<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended June 30, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
________________________ to _______________________
Commission file number 33-93132
LA JOLLA DIAGNOSTICS, INC.
--------------------------
[Name of small business issuer in its charter]
California 94-2901715
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7777 Fay Avenue, Suite 160, La Jolla, California 92037
- ------------------------------------------------ ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number including area code: (619) 454-6790
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of Act:
Common Stock, No Par Value
--------------------------
(Title of Class)
Check whether this issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were
$(2,516,096).
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was last sold by the
registrant outstanding as of June 30, 1997 was $1,337,816.
The number of shares of the Common Stock of the registrant outstanding
as of June 30, 1997 was 9,137,534.
Documents incorporated by reference and parts of Form 10-KSB into
which incorporated: One.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
THIS REPORT INCLUDES A TOTAL OF 48 PAGES. THE EXHIBIT INDEX APPEARS ON PAGE
47.
<PAGE> 2
PART 1
ITEM 1. BUSINESS
La Jolla Diagnostics, Inc. (the "Company"), a California corporation (OTC
Bulletin Board, Symbol LAJD) is a medical and healthcare products company. The
Company has two divisions, an Ophthalmic Division engaged in developing
ophthalmic solutions and related products, and a Diagnostic Division, primarily
concerned with the development and marketing of clinical diagnostic products
using immunological and molecular biological technologies.
Prior to April 17, 1995, the Company had not engaged in significant business
activities since December 31, 1991. As of April 17, 1995, the Company acquired
Unified Technologies, Inc. ("Unified"). The Company is now utilizing the
business, scientific and technical expertise of the founders of Unified to
develop its ongoing business operations. The Company was incorporated April
26, 1983 under the name Women's Health Centers of America, Inc. On February 8,
1990, the Company completed the acquisition of Chemical Dependency Healthcare,
Inc. On April 17, 1995, following the acquisition of Unified, the Company
changed its name to La Jolla Diagnostics, Inc. The Company currently has four
subsidiaries, Unified Technologies, Inc., Antisera Associates, Ltd., Nasal
Mist, Inc. (formed August 6, 1997) and Chemical Dependency Healthcare of
California, Inc. The discussion of the Company herein refers to the Company
and its subsidiaries on a consolidated basis.
The Company's corporate headquarters are located at 7777 Fay Avenue, Suite 160,
La Jolla, California 92037 with laboratory facilities in nearby Sorrento Valley
at 11107 Roselle, San Diego, California 92121.
The Company's management and scientists have extensive expertise in a wide
variety of healthcare areas, including basic science, clinical investigation,
product development and dealing with the Food & Drug Administration (FDA).
================================================================================
LA JOLLA DIAGNOSTICS, INC.
OPHTHALMIC PRODUCTS DIAGNOSTIC PRODUCTS
- --------------------------------------------------------------------------------
- LIVING WATER EYE LOTION(TM)* - Antisera Reagents*
- Feverfew Nasal Mist(TM)* - DNA Test for Breast Cancer
- OptoPet Eye Wash(TM)* - Test for Colon Cancer
- Glaucoma Drug - Heart Attack Predictor
- HYPERTONIC LW(TM) - Other
- Other
================================================================================
* Now being marketed.
2
<PAGE> 3
OPHTHALMIC DIVISION PRODUCTS
OPHTHALMIC NASAL SOLUTIONS
One of the Company's founders, Don Brucker, was a pioneer in the development of
soft contact lenses and other ophthalmic products, and using his know-how and
reputation, the Company has negotiated for exclusive access to a proprietary
technology for the special preparation of ophthalmic solutions. These
solutions are prepared with a patent-pending clustered water technology which
the Company feels gives them significant advantages over competitive products.
This clustered water in the buffering system is formulated with a magnetic
resonation process. The Company has a license for the exclusive use of this
technology for all eye and nasal solutions.
The clustered water remains chemically identical with unprocessed water,
however, when exposed to active biological molecules, the clusters form
polywater complexes which take on the structural and electronic "signature" of
biomolecules, a process which may enhance the biological effectiveness of the
solution. These solutions include:
FEVERFEW NASAL MIST(TM) (currently being marketed)
FEVERFEW NASAL MIST(TM), a patent-pending moisturizing nasal spray containing
the herb feverfew. The Company is investigating the possibility of adding
further indications for its use beyond that as a moisturizer, including its use
for symptomatic relief of migraine, menstrual and hangover headaches. The
product has been shown at several professional conventions and has been
favorably commented on by many health care practitioners.
The suggested retail price of the FEVERFEW NASAL MIST(TM) is currently $29.95
per spray bottle. The length of time a bottle will last will depend upon its
frequency of use and will vary from approximately one month (for those who may
choose to use the product prophylactically on a frequent basis) to several
months.
LIVING WATER EYE LOTION(TM) (currently being marketed)
LIVING WATER EYE LOTION(TM) is an eye wash or irrigating solution, used in
cleansing the eye to help relieve irritation, burning, stinging, and itching
due to loose foreign material, air pollutants (smog or pollen), or chlorinated
water.
The solution is a clustered water borate buffered, sterile isotonic aqueous
solution containing sodium chloride. It is preserved with a mild preservative,
0.1% sorbic acid and disodium EDTA (ingredients commonly used in solutions for
sensitive eyes). In contrast with:
- "Eye lubricants," "Artificial Tears," and "Lens Lubricants," which
contain ingredients which increase fluid viscosity in an attempt to
relieve eye dryness or re-wet contact lenses.
3
<PAGE> 4
- "Eye redness relievers," which contain vasoconstrictors which can
cause eye problems when used too frequently.
- Eye drops, which contain antihistamines to treat allergy symptoms.
LIVING WATER EYE LOTION(TM) is specially formulated to enhance eye comfort by
irrigating, flushing and cleansing without interfering with natural functions.
The product has generally exceeded the expectations of those who have tried it.
OPTOPET EYE WASH(TM) (currently being marketed)
OPTOPET EYE WASH(TM) is for cleansing the eyes of dogs and cats and removing
mucous which causes fur stains beneath the eyes (a major problem in certain
breeds).
PILOCARPINE LW(TM) (future marketing effort and product)
PILOCARPINE LW(TM) is a prescription drug used in the treatment of glaucoma, a
condition of the eye in which there is usually an elevation of the intraocular
pressure which may lead to deterioration of the visual fields and ultimately to
blindness. The condition, more prevalent after the age of forty, is frequently
symptomless in its early stages unless it is diagnosed during an eye
examination.
The active ingredient in the product, pilocarpine (one of the oldest methods of
glaucoma treatment), is in a solution similar to the Company's LIVING WATER EYE
LOTION(TM). The properties of LIVING WATER EYE LOTION(TM) make it an
exceptional vehicle for the introduction of the pilocarpine to the eye.
Presently, the use of pilocarpine (a miotic, i.e., makes the pupil smaller) is
limited, because it is uncomfortable to use and is frequently only partially
effective. Its use in a LIVING WATER EYE LOTION(TM) type of solution may allow
the use of a smaller concentration of pilocarpine, and deminish side effects.
HYPERTONIC LW(TM) (future marketing effort and product)
HYPERTONIC LW(TM) is a hypertonic saline (2%) agent (eye drop) which may be
used to reduce corneal edema (swelling) of various etiologies, including the
overwearing of contact lenses, and healing after photorefractive keratectomy
(PRK) surgery.
A hypertonic solution exerts an osmotic gradient greater than that present in
body tissues and fluids, so that water is drawn from the body tissue across
semi-permeable membranes. Applied topically to the eye, it draws fluid out of
the cornea.
Most hypertonic saline agents may cause temporary burning and irritation on
instillation. The HYPERTONIC LW(TM) formulation is similar that of LIVING
WATER EYE LOTION(TM), and is designed to enhance eye comfort.
4
<PAGE> 5
OTHER OPHTHALMIC SOLUTIONS
Several compounds, such as steroids, antibiotics and antioxidants using LIVING
WATER EYE LOTION(TM) type of solution as a vehicle are being studied by the
Company. As with PILOCARPINE LW(TM), the use of a clustered water type solution
may offer certain advantages to the user.
OTHER NASAL SPRAYS
The company is developing and intends to patent other nasal sprays.
MISCELLANEOUS PRODUCTS
The Company has arranged to have contact lenses privately labeled by a large
manufacturer under the name of the BRUCKER THIN PROFILE(TM) Soft Contact Lens.
This lens is designed to allow the efficient fitting of an exceptionally
versatile contact lens which enables the fitter to stock a small inventory of
lenses, and is especially suited for export. The lenses have been marketed in
Russia for over two years.
The Company is also working on certain other product related projects, and is
test marketing a muscle relaxing device called Electronic-2.
DIAGNOSTIC DIVISION PRODUCTS
The Diagnostic Division is developing and marketing clinical diagnostic
products using immunologic and molecular biologic technologies. These products
include:
ANTISERA
The Company has made the decision to sell its inventory of antisera products
via a close-out sale because it has been determined that the marketing of
antisera products no longer fits into the Company's long-range plans. The
Company intends to concentrate on proprietary diagnostic products and consumer
healthcare products.
In the past, the Company marketed its inventory of antisera on a limited basis
by placing ads in journals stressing the high quality of the products, along
with discount prices. The initial response to the ads, that is people and
institutions requesting catalogs, was commensurate with the marketing effort,
but follow-ups with actual orders was not.
After investigation, the Company has come to the conclusion that the discount
offered of 10 to 20 percent below standard market prices was not sufficient to
entice users of antisera away from their customary suppliers, so marketing was
suspended.
Now that the Company has made the decision to close out its antisera inventory,
it feels confident that a more vigorous discounting of antisera prices, along
with aggressive advertising
5
<PAGE> 6
in leading journals, stressing that the demand for a product determines the
price, will result in a sale of a significant portion of the inventory in a
relatively short period of time.
The proposed 40 percent discount off the Company's present catalog discount
prices will result in an average discount of 50 percent or more off the
industry standard.
During the year the Company wrote down the value of the inventory by
approximately 40 percent in order to reflect its estimates of the results of
the close-out sale. Also, per the partnership agreement between the Company
and Sogery Trust (Antisera Associates, Ltd., Financial Statement Note D), if
the Company is unable to sell the inventory due to lack of marketability or
reduction in value, the outstanding balance of the promissory note will be
reduced as appropriate to reflect any corresponding reduction in value. The
Note Receivable was written down by $406,900 and the Interest Receivable of
$100,648 was written off.
The Company's entire antisera inventory was valued by unrelated parties
(brokers) to be in excess of $4.1 million on a 10 to 20 percent discount sale
basis as of June 1994. These valuations were substantiated by an independent
research scientist as of June 1995 and again as of June 1996. The cost of
marketing and processing the antisera was taken into consideration when
arriving at this valuation.
The Company is a supplier of high quality, highly purified antibodies which are
needed for basic research and clinical immunological assays. The primary users
of these antisera products include universities and other research facilities,
clinical diagnostic laboratories, hospitals and clinics, where certain antibody
reagents are used in large volumes.
For example, all clinical diagnostic laboratories that analyze serum for
immunogloblin profiles require at least five antibody reagents: anti- IgG,
anti-IgM, anti-IgA, anti-lambda chain and anti-kappa chain for routine clinical
analysis of patient serum by immunoelectrophoresis and nephelometry. The
Company sells all of these products, as well as many other antisera. Three
anti-opiold receptor antibodies (anti-kappa, anti-mu and anti-delta) have been
added to the Company's line of products, making them available commercially for
the first time. There is good evidence that these antibodies will prove useful
as research immuno-reagents for studies in: 1) AIDS and generalized
immunosuppression; 2) autoimmune diseases; 3) habitual drug use; and 4)
neuropharmacology.
In addition, the Company has added two new anti-human cytokine antibodies
(anti-interleukin-6 and anti-interleukin-8) to its research product line.
These cytokines are known to be involved in: 1) the regulation of normal
antibody syntheses; 2) autoimmune diseases; and 3) inflammatory responses.
MOLECULAR DIAGNOSTICS (BREAST CANCER TEST)
The Company is expanding its current technology to develop tests for the DNA
fingerprinting by use of gene amplification of certain proteins specifically
associated with both primary and metastatic breast cancer tumors.
6
<PAGE> 7
Potential molecular diagnostic tests include the DNA fingerprinting of tumor
biopsies. Breast cancer has been targeted as the first tumor for diagnostic
development. This molecular diagnostic method of breast cancer detection has
the potential to be intrinsically superior to the present method of
identification by histological examination.
The Company's method of finding cancerous tissue may be so sensitive that it
can identify small numbers of malignant cells, which could prove critically
important in the search for both primary and metastatic tumors which may spread
to the lymph system and beyond.
Tissue samples have been tested using the Company's Breast Cancer DNA
fingerprinting, and preliminary results of a blinded study confirm the
specificity and sensitivity of the technology.
The Company hopes to begin scheduling final clinical trials of its breast
cancer markers, pending additional funding, with the objective of receiving
clearance from the FDA to market the product in a diagnostic test.
Ultimately this DNA fingerprint technology could be developed for many other
tumor types.
IMMUNODIAGNOSTICS (COLON CANCER TEST)
Immunodiagnostic tests are frequently used by clinical diagnostic laboratories
for the diagnosis of cancer, autoimmune and infectious diseases. A list of
potential tests have been identified by the Company and several have been
selected for possible development. The serologic diagnostic test for
gastrointestinal cancer will be the first in the list to be developed.
The test uses Enzyme-Linked Immunosorbent Assay (ELISA) technology, and appears
to have a specificity for colon and other gastro-intestinal cancers.
The Company has access to clinical serum samples recruited from patients to
validate the test in cooperation with clinicians at Sharp Rees- Stealy Medical
Center in San Diego (which has a Certificate of Approval from the Western
International Review Board to collect samples). Continued testing is dependent
on additional funding.
MYOCARDIAL INFARCTION PREDICTOR
The Company is filing for patent application on a novel method of identifying
risk factors for myocardial infarction among a certain subset of mature people.
The company intends to market an inexpensive test which would be used for
screening purposes. Those with this risk factor are several times more likely
to experience morbidity or mortality from a condition which may be ameliorated
by changes in living conditions and life style. A final kit form for the test
is being developed.
7
<PAGE> 8
DOMESTIC MARKET, OPHTHALMIC DIVISION
FEVERFEW NASAL MIST(TM)
The Company feels that the market for moisturizing nasal sprays, which do not
contain vasoconstriction (decongestant) agents and/or antihistamines with their
attendant side effects, is growing and will continue to grow along with an
overall national trend toward natural and alternative medicine.
Besides its use as a moisturizing nasal spray, the Company intends to pursue
the possibility of adding an indication for the use of FEVERFEW NASAL MIST(TM)
for aiding in the alleviation of the symptoms of migraine headaches, menstrual
headaches and hangover headaches, all which are thought to be caused by the
dilation of cerebral blood vessels. Though probably a majority of people
suffering from migraines, and most health care practitioners who treat migraine
headaches are familiar with the herb feverfew. In addition, the symptoms of
some menstrual headaches have a similar etiology as migraine headaches, which
greatly enlarges the potential market.
At the present time, all the products which are indicated to have some efficacy
in the treatment of migraine headache symptoms are sold with a prescription;
however, an FDA advisory panel recently voted to add an indication for migraine
of the OTC product, Excedrin. If the FDA follows the suggestion of its
advisory panel, which it usually does, it might set a precedent in regards to
FEVERFEW NASAL MIST(TM) .
Feverfew (Tanacetum parthenium), an herb which has been used for centuries as a
folk remedy, is commonly recommended as an aid in relieving the symptoms of
migraine headaches without side effects. Recent international clinical studies
continue to give promising results. Traditionally, feverfew is taken orally,
either in capsule or liquid solution form.
Migraine headaches are believed to be caused by dilation of the blood vessels
of the skull and the scalp. Feverfew is said to be an anti- inflammatory and
reduces blood vessel spasms.
More than 20 million people in the United States suffer from migraines,
according to the National Headache Foundation, most often striking those
between the ages of 25 and 45. Three out of four diagnosed cases are women.
The frequency and severity of migraines varies greatly among individuals. The
worldwide market for migraine remedies is estimated to be in the neighborhood
of $4 billion per year.
Twenty percent of migraine patients experience a pre-headache visual aura which
may include sparkling lights, blind spots and vibrating patterns called
scintillating scotoma.
Eighty-seven percent of migraine patients sometimes suffer from nausea and
fifty-six percent vomit on occasion. Other symptoms include blurred vision,
diarrhea, and increased sensitivity to light, sound and smell.
8
<PAGE> 9
Patients search for the perfect medicine and are frequently shocked to find
there isn't one. What may work for one person may be useless or actually make
the symptoms worse for another. Most medicines have side effects. Migraine
sufferers are forced to settle for what works best, while trying to avoid
things which may trigger an attack. "Triggers" vary from individual to
individual, and range from chocolate chip cookies to changes in atmospheric
pressure to stressful situations.
Menstrual headaches are common, and usually are treated by OTC headache
products, such as aspirin or Tylenol, or specialized menstrual products, such
as Midol. FEVERFEW NASAL MIST(TM) could be an effective and economical
treatment
LIVING WATER EYE LOTION(TM)
LIVING WATER EYE LOTION(TM) falls under the category of an OTC eye wash or
irrigating solution. It can be used by anyone who wishes to cleanse the eye to
relieve irritation, burning, stinging or itching. However, because of its
superior qualities it is frequently being used in place several different types
of OTC eye solutions including vasoconstrictors such as Visine, astringents
such as Murine, and lubricating agents or artificial tears. The total OTC
ophthalmic solution market in the Untied States is in the hundreds of millions
of dollars.
Major ophthalmic solution suppliers include Allergan, Alcon Laboratories (a
subsidiary of Nestle), Bausch and Lomb, Ciba Vision Corp., IOLab (a subsidiary
of Johnson & Johnson), Merck, Pharmacia Ophthalmic and Pilkington Barnes-Hind.
Therefore, though LIVING WATER EYE LOTION(TM) compares favorably with other OTC
eye solutions, the Company does not intend to compete with the brand leaders.
In addition to traditional sales and marketing efforts, it intends to use
existing specialized distributors and marketing channels which it has
identified, and who have specialized capabilities and/or interests. These
channels include the Internet, multi-level marketing groups, and certain other
consumer groups with special needs.
OPTOPET EYE WASH(TM)
The domestic market for veterinary ophthalmic solutions is a highly fragmented
market estimated at $10.8 million in annual revenues. The Company believes its
eye drop, which is especially effective in cleansing the eyes of dogs and cats
(a major problem in certain breeds), will capture a significant portion of the
market. The product is being introduced to pet owners, pet stores and
veterinarians through a public relations campaign in pet magazines and the
general press.
PILOCARPINE LW(TM)
It is estimated that over 2 million people suffer from glaucoma in the United
States, with almost 80,000 Americans blind from the condition, making it the
nation's leading cause of preventable blindness.
9
<PAGE> 10
There are many glaucoma medications on the market. Existing products have
unpleasant side effects, such as, blurred vision, burning eyes, conjunctivitis,
headaches and heart palpitations. The leading glaucoma product is Timoptic by
Merck with sales estimated of $175 million in the United States, and $395
million worldwide.
Because Pilocarpine LW contains a low concentration of this active ingredient
in a solution similar the Company's Living Water Eye Lotion(TM), it should be
well accepted by both patients and ophthalmologists who will prescribe it.
HYPERTONIC LW(TM)
In addition to being used as a "first aid" treatment in cases of corneal edema
caused by the overwearing of contact lenses, HYPERTONIC LW(TM) is suitable for
use on a standard prophylactic basis for a period of weeks or months on a
post-PRK patient.
OTHER OPHTHALMIC SOLUTIONS
The properties of LIVING WATER EYE LOTION(TM) would benefit many other types of
ophthalmic solutions, and while the volume of use of many of these solutions is
not great because they are usually not used chronically, they may make
profitable niche markets of several million dollars each.
CONTACT LENSES
The domestic contact lens market is crowded and competitive and the Company has
no plans to market any lenses now available in this country.
DOMESTIC MARKET, DIAGNOSTIC DIVISION
ANTISERA PRODUCTS
The primary users of antisera products include universities and other research
facilities, clinical diagnostic laboratories, hospitals and clinics, where
anti-IgG, anti-IgM and anti-IgA antibody reagents are used in large volume.
Smaller volumes of the anti-IgD and anti-IgE are in demand because the IgD and
IgE antigens are rarer.
Although there are many immunological reagent suppliers, there is an apparent
inadequate number of primary manufacturing suppliers of certain types of
top-quality highly purified antibodies which are needed for basic research and
clinical immunological assays. The Company has the capacity to further purify
antigens as needed, should the demand justify it.
CANCER DIAGNOSTIC PRODUCTS
10
<PAGE> 11
Based on the estimated sales for a single serum test being marketed for
prostate cancer, the combined estimated sales of diagnostic tests for the
cancers listed below exceeded $250 million in 1993 in the United States, and
has increased since then. As new tests are developed that are more accurate
and more specific the market will expand accordingly.
There were over $70 million of prostatic specific antigen (PSA) test kits for
prostatic cancer distributed by the PSA kit manufacturers in the United States
during 1992, when the product was still in an introductory phase.
<TABLE>
<CAPTION>
Estimated New Cancer Cases and Cancer Deaths for 1993 (American Cancer Society)
- -------------------------------------------------------------------------------------------
SITE OF CANCER ESTIMATED NEW CANCER CASES ESTIMATED
(000'S) CANCER DEATHS (000'S)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------------------
Breast 183 46
- -------------------------------------------------------------------------------------------
Ovary 22 13
- -------------------------------------------------------------------------------------------
Colon-Rectum 152 57
- -------------------------------------------------------------------------------------------
Lung 170 149
- -------------------------------------------------------------------------------------------
Bladder 52 10
- -------------------------------------------------------------------------------------------
TOTAL FOR SELECTED SITES 579 276
- -------------------------------------------------------------------------------------------
</TABLE>
BREAST CANCER MOLECULAR DIAGNOSTIC TEST
The incidence of breast cancer among women appears to be increasing. In the
l970s, one in twenty women could expect to experience the condition during
their lifetime. Today the incidence has increased to one in eight. The
present method of cancer detection is the histological examination of tissue.
The Company's DNA fingerprinting diagnostic test could be used on all breast
tumor biopsies submitted for diagnostic analysis as a confirmatory test for
malignant tissue.
In addition, because of its sensitivity, the Company's breast cancer marker
test should have special value in determining if a malignant tumor has
metastasized to the lymph glands, where a small number of cancerous cells might
be overlooked during a histological exam.
Ultimately, all pathologists, clinical diagnostic laboratories, and hospital
laboratories involved in breast cancer detection would be potential customers
for the Company's product.
COLON CANCER IMMUNODIAGNOSTIC TEST
There are approximately 150,000 new occurrences of Colorectal Cancer each year
in the United States and 60,000 deaths, making it second only to lung cancer as
a cause of death from cancer.
Several key immune system components are already being measured already using
ELISA-based technology. These tests report the presence of the antigen for
which the substance is being tested.
11
<PAGE> 12
The Company's colon cancer serologic test using ELISA technology appears to be
very specific to colon cancer. If the specificity of the preliminary study
continues to hold true, the test may become a screening test to be used in
conjunction with routine physical examinations.
Ultimately, all 4,000 general medical diagnostic laboratories and all hospital
laboratories would be targeted customers for the product.
MYOCARDIAL INFRACTION PREDICTOR
The Company's myocardial infarction risk factor predictor for mature people has
the potential for broad use, especially in a managed care environment where the
cost saving advantages of disease prevention are stressed.
INTERNATIONAL MARKETS
OPHTHALMIC SOLUTIONS
Because of the unique properties of its clustered water nasal and ophthalmic
solutions, the Company believes it will find a ready market overseas. The
Company has had numerous discussions with various groups in several countries,
with no definitive results at this time.
CONTACT LENSES
The Company's contact lenses and fitting philosophy are customized for export.
The Company's Russian distributor is currently ordering several thousand lenses
a month.
DIAGNOSTIC PRODUCTS
The entire world of in vitro diagnostic products market is reported to be
approximately $7 billion, with the United States approximately $3.7 billion.
It is possible to export diagnostic products and kits prior to receiving final
FDA clearance if permission is given by the foreign governments involved. FDA
approval would further facilitate the large scale export from the United States
of the Company's diagnostic kits.
RESEARCH AND DEVELOPMENT
The Company is maintaining an active research and development program in the
areas of ophthalmic nasal products and immuno/molecular diagnostics using a
network of prominent consultants as an addition to its internal staff and
facilities.
REGULATORY AFFAIRS
12
<PAGE> 13
As a manufacturer, importer and distributor of medical products, the Company is
subject to various regulations of the FDA, and various state and foreign health
regulatory agencies. The FDA has promulgated regulations to which the Company
must adhere relating to the effectiveness and safety of the Company's products.
These regulations include, but are not limited to, premarket approval
regulations, manufacturing and quality assurance procedures, and conditions and
procedures under which investigation of new products or new uses may be
conducted. The Company's antisera products do not require FDA approval for its
use as research reagents. The Company's diagnostic tests may require
submission to the FDA as a premarketing application (PMA) for a new type of
diagnostic product or a premarket notification under Section 510(k) for any
diagnostic product which is substantially similar to an existing product with
FDA approval. Some of the Company's diagnostic tests now in the planning stage
are unique, and therefore, will require clinical trials to prove its efficacy
before a PMA can be submitted to the FDA.
The Company estimates the total time for clearance for each test will be
between two and three years. However, it is possible that diagnostic products
which are unique and life saving could receive a fast track registration which
would significantly shorten the time needed for FDA approval. The Company
believes that its molecular diagnostic kit for the identification of breast
cancer and its immunodiagnostic kit for ulcerative colitis might qualify for
fast track treatment. However, for planning purposes, it is assumed that the
FDA would follow a traditional approval process.
Ophthalmic nasal solutions do not require FDA pre-clearance if they fall into
certain OTC or generic categories. Other types do require pre- clearance. The
Company's products will fall into both categories. The Company may search for
a pharmaceutical company to enter into a joint venture for the development of
products requiring full FDA pre-clearance.
The Company believes its long-term success will be partially dependent on its
ability to efficiently gain approval on the products which will require FDA
pre-clearance. The Company's Chief Executive Officer has had substantial
experience in dealing with FDA registration and regulation requirements.
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for the Company's products, processes and know-how is
important to the Company's business. Thus, the Company plans to aggressively
prosecute and defend its proprietary technology. The Company intends to file
patent applications, where appropriate, to protect technology, inventions and
improvements that are considered important to the development of its business.
The Company also relies upon trade secrets, know-how, continuing technological
innovation and licensing opportunities to develop and maintain its competitive
position.
The Company currently holds no patents, but has filed two patent applications
one on its Myocardial Infarction Predictor and one on its Feverfew Nasal
Mist(TM).
13
<PAGE> 14
The Company has an exclusive license agreement to market eye and nasal products
from the developer and founder of a clustered water process, who holds a patent
pending on the technology.
The patent positions of medical product firms, including the Company's, are
generally uncertain and involve complex legal and factual questions.
Consequently, even though the Company may prosecute its patent applications
with the United States and foreign patent offices, the Company does not know
whether any applications will result in the issuance of patents or whether any
issued patents will provide significant proprietary protection or will be
circumvented or invalidated. Since patent applications in the United States
are maintained in secrecy until patents are issued, and publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries, the Company cannot be certain that it was the original creator of
inventions which may be covered by patent applications or that it was the first
to file patent applications for such inventions.
There can be no assurance that patents, if issued, would be held valid by a
court of competent jurisdiction. Moreover, to determine priority of invention,
the Company may have to participate in interference proceedings declared by the
United States Patent and Trademark Office or opposition proceedings before an
equivalent foreign agency, which could result in substantial cost to the
Company.
There can be no assurance that the patent applications, if any, will result in
patents being issued or that if issued, the patents will afford protection
against competitors with similar technology; nor can there be any assurance
that others will not obtain patents that the Company would need to license or
circumvent.
The Company will also rely upon unpatented trade secrets, and there can be no
assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its right to unpatented trade secrets.
HUMAN RESOURCES
As of June 30, 1997, the Company had four full-time employees and utilized the
services of six part-time personnel, of whom seven were engaged in research,
development and manufacturing, and three in marketing, customer service and
general administration. The Company's research and development staff is made
up of professionals working as independent contractors, who perform their
services in exchange for Common Stock and Warrants. See "Management,
Consultants and Advisors." None of the Company's employees are covered by a
collective bargaining agreement, and the Company has experienced no work
stoppages. The Company believes that it maintains positive relations with its
personnel.
The success of the Company in its research and development of medical products
is dependent upon the experience and know-how of its key scientific and
technical personnel.
14
<PAGE> 15
ITEM 2. PROPERTY
The corporate headquarters of the Company are located at 7777 Fay Avenue, Suite
160, La Jolla, California 92037. The facilities are approximately 1,300
square feet and are leased at approximately $2,000 per month. The Company has
a month-to-month lease and is currently looking at larger quarters. The
Company's laboratory facility of approximately 1,200 square feet is located at
11107 Roselle St., San Diego, California 92121 (the Sorrento Valley Facility).
The Company leases the Sorrento Valley Facility at a current monthly rate of
$3,500. The Company is currently negotiating a new 2-year lease at the same
location.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual shareholder meeting on September
18, 1996 at which time the following matters were presented to the security
holders regarding ratification by the Board of Directors, increasing the
authorized number of shares of common stock from 10,000,000 to 50,000,000,
authorizing an Incentive Bonus and Stock Option Plan and approving the
auditors.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At October 10, 1997, there were over 500 holders of record of the Common Stock.
The Company has not paid cash dividends on its capital stock since inception
nor does it intend to for the future. The Company currently intends to retain
earnings, if any, for use in its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The Company has not had significant revenues from operations in each of its
last three fiscal years and is believed to still be in its development stage.
The Company's business is divided into two separate, distinct operations: the
Opthalmic Division and the Diagnostic Division.
PLAN OF OPERATIONS
Financial Resources
At June 30, 1997 and 1996, the Company had current assets of $79,011 and
$149,427 (including cash of $13,275 and $28,083) and inventory of $2,483,890
and $4,151,885 ($2,456,911 and $4,140,579 of which constituted the inventory of
antisera) for both periods, respectively. The antisera inventory was the
result of fifteen years of work by the late Dr. James Plummer, a well-known San
Diego immunologist. On June 8, 1994, Unified acquired the inventory from the
Plummer Family Trust in exchange for 1,065,940 shares of Unified common stock
along with warrants to purchase an additional 120,000 shares of Unified stock
at $0.10 per share (532,970 shares of the Company's common stock along with
warrants to purchase an additional 60,000 shares at $0.20 per share, after
giving effect for the subsequent 1 for 2 shares of Unified stock exchanged in
the merger). The purchase was recorded at Unified's cost, the fair value of
the inventory received for the stock of $4,142,784 based on the valuation of
the antisera as of June 8, 1994; equivalent to $7.77 per share for the common
stock received by the Plummer Family Trust. The inventory was transferred at
historical cost to La Jolla Diagnostics, Inc. on April 17, 1995, the date of
the acquisition of Unified, as the business combination was recorded under the
pooling of interest method.
The Company has made the decision to sell its inventory of antisera products
via a close-out sale because it has been determined that the marketing of
antisera products no longer fits into the Company's long-range plans. The
Company intends to concentrate on proprietary diagnostic products and consumer
healthcare products.
In the past, the Company marketed its inventory of antisera on a limited basis
by placing ads in journals stressing the high quality of the products, along
with discount prices. The initial response to the ads, that is people and
institutions requesting catalogs, was commensurate with the marketing effort,
but follow-ups with actual orders was not.
16
<PAGE> 17
After investigation, the Company has come to the conclusion that the discount
offered of 10 to 20 percent below standard market prices was not sufficient to
entice users of antisera away from their customary suppliers, so marketing was
suspended.
Now that the Company has made the decision to close out its antisera inventory,
it feels confident that a more vigorous discounting of antisera prices, along
with aggressive advertising in leading journals, stressing that the demand for
a product determines the price, will result in a sale of a significant portion
of the inventory in a relatively short period of time.
The proposed 40 percent discount off the Company's present catalog discount
prices will result in an average discount of 50 percent or more off the
industry standard.
During the year the Company wrote down the value of the inventory by
approximately 40 percent in order to reflect its estimates of the results of
the close-out sale. Also, per the partnership agreement between the Company
and Sogery Trust (Antisera Associates, Ltd., Financial Statement Note D), if
the Company is unable to sell the inventory due to lack of marketability or
reduction in value, the outstanding balance of the promissory note will be
reduced as appropriate to reflect any corresponding reduction in value. The
Note Receivable was written down by $406,900 and the Interest Receivable of
$100,648 was written off.
Sales for the years ended June 30, 1997 and 1996 were $173,624 and $143,977,
comprised of $10,894 and $17,005 in eye lotion, $2,766 and $1,485 in
Electronica-2's, $679 and $75 in antisera sales, and $149,414 and $123,647 in
contact lenses, respectively, for each period. Contact lens sales were all
overseas and constituted approximately 86 percent of total sale for each period
reported.
Costs and expenses for the twelve months ended June 30, 1997 and 1996 were
$906,719 and $662,480 resulting in a loss from operations for the period of
$733,095 and $518,503, respectively. Costs and expenses included consulting
services of $266,112 and $105,808, and research and development expense of
$80,938 and $82,951, substantially all of which was for services performed by
the directors, officers and advisors identified in the section "Management",
who accepted as compensation for such services common stock and warrants to
acquire common stock of the Company. See "Executive Compensation - Stock
Awards and Performance Warrants."
The increase in selling and administrative expenses for the years ended June
30, 1997 and 1996 are due to the Company's increase in research and
development, sales, and financial and reporting responsibilities. Selling and
administrative expenses included; $110,265 and $113,993 salaries, $49,611 and
$45,564 rent, $54,612 and $123,479 legal and accounting fees, $6,511 and
$15,158 advertising, and $193,434 and $(61,587) in miscellaneous other expense.
17
<PAGE> 18
Valuation of Antisera Inventory
The Company has made the decision to sell its inventory of antisera products
via a close-out sale because it has been determined that the marketing of
antisera products no longer fits into the Company's long-range plans. The
Company intends to concentrate on proprietary diagnostic products and consumer
healthcare products.
In the past, the Company marketed its inventory of antisera on a limited basis
by placing ads in journals stressing the high quality of the products, along
with discount prices. The initial response to the ads, that is people and
institutions requesting catalogs, was commensurate with the marketing effort,
but follow-ups with actual orders was not.
After investigation, the Company has come to the conclusion that the discount
offered of 10 to 20 percent below standard market prices was not sufficient to
entice users of antisera away from their customary suppliers, so marketing was
suspended.
Now that the Company has made the decision to close out its antisera inventory,
it feels confident that a more vigorous discounting of antisera prices, along
with aggressive advertising in leading journals, stressing that the demand for
a product determines the price, will result in a sale of a significant portion
of the inventory in a relatively short period of time.
The proposed 40 percent discount off the Company's present catalog discount
prices will result in an average discount of 50 percent or more off the
industry standard.
During the year the Company wrote down the value of the inventory by
approximately 40 percent in order to reflect its estimates of the results of
the close-out sale. Also, per the partnership agreement between the Company
and Sogery Trust (Antisera Associates, Ltd., Financial Statement Note D), if
the Company is unable to sell the inventory due to lack of marketability or
reduction in value, the outstanding balance of the promissory note will be
reduced as appropriate to reflect any corresponding reduction in value. The
Note Receivable was written down by $406,900 and the Interest Receivable of
$100,648 was written off.
The Company believes an active market exists for its antisera inventory. The
level of sales of the antisera inventory is directly dependent on marketing
efforts. An aggressive marketing campaign could result in a rapid turnover of
the inventory at favorable prices. As the Company emerges from its development
stage, management intends to focus more on marketing and sales of the antisera
inventory.
Material Uncertainties Affecting Liquidity and Value of Antisera Inventory
In addition to the factors which might affect the value of the antisera
inventory discussed in "Risk Factors," above, there are other factors which
might affect the value of the antisera inventory.
18
<PAGE> 19
The Company's ability to increase sales of antisera depends heavily on the
success of its marketing strategy, which includes, among other things,
advertising in research journals and directly mailing brochures listing the
Company's inventory and sale prices to research facilities. There can be no
assurance that potential consumers of antisera will commit to purchase the
Company's inventory at the Company's close-out prices.
Competition in the area of antisera sales could also have a significant impact
on the value of the antisera. The Company is competing against approximately
500 other marketers of immunologic and biologic reagents, including some of the
largest healthcare companies in the United States. While increases in
biological research have increased the demand for antisera, there could also be
an increase in the number of antisera providers hoping to serve the growing
market. If the supply of antisera outpaces the increased demand, the close-out
sale value of the inventory could drop. Similarly, declines in biological
research due to funding deficiencies or other causes beyond the control of the
Company could result in decreased demands and lower inventory values. Further,
innovations in research techniques could lessen demand for antisera or reduce
production costs, either of which could negatively impact the value of the
inventory.
Antisera Associates
The Company has a 75 percent interest in Antisera Associates, Ltd., which was
formed on December 21, 1994. Antisera Associates, Ltd. was formed to market,
sell and distribute the antisera inventory.
The partnership was formed when the Company sold $1,000,000 of antisera
inventory to Sogery Trust, an unrelated entity, for $100,000 in cash and a note
for $900,000. Following the sale, the Company contributed its remaining
$3,142,784 of antisera inventory for its 75 percent interest, and Sogery Trust
contributed its $1,000,000 of inventory for a 25 percent interest in the
partnership.
The minority interest has been accounted for under the "parent company theory"
in the consolidated balance sheet. Under this approach, the minority interest
is not considered part of stockholders' equity, and is disclosed in the
consolidated balance sheet between the liability section and the stockholders'
equity section.
Expected Purchases or Sales of Plant and Significant Equipment
The Company does not expect to purchase and/or sell any significant equipment
during the next twelve months.
Expected Changes in Number of Employees
The Company plans to add additional employees over the next twelve months as
its research and development effort increases, and its sales of solutions,
diagnostic kits and miscellaneous products expand. Two people are expected to
be added in sales, marketing and administrative, two estimated in the
laboratory for both research and development projects and the processing of
19
<PAGE> 20
antisera, and one to handle regulatory matters. In addition, consultants
and part-time or temporary employees may be used on specific projects.
RESULTS OF OPERATIONS
As discussed above, the Company did not engage in significant business prior to
April 17, 1995. On that day, the Company acquired Unified, a small development
stage business.
Fiscal Years Ended June 30, 1997 and 1996
On a consolidated basis, the Company had sales totaling $173,624 for the year
ended June 30, 1997, compared with $143,977 in sales for the Company for the
same period ending June 30, 1996. The increase in sales resulted from
increased sales of contact lenses and eye solutions, as well as the
introduction of the FeverFew nasal mist product to the public.
The Company experienced a net loss of $2,516,096 for the twelve-month period
ended June 30, 1997, compared with a net loss of $454,479 for the same period
ended June 30, 1996. The increase in losses is principally attributable to the
previously discussed antisera inventory write down, a write down of the note
receivable on antisera inventory and interest on the note receivable and
consulting fees ($266,112 for the twelve-month period ended June 30, 1997).
See "Plan of Operation -- Financial Resources," above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through private placements of
common stock, issuing warrants to acquire stock in exchange for services
rendered for the benefit of the Company, and to a lesser degree, sales. The
Company anticipates that the proceeds from private placements of stock and
exercise of warrants, together with existing capital and revenues from product
sales will be sufficient to finance its operations and working capital
requirements for at least twelve months. See "Plan of Operation -- Financial
Resources.
20
<PAGE> 21
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants 22
Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and 1996 23
Consolidated Statements of Operations for the years ended June 30, 1997 and 25
1996, and cumulative totals for development stage operations from December 3,
1993 (date of recommencement) through June 30, 1997
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the 26
years ended June 30, 1997 and 1996, for the period December 3, 1993 (date of
recommencement) through June 30, 1994, and for the period July 1, 1993 through
December 2, 1993
Consolidated Statements of Cash Flows for the years ended June 30, 1997 and 28
1996, and cumulative totals for development stage operations from December 3,
1993 (date of recommencement) through June 30, 1997
Notes to Consolidated Financial Statements 30-39
</TABLE>
21
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of La Jolla
Diagnostics, Inc. (a California corporation) and subsidiaries (Note A) as of
June 30, 1997 and 1996, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years ended June 30,
1997 and 1996, and cumulative totals for development stage operations from
December 3, 1993 (date of recommencement) through June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 La Jolla
Diagnostics, Inc. and subsidiaries as of June 30, 1997 and 1996, and the
results of operations and their cash flows for the years ended June 30, 1997
and 1996, and cumulative totals for development stage operations from December
3, 1993 (date of recommencement) through June 30, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note N to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note N.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Harlan & Boettger, LLP
San Diego, California
October 9, 1997
22
<PAGE> 23
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 13,275 $ 28,083
Accounts receivable 9,953 1,729
Advances to officer 8,487 1,156
Inventory: Healthcare Products 26,979 11,306
Prepaid expenses 20,317 6,505
Interest receivable -- 100,648
---------- ----------
TOTAL CURRENT ASSETS 79,011 149,427
INVENTORY (Note E) 2,456,911 4,140,579
PROPERTY & EQUIPMENT, net 45,820 43,248
NOTE RECEIVABLE (Note D) 493,100 900,000
OTHER ASSETS 58,835 7,314
---------- ----------
$3,133,677 $5,240,568
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 282,226 $ 178,528
Accrued expenses 34,490 37,385
Customer deposits 40,418 --
Lease obligations, current portion (Note H) 2,408 2,836
Loans payable (Note G) 293,216 99,279
---------- ----------
TOTAL CURRENT LIABILITIES 652,758 318,028
LEASE OBLIGATION, non-current portion (Note H) 5,240 8,928
MINORITY INTEREST 358,650 791,992
</TABLE>
23
<PAGE> 24
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS (CON'T)
AS OF JUNE 30, 1997 AND 1996
<TABLE>
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Common stock, no par value (50,000,000 shares authorized, 9,137,534 and
7,309,482 shares issued & outstanding, respectively) 11,816,245 11,304,740
Additional paid-in capital (Note M) 831,247 831,247
Preferred stock, no par value (5,000,000 shares authorized, no shares
issued) -- --
Retained deficit ($4,119,944 and $1,603,848 deficit accumulated during
development stage begun December 3, 1993, respectively) (Note B)
(10,530,463) (8,014,367)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,117,029 4,121,620
------------ ------------
$ 3,133,677 $ 5,240,568
============ ============
</TABLE>
24
<PAGE> 25
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
JUNE 30, 1997 AND 1996, AND CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OPERATIONS
FROM DECEMBER 3, 1993
(DATE OF RECOMMENCEMENT) THROUGH JUNE 30, 1997
<TABLE>
<CAPTION>
DEVELOPMENT STAGE
JUNE 30, 1997 JUNE 30, 1996 ENDED JUNE 30, 1997
(NOTE B)
------------- ------------- -------------------
<S> <C> <C> <C>
NET SALES (Note L) $ 173,624 $ 143,977 $ 455,023
COSTS AND EXPENSES:
Cost of products sold 131,952 106,080 327,639
Selling and administrative expenses 414,433 359,781 964,399
Research and development 80,938 82,951 606,906
Consulting services 266,112 105,808 1,132,453
Depreciation and amortization 13,284 7,860 22,763
----------- ----------- -----------
TOTAL COSTS & EXPENSES 906,719 662,480 3,054,160
----------- ----------- -----------
LOSS FROM OPERATIONS (733,095) (518,503) (2,599,137)
OTHER INCOME & EXPENSES:
Interest income 579 67,361 101,227
Interest expense (23,305) (13,427) (38,409)
Minority interest 433,342 12,490 616,391
Inventory write down (1,683,668) -- (1,683,668)
Interest & Notes receivable write down (507,548) -- (507,548)
----------- ----------- -----------
TOTAL OTHER INCOME & EXPENSES (1,780,600) 66,424 (1,512,007)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (2,513,696) (452,079) (4,111,144)
PROVISION FOR INCOME TAXES (Note I) 2,400 2,400 8,800
----------- ----------- -----------
NET LOSS (Note B) $(2,516,096) $ (454,479) $(4,119,944)
=========== =========== ===========
NET LOSS PER COMMON SHARE (Note F) $ (0.32) $ (0.07) $ (0.92)
=========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING 7,720,196 6,678,171 4,471,777
=========== =========== ===========
</TABLE>
25
<PAGE> 26
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE
YEARS ENDED JUNE 30, 1997, 1996 AND 1995, FOR THE PERIOD DECEMBER 3, 1993 (DATE
OF RECOMMENCEMENT) THROUGH JUNE 30, 1994, AND FOR THE PERIOD JULY 1, 1993
THROUGH DECEMBER 2, 1993
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------------- PAID-IN RETAINED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- ---------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 580,951 $ 6,370,919 $ -- $(6,408,367) $ (37,448)
Net loss incurred prior to
development stage operations -- -- -- (2,152) (2,152)
--------- ---------- ------- ---------- ---------
BALANCE, DECEMBER 2, 1993 580,951 6,370,919 -- (6,410,519) (39,600)
Issuance of stock for cash 4,205,780 8,412 -- -- 8,412
Issuance of stock for
inventory (Note D) 532,970 4,142,784 -- -- 4,142,784
Net loss incurred during
development stage operations -- -- -- (30,305) (30,305)
--------- ---------- ------- ---------- ---------
BALANCE, JUNE 30, 1994 5,319,701 10,522,115 -- (6,440,824) 4,081,291
Issuance of stock in private
placement 590,500 236,200 -- -- 236,200
Issuance of stock for services 402,000 160,800 -- -- 160,800
Additional paid-in capital
from non-cash related party
transaction (Note N) -- -- 900,000 -- 900,000
Net loss incurred during
development stage operations -- -- -- (1,119,064) (1,119,064)
--------- ---------- ------- ---------- ---------
BALANCE, JUNE 30, 1995 6,312,201 10,919,115 900,000 (7,559,888) 4,259,227
Conversion of common stock
warrants 459,781 220,625 -- -- 220,625
Issuance of stock for services 225,000 40,000 -- -- 40,000
Issuance of stock in private
placement 312,500 125,000 -- -- 125,000
Deferred offering costs -- -- (68,753) -- (68,753)
Net loss incurred during
development stage operations -- -- -- (454,479) (454,479)
--------- ---------- ------- ---------- ---------
BALANCE, JUNE 30, 1996 7,309,482 $11,304,740 $ 831,247 $(8,014,367) $ 4,121,620
</TABLE>
26
<PAGE> 27
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE
YEARS ENDED JUNE 30, 1997, 1996 AND 1995, FOR THE PERIOD DECEMBER 3, 1993 (DATE
OF RECOMMENCEMENT) THROUGH JUNE 30, 1994, AND FOR THE PERIOD JULY 1, 1993
THROUGH DECEMBER 2, 1993
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
---------------------- PAID-IN RETAINED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 (CON'T) 7,309,482 $ 11,304,740 $ 831,247 $ (8,014,367) $ 4,121,620
Conversion of common stock 489,916 141,818 -- -- 141,818
warrants
Issuance of stock for cash 370,000 135,430 -- -- 135,430
Issuance of stock for 968,136 234,257 -- -- 234,257
services
Net loss incurred during
development stage -- -- (2,516,096) (2,516,096)
operations --
--------- ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1997 9,137,534 $ 11,816,245 $ 831,247 $(10,530,463) $ (2,117,029)
========= ============ ============ ============ ============
</TABLE>
27
<PAGE> 28
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1997 AND
1996, AND CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OPERATIONS FROM DECEMBER 3,
1993 (DATE OF RECOMMENCEMENT) THROUGH JUNE 30, 1997
<TABLE>
<CAPTION>
DEVELOPMENT
STAGE ENDED
JUNE 30, JUNE 30, JUNE 30, 1997
1997 1996 (NOTE B)
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,516,096) $ (454,479) (4,119,944)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 13,284 7,860 22,763
Interest and note receivable writedown 507,548 -- --
Inventory writedown 1,683,668 -- 1,683,668
Minority interest (433,342) (12,489) 258,650
Issuance of stock for services 234,257 40,000 435,057
Loss on fixed asset disposal 204 -- 204
Additional paid-in capital from non-cash related
party transaction (Note N) -- -- 900,000
Changes in assets and liabilities:
(Increase)/decrease in inventories (15,673) 2,296 (24,774)
(Increase)/decrease in accounts receivable (8,224) 27,386 (9,953)
Increase in pepaid epenses (13,812) -- (20,317)
Increase in other assets -- (15,123) (8,069)
Increase in interest receivable -- (67,362) --
Increase in notes receivable -- -- (493,100)
Increase in accounts payable and accrued expenses 100,802 105,883 316,716
Increase in customer deposits 40,418 -- 40,418
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (406,966) (366,028) (1,018,681)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (17,150) (31,209) (53,990)
Payments for Nasal Mist, Inc. investments (52,181) -- (52,181)
Proceeds from sale of property and equipment 1,750 -- 1,750
Advances (to)/from officer (7,331) 4,503 (8,487)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (74,912) (26,706) (112,908)
----------- ----------- -----------
</TABLE>
28
<PAGE> 29
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1997
AND 1996, AND CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OPERATIONS FROM
DECEMBER 3, 1993 (DATE OF RECOMMENCEMENT) THROUGH JUNE 30, 1997
CASH FLOWS FROM FINANCING ACTIVITIES: (CON'T)
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 277,248 345,625 867,485
Deferred offering costs -- -- (68,753)
Payments on related party debt -- -- (40,152)
Payments on capital lease obligations (4,115) (2,076) (6,983)
Proceeds from notes payable, net 193,937 56,910 293,216
Proceeds from minority interest in partnership -- -- 100,000
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 467,070 400,459 1,144,813
----------- ----------- -----------
NET INCREASE(DECREASE) IN CASH (14,808) 7,725 13,224
CASH AT BEGINNING OF PERIOD 28,083 20,358 51
----------- ----------- -----------
CASH AT END OF PERIOD $ 13,275 $ 28,083 $ 13,275
=========== =========== ===========
</TABLE>
29
<PAGE> 30
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF CONSOLIDATION:
La Jolla Diagnostics, Inc., a California corporation (the "Company")
was incorporated on April 26, 1983 as Women's Health Centers of
America, Inc. On February 8, 1990, the Company acquired Chemical
Dependency Healthcare of California, Inc. and changed its name to
Chemical Dependency Healthcare, Inc. On April 17, 1995, the Company
acquired Unified Technologies, Inc. and changed its name to La Jolla
Diagnostics, Inc. The Company has two wholly-owned subsidiaries,
Unified Technologies, Inc. (UTI) and Chemical Dependency Healthcare of
California, Inc. (CDHC) and a 75 percent ownership interest in
Antisera Associates, Limited, a California limited partnership. The
Company is still considered a development stage business (see Note B).
The consolidated financial statements include the accounts of La Jolla
Diagnostics, Inc. and its subsidiaries. Minority interest represents
the minority partner's share of the equity in Antisera Associates,
Limited. All significant intercompany transactions and balances have
been eliminated in consolidation.
BASIS OF ACCOUNTING:
The Company's policy is to use the accrual method of accounting and to
prepare and present financial statements which conform to generally
accepted accounting principles.
INVENTORY:
Inventory consists of medical and healthcare products, and the
antisera products. The inventory is valued at the lower of cost or
market. Cost is determined under the first-in, first-out (FIFO)
method.
PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost. Maintenance, repairs and
minor renewals are expensed as incurred. When property and equipment
are retired or otherwise disposed, the related cost and accumulated
depreciation are eliminated and any gain or loss on disposition is
reflected in income or expense. Depreciation is provided principally
on the straight-line method over the estimated useful lives of the
assets of five years. Property and equipment is shown net of
accumulated depreciation of $19,634 and $8,223 for the years ended
June 30, 1997 and 1996, respectively.
30
<PAGE> 31
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER ASSETS:
Other assets consist of costs incurred by the Company as their initial
investment in Nasal Mist, Inc. (a California corporation),
incorporated on August 4, 1997, organizational costs net of
accumulated amortization of $1,800 and $1,140, respectively, and
deposits.
INCOME TAXES:
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consists of taxes currently due plus
deferred taxes related primarily to differences between the basis of
various assets for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Deferred taxes also are recognized for net operating losses that are
available to offset future taxable income and tax credits that are
available to offset future federal income taxes.
USE OF ESTIMATES:
The preparation of the Company's financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the financial statement date and the reported
amounts of revenue and expenses during the reporting period. Due to
uncertainties inherent in the estimation process, it is reasonably
possible that actual results could differ from these estimates.
B. DEVELOPMENT STAGE BUSINESS:
The Company is a development stage business engaged in the development
and sale of medical products. The Company researches, develops,
manufactures and markets various healthcare products and provides
certain laboratory services. The consolidated financial statements
reflect activity primarily related to identifying suitable products
for sale and efforts devoted to financing and carrying on
administrative functions. The Company has recommenced its operations,
however, revenues generated to date have been primarily related to the
sale of ancillary products to foreign markets.
31
<PAGE> 32
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
B. DEVELOPMENT STAGE BUSINESS: (CONTINUED)
Development stage operations for the Company began upon the
incorporation of UTI on December 3, 1993. Prior to this date, the
Company was inactive and had no material operations. The following
information details the deficit accumulated during the development
stage and the related losses:
Retained deficit as of June 30, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deficit accumulated during the
development stage $ (4,119,944) $ (1,603,848)
Deficit accumulated prior to the
development stage (6,410,519) (6,410,519)
------------ ------------
$(10,530,436) $ (8,014,367)
============= ============
</TABLE>
The Company has restated common stock to reflect the reverse stock
split as a result of the merger (Note F). For the years ended June
30, 1997, 1996, 1995 and 1994, changes in stockholders' equity
(deficit) reflect activity incurred during the development stage
period.
C. ACQUISITIONS:
On April 17, 1995, Chemical Dependency Healthcare of California, Inc.
(CDHC) acquired 100 percent of the outstanding stock of UTI by issuing
4,938,750 shares of its no par value common stock in exchange for
9,877,500 shares of UTI common stock. This stock exchange resulted in
UTI shareholders receiving one share of CDHC common stock for every
two shares of UTI common stock held. The business combination has
been accounted for under the pooling of interests method. Effective
April 17, 1995, the Company changed its name from Chemical Dependency
Healthcare of California, Inc. to La Jolla Diagnostics, Inc. (Note A).
Under the pooling of interests method, UTI's results of operations
have been included in the consolidated results of operations since the
date of its inception, December 3, 1993, and the assets and
liabilities of the separate companies have been combined and are
recorded at their historical cost based amounts. Since CDHC was
inactive and had no assets or operations for any reported periods
prior to the merger, the consolidated results of operations consist
solely of UTI's operations prior to the date of combination and the
basis of accounting used by UTI has continued and accordingly, no
adjustments were necessary to change to different accounting methods.
The operations subsequent to the merger relate to the continuing
development stage activities, which relate primarily to the
development and sale of medical healthcare products (Note B).
32
<PAGE> 33
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
C. ACQUISITIONS: (CONTINUED)
In July 1994, UTI merged with Pathfinder Holding Corporation
(Pathfinder), a Nevada publicly-held shell corporation, in which
Pathfinder was to be the surviving entity. However, after the merger
was completed, certain unintentional misrepresentations concerning the
SEC registration status of Pathfinder's stock were discovered,
resulting in an agreement among the parties to rescind the merger.
Accordingly, on February 10, 1995, the merger was rescinded and all
the assets and liabilities of the Company existing prior to the
merger, as well as all assets acquired and obligations created after
the merger were transferred to UTI. In exchange for the recision and
the rights to the name Pathfinder Holding Corporation, the Company
issued warrants to purchase an aggregate of 678,300 shares of the
Company's common stock at an exercise price of the greater of $1.00 or
50 percent of the average trading price for the five days prior to
exercise.
D. FORMATION OF ANTISERA ASSOCIATES, LTD.
On December 21, 1994, the Company sold $1,000,000 of antisera
inventory to Sogery Trust , an unrelated entity, for $100,000 in cash
and a note receivable of $900,000 secured by the inventory. Following
the sale, the Company and Sogery Trust formed Antisera Associates,
Ltd., whereby the Company contributed $3,142,784 of antisera inventory
for a 75 percent interest and Sogery Trust contributed its $1,000,000
of inventory for a 25 percent interest in the partnership.
The original note receivable from Sogery Trust bears interest at 7
percent annual rate with principal payments of $112,500, $270,703,
$322,998 and $193,799 due in fiscal years 1996, 1997, 1998 and 1999,
respectively. Per the partnership agreement, if the Company is unable
to sell the inventory due to lack of marketability or reduction in
value, then the outstanding balance on the promissory note will be
reduced as appropriate to reflect any corresponding reduction in
value. During the year ended June 30, 1997, the Company wrote down
the inventory by approximately 40% ($1,683,668) and began preparing
for the implementation of a close-out sale marketing campaign.
Based on the Company's inventory write-down and close-out sale
marketing campaign, the Sogery note receivable was correspondingly
written down by $406,900 and the interest receivable of $100,648 was
written off.
The antisera was purchased by UTI on June 8, 1994 from a private
family trust in bulk form for total consideration valued at $4,142,784
consisting of 532,970 shares of the Company's common stock (with an
effective share price of $7.77 per share), along with warrants to
purchase an additional 60,000 shares at $0.20 per share (after giving
effect for the 1 for 2 shares of UTI stock exchanged in the UTI
merger). During the time period subsequent to the exchange of the
Company's common stock for the antisera inventory, the Company had
numerous cash sales of common stock. These shares sold through a
private placement, the average share value approximated $0.40 per
share.
33
<PAGE> 34
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
E. INVENTORY:
Inventory as of June 30, 1997 and 1996 is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Antisera products $2,456,911 $4,140,579
Healthcare products 26,979 11,306
---------- ----------
$2,483,890 $4,151,885
========== ==========
</TABLE>
F. NET LOSS PER COMMON SHARE:
Net loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the
period. For the years ended June 30, 1997 and 1996, the Company's
common stock equivalents were antidilutive, and therefore, were not
included in the computation of net loss per common share. The per
share computations reflect the effect of a 10 for 1 reverse stock
split that occurred on April 14, 1995 and a 2 for 1 stock exchange
between the Company and UTI on April 17, 1995.
G. LOANS PAYABLE:
Loans Payable as of June 30, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Loans payable to unrelated parties, unsecured, with
annual interest of 10 percent, due on demand $ 7,341 $ 64,279
Loan payable to a group of foreign investors,
unsecured, with annual interest of 8 percent, due on 32,125 35,000
demand
Loans payable to unrelated parties, unsecured, with
annual interest of 10 percent, due August 1997, note
holders have option to convert at $1.00/share into
shares of common stock of Nasal Mist, Inc. 26,700 --
Loans payable to unrelated parties, unsecured, with
annual interest from 8 to 12 percent, due at various
dates through January 1998, not holders have the option
to convert at $.20/share to $1.00/share into shares of
common stock of the Company 227,050 --
-------- --------
$293,216 $ 99,279
======== ========
</TABLE>
34
<PAGE> 35
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
H. CAPITAL LEASE OBLIGATION:
The Company leases computer and equipment under a capital lease. The
economic substance of these capital lease agreements is that the
Company is financing the acquisition over a sixty month period. The
capital leases are reflected in the Company's assets & liabilities.
The following is an analysis of the book value of the leased assets
included in property and equipment:
<TABLE>
<S> <C>
Cost $ 11,464
Accumulated Depreciation (4,185)
--------
$ 7,279
========
</TABLE>
The following is a schedule by year of the future minimum lease
payments under the above capital leases, together with the present
value of the net minimum lease payments:
<TABLE>
<CAPTION>
Year ending June 30
-------------------
<S> <C>
1998 $3,600
1999 2,556
2000 2,556
2001 298
------
9,010
Amount representing interest 1,362
------
Present value of net minimum lease payment 7,648
Less current portion (2,408)
------
$5,240
======
</TABLE>
I. INCOME TAXES:
The provision for income taxes for the years ended June 30, 1997 and
1996 consists solely of the $800 minimum California franchise taxes
for the Company and its wholly-owned subsidiaries.
Provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Current income taxes $2,400 $2,400
Deferred income taxes -- --
------ ------
Provision for income taxes $2,400 $2,400
====== ======
</TABLE>
35
<PAGE> 36
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
I. INCOME TAXES: (CONTINUED)
The Company's total deferred tax asset as of June 30, 1997 is as
follows:
<TABLE>
<S> <C>
Net operating loss carryforwards $ 143,000
Valuation allowance 143,000
----------
Net deferred tax asset $ --
==========
</TABLE>
As of June 30, 1997, the Company had net operating loss carryforwards,
before any limitations which expire as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, FEDERAL STATE
------- -----
<S> <C> <C> <C>
1998 $ 200,000 $ 4,000
1999 849,000 16,000
2000 720,000 79,500
2001 1,080,000 190,000
2002 1,130,000 1,256,800
2003 634,000 --
2004 145,000 --
2005 1,270,000 --
2006 180,000 --
2007 190,000 --
2008 8,000 --
2009 32,000 --
2010 159,000 --
2011 380,000 --
2012 2,516,100 --
---------- ----------
$9,493,100 $1,546,300
========== ==========
</TABLE>
The realization of any future income tax benefits from the utilization
of net operating losses has been determined to be limited. Federal
and state tax laws provide that when a more than 50 percent change in
ownership of a company occurs within a three-year period, the net
operating loss is limited. The net operating loss carryforwards have
been limited to approximately $15,000 per year until expiration.
Losses generated after the merger will not be limited by any change
that resulted from the merger.
36
<PAGE> 37
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
J. WARRANTS AND OPTIONS:
Warrants and options outstanding as of June 30, 1997 and 1996 consists
of 2,991,350 and 2,670,566, nonredeemable warrants and options to
purchase shares of common stock of the Company, which are exercisable
into 1 share of common stock each at various prices ranging from $0.20
to $1.00 per share. The warrants were issued for certain transactions
and performances of services and expire five years after the date of
issuance. The options were issued for certain transactions and
performance of services and expire at various times from three to
eight years. Warrants in the amount of $141,818 and $220,625 have
been exercised during the years ended June 30, 1997 and June 30, 1996,
respectively.
K. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes for the years ended June 30,
1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Interest $8,807 $3,300
====== ======
Income taxes $2,400 $2,400
====== ======
</TABLE>
During 1997 and 1996, the Company entered into various agreements with
certain individuals and businesses whereby it issued common stock in
exchange for services performed by them. In connection with this, for
the years ended June 30, 1997 and 1996, the Company issued 1,168,136
and 225,000 shares of common stock for total consideration of $234,257
and $40,000, respectively.
L. EXPORT SALES:
The Company's operations consist of sales of products to domestic and
foreign markets. As of June 30, 1997 the Company had unshipped orders
for products totaling $40,418. There were no unshipped orders as of
June 30, 1996. Although the Company is a development stage business
and product sales have just commenced, the breakdown of sales between
markets is as follows for the years ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Domestic market $ 24,562 $ 20,330
Foreign market (Russia) 149,415 123,647
-------- --------
$173,977 $143,977
======== ========
</TABLE>
37
<PAGE> 38
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
M. RELATED PARTY TRANSACTIONS:
During the year ended June 30, 1995, various shareholders and
directors of the Company provided consulting and research and
development activities related to the formation and recommencement of
business activities.
In connection with these services, the Company recognized research and
development and consulting expenses of $427,591 and $472,409,
respectively. As of June 30, 1995, the Company and the various
related individuals agreed to eliminate the amounts due to these
related parties, and accordingly, the Company recorded a $900,000
increase to additional paid-in capital. No gain was recorded since
the extinguishment of debt was between related parties and reflected
as a capital transaction.
In conjunction with the elimination of the debt to the related
parties, the Company issued 900,000 nonredeemable warrants to the
above-mentioned shareholders and directors of the Company. The
warrants are exercisable at $0.50 per warrant, with each warrant
exercisable into one share of common stock. There was no entry made
to record the warrants issued since the exercise price on the date of
issuance was greater than the fair market value of the stock.
For the years ended June 30, 1997 and June 30, 1996 various
shareholders and directors provided consulting and research and
development activities and were compensated with S-8 Common Stock
issuances and S-8 stock options.
N. GOING CONCERN:
As shown in the accompanying Financial Statements, the Company has
incurred recurring losses from operations. As of June 30, 1997,
current liabilities exceed current assets by approximately $(574,000)
The Company has also been unsuccessful in marketing or selling
significant amounts of the antisera inventory. In addition, the
Company had negative cash flows from operations of $407,000 for the
year ended June 30, 1997. These factors, as well as the uncertainty
regarding the Company's ability to continue to raise capital through
the sale of equity securities, create an uncertainty as to the
Company's ability to continue as a going concern.
Management feels confident that the above problems are being solved.
It intends to close-out its inventory of antisera (various reagents
which contain antibodies against immunoglobulins) by reducing current
sale prices by approximately 40 percent in order to concentrate on the
development of its proprietary diagnostic products, and the marketing
and development of its ophthalmic solutions, and nasal sprays. The
Company expects the close-out sale of antisera will create significant
revenues and provide cash for working capital over the next three to
five years.
38
<PAGE> 39
The proprietary diagnostic products being developed include a Breast
Cancer Diagnostic Test and a Heart Attack Predictor.
The Company's ophthalmic solutions and nasal sprays, all of which use
a patent pending clustered water technology, include Feverfew Nasal
Mist, Living Water Eye Lotion and OptoPet Eye Wash. The Feverfew
product has received the most attention and has started generating
sales in the second quarter of 1997.
The Company is also trying to raise capital through the exercise of
outstanding options and warrants through a private placement to
provide capital for the introduction of Feverfew Nasal Mist and other
nasal sprays the Company may develop.
The ability of the Company to continue as a going concern is dependent
upon their success in the above endeavors to obtain additional sources
of capital, and attain sufficient growth in their user base to enable
them to achieve future profitability. The accompanying financial
statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
<PAGE> 40
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and current position(s) of each director and executive officer of
the Company are as set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Donald Brucker 64 President, Chief Executive Officer, Chief
Financial Officer and Director
Robert Hamburger 74 Director
Stanley Heyman 52 Director
Richard O'Connor 51 Director and Consultant
Greg Campbell 49 Director and Consultant
David Flaugh 50 Director, Secretary and Consultant
</TABLE>
Donald Brucker
Donald Brucker serves as a director and as the Company's Chief Executive
Officer and Chief Financial Officer. He is responsible for business
development, marketing and FDA regulatory affairs. The Company will be
recruiting a Chief Financial Officer, but until an appropriate person can be
hired, Mr. Brucker's responsibilities will also include financial and
accounting matters. Mr. Brucker has been in the medical products business for
over 30 years. He was a founder and the Chief Executive Officer of Continuous
Curve Contact Lenses, Inc., at one time, the second largest manufacturer of
contact lens products. Continuous Curve was recognized as an innovator in
introducing new series of FDA-approved contact lenses. As Chief Executive
Officer of Continuous Curve, Mr. Brucker administered their public offering in
1977 and its sale to Revlon in 1981 for a value in excess of $100,000,000.
Following the acquisition, Mr. Brucker became President of Revlon Vision Care.
From 1981 to 1982, Mr. Brucker served as Chief Executive Officer of Immunetech
Pharmaceuticals (now known as Dura Pharmaceuticals).
From 1982 to 1989, Mr. Brucker served as a consultant for several healthcare
and medical device companies. From 1989 to 1993, Mr. Brucker was Chief
Executive Officer of Ariel Life Systems, the former maker of a computerized
exercise system. On June 24, 1994, Ariel filed a bankruptcy petition. As a
result of losses suffered by Mr. Brucker in connection with his investment in
Ariel, on February 3, 1994 Mr. Brucker personally filed a bankruptcy petition.
40
<PAGE> 41
Robert N. Hamburger, M.D.
Dr. Hamburger serves as a director and as the Company's medical laboratory
director with responsibility for all clinical assays which are reported. Dr.
Hamburger reviews the quality and accuracy of all clinical diagnostic
laboratory results before they are reported to clinicians. Since July 1, 1990,
Dr. Hamburger has been a Professor Emeritus at USCD School of Medicine, where
from 1970 to 1990 he was Chairman of the Pediatric Allergy and Immunology
Division. Dr. Hamburger has published over 200 articles, is the holder of
three patents, and has achieved national and international recognition for his
research in immunology.
Stanley V. Heyman
Mr. Heyman is the President of Heyman & Associates, Inc., Certified Public
Accountants, which was founded in 1994. From 1990 to 1994, Mr. Heyman was a
partner of Eisenberg & Heyman, and from 1984 through 1990, he was a partner in
the San Diego office of Coopers & Lybrand, practicing in the tax department.
Richard O'Connor
Dr. O'Connor is Chief of the Department of Asthma, Allergy and Clinical
Immunology for Sharp Rees-Stealy at San Diego, California, and as the Director
of the Department of Clinical Research, he has supervised more than 150
pharmaceutical clinical trials.
Dr. O'Connor is a Clinical Professor of Pediatrics at UCSD School of Medicine
and has published nearly on hundred articles in the field of Immunology an
Allergy. He is the former Laboratory Director of the Immunology and Allergy
Laboratory for the Department of Pediatrics at UCSD.
Gregory S. Campbell
Mr. Campbell (Board Member), who most recently served as executive vice
president of Colwell Banker Corporation, Mission Viejo, where he directed
operations for Coldwell Banker Residential Affiliates, Coldwell Banker
Residential Brokerage, Guardian Tile & Escrow, Corporate Marketing, Education
and Real Estate and The Home Mortgage Network Joint Venture. Coldwell Banker
is a national residential real estate company with more than 2,500 offices and
56,000 sales associates.
Prior to joining Coldwell Banker, Mr. Campbell served as senior vice president
of asset management for Homart Development, Co., a Sears-owned national
regional shopping center and office building developer. He also held senior
positions at a number of leading nationwide real estate consulting, management
and brokerage firms. Mr. Campbell is a Wheaton Collecge graduate with a degree
in business and economies.
41
<PAGE> 42
David Flaugh
Mr. Flaugh (Board Member) recently completed a 25-year tenure at Laboratory
Corporation of America (formerly National Health Laboratories), a nationwide
clinical laboratory company. As Chief Operating Officer and Chief Financial
Officer, Mr. Flaugh guided the company through an aggressive acquisition
program, which included the purchase of approximately 60 laboratory companies
with annual revenues of $350 million. He also managed the company's merger
with Roche Biomedical Laboratories (to form LabCorp) in May 1995. Prior to the
merger, the company had reached $1 billion in annual sales.
All members of the Board of Directors are elected to serve until their
respective successors have been elected and qualified or until their earlier
death, resignation or removal in the manner specified in the Company's by-laws.
The Board of Directors has a Compensation Committee, currently comprised of
Messrs. Hamburger, Heyman and O'Connor, and an Audit Committee, currently
comprised of Messrs. Hamburger, Heyman and O'Connor. The Compensation
Committee makes recommendations concerning salaries and bonuses for executive
officers of the Company. The Audit Committee reviews the results and scope of
the audits and other services provided by the Company's independent auditors.
The Directors of the Company intend to use reasonable efforts to expand the
Board to seven directors and appoint to the Company's Board of Directors one
more outside director before the end of fiscal year 1998.
PROMOTERS, CONSULTANTS, ADVISERS AND FOUNDERS
The following individuals have performed and are expected to continue providing
services to the Company as consultants and advisers. These individuals have
devoted varying amounts of time, but are also engaged in other business
activities not related to the Company. The amount of time individuals may
devote to the Company will depend upon their availability, the success of the
projects they work on, and the directions the Company chooses to devote its
resources. Except as noted below, advisors have been compensated by issuing
warrants to purchase Common Stock of the Company. See "Stock Awards and
performance Warrants."
Robert R. Buchner
Mr. Buchner is responsible for all aspects of research and development for the
molecular diagnostic products, including selection of DNA sequences, managing
the production and quality assurance of probes and primers, developing
DPR-based assays, and supervising the validation of the clinical trials of each
assay kit. He will also manage the performance of all assays which are offered
for service to generate revenue while the FDA approval process is in progress.
Mr. Buchner intends to devote substantially all of his efforts to the business
of the Company. Mr. Buchner is also a scientist for the Scripps Research
Institute at La Jolla, California, where he evaluates molecular biological
products and techniques for research applications. He has held
42
<PAGE> 43
this position since 1992. Mr. Buchner has also been a staff scientist with
Stratagene Cloning Systems since 1991. Mr. Buchner was the founding laboratory
manager for the Presbyterian Cancer Center in Philadelphia, Pennsylvania and
was a former research associate for both Immunetech Pharmaceuticals and Xitel
Corporation in San Diego, California.
Robert Ziccardi, Ph.D.
Dr. Ziccardi is a protein chemist with the Scripps Research Institute and is
working with the Company in the area of antibody purification. Dr. Ziccardi
received his Ph.D. in biochemistry from the University of California at Los
Angeles and is an adjunct professor of chemistry at Palomar College. Dr.
Ziccardi is currently devoting substantially full-time to the Company and is
being compensated at the rate of $52,000 per year.
Vic Braden
Mr. Braden is advising the Company in regards to the marketing of the
Electronica-2, a product which he is endorsing. Mr. Braden is a
nationally-known educator of tennis and other sports. Among his many
activities, he is Director of the Vic Braden Tennis College, the Vice Braden
Ski College, and Instruction Editor of Tennis Magazine. He has been featured
in numerous magazines, including Sports Illustrated, Business Week, and Time.
Mr. Braden will be compensated based upon sales of the Electronica-2 product.
Edward Morgan, Ph.D.
Dr. Morgan is the Company's senior consultant for immunology and advises the
Company regarding immunological procedures. A graduate of the University of
California in Berkeley with a Ph.D. in immunology, Dr. Morgan has been a member
of the Department of Immunology, Scripps Clinic and Research Foundation in La
Jolla, California since 1978. Dr. Morgan also has had experience working in
industry with Immunetech Pharmaceuticals and Tanabe Research Laboratories.
Grigory P. Vorobiev, M.D, Ph.D.
Dr. Vorobiev is a liaison between the Company and various scientific and
medical institutions in the former Soviet Union. Dr. Vorobiev is an Honor
Physician of Russia, and is Chairman of the Medical Division for the National
Athletic Team in Russia.
43
<PAGE> 44
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE CASH COMPENSATION
Summary of Cash and Certain Other Compensation
The following table shows, for the most recent four fiscal years, the cash
compensation paid by the Company, as well as all other compensation paid or
accrued for those years to the Chief Executive Officer and the Company's other
executive officers as of June 30, 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NAME AND FISCAL YEAR ANNUAL COMPENSATION LONG-TERM COMPENSATION
PRINCIPAL
POSITION SALARY BONUS OTHER STOCK AWARDS WARRANTS
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Donald Brucker, 1997 $96,000 $ 0 $ 0 0 0
---------------------------------------------------------------------------------------------
President, CEO,
CFO 1996 $96,000 $ 0 $ 0 0 0
---------------------------------------------------------------------------------------------
1995 $49,604 $ 0 $ 0 1,361,972 190,000
---------------------------------------------------------------------------------------------
1994 $ 0 $ 0 $ 0 0 0
---------------------------------------------------------------------------------------------
1993 $ 0 $ 0 $ 0 0 0
---------------------------------------------------------------------------------------------
</TABLE>
STOCK AWARDS AND PERFORMANCE WARRANTS
As of the date of the Unified acquisition (April 17, 1995), each of the
following executive officers, directors, consultants, advisers, promoters and
founders was issued Common Stock and granted a Common Stock performance warrant
(collectively, the "Performance Warrants") by the Company to purchase the
number of shares of Common Stock at any time prior to April 17, 2000 at the
prices as set forth in the table below. The Common Stock and Performance
Warrants were earned when issued and granted. The Company has entered into
Stock Restriction Agreements with certain of the persons listed below.
Pursuant to the Stock Restriction Agreement, the Common Stock may not be
transferred without the consent of the Company for a period of two years, and
thereafter shall be subject to the resale restrictions as set forth in
Paragraph (e)(1) of Rule 144 of the Rules and Regulations of the Securities and
Exchange Commission. Further, pursuant to the Stock Restriction Agreement,
such Common Stock is subject to forfeiture in the event the Shareholder is no
longer affiliated with the Company as an officer, director, consultant or
adviser upon payment by the Company to such Shareholder of the sum of $0.01 per
share. The Performance Warrants are nontransferable and under the terms of
certain Stock Restriction Agreements expire unless exercised by the warrant
holder within 30 days after such holder is no longer affiliated with the
Company as an officer, director, consultant or adviser
44
<PAGE> 45
The following table sets forth certain information concerning the Stock Awards
and Performance Warrants at June 30, 1997:
<TABLE>
<CAPTION>
==============================================================================================================
NAME COMMON STOCK VALUE OF COMMON NUMBER OF SHARES OF VALUE OF UNEXERCISED
AWARDED STOCK AWARDS(1) STOCK UNDERLYING IN-THE-MONEY
PERFORMANCE WARRANTS PERFORMANCE WARRANTS
AS OF JUNE 30, 1997 ($) AS OF JUNE 30,
1997(1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Robert Blanchard 75,000 $30,000 -- --
- --------------------------------------------------------------------------------------------------------------
Robert Hamburger -- -- 20,000 $ 5,000
- --------------------------------------------------------------------------------------------------------------
All other executive 75,000 $30,000 20,000 $ 5,000
officers, promoters,
consultants and
advisers as a group
==============================================================================================================
</TABLE>
NOTES:
(1) Warrants at an exercise price of $0.50 per share.
COMPENSATION OF DIRECTORS
No director of the Company receives any cash compensation for his service as a
director. Common Stock and Performance Warrants granted to directors are
listed above. All directors are entitled to be reimbursed for travel and other
expenses incurred while attending meetings of the Board of Directors.
EMPLOYMENT CONTRACTS
The Company has no employment contracts.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of Common Stock as of September 1, 1996 (assuming the exercise of
options and warrants exercisable within 60 days of the date hereof) by: (i)
each person known to the Company to beneficially own more than 5 percent of the
outstanding shares of Common Stock, (ii) each of the Company's directors, (iii)
each of the Company's executive officers named in the Summary Compensation
Table above, and (iv) all directors and officers of the Company as a group.
Unless otherwise indicated below, the persons and entities named in the table
have sole voting and sole investment power with respect to all the shares
beneficially owned, subject to community property laws, where applicable.
Percentage ownership assumes all warrants and options of listed person
exercised and all other warrants and options unexercised.
45
<PAGE> 46
<TABLE>
<CAPTION>
========================================================================================
NAME AND ADDRESS AMOUNT PERCENT
<S> <C> <C>
Donald Brucker(1) 1,551,972.5 24
2838 Caminito Turnberry
La Jolla, CA 92037
- -------------------------------------------------------------------------------------------
Kenneth Brucker, as Trustee(2) 1,361,972.5 21
of the A.K. Trust
1706 Torrence Street
San Diego, CA 92103
- -------------------------------------------------------------------------------------------
Robert Buchner(3) 967,295 15
713 N. Daisy Street
Escondido, CA 92027
- -------------------------------------------------------------------------------------------
Robert Hamburger, M.D.(4) 770,010 12
9485 La Jolla Shores
La Jolla, CA 92037-1149
- -------------------------------------------------------------------------------------------
Richard O'Connor(5) 740,000 11
Sharp Rees-Stealy
2001 4th Avenue
San Diego, CA 92101
- -------------------------------------------------------------------------------------------
Andrei Vorobiev(6) 740,000 11
921 Coast Blvd., South #1
La Jolla, CA 92037
- -------------------------------------------------------------------------------------------
Jennifer Lee Plummer(7) 592,970 9
9998 Muffin Court
San Diego, CA 92129
- -------------------------------------------------------------------------------------------
All directors and executive 2,766,982.5 41
officers as a group (four
individuals)
- -------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) Includes 1,361,972.5 shares owned of record by the A.K. Trust of which Mr.
Brucker is a beneficiary and 190,000 shares subject to a Performance
Warrant.
(2) Held as Trustee only, Kenneth Brucker disclaims any beneficial ownership.
(3) Includes 150,000 shares subject to Performance Warrants.
(4) Includes 25,000 shares held by the Hamburger Family Trust, of which Dr.
Hamburger is a trustee and beneficiary, 100,000 shares subject to a
Performance Warrant, and 5,000 shares subject to a Warrant received by Dr.
Hamburger in connection with the acquisition of 25,000 shares of Common
Stock by the Hamburger Family Trust pursuant to a private placement.
(5) Includes 100,000 shares subject to Performance Warrants.
(6) Includes 60,000 shares subject to Performance Warrants.
(7) Includes 60,000 shares subject to Performance Warrants, and 532,970 shares
held as Trustee of the Plummer Family Trust, of which she is also a
beneficiary.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS RELATED TO UNIFIED ACQUISITION
In connection with the Unified acquisition (on April 17, 1995), the Company
issued shares of Common Stock and granted warrants to acquire shares at various
exercise prices. The Common
46
<PAGE> 47
Stock issued and Warrants granted to such persons are set forth on the tables
under "MANAGEMENT -- Stock Awards and Performance Warrants."
OTHER TRANSACTIONS
The Company, also from time to time, retains the services of Heyman &
Associates, Inc., of which Stanley V. Heyman is a principal. Mr. Heyman is a
director of the Company. The Company has compensated various of its officers,
directors and promoters with stock awards and warrants. See under "MANAGEMENT
- -- Stock Awards and Performance Warrants."
ITEM 13(a). EXHIBITS
1. Corporation's proxy statement incorporated by reference.
ITEM 13(b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter of
fiscal year ended June 30, 1997.
47
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: October 13, 1997 LA JOLLA DIAGNOSTICS, INC.
By: /S/ DON BRUCKER
-------------------------------------
Don Brucker
President, Chief Executive Officer
In accordance with the Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ DON BRUCKER
- ------------------------------- Director, President, Chief Executive October 13, 1997
Don Brucker Officer and Chief Financial Officer
(Principal Executive Officer, Principal
Financial Officer and Controller)
/S/ ROBERT HAMBURGER
- ------------------------------- Director October 13, 1997
Robert Hamburger, M.D.
/S/ STANLEY V. HEYMAN
- ------------------------------- Director October 13, 1997
Stanley V. Heyman
/S/ RICHARD O'CONNOR
- ------------------------------- Director October 13, 1997
Richard O'Connor, M.D.
/S/ GREGORY S. CAMPBELL
- ------------------------------- Director October 13, 1997
Gregory S. Campbell
/S/ DAVID FLAUGH
- ------------------------------- Director and Secretary October 13, 1997
David Flaugh
</TABLE>
48
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 13,275
<SECURITIES> 0
<RECEIVABLES> 503,053
<ALLOWANCES> 0
<INVENTORY> 2,483,890
<CURRENT-ASSETS> 79,011
<PP&E> 45,820
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,133,677
<CURRENT-LIABILITIES> 652,758
<BONDS> 0
0
0
<COMMON> 11,816,245
<OTHER-SE> (9,699,216)
<TOTAL-LIABILITY-AND-EQUITY> 3,133,677
<SALES> 173,624
<TOTAL-REVENUES> 174,203
<CGS> 131,952
<TOTAL-COSTS> 906,719
<OTHER-EXPENSES> 2,214,521
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,513,696)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,516,096)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> 0
</TABLE>
