333,330 common shares
outstanding at the date of the agreement. The agreement has been
accounted for as the reorganization of Linco, with a related
2,371.45 -for-1 stock split, and the issuance of 3,333,330 common
shares to the SPPS shareholders. Those shares were recorded at
zero. The accompanying financial statements have been restated for
all periods presented for the effects of the stock split from the
reorganization of Linco. In connection with the reorganization,
SPPS changed its name to First Scientific, Inc. This
reorganization was not deemed to be the acquisition of a business;
accordingly no pro forma information is presented.
Principles of Consolidation - The accompanying consolidated
financial statements include the accounts and transactions of
Linco (now First Scientific Corporation) for all periods presented
and the accounts and transactions of First Scientific, Inc. from
September 15, 1998. Intercompany accounts and transactions have
been eliminated in consolidation. The consolidated entities are
collectively referred to herein as the Company.
Business Condition -Historically, the Company has suffered losses
from operations and has had negative cash flows from operating
activities. Sales of the Company's products have not provided
revenues sufficient to sustain operations. During 1998, the
Company completed a reorganization with SPPS and obtained
$2,000,000 of equity financing. The Company also converted
$181,877 in shareholder loans, deferred salary, and accrued
interest, to capital. The Company's long-term continued existence,
however, is dependent upon its ability to achieve profitable
operations as well as its ability to obtain additional equity
financing. During the year ended December 31, 1998, and
subsequently, the Company has received firm orders for its
products from significant new customers as further described under
"Subsequent Events." Although recent and potential orders do not
guarantee that profitable operations will be obtained or
sustained, management believes these recent orders and other
similar potential sales will provide sufficient cash flows to
sustain operations and that the Company will ultimately establish
profitable operations.
Development Stage Enterprise - Since inception, the Company has
spent most of its efforts in developing and marketing various
products; however, it has not yet had sales sufficient to sustain
operations and has relied upon cash flows from financing
activities (primarily debt and equity issuances) to sustain
operations. Therefore, the Company is considered to be in the
development stage.
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 in these financial statements and accompanying
notes. Actual results could differ from those estimates.
Financial Instruments - The amounts reported as cash, securities
available-for-sale, accounts payable, customer deposits, and
accrued liabilities are considered to be reasonable approximations
of their fair values. The fair value estimates presented herein
were based on market information available to management at the
time of preparation of the financial statements.
Concentration of Risk - The concentration of business with a small
number of customers subjects the Company to a concentration of
risk such that the loss of a customer can significantly effect
revenues. Historically, the Company has relied on sales to a small
group of domestic customers but has not been limited by geographic
region.
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 1998 and 1997, sales totaling
$53,531 or 64% of sales, and $26,506, or 86% of sales,
respectively, were to one customer.
Investments - Investment in marketable equity securities were
categorized as available for sale at December 31, 1998. Available-
for-sale securities are stated at fair value, with unrealixzed
gains and losses, net of deferred income taxes, reported as a
component of accumulated other comprehensive loss. Marketable
equity securities with fair values of $302,847 and $202,059 were
transferred to the Company on September 17, and November 18, 1998,
respectively, in exchange for 673,123 shares of common stock
under the terms of a reorganization agreement which was intended
to be a tax free transfer. Deferred income taxes of $48,460 were
recognized at the dates the securities were received. The Company
immediately sold the securities received on September 17, 1998
for gross proceeds of $302,847, resulting in no gain or loss
being recognized from the sale of securities during 1998. At
December 31, 1998, available-for-sale securities consisted of
the following:
Cost $ 202,059
Gross unrealized losses (7,275)
----------
Estimated Fair Value $ 194,784
==========
Long-term investments at December 31, 1998 consisted of equity
securities restricted from resale until they have been held for
one year. These secutities are stated at cost of $50,000.
Inventory - Inventory is stated at the lower of cost or market.
Cost is determined using the first-in, first-out method.
Property & Equipment - Property and equipment is stated at cost.
Maintenance and repairs of equipment are charged to operations and
major improvements are capitalized. Upon retirement, sale, or
other disposition of equipment, the cost and accumulated
depreciation are eliminated from the accounts and gain or loss is
included in operations. Depreciation is computed using the
straight-line method over the estimated useful lives of the
property and equipment, which are three to seven years.
Depreciation expense was $2,879 and $103 for the years ended
December 31, 1998 and 1997, respectively.
Sales Recognition - Sales are recognized upon shipment of products
to customers. Customers' pre-payments are recorded as a liability
pending completion and shipment of the order.
Research and Development Expense - Current operations are charged
with all research and product development expenses.
Basic and Diluted Loss Per Share - Basic loss per common share is
computed by dividing net loss by the weighted-average number of
common shares outstanding during the period. Diluted loss per
share is calculated to give effect to potentially issuable common
shares except during loss periods when those potentially issuable
common shares would decrease the loss per share. There were
1,315,000 and 0 potentially issuable common shares which were
excluded from the calculation of diluted loss per common share for
the years ended December 31, 1998 and 1997, respectively.
New Accounting Standards - The Financial Accounting Standards
Board issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" and SFAS No. 132, "Employers'
Disclosures About Pensions and Other Post-Retirement Benefits,"
during 1998. These statements, which are effective for fiscal
years beginning after December 15, 1997, expand or modify
disclosures and will have no impact on the Company's consolidated
financial position, results of operations, or cash flows. In March
1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The
Company is currently analyzing the impact of this statement, which
is required to be adopted in 1999, and does not expect it to have
a material impact on the Company's financial position, results of
operations or cash flows.
NOTE 2 - ACQUISITION OF TECHNOLOGY
In connection with the reorganization agreement with SPPS, the
Company issued 5,201,920 shares of common stock valued at
$3,901,440, or $0.75 per share, to a director for the transfer of
all rights and ownership of technology relating to three scientific
formulations and the cancellation of the Company's obligation
under a royalty agreement relating to the use of the technology.
The value of the contributed technology was determined based upon
the fair value of common stock issued for cash following the
reorganization with SPPS. The scientific formulations were
developed by the director and the Company and the common shares
were issued to fully transfer the director's interest in the
technology to the Company. The technology relates to two non-alcohol
based antibacterial sanitizing formulations that remove bacteria
while moisturizing the skin and a dimethicone-based topical rash
prevention and treatment formulation that cleanses and moisturizes
the skin for treatment of skin rashes caused by incontinence and
other irritations. The technology was in process except for one
formulation valued at $130,000. The cost of the completed
technology was capitalized and is being amortized over a period of
18 months. In process technology was valued at $3,766,440 and was
charged to operations at the date acquired.
NOTE 3 - NOTES PAYABLE TO RELATED PARTIES
Since inception, the Company has relied on funds advanced by
shareholders to meet its obligations and fund its development
activities. These advances have been classified as related party
notes payable and accrue interest at the rate of 10% per year.
Notes payable to related parties were $22,693 and $106,939 at
December 31, 1998 and 1997, respectively. During September 1998,
the shareholders converted $90,000 of outstanding notes payable,
together with accrued interest, to additional paid-in capital.
NOTE 4 - NOTES PAYABLE
December 31,
----------------------
1998 1997
-------- ---------
Notes payable to banks, interest from 10.5%
to 10.75%, guaranteed by shareholders, unsecured. . $ - $ 106,288
Convertible note payable to an individual, interest
at 19.5%, due November 1998, converted along with
accrued interest into 169,781 shares of common
stock during September 1998. . . . . . . . . . . . . - 50,000
------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . - 156,288
Less Current Portion Due . . . . . . . . . . . . . . - 81,688
------- --------
Long-Term Notes Payable. . . . . . . . . . . . . . . $ - $ 74,600
======= ========
Line of Credit - The Company had a $10,000 line of credit from a
bank with interest of 10.75%. The principal balance as of December
31, 1997 was $9,150, and is included in notes payable to banks
listed above. The note was due March 26, 1998, was subsequently
renewed and increased in the amount of $11,050 during July 1998
and was fully repaid and closed during September 1998.
Short-Term Advance - During August 1998, an investor advanced
$50,000 to the Company to meet current expenses. During September,
the advance was converted into 66,667 shares of common stock at
$0.75 per share.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Capital and Operating Leases - During 1998, the Company entered
into operating lease agreements to lease office space and a
copier, and a capital lease agreement for computer equipment. The
office lease is for a two-year term, is renewable on an annual
basis, and currently requires lease payments of $2,576 per month
with annual escalations equal to the lesser of the change in the
consumer price index or 5%. The copier lease is for 36 months with
monthly payments of $146. The capital lease is for a three-year
term requiring monthly payments of $294. The future minimum lease
payments for these leases at December 31, 1998 are as follows:
For the Year Ending
December 31, Capital Operating
------------- ------- ---------
1999 $ 3,523 $ 22,181
2000 3,523 15,476
2001 2,349 1,275
------- ---------
Total Minimum Payments 9,395 $ 38,932
------- =========
Less amount representing interest $ 2,541
-------
Present value of net minimum
lease payments $ 6,854
=======
Unasserted Claim - Subsequent to December 31, 1998, on January 5,
1999 the Company was advised of an unasserted claim against it as
a result of a 1991 Agreement in Principle (the "Agreement"). The
Agreement purported to promise stock in Linco Industries, Inc. to
an individual if certain conditions were met in representing the
Company to potential customers. No legal proceeding has been
filed with respect to this claim and the Company has entered into
negotiations to resolve the matter. However, management of the
Company maintains the Agreement is no longer valid because the
conditions in the Agreement were not met within a reasonable time
and because of the failure of other terms. Additionally, due to an
indemnification clause in the reorganization agreement with SPPS,
the former shareholders of Linco are required to satisfy
obligations of Linco incurred prior to the reorganization.
Consequently the Company will require the responsibility of any
settlement resulting from the Agreement to be satisfied by former
shareholders of Linco.
NOTE 6 - COMMON STOCK
On April 30, 1990, the Company issued 7,114,350 common shares in exchange
for promissory notes from shareholders in the amount of $15,000.
Concurrently, 2,371,450 common shares, valued at $5,000 based upon the
value of the promissory notes, were issued for legal and accounting
services. The founding shareholders thereafter made loans to the Company
to fund operations. On December 31, 1993, the notes receivable from
shareholders were set off against notes payable to the shareholders.
On January 20, 1993, the Company issued 284,574 shares of common stock
valued at $19,355 in exchange for laboratory and technical services
provided to the Company. The shares were valued at $0.07 per share based
upon the value of an outside private placement on October 7, 1993 in which
514,605 common shares were issued in exchange for cash in the amount of
$35,000, or $0.07 per share.
During 1994, the Company redeemed 2,371,450 common shares in exchange for
the release by a bank of an original shareholder's personal guarantee of
$75,000 in notes payable. The shares were valued at zero. There were no
unstated rights or privileges in connection with this transaction. On
January 20, 1995, the Company issued 2,371,450 common shares for technical
and director services, as well as for compensation relating to a new
shareholder's personal guarantee of notes payable. The Company determined
the fair value of the services provided to be $50,000.
The Company issued 83,001 and 99,601 common shares to a private investor
for cash proceeds of $10,000 and $25,000, or $0.12 and $0.25 per share on
March 27, and October 10, 1996, respectively. On May 7, 1998, an
additional 21,343 common shares were issued in a private placement for
cash in the amount of $6,250.
On June 1, 1998, the Company redeemed 1,778,588 common shares from an
individual who had served on the Board of Directors and had developed
certain technology for use by the Company, including the primary formulas
used by the Company in its products. The Company also obtained the
release of the individual's personal guarantee of Company debt. The
common stock was also redeemed in exchange for the release by the Company
of any ownership claim it may have had to certain technology. The
technology was deemed worthless at that time and the common stock had no
significant value. The individual vacated his position on the board of
directors. Whether the transferred technology had any value was in
question. Accordingly, the shares redeemed were valued at zero and no gain
was recognized on the transfer of the technology. There were no unstated
rights or privileges associated with the redemption. In connection with
the redemption, the Company entered into a license and royalty agreement
with the individual which provided the Company with the use of the
technology. The royalty agreement granted a 25% gross profits interest in
the products the Company sells which are based upon the formulas. The
agreement also provided for a minimum annual royalty of $60,000 regardless
of the Company's sales volume. However, the Company did not anticipate
future sales of products which were subject to the royalty agreement and
therefore did not recognize a liability under the royalty agreement.
Independent of the above redemption and because of the cash investment in
common stock by a third party, on September 15, 1998, in compliance with
the third party's request, the individual came back to being a member of
the board of directors, terminate the license and royalty agreement and
transferred the entire ownership of the formulas and associated technology
to the Company, all in exchange for 5,201,920 common shares. The
technology, and the shares issued, were valued at $3,888,019 net of
deferred taxes of $13,421, or $0.75 per share as further described in
Note 2.
On July 9, 1998, the Company issued 87,744 shares of common stock to a
private investor for $30,000 in cash or $0.34 per share.
On September 15, 1998, for accounting purposes, the Company was deemed to
have issued 3,333,330 common shares, valued at $0, to the shareholders of
SPPS in connection with the reverse acquisition of SPPS. No assets were
received nor were any liabilities assumed in connection with this
acquisition.
On September 14, 1998, related party notes payable together with accrued
interest in the amount of $90,000 and $91,877 of deferred salary were
converted into additional paid-in capital without the issuance of
additional shares. No unstated rights or privileges were granted in
connection with these contributions to capital.
In contemplation of the reorganization of the Company, an advance in the
amount of $50,000 was received from an investor on August 6, 1998 in order
to meet short-term expenses. The advance was converted into 66,667 shares
of common stock at $0.75 per share on September 17, 1998.
The Company issued 169,781 shares of common stock at $0.34 per share on
September 30, 1998 upon conversion of a $50,000 convertible note payable,
together with interest in the amount of $8,050. The note was convertible
at the rate on the date that an outside investment of more than $25,000
was received by the Company. Such an outside investment occurred during
July 1998 at $0.34 which established the conversion price of the note. No
beneficial conversion feature is ascribed to the conversion because at the
measurement date the rate per share was not priced below market.
The Company issued 1,860,203 shares of common stock in a private placement
offering for cash proceeds of $1,395,153 or $0.75 per share from September
through December 1998.
On September 17, and November 18, 1998, the Company issued 403,796 and
269,327 shares of common stock in exchange for securities
available-for-sale valued at $254,387 net of deferred tax and $201,999,
respectively. The shares were shares issued at $0.75 per share before
deferred income tax of $48,460. Additionally, the Company issued 66,666
shares of common stock at $0.75 per share in exchange for restricted
securities valued at $50,000 on November 18, 1998.
NOTE 7 - OTHER EQUITY ADJUSTMENTS
Other equity adjustments include deferred compensation from stock
options granted in 1998 which vest through 2000 and accumulated
other comprehensive loss relating to unrealized loss on investment
in securities available-for-sale. Changes in equity adjustments
for the year ended December 31, 1998 were as follows:
Accumulated Total
Other Other
Deferred Comprehensive Equity
Compensation Loss Adjustments
---------- ---------- ----------
Balance - December 31, 1997 $ - $ - $ -
Compensation from grant
of stock options (174,194) - (174,194)
Amortization of deferred
compensation 90,138 - 90,138
Unrealized loss on investment in
securities available-for-sale - (7,275) (7,275)
---------- ---------- ----------
Balance - December 31, 1998 $ (84,056) $ (7,275) $ (91,331)
========== ========== ==========
NOTE 8 - STOCK OPTIONS
On September 30, 1998, the Company granted stock options to two
outside directors to purchase a total of 1,050,000 shares of
common stock at $0.75 per share. The options vest according to a
schedule over three years and expire September 30, 2003. Options
to purchase 125,000 shares were exercisable at September 30, 1998.
The options granted were valued at their fair value of $174,194 on
the grant date, which amount will be recognized by the Company as
the options vest. Accordingly, $90,138 was charged to operations
during the year ended December 31, 1998. The Company will
recognize $61,936 and $22,120 as a charge to operations during the
years ending December 31, 1999 and 2000, respectively.
The fair value of the options was determined by using the
Black-Scholes option-pricing model with the following assumptions:
dividend yield of 0.0%, expected volatility of 0.0%, risk-free
interest rate of 5.0% and expected life of 5 years. The expected
volatility was assumed to be 0.0% because, at the grant date, the
Company was a privately held enterprise and there was no market
for its common stock.
The Board of Directors approved the 1998 Stock Option Plan (the
"Plan") during December 1998, which authorized options to purchase
2,500,000 shares of common stock. Options to purchase 265,000
common shares were granted under the Plan on December 31, 1998,
with an exercise price of $0.75 per share. The options become
exercisable from the date granted through December 31, 2002. The
unexercised options expire on December 31, 2007.
A summary of the status of the Company's stock options as of
December 31, 1998 and changes during the year then ended are
presented below:
Weighted-Average
Shares Exercise Price
---------- ---------------
Outstanding at beginning of year. . . . . - $ -
Granted . . . . . . . . . . . . . . . . . 1,315,000 0.75
----------
Outstanding at end of year . . . . . . . 1,315,000 0.75
==========
Options exercisable at end of year. . . . 221,000 0.75
==========
Weighted-average fair value of
options granted during the year . . . . $ 0.13
======
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices At 12/31/98 Contractual Life Exercise Price At 12/31/98 Exercise Price
-------- ----------- ----------------- ---------------- ----------- ----------------
<C> <C> <C> <C> <C> <C>
$0.75 1,315,000 6.0 years $0.75 221,000 $0.75
</TABLE>
The Company measures compensation to employees under stock-based
options and plans using the intrinsic value method prescribed in
Accounting Principles Board Opinion 25, Accounting for Stock
Issued to Employees, and related interpretations. Compensation for
options to outside directors is measured using the fair value
method set forth under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation". Stock-based
compensation charged to operations was $0 and $90,138 for the year
ended December 31, 1998 from options granted to employees and to
outside directors, respectively. Had compensation cost for the
Company's options been determined based on the fair value at the grant
dates consistent with the alternative method set forth under Statement
of Financial Accounting Standards No. 123, net loss and loss per
share would have increased to the pro forma amounts indicated below:
Cumulative
From April 30,
1990 (Date of
Inception
For the Years through
Ended December 31, December 31,
1998 1997 1998
------------ ---------- ------------
Net loss:
As reported . . . . . . . . . $ (4,280,512) $ (96,181) $ (4,762,745)
Pro forma . . . . . . . . . . (4,390,379) (96,181) (4,872,612)
Basic and diluted loss per share:
As reported. . . . . . . . . $ (0.33) $ (0.01) $ (0.46)
Pro forma. . . . . . . . . . (0.34) (0.01) (0.47)
NOTE 9 - CASH FLOW INFORMATION
Supplemental Cash Flow Information - Interest was paid in the
amount of $17,516 and $12,474 during the years ended December 31,
1998 and 1997, respectively.
Noncash Investing and Financing Activities - During the years
ended December 31, 1998 and 1997, the Company deferred
compensation to employees of $57,000 and $10,225, respectively.
For the period from April 30, 1990 through December 31, 1997, the
Company deferred compensation to employees in the amount of $83,877.
During the year ended December 31, 1993, the Company set off
receivables from the stockholders in the amount of $15,000 against
related party notes payable in the same amount.
An advance from an investor in the amount of $50,000 was converted
into 66,667 shares of common stock on September 17, 1998.
On September 14, 1998, accrued expenses of $91,877 for deferred
salaries and related party notes payable together with accrued
interest in the amount of $90,000 were converted into additional
paid-in capital without the issuance of additional shares.
On September 15, 1998, the Company issued 5,201,920 shares of
common stock in exchange for the rights to technology valued at
$3,901,440 and the cancellation of a license and royalty agreement
central to the Company's products.
On September 15, 1998, for accounting purposes, the Company was
deemed to have issued 3,333,330 common shares, valued at $0, to
the shareholders of SPPS in connection with the reverse
acquisition of SPPS. No assets were received nor were any
liabilities assumed in connection with this acquisition.
On September 30, 1998, the Company issued 169,781 common shares
upon the conversion of a $50,000 note payable together with
accrued interest in the amount of $8,050. During and September and
December 1998, the Company issued 673,123 shares of common stock
in exchange for $456,386 of securities available-for-sale, net of
deferred tax. During December 1998 the Company issued 66,666 shares
of common stock in exchange for $50,000 of restricted equity securities.
During October 1998 the Company purchased computer equipment and
incurred a capital lease obligation in the amount of $7,716.
NOTE 10 - INCOME TAXES
The following presents the components of the net deferred tax
asset at December 31, 1998:
Purchased technology amortization . . . . . . . . . . $ 40,564
Difference in fair value and tax basis of
contributed securities . . . . . . . . . . . . . . . 89,762
---------
Total Deferred Tax Liabilities. . . . . . . . . . 130,326
---------
Operating loss carry forwards . . . . . . . . . . . . . . (224,793)
Unrealized loss on investment in securities
available-for-sale . . . . . . . . . . . . . . . . . (2,713)
---------
Total Deferred Tax Assets . . . . . . . . . . . . (227,506)
---------
Valuation allowance for deferred tax assets . . . . . 97,180
---------
Net Deferred Tax Asset. . . . . . . . . . . . . . . . $ -
=========
The valuation allowance for deferred tax assets increased by $120,889
and $35,829 during the years ended December 31, 1998 and 1997, net of
$185,206 reductions from deferred taxes on acquisitions during the year
ended December 31, 1998. At December 31, 1998, the valuation allowance
included $2,713 for which subsequently recognized tax benefits will be
allocated to unrealized loss on investment in securities available-for-sale.
The Company has U.S. Federal net operating loss carry forwards of $602,663
at December 31, 1998 which expire, if unused, in years 2013 through 2014.
The benefit from income taxes consisted of the following for the years ended
December 31, 1998 and 1997:
1998 1997
---------- ----------
Deferred Tax Benefit
Federal. . . . . . . . . . . . . . . . $ 53,586 $ -
State. . . . . . . . . . . . . . . . . 8,295 -
---------- ----------
Benefit from Income Taxes . . . . . . . $ 61,881 $ -
========== ==========
The following is a reconciliation of the income tax benefit
computed at the federal statutory tax rate with the provision for
income taxes for the years ended December 31, 1998 and 1997:
1998 1997
----------- ----------
Income tax benefit at statutory rate (34%). . . $ 1,476,414 $ 32,702
Non deductible expenses, primarily
purchased research and development . . . . . . (1,439,649) (48)
Change in valuation allowance . . . . . . . . . (118,186) (35,829)
State benefit, net of federal tax . . . . . . . 143,302 3,175
----------- ----------
Benefit from Income Taxes . . . . . . . . . . . $ 61,881 $ -
=========== ==========
NOTE 11-SUBSEQUENT EVENTS (Unaudited)
During February 1999, the Company completed negotiations with a customer
for the sale of Dimethicone-based concentrate and testing by the Company
of products to be manufactured by the customer. Resulting revenues of
approximately $750,000, are anticipated over the following 12 months.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet as of December 31, 1998, and statements of operations for the twelve
months ended December 31, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,286,299
<SECURITIES> 194,784
<RECEIVABLES> 614
<ALLOWANCES> 0
<INVENTORY> 26,619
<CURRENT-ASSETS> 1,537,672
<PP&E> 95,378
<DEPRECIATION> (2,982)
<TOTAL-ASSETS> 1,788,818
<CURRENT-LIABILITIES> 188,826
<BONDS> 0
0
0
<COMMON> 20,170
<OTHER-SE> 1,575,038
<TOTAL-LIABILITY-AND-EQUITY> 1,788,818
<SALES> 83,149
<TOTAL-REVENUES> 97,831
<CGS> 54,997
<TOTAL-COSTS> 4,364,257
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,970
<INCOME-PRETAX> (4,342,393)
<INCOME-TAX> (61,881)
<INCOME-CONTINUING> (4,280,512)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,280,512)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
FIRST SCIENTIFIC, INC.
1998 STOCK INCENTIVE PLAN
1. PURPOSE. This 1998 Stock Incentive Plan (the "Plan") is intended to
provide incentives: (a) to the officers and other employees of First
Scientific, Inc., a Delaware corporation (the "Company"), and any present
or future subsidiaries of the Company (individually, a "Related
Corporation" and collectively "Related Corporations") by providing them
with opportunities to purchase stock in the Company pursuant to options
granted hereunder that qualify as "incentive stock options" under Section
422A(b) of the Internal Revenue Code of 1986, as amended (the "Code")
(individually an "ISO" and collectively "ISOs"); (b) to directors,
officers, employees and consultants of the Company and Related
Corporations by providing them with opportunities to purchase stock in the
Company pursuant to options granted hereunder that do not qualify as ISOs
(individually a "Non-Qualified Option" and collectively "Non-Qualified
Options"); (c) to directors, officers, employees and consultants of the
Company and Related Corporations by providing them with awards of stock in
the Company ("Awards"); and (d) to directors, officers, employees and
consultants of the Company and Related Corporations by providing them with
opportunities to make direct purchases of stock in the Company
("Purchases"). Both ISOs and Non-Qualified Options are referred to
hereinafter individually as an "Option" and collectively as "Options".
Options, Awards and authorizations to make Purchases are referred to
hereinafter collectively as "Stock Rights". As used herein, the terms
"parent" and "subsidiary" mean "parent corporation" and "subsidiary
corporation", respectively, as those terms are defined in Section 425 of
the Code.
2. ADMINISTRATION OF THIS PLAN.
(a) Board or Committee Administration. This Plan shall be
administered solely by the Company's Board of Directors (the "Board") or
by a Compensation Committee (the "Committee") consisting of not less than
two (2) members appointed by the Board, provided the members of the Board
or such Committee members have not within one year prior to such Committee
service received, or during such service receive, a grant or award of
Stock Rights under this Plan or any other plan of the Company.
Hereinafter, all references in this Plan to the "Committee" shall mean the
Board if no Committee has been appointed. Subject to ratification of the
grant or authorization of each Stock Right by the Board (if so required by
applicable state law), and subject to the terms of this Plan, the
Committee shall have the authority to (i) determine the employees of the
Company and Related Corporations (from among the class of employees
eligible under Section 3 below to receive ISOs) to whom ISOs may be
granted, and to determine (from among the class of individuals and
entities eligible under Section 3 below to receive Non-Qualified Options
and Awards and to make Purchases) to whom Non-Qualified Options, Awards
and authorizations to make Purchases may be granted; (ii) determine the
time or times at which Options or Awards may be granted or Purchases made;
(iii) determine the option price of shares subject to each Option, which
price shall not be less than the minimum price specified in Section 6
below, and the purchase price of shares subject to each Purchase; (iv)
determine whether each Option granted shall be an ISO or a Non-Qualified
Option; (v) determine (subject to Section 7 below) the time or times when
each Option shall become exercisable and the duration of the exercise
period; (vi) determine whether restrictions such as repurchase options are
to be imposed on shares subject to Options, Awards and Purchases and the
nature of such restrictions, if any; and (vii) interpret this Plan and
prescribe and rescind rules and regulations relating to this Plan. If the
Committee determines to issue a Non-Qualified Option, the Committee shall
take whatever actions it deems necessary under Section 422A of the Code
and the regulations promulgated thereunder, to ensure that such Option is
not treated as an ISO. The interpretation and construction by the
Committee of any provisions of this Plan or of any Stock Right granted
under this Plan shall be final unless otherwise determined by the Board.
The Committee may from time-to-time adopt such rules and regulations for
carrying out this Plan as it may deem appropriate. No member of the Board
or of the Committee shall be liable for any action or determination made
in good faith with respect to this Plan or any Stock Right granted under
this Plan.
(b) Committee Actions. The Committee may select one of its
members as its chairman, and shall hold meetings at such times and places
as it may determine. Acts by a majority of the Committee, or acts reduced
to or approved in writing by a majority of the members of the Committee,
shall be the valid acts of the Committee. From time-to-time the Board may
increase the size of the Committee and appoint additional members thereof,
may remove members (with or without cause) and may appoint new members in
substitution therefor, fill vacancies (however caused), or remove all
members of the Committee and thereafter directly administer this Plan.
(c) Grant of Stock Rights to Board Members. Stock Rights may be
granted to members of the Board, but any such grant shall be made and
approved in accordance with Section 2(d) below, if applicable. All grants
of Stock Rights to members of the Board shall in all other respects be
made in accordance with the provisions of this Plan applicable to other
eligible persons. Members of the Board who are either (i) eligible for
Stock Rights pursuant to this Plan or (ii) have been granted Stock Rights
may vote on any matters affecting the administration of this Plan or the
grant of any Stock Rights pursuant to this Plan, except that no such
member shall act upon the granting to himself or herself of Stock Rights,
but any such member may be counted in determining the existence of a
quorum at any meeting of the Board during which action is taken with
respect to the granting to him or her of Stock Rights.
(d) Compliance with Federal Securities Laws. Various restrictions
apply to officers and directors and others who may be deemed insiders.
Holders of Stock Rights should consult with their legal and tax advisors
regarding the securities law, tax law and other effects of transactions
under this Plan. These restrictions relate to holding periods,
alternative minimum tax calculations and other matters and should be
clearly understood by the holders of Stock Rights.
(e) Intent of Plan. This Plan is intended to be an
"employee benefit plan" under Rule 16b-3 promulgated under Section 16(b)
of the Securities Exchange Act of 1934, as amended (the "1934 Act"). This
Plan is also intended to be a "compensatory benefit plan" under Rule 701
promulgated under the Securities Act of 1933, as amended. Transactions
under this Plan are intended to comply with said Rules and counterpart or
similar provisions of state securities laws and regulations where
applicable. To the extent any provisions of this Plan or any action by
the Committee or of the Board fails to so comply, each provision(s) and
action(s) shall be deemed to be null and void, to the extent permitted by
applicable law and as deemed advisable by the Commission, state securities
regulators or the Board.
(f) Shareholder Approval. Grants of incentive stock options
(but not of Non-Qualified Options) hereunder shall be subject to
shareholder approval of this Plan within twelve (12) months following the
date this Plan is approved and adopted by the Board.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted to any employee
of the Company or any Related Corporation. Any officer or director of the
Company who is not also an employee of the Company may not be granted ISOs
under this Plan. Non-Qualified Options, Awards and authorizations to make
Purchases may be granted to any employee, officer or director (whether or
not such person is also an employee of the Company) or to consultant to
the Company or any Related Corporation. The Committee may take into
consideration a recipient's individual circumstances in determining
whether to grant an ISO, a Non-Qualified Option, an Award or an
authorization to make a Purchase. The granting of a Stock Right to any
individual or entity shall neither entitle that individual or entity to,
nor disqualify that individual or entity from, participation in any other
grant of Stock Rights.
4. STOCK. The stock subject to Options, Awards and Purchases shall be
authorized but unissued shares of Common Stock of the Company, par value,
$0.001 per share (the "Common Stock"), or shares of Common Stock
reacquired by the Company in any manner. The aggregate number of shares
that may be issued pursuant to this Plan is two million five hundred
thousand (2,500,000), subject to adjustment as provided in Section 13
below. Any such shares may be issued as ISOs, Non-Qualified Options or
Awards or to individuals or entities making Purchases, so long as the
number of shares so issued does not exceed such number, as adjusted. If
any Option granted under this Plan shall expire or terminate for any
reason without having been exercised in full or shall cease for any reason
to be exercisable in whole or in part, or if the Company shall reacquire
any unvested shares issued pursuant to Awards or Purchases, the
unpurchased shares subject to such Options and any unvested shares so
reacquired by the Company shall again be available for grants of Stock
Rights under this Plan.
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under this
Plan at any time until ten years after the date of the approval and
adoption of this Plan by the Board. The date of grant of a Stock Right
under this Plan will be the date specified by the Committee at the time it
grants the Stock Right; provided, however, that such date shall not be
prior to the date on which the Committee acts to approve the grant. The
Committee shall have the right, with the consent of the optionee, to
convert an ISO granted under this Plan into a Non-Qualified Option
pursuant to Section 16 below.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
(a) Price for Non-Qualified Options. The exercise price per share
specified in the agreement relating to each Non-Qualified Option granted
under this Plan shall in no event be less than the lesser of (i) the book
value per share of the Common Stock as of the end of the fiscal year of
the Company immediately preceding the date of such grant or (ii) fifty
percent (50%) of the fair market value per share of the Common Stock on
the date of such grant. Subject to the foregoing sentence, the exercise
price and nature of consideration for Non-Qualified Options granted
hereunder shall be determined by the Committee or the Board in its sole
discretion, taking into account factors it deems relevant.
(b) Price for ISOs. The exercise price per share specified in the
agreement relating to each ISO granted under this Plan shall not be less
than the fair market value per share of the Common Stock on the date of
such grant. In the case of an ISO to be granted to an employee owning
stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of any Related
Corporation, the price per share specified in the agreement relating to
such ISO shall not be less than one hundred ten percent (110%) of the fair
market value per share of the Common Stock on the date of grant.
(c) $100,000 Annual Limitation on ISOs. Each eligible employee
may be granted ISOs only to the extent that (in the aggregate under this
Plan and all incentive stock option plans of the Company and any Related
Corporation), such ISOs do not become exercisable for the first time by
such employee during any calendar year in a manner that would entitle the
employee to purchase more than $100,000 in fair market value (determined
at the time the ISOs were granted) of the Common Stock in that calendar
year. Any options granted to an employee in excess of that amount will be
granted as Non-Qualified Options.
(d) Awards and Purchases. Awards and Purchases under this
Plan shall be made at prices equal to the fair market value of the Common
Stock on the date of such Award or Purchase. Fair market value shall be
determined by the Committee or the Board in its sole discretion in
accordance with Section 6(e) below. Shares of Common Stock may be issued
in Award and Purchase transactions for any lawful consideration determined
by the Committee or the Board in its sole discretion.
(e) Determination of Fair Market Value. If, at the time an
Option is granted under this Plan, the Company's Common Stock is publicly
traded, "fair market value" shall be determined as of the last business
day for which the prices or quotes discussed in this sentence are
available prior to the date such Option is granted and shall mean (i) the
average (on that date) of the high and low prices of the Common Stock on
the principal national securities exchange on which the Common Stock is
traded, if the Common Stock is then traded on a national securities
exchange; or (ii) the last reported sale price (on that date) of the
Common Stock on the NASDAQ National Market List, if the Common Stock is
not then traded on a national securities exchange; or (iii) the closing
bid price (or average of bid prices) last quoted (on that date) by an
established quotation service for over-the-counter securities, if the
Common Stock is not reported on the NASDAQ National Market List. However,
if the Common Stock is not publicly-traded at the time an Option is
granted under this Plan, "fair market value" shall be deemed to be the
fair value of the Common Stock as determined by the Committee or the Board
in its sole discretion, after taking into consideration all factors that
it deems appropriate, including, without limitation, recent sale and offer
prices of the Common Stock in private transactions negotiated at arm's
length.
7. OPTION DURATION. Subject to earlier termination as provided in
Sections 9 and 10 below, each Option shall expire on the date specified by
the Committee or the Board, but not more than (i) ten (10) years and one
(1) day from the date of grant in the case of Non-Qualified Options, (ii)
ten (10) years from the date of grant in the case of ISOs generally and
(iii) five (5) years from the date of grant in the case of ISOs granted to
an employee owning stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or of
any Related Corporation. Subject to earlier termination as provided in
Sections 9 and 10 below, the term of each ISO shall be the term set forth
in the original instrument granting such ISO, except with respect to any
part of such ISO that is converted into a Non-Qualified Option pursuant to
Section 16 below.
8. EXERCISE OF OPTIONS. Subject to the provisions of Sections 9
through 12 below, each Option granted under this Plan shall be exercisable
as follows:
(a) Vesting. The Option shall either be fully exercisable on the
date of grant or shall become exercisable thereafter in such installments
as the Committee or Board may specify.
(b) Full Vesting of Installments. Once an installment becomes
exercisable it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Committee or the Board.
(c) Partial Exercise. Each Option or installment may be exercised
at any time or from time-to-time, in whole or in part, for up to the total
number of shares with respect to which it is then exercisable.
(d) Acceleration of Vesting. The Committee or the Board shall
have the right to accelerate the date of exercise of any installment of
any Option; provided, however, that the Committee or the Board shall not,
without the consent of the optionee, accelerate the exercise date of any
installment of any Option granted to any employee as an ISO (and not
previously converted into a Non-Qualified Option pursuant to Section 16
below) if such acceleration would violate the annual vesting limitation
contained in Section 422A(d) of the Code, as described in Section 6(c) above.
9. TERMINATION OF EMPLOYMENT. If an ISO optionee ceases to be employed
by the Company or any Related Corporation other than by reason of death or
disability as defined in Section 10 below, no further installments of such
optionee's ISOs shall become exercisable, and such optionee's ISOs shall
terminate after the passage of ninety (90) days from the date of
termination of such optionee's employment, but in no event later than on
their specified expiration date(s), except to the extent that such ISOs
(or the unexercised installments thereof) have been converted into
Non-Qualified Options pursuant to Section 16 below. Employment shall be
considered as continuing uninterrupted during any bona fide leave of
absence (such as those attributable to illness, military obligations or
governmental service), provided that the period of such leave does not
exceed ninety (90) days or, if longer, any period during which such
optionee's right to reemployment is guaranteed by statute. A bona fide
leave of absence with the written approval of the Committee or the Board
shall not be considered an interruption of employment under this Plan,
provided that such written approval contractually obligates the Company or
any Related Corporation to continue the employment of the optionee after
the approved period of absence. ISOs granted under this Plan shall not be
affected by any change of employment within the Company or among the
Company and any Related Corporation, so long as the optionee continues to
be an employee of the Company or any Related Corporation. Nothing in this
Plan shall be deemed to give any grantee of any Stock Right the right to
be retained in employment or other service by the Company or any Related
Corporation for any period of time.
10. DEATH; DISABILITY.
(a) Except for ISO optionees, Stock Right optionees shall be
deemed fully vested as of the date of their death or onset of disability.
For purposes of this Plan, the term "disability" shall mean "permanent
and total disability" as defined in Section 22(e)(3) of the Code or any
successor statute. With respect to ISO optionees, the following shall apply:
i) Death. If an ISO optionee ceases to be employed
by the Company or any Related Corporation by reason of such optionee's
death, any ISO of such optionee may be exercised, to the extent of the
number of shares with respect to which the optionee could have exercised
on the date of the optionee's death, by the optionee's estate, personal
representative or beneficiary who has acquired the ISO by will or by the
laws of descent and distribution, at any time prior to the earlier of the
specified expiration date of the ISO or one year from the date of the
optionee's death.
ii) Disability. If an ISO optionee ceases to be
employed by the Company or any Related Corporation by reason of
disability, such optionee (or such optionee's custodian) shall have the
right to exercise any ISO held by such optionee on the date of termination
of employment, to the extent of the number of shares with respect to which
the optionee could have exercised on that date, at any time prior to the
earlier of the specified expiration date of the ISO or one year from the
date of the termination of the optionee's employment. For purposes of
this Plan, the term "disability" shall mean "permanent and total
disability" as defined in Section 22(e)(3) of the Code or any successor
statute.
11. ASSIGNABILITY. No Option or Derivative Security (as that term is
defined in Rule 16b-3 under the 1934 Act) shall be assignable or
transferable by the optionee except as permitted under Rule 16b-3 under
the 1934 Act or by will or by the laws of descent and distribution, and
during the lifetime of the optionee each Option shall be exercisable only
by the optionee.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such form as the Committee or
the Board may approve from time to time. Such instruments shall conform
to the terms and conditions set forth in Sections 6 through 11 above and
may contain such other provisions as the Committee or the Board deems
advisable, which are not inconsistent with this Plan, including, without
limitation, restrictions applicable to shares of the Company's Common
Stock issuable upon exercise of Options. In granting Non-Qualified
Options, the Committee or the Board may specify that Non-Qualified Options
shall be subject to the restrictions set forth herein with respect to
ISOs, or to such other termination and cancellation provisions as the
Committee or the Board may determine. The Committee or the Board may from
time-to-time confer authority and responsibility on one or more of its
members and/or one or more officers of the Company to execute and deliver
such instruments. The proper officers of the Company are authorized and
directed to take any and all action necessary or advisable from
time-to-time to carry out the terms of such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to the optionee
hereunder shall be adjusted as hereinafter provided, unless otherwise
specifically provided in the written agreement between the optionee and
the Company regarding such Option:
(a) Stock Dividends and Stock Splits. If the shares of the
Company's Common Stock shall be subdivided or combined into a greater or
smaller number of shares or if the Company shall issue any shares of
Common Stock as a stock dividend on its outstanding Common Stock, the
number of shares of Common Stock deliverable upon the exercise of Options
shall be appropriately increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price per share to
reflect such subdivision, combination or stock dividend.
(b) Assumption of Options by Successors. In the event of a
dissolution or liquidation of the Company, a merger in which the Company
is not the surviving entity, or the sale of all or substantially all of
the Company's assets, the Committee or the Board may in its sole
discretion accelerate the exercisability of any or all outstanding Options
so that such Options would be exercisable in full prior to the
consummation of such dissolution, liquidation, merger or asset sale at
such times and on such conditions as the Committee or the Board shall
determine, unless the successor entity, if any, assumes the outstanding
Options or substitutes substantially equivalent options therefor.
(c) Recapitalization or Reorganization. In the event of a
recapitalization or reorganization of the Company (other than a
transaction described in Section 13(b) above) pursuant to which securities
of the Company or of another entity are issued with respect to the
outstanding shares of Common Stock, an optionee, upon exercising an
Option, shall be entitled to receive for the purchase price paid upon such
exercise the securities the optionee would have received if the optionee
had exercised the Option prior to such recapitalization or reorganization.
(d) Modification of ISOs. Notwithstanding the foregoing, any
adjustments made pursuant to Sections 13(a), (b) or (c) above with respect
to ISOs shall be made only after the Committee or the Board, after
consulting with counsel for the Company, determines whether such
adjustments would constitute a "modification" of such ISOs (as that term
is defined in Section 425 of the Code) or would cause any adverse tax
consequences for the holders of such ISOs. If the Committee or the Board
determines that such adjustments made with respect to ISOs would
constitute a modification of such ISOs, it may refrain from making such
adjustments.
(e) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at such
other time and subject to such other conditions as shall be determined by
the Committee or the Board.
(f) Issuances of Securities. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or of
securities convertible into shares of stock of any class, shall affect,
and no adjustment by reason thereof shall be made with respect to, the
number or price of shares subject to Options. No adjustments shall be
made for dividends paid in cash or in property other than securities of
the Company.
(g) Fractional Shares. No fractional shares shall be issued under
this Plan and each optionee shall receive cash from the Company in lieu of
such fractional shares.
(h) Adjustments. Upon the happening of any of the foregoing
events described in Section 13(a), (b) or (c) above, the class and
aggregate number of shares set forth in Section 4 above that are subject
to Stock Rights that previously have been or subsequently may be granted
under this Plan shall also be appropriately adjusted to reflect the events
described in such Sections. The Committee or the successor board shall
determine the specific adjustments to be made under this Section 13 and,
subject to Section 2 above, its determination shall be conclusive.
If any person or entity owning restricted Common Stock obtained by
exercise of a Stock Right made hereunder receives shares or securities or
cash in connection with a corporate transaction described in Sections
13(a), (b) or (c) above as a result of owning such restricted Common
Stock, such shares or securities or cash shall be subject to all of the
conditions and restrictions applicable to the restricted Common Stock with
respect to which such shares or securities or cash were issued, unless
otherwise determined by the Committee or the successor board.
14. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or
installment thereof) shall be exercised by giving written notice to the
Company at its principal office address. Such notice shall identify the
Stock Right being exercised and specify the number of shares as to which
such Stock Right is being exercised, accompanied by full payment of the
purchase price therefor either (a) in United States dollars in cash or by
check, or (b) at the discretion of the Committee or the Board, through
delivery of shares of Common Stock having a fair market value equal (as of
the date of the exercise) to the cash exercise price of the Stock Right,
or (c) at the discretion of the Committee or the Board, by delivery of the
grantee's personal recourse promissory note bearing interest payable not
less than annually at no less than one hundred percent (100%) of the
lowest applicable Federal rate (as defined in Section 1274(d) of the
Code), or (d) at the discretion of the Committee or the Board, through the
use of some of the shares or the rights to purchase some of the shares for
which the Option is being exercised, or (e) at the discretion of the
Committee or the Board, by any combination of clauses (a), (b), (c) and
(d) above. If the Committee or the Board exercises its discretion to
permit payment of the exercise price of an ISO by means of the methods set
forth in clauses (b), (c), (d) or (e) of the preceding sentence, such
discretion shall be exercised in writing at the time of the grant of the
ISO in question. The holder of a Stock Right shall not have the rights of
a shareholder with respect to the shares covered by his, her or its Stock
Right until the date of issuance of a stock certificate for such shares.
Except as expressly provided in Section 13 above with respect to changes
in capitalization and stock dividends, no adjustment shall be made for
dividends or similar rights for which the record date is before the date
such stock certificate is issued.
15. TERM AND AMENDMENT OF PLAN. This Plan was approved and adopted by
the Board on September 23, 1998 (subject with respect to the validation of
ISOs granted under this Plan to approval of this Plan by the stockholders
of the Company). If the approval of this Plan by the Company's
stockholders is not obtained by December 31, 1998, any grants of ISOs
under this Plan made prior to that date will be rescinded. This Plan
shall expire on October 31, 2008 (except as to Options outstanding on that
date). Subject to the provisions of Section 5 above, Stock Rights may be
granted under this Plan prior to the date of stockholder approval of this
Plan. The Board may terminate or amend this Plan in any respect at any
time; provided, however, that the Board may not amend this Plan in any of
the following respects without the approval of the Company's stockholders
obtained within twelve (12) months before or after the Board adopts a
resolution authorizing any of the following actions: (a) the total number
of shares that may be issued under this Plan may not be increased (except
by adjustment pursuant to Section 13 above); (b) the provisions of Section
3 above regarding eligibility for grants of ISOs may not be modified; (c)
the provisions of Section 6(b) above regarding the exercise price at which
shares may be offered pursuant to ISOs may not be modified (except by
adjustment pursuant to Section 13 above); and (d) the expiration date of
this Plan may not be extended. Except as otherwise provided in this
Section 15, in no event may action of the Board or the stockholders alter
or impair the rights of a grantee, without such grantee's consent, under
any Stock Right previously granted to such grantee. The Committee or the
Board may amend the terms of any Stock Right granted if such amendment is
agreed to by the recipient of such Stock Right.
16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOS.
The Committee or the Board, at the written request of any optionee, may in
its discretion take such actions as may be necessary to convert such
optionee's ISOs (or any installments or portions of installments thereof)
that have not been exercised on the date of conversion into Non-Qualified
Options at any time prior to the expiration of such ISOs, regardless of
whether the optionee is an employee of the Company or a Related
Corporation at the time of such conversion. Such actions may include, but
shall not be limited to, extending the exercise period or reducing the
exercise price of the appropriate installments of such Options. At the
time of such conversion, the Committee or the Board (with the consent of
the Optionee) may impose such conditions on the exercise of the resulting
Non-Qualified Options as the Committee or the Board in its discretion may
determine, provided that such conditions shall not be inconsistent with
this Plan. Nothing in this Plan shall be deemed to give any optionee the
right to have such optionee's ISOs converted into Non-Qualified Options,
and no such conversion shall occur until and unless the Committee or the
Board takes appropriate action. The Committee or the Board, with the
consent of the optionee, may also terminate any portion of any ISO that
has not been exercised at the time of such termination.
17. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under
this Plan shall be used for general corporate purposes.
18. GOVERNMENTAL REGULATION. The Company's obligation to sell and
deliver shares of Common Stock under this Plan is subject to the approval
of any governmental authority required in connection with the
authorization, issuance or sale of such shares.
19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, the grant of an Award, the making of a Purchase of
Common Stock for less than its fair market value, the making of a
Disqualifying Disposition (as that term is defined in Section 20 below) or
the vesting of restricted Common Stock acquired upon the exercise of a
Stock Right hereunder, the Company, in accordance with Section 3402(a) of
the Code, may require the optionee, Award recipient or purchaser to pay
additional withholding taxes in respect of the amount that is considered
compensation includable in such individual's gross income. The Committee
or the Board in its discretion may condition (i) the exercise of an
Option, (ii) the grant of an Award, (iii) the making of a Purchase of
Common Stock for less than its fair market value or (iv) the vesting of
restricted Common Stock acquired by exercising a Stock Right, on the
grantee's payment of such additional withholding taxes.
20. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. Each employee who
receives an ISO must agree to notify the Company in writing immediately
after the employee makes a Disqualifying Disposition of any shares of the
Company's Common Stock acquired pursuant to the exercise of an ISO. A
Disqualifying Disposition is any disposition (including any sale) of such
Common Stock before the later of (a) two (2) years after the date the
employee was granted the ISO or (b) one (1) year after the date the
employee acquired the Common Stock by exercising the ISO. If the employee
dies before such shares of Common Stock are sold, these holding period
requirements do not apply and no Disqualifying Disposition can occur
thereafter.
21. GOVERNING LAW; CONSTRUCTION. The validity and construction of this
Plan and the instruments evidencing Stock Rights shall be governed by the
laws of the State of Utah, or the laws of any jurisdiction in which the
Company or its successors in interest may be organized. In construing
this Plan, the singular shall include the plural and the masculine gender
shall include the feminine and neuter, and vice versa, unless the context
otherwise requires.
22. FINANCIAL ASSISTANCE. The Company is vested with authority
under this Plan to assist any employee to whom an Option is granted
hereunder (including any director or officer of the Company or any Related
Corporation) in the payment of the purchase price payable upon the
exercise of an Option, by lending the amount of such purchase price to
such employee on such terms, at such rates of interest and upon such
security (or with no security) as shall have been authorized by the
Committee or the Board.
