ITEM 1. BUSINESS
GENERAL
Daltex Medical Sciences, Inc. (the "Company"), incorporated on July 28, 1983 in the State of Delaware, is a developmental stage pharmaceutical and medical device company. The business objectives of the Company are to identify, develop and market certain medical device and pharmaceutical product technologies designed to reduce the cost of specific diagnostic tests or therapeutic treatments and to increase the accuracy, efficacy and/or safety of these tests and treatments in hospital and home health care environments.
The Company owns or has rights to a variety of medical device and pharmaceutical technologies, including, (i) antimicrobial materials, compounds and processes to treat venous catheters, vascular grafts, surgical and other implants, wound dressings and disposable gloves to prevent or reduce infection and to inhibit the transmission of infectious diseases, (ii) nutritional supplements for prevention of atopic diseases, (iii) skin care pharmaceutical technologies, both ethical and over-the-counter, and (iv) a mapping and potential screening system, based on ultrasound technology, for the location and early diagnosis of breast cancer. See "Product Technologies." The development and licensing of many of these products will require extensive laboratory tests and clinical evaluation and must be cleared by various governmental regulatory agencies before they will be available for marketing. This process may take several years and significant financial resources to complete, and there can be no assurance that such regulatory clearances or approvals will be obtained or that the Company will have sufficient financial resources to complete the developmental or approval processes. See "Governmental Regulation." Due to the Company's financial condition, it has dramatically reduced marketing and sales activities and is considering a possible liquidation of the Company. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Of the foregoing technologies, during the fiscal year ended July 31, 1997, the Company has concentrated its efforts on (i) extremely limited research and development activities in the field of antimicrobial technology, while continuing to seek suitable partners to further commercialize its antimicrobial technologies, (ii) protecting and enhancing its intellectual property rights in antimicrobial technology and in an invention concerning the prevention of atopic diseases, (iii) attempts to market and sell its antimicrobial disposable examination and surgeons' gloves outside the United States, and (iv) attempts to obtain clearance in the United States from the United States Food and Drug Administration ("FDA") for the sale of such gloves.
While in certain limited cases the Company may directly market its products to end users, the Company has, in the past, entered into licensing agreements or distribution arrangements for the marketing and distribution of its products and manufacturing agreements with third parties. The Company currently has definitive license agreements and cooperative development agreements for the research, development and commercialization and/or the production of prototypes with respect to the following technologies: (i) the application of the antimicrobial materials to make polyurethane-based cardiovascular catheters, related devices and wound drains and (ii) the application of the antimicrobial materials to seven medical implant product areas.
The Company's research and development activities have been discontinued due to the Company's limited resources and as reflected in the Report of the Independent Auditors, there is substantial doubt concerning the Company's ability to continue as a going concern. The Company is continuing to actively explore a number of ways of raising additional capital, including loans, various equity offerings, private placements, mergers with revenue-producing entities, and a sale of the Company's Common Stock or assets. However, to date the Company has received no commitments for a sale or merger of the Company and there can be no assurance that the Company's attempts to sell or merge the Company or to raise additional capital will be successful or that the Company will be able to continue as a going-concern.
TECHNOLOGY LICENSING ARRANGEMENTS
(i) Antimicrobial Products
(1) Catheters and Cardiovascular Products. Pursuant to a definitive license agreement entered into in March 1991 (the "Arrow License") with Arrow International, Inc. ("Arrow"), a leading manufacturer and marketer of catheters and cardiovascular products, the Company has sublicensed to Arrow certain applications of its antimicrobial technology that has been licensed by the Company from Columbia University (the "University"). See "Product Technologies - Licenses With the University." Pursuant to the Arrow License, Arrow is obligated to pay periodic royalties, including minimum annual royalties, to the Company based upon units sold in several product applications which incorporate the Company's antimicrobial technology and quarterly development phase payments for product applications not yet offered for sale. The term of the Arrow License is the longer of the life of any issued patent which has claims covering one or more of the product applications or ten years. In January 1991, Arrow introduced to the market, pursuant to a 510(k) notification filed with the FDA, its first antimicrobial product, a multi-lumen central venous catheter with antiseptic surface, incorporating the Company's antimicrobial technology. Clinical tests sponsored by Arrow demonstrate that the treated catheter surface provides significant inhibition of organisms associated with hospital-based infections without side effects, such as toxicity or thrombogenicity. In December 1994, Arrow reported to the Company that it had received FDA clearance to market a second antimicrobial product, the percutaneous sheath introducer system ("PSI"), incorporating the antimicrobial technology which the Company had licensed to Arrow. In January 1996, Arrow introduced the PSI to the marketplace. Since that time, the Company has received nominal quarterly royalty payments based on limited sales of the newly marketed PSI, instead of quarterly development fees related to this product. However, there can be no assurance that Arrow's sales of PSI units will increase or that the Company will receive significant royalties from the sale of this product in the future.
In October 1995, the Company and Arrow agreed to modify the terms of the existing Arrow License (the "Modified Arrow License") concerning only those license fees payable to the Company by Arrow for antimicrobially treated multi-lumen central venous catheters. Pursuant to the Modified Arrow License, Arrow paid the Company a one-time royalty of $600,000 for the period August 31, 1995 through September 1, 2000, of which 50% was paid in November 1995 to the University pursuant to the 1987 License Agreement (as hereinafter defined), for a multi-lumen central venous catheter with antiseptic surface
(exclusive of silicone Hickman/Broviac type, implantable port or peripherally inserted central venous catheters) in lieu of the periodic royalty currently paid pursuant to the Arrow License. After September 1, 2000, the periodic royalty payments provided for in the Arrow License for the multi-lumen central venous catheters will resume and will be adjusted to reflect increases in the Consumer Price Index through September 1, 2000. All other terms and conditions of the Arrow License (including Arrow's obligation to make quarterly royalty payments based on sales of PSI units sold, and quarterly development phase payments to the Company for those products Arrow has developed incorporating the Company's antimicrobial technology, once they have received regulatory clearance and have reached the marketplace), except those terms modified by the Patent Settlement Agreement of January 1, 1995, remain in full force and effect. In addition, the Modified Arrow License does not modify or alter the terms of the Patent Settlement Agreement.
In fiscal 1997, the Company received periodic royalties and development fees under the Arrow License. In addition, in June 1997 the Company received $100,000 payment as consideration for the second modification license agreement to the original license agreement of which 50% was paid to the University for its share. In November 1995, the Company received $75,000 from Arrow to help fund the payment of legal costs incurred by the Company in connection with the Patent Interference Proceedings and the Patent Settlement Agreement.
Pursuant to the Patent Settlement Agreement, the Arrow License has been amended to a coexclusive grant of a sublicense to Arrow and Becton Dickinson and Company ("Becton Dickinson"), on a royalty bearing basis, with respect to two applications of the antimicrobial technology for the manufacture, use and sales of IV catheters and peripherally inserted central venous catheters. As amended pursuant to the terms of the Patent Settlement Agreement, this coexclusive sublicense entitles Becton Dickinson to receive the additional royalties Arrow has agreed to pay to the Company based on sales of antimicrobially treated central venous catheters. Under the Patent Settlement Agreement, Arrow alone retains the exclusive right to manufacture and sell antimicrobially treated central venous catheters incorporating the antimicrobial technology already sublicensed to Arrow by the Company. Becton Dickinson has also agreed to license to the Company, on a royalty bearing basis, one of its patents with the right to sublicense it to others. The Patent Settlement Agreement allows the Company the opportunity to continue to seek sublicensees of applications of the antimicrobial technology licensed from the University, other than those applications governed by the terms of the Patent Settlement Agreement.
(2) Medical Implants. Pursuant to the terms of a definitive license agreement entered into in May 1992, a leading manufacturer of medical implants has been testing the Company's antimicrobial technology with a range of medical implant products in seven product areas not previously licensed to others. Pursuant to this agreement, the manufacturer is obligated to pay royalties, including minimum annual royalties once commercialized, to the Company based upon units sold within three market segments in product applications incorporating the Company's antimicrobial technology. The Company receives non-refundable annual development fees in advance for product applications not yet offered for sale, covering products following the premarket notification procedure or until an investigational device exemption ("IDE") is delivered to the FDA for those products using the premarket approval ("PMA") regulatory procedure. Development fees due for products using the PMA procedure will resume two years after delivery of the PMA to the FDA until final FDA approval has been obtained. The term of the license agreement
is for the life of any issued patent licensed to the manufacturer under the agreement with claims covering one or more of the licensed product applications, unless earlier terminated by the manufacturer in its sole discretion or by the Company due to the manufacturer's failure to cure a default in the fulfillment of its obligations under the agreement. In October 1994, the manufacturer informed the Company that it had received FDA clearance to market one application of the antimicrobial technology to an implanted medical device. The minimum annual royalty for this market segment will be equal to the development fee. In October 1995, the manufacturer informed the Company that pursuant to the 510(k) notification procedure, it had received FDA clearance in April 1995 to market two additional implanted medical device products incorporating the Company's antimicrobial technology. With the recently received FDA clearance of these two additional products, the manufacturer has advised the Company that it has decided to shift its market introduction efforts to these two newly approved medical devices, and is currently working on a protocol for a clinical trial involving six surgical centers. The manufacturer had advised the Company that it has entered the marketplace with respect to one of these products. Based upon the regulatory success to date, the manufacturer has also begun work on some basic product performance models involving another product application incorporating the Company's antimicrobial technology on a limited basis until a product specification is developed and preliminary testing is complete. The manufacturer will continue to pay the annual development fees to the Company on all of the applications licensed to the manufacturer, until the products are sold; thereafter, the Company will receive royalties based on the number of units sold of each product. The manufacturer also has advised the Company that it intends to submit to the FDA additional applications under the 510(k) notification procedure seeking clearance to market additional products in other market segments; although, there can be no assurance that any other FDA clearances or approvals for these other applications will be obtained.
(3) Gloves. During the fiscal year ended July 1997, the Company has been in contact with several medical products distributors for the sale of the Company's antimicrobial latex examination and surgeons' gloves in Egypt and the Middle East, India, Holland, and in Japan, but was unsucessful in obtaining any distribution agreements.
The Company received no money from sales of its antimicrobial latex examination or surgeons' gloves in either fiscal 1997 or 1996.
(ii) Atopic Products
In August 1992, the Company signed an agreement with Beiersdorf AG of Hamburg, Germany ("Beiersdorf") for the purchase of the Company's patents, pending patent applications and related know-how relating to the administration of nutritional supplements for the prevention and treatment of atopic diseases, including bronchial asthma and atopic dermatitis. Pursuant to such agreement, the Company received a nonrefundable cash payment of $300,000 as part of the purchase price and would have been entitled to receive varying percentage royalties on net sales of products based on such patents and know-how. The Company was also entitled to receive a second cash payment of $400,000 from Beiersdorf upon the granting of additional patents under pending European applications for the invention concerning only the prevention of atopic diseases and the resolution of any opposition challenge raised to such patents.
By letter dated October 17, 1995, Beiersdorf informed the Company that it was abandoning the projects for developing products under the two German patents Beiersdorf had acquired from the Company pursuant to the 1992 agreement. Consequently the Company is not entitled to any further payment under the 1992 agreement. Further, under the terms of the 1992 agreement, the Company has the right to repurchase the subject patents together with subject matter as defined in the agreement. The repurchase price would consist of the $300,000 non-refundable cash payment received from Beiersdorf plus legal and clinical development costs of approximately $100,000 representing Beiersdorf's out-of-pocket expenses. The Company had six months to exercise its right to purchase. Which it subsequently elected not to pursue.
PRODUCT TECHNOLOGIES
The Company, until March 1, 1994, focused its extremely limited research and development and commercialization activities on the following medical technologies, which are in varying stages of research and/or development or commercialization and the rights to which have been obtained. Since March 1, 1994 and continuing to date, all research and development efforts have been substantially discontinued due to the Company's limited resources.
Pharmaceuticals
(i) Antimicrobial (Antibacterial) Compounds, Processes and Materials for Reduction of Infection in Vascular Grafts, Surgical and Other Implants and Inhibiting Infectious Diseases
The late Dr. Charles L. Fox, Jr., a former Director of the Company and a former member of its Scientific Advisory Board, Dr. Keith Reemtsma, a member of the Company's Scientific Advisory Board, and Dr. Shanta Modak are the inventors of certain antimicrobial processes and materials for reducing infection in vascular grafts, surgical sutures, various surgical or other implants, including heart valves, artificial joints and bones, indwelling catheters, disposable gloves and certain contraceptive devices. The Company holds exclusive worldwide commercial licenses, including sublicensing rights, to the patented and patent-pending antimicrobial technology originally developed at the University. The Company has entered into certain licensing agreements, development agreements and letters of intent described above with respect to these processes and materials.
Licenses with the University. Pursuant to an agreement executed in January 1985 with the University (of which Dr. Fox was and Drs. Reemtsma and Modak are affiliates), the Company: (a) agreed to fund research and development with respect to the Company's antimicrobial processes and materials in an amount equal to $175,000 per annum for two years; (b) granted a $50,000 fellowship to the University in connection with such research and development program; (c) issued to the University 18,750 shares of Common Stock and (d) agreed to pay a royalty to the University based on the net sales price of any products resulting from the sponsored research, in an amount equal to 50% of the royalty received from sublicensees, if any, or, if there are no sublicensees, a royalty to be determined by an independent fairness opinion from a qualified expert who is mutually acceptable to the University and the Company based in part upon a marketing plan prepared by the Company, payable for the life of any patents issued in connection with such sponsored research. If any invention resulting from such research is not patentable, the royalty will be payable for ten years at one-half the royalty rate for patentable inventions determined by such opinion. The research term under the agreement was extended on a no-cost basis by the parties until June 1987 and is now completed.
Two U.S. patents issued in January 7, 1986 and April 8, 1986, respectively, were covered under such agreement of January 1985. In December 1985, the University granted the Company a second license for exclusive worldwide rights to commercially exploit the subject matter under a third U.S. patent issued in September 1986. Two inventions arose during the course of the Company-sponsored research described above; an invention by the late Dr. Fox and Dr. Modak relating to the use of silver sulfadiazine alone or in combination with other agents in compositions or on articles, such as condoms, to inhibit the transmission of the AIDS virus, HBV and other sexually transmitted diseases (the "AIDS-related invention"); and anti-infective gloves and other medical devices invented by the late Dr. Fox and Dr. Modak and later by Dr. Modak and Dr. Lester Sampath (also affiliated with the University) (the "Device Invention").
In December 1987, the Company was granted a third license by the University under U.S. patent application Serial No. 018,624 filed in February 1987, entitled "Method of Inhibiting the Transmission of the AIDS Virus," and paid the University a total of $50,000 as an initial license fee for the exclusive worldwide commercial exploitation of the original AIDS-related and Device Inventions described above ("1987 License Agreement"). On May 10, 1989, this license was amended by written amendment to include for no additional fee, a U.S. patent application entitled "Method of Preparing an Infection Resistant Medical Device." As amended, the 1987 License Agreement included not only the two specifically mentioned patent applications, but further included "any patents included thereon, and any foreign counterparts thereof, including any continuations, continuations-in-part, divisions, additions, reissues, and extensions thereof." The University had agreed in principle at that time to include the newest device application on the antiviral glove under the license agreement without requiring the payment of an additional fee.
The original AIDS-related invention was claimed under U.S. patent application, entitled "Method of Inhibiting the Transmission of AIDS Virus" but was later abandoned in favor of the expanded AIDS-related continuation-in-part application filed in October 1988, which resulted in a patent issued in August 1990. Additionally, in June 1991, another AIDS-related continuation-in-part application Serial No. 678,260 entitled "Composition for Inhibiting Transmission of Hepatitis B Virus" was filed, and resulted in an issued patent in August 1994.
However, since the Company has been unsuccessful in licensing to third parties two of the issued patents and one patent application of the AIDS-related invention, the Company has proposed, and the University has agreed in principle, that the Company reassign such patents and patent application to the University; however, the Company has not received written confirmation of this agreement in principle to date. The Company and the University are currently negotiating a settlement of legal fees charged to the Company by the University's patent counsel for the prosecution and maintenance of the two issued patents and the patent application.
The original Device Invention was claimed under U.S. patent application, Serial No. 154,920, entitled "Method of Preparing an Infection-Resistant Medical Device" filed in February 1988, but was later abandoned in favor of a continuation-in-part patent application filed in October 1988 entitled "Infection-Resistant Compositions, Medical Devices and Surfaces and Methods for Preparing Same," which resulted in issued U.S. Patent No. 5,019,096 (the "Omnibus Patent"). The Omnibus Patent covered not only infection-resistant medical gloves, but also covered other infection-resistant medical devices, such as catheters and wound dressings. Another continuation-in-part application to the Omnibus Patent was later filed on July 18, 1990 (Serial No. 555,093) which resulted in U.S. Patent No. 5,133,090 (the "Glove" patent), which specifically covered antiviral gloves.
The terms of the third license agreement are the same as in the foregoing licenses with the University, except that the Company and the University will receive 45% and 55%, respectively, of any sublicensing revenue after the Company has received net revenues from its sublicensees of $3 million. In February 1989, the Company reached an agreement in principle with the University to modify the sublicensing fee-sharing arrangement under the third license of December 1987 to a scaled percentage arrangement, based on net revenues received from sublicensees.
As stated above, the Device Invention was claimed in U.S. patent application Serial No. 154,920 filed in February 1988 which was later abandoned in favor of the expanded continuation-in-part application Serial No. 258,189 filed in October 1988. The second of these applications matured into the Omnibus Patent dated May 28, 1991 described above, claiming part of the subject matter with the remainder of the subject matter being the subject of a further continuation application filed in order to provoke an interference with two issued U.S. patents. Three interference proceedings were officially declared on March 17, 1994. The first involved the continuation application and U.S. Patent No. 4,925,668, assigned to Becton Dickinson; the second involved the continuation application and U.S. Patent No. 4,999,210, assigned to Becton Dickinson; and the third involved the continuation application and U.S. Patent No. 5,013,306, assigned to Becton Dickinson. The third interference was dissolved at the request of the University on the grounds that the invention defined by the interference counts was not disclosed in the continuation application.
The Company, the University, Becton Dickinson and Arrow (a sublicensee of the Company having rights to certain patents licensed from the University to the Company) entered into a Patent Settlement Agreement dated as of January 1, 1995 settling all disputes among the parties over the rights to the patents involved in the Interference Proceedings.
In November 1995, the Company paid the University a total amount of $385,841: $300,000 (representing the University's 50% share of the one-time royalty the Company received from Arrow pursuant to the Modified Arrow License described above), $34,289 (representing the remaining balance due the University pursuant to a research agreement), $48,071 (representing the University's 50% share of sublicense and royalty fees received by the Company from Arrow between April 30 and October 12, 1995), and $3,481 (representing royalties owed the University, pursuant to the 1987 license agreement and the agreement in principle, based on net sales of the Company's antimicrobial examination gloves sold in 1991, 1992 and 1993, which the Company had been reserving in accrued expenses).
The Company currently owes the University $176,605 for its share of sublicensing and royalty payments the Company has received from its sublicensees. In addition, the University claims that the Company has an outstanding balance of $5,711 pursuant to the Research Agreement; although, as stated above, in November 1995 the Company paid the University $34,289 representing the amount invoiced by the University for work completed under such Agreement. The Company and the University are negotiating a resolution of this matter.
The Company has been billed $661,005 by the University's patent counsel; although, the Company is disputing a substantial portion of these fees. Included in this amount is approximately $138,445, representing charges in connection with the Company's protection of its intellectual property rights through domestic and foreign patent filings and related matters. Also included in this amount is approximately $108,560, representing charges in connection with the two AIDS-related patents and the patent application for antimicrobially treated condoms which the Company and the University have agreed in principle to reassign to the University, due to the fact that the Company has been unsuccessful in licensing these technologies to third parties; however, the Company has not received to date any written confirmation with respect to this agreement in principle. Finally, approximately $414,000 is included in this amount, representing charges in connection with the previously disclosed Patent Interference Proceedings and subsequent Patent Settlement Agreement. The Company disputes the Company's responsibility for this $414,000, and the Company and the University are attempting to negotiate a settlement. Because the Company has proposed to reassign the two patents and one patent application to the University, the Company has requested that the University credit the Company for the $108,560 outstanding amount due the University's patent counsel related to these matters.
The Company has continued to reserve royalties due the University consistent with the terms of the written license agreement which had been negotiated between the parties based upon the agreement in principle. At this time, the Company is working with the University to resolve the matter.
COMPETITION
The medical technology and pharmaceutical industries are highly competitive, and there are many other entities, including many major companies and large research centers, developing, manufacturing and marketing products that are similar to those products and technologies which the Company has licensed, sold, has developed or has rights to develop, manufacture or market. Most of these competitors have access to significantly greater technical, financial and marketing resources than those available to the Company which could enable these competitors to develop, manufacture and market competitive products more effectively than the Company. Products of competitors might dominate their markets or be developed and receive governmental approval prior to similar products derived from technologies developed by the Company. Due to the Company's present financial condition it is not actively participating in the marketplace.
PROPRIETARY INFORMATION
The Company owns one patent in each of Canada and Europe for the oral retinoid for the treatment of age-related skin disorders and one patent for the silver or zinc sulfadiazine toothpaste. The technology underlying the patent for the silver or zinc sulfadiazine toothpaste had been the subject of the Company's research and development efforts relating to antimicrobial products and, combined with various enhancements, had led to several additional patents with respect to which the Company holds exclusive licenses. The sulfadiazine toothpaste patent is dated December 17, 1985; the aged skin treatment Canadian and European patents are dated February 1, 1994 and April 5, 1995, respectively. Each of the patents not abandoned is or was effective for 17 years, and the currently effective patents will expire between 2002 and 2011. As a result, there can be no assurance that the Company or its licensees or purchasers of its patents will be able to develop products from these patented technologies in a timely manner to take advantage of these patent rights. There can be no assurance that the Company will develop a commercially marketable product from any of these patents or that other entities will not assert claims with respect to any of the Company's technologies or products which are covered by such patents.
In addition, the Company has received three licenses from the University conveying exclusive worldwide commercial rights to seven patents concerning antimicrobial compounds, processes and materials.
RESEARCH AND DEVELOPMENT
The Company's primary business has been, since its inception, research and development. However, effective March 1, 1994, due to the Company's financial condition, the Company's research and development activities have been substaintially discontinued.
MANUFACTURING AND MARKETING
The Company does not own any facilities for the manufacture of any of the products that the Company has developed.
GOVERNMENTAL REGULATION
All of the technologies involved in the Company's projects involve products which are subject to substantial federal and state regulation. The products must all comply with the requirements of the Federal Food, Drug and Cosmetic Act (the "Act") administered by the FDA, as well as similar laws in certain foreign countries in which the Company's products are sold.
Status of Pending Applications
To date, the only clearances obtained from the FDA to market a product derived from the Company's antimicrobial technologies have been via a 510(k) notification, filed by one of the Company's licensees for the marketing of a central venous catheter with antiseptic surface and antimicrobially treated percutaneous sheath introducer systems. Three 510(k) notifications, filed by another licensee of the Company, for the marketing of implanted medical devices incorporating an antimicrobial preservative have also received FDA clearance to market.
At present, the Company does not have sufficient financial resources to fund any clinical testing, if such clinical testing is required.
EMPLOYEES
Mrs. Diane E. Fritz, Vice President and Assistant Corporate Secretary, was the Company's one full-time employee during fiscal 1997. Mrs. Fritz performed office managerial, general operational and clerical functions.
Bruce Hausman, Esquire, currently serves as President, Chief Executive Officer and a director.
ITEM 2.
ITEM 2. PROPERTIES
Since June 1989, the Company has maintained its executive offices, which consist of approximately 1,800 square feet at 50 Kulick Road, Fairfield, New Jersey, pursuant to a three-year written lease, which has been extended on a year-to-year basis. In November 1997 the Company vacated its office facilities. Its current mailing address is 7777 Glades Road #214, Boca Raton, FL 33434.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
IDENTIFICATION OF PRINCIPAL MARKET
The Company's Common Stock and Units (consisting of three shares of Common Stock and three Class A Warrants) are currently listed on the National Association of Securities Dealers, Inc. ("NASD") OTC Bulletin Board. The Common Stock and Units were traded in the over-the-counter market on the Nasdaq Stock Market ("Nasdaq"), under the respective symbols "DLTX" and "DLTXU" until May 22, 1992. On May 22, 1992, the Common Stock and Units were deleted from Nasdaq, because the Company did not meet certain maintenance requirements for continued inclusion on Nasdaq related to amounts for total assets, capital and surplus and minimum bid price.
The following tables set forth the range of high- and low-bid prices for the Company's Common Stock, Class A Warrants, and Units for each quarterly period beginning August 1, 1994 as reported by the NASD OTC Bulletin Board. The following over-the-counter market quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not necessarily represent actual transactions.
Fiscal 1996
Units High Low
1st Quarter Ended October 31, 1995 .25 .25 2nd Quarter Ended January 31, 1996 .25 .125 3rd Quarter Ended April 30, 1996 .25 .25 4th Quarter Ended July 31, 1996 .25 .1875
Common Stock
1st Quarter Ended October 31, 1995 .14 .125 2nd Quarter Ended January 31, 1996 .125 .08 3rd Quarter Ended April 30, 1996 .125 .07 4th Quarter Ended July 31, 1996 .09 .04
Class A Warrants
1st Quarter Ended October 31, 1996 .001 .001 2nd Quarter Ended January 31, 1996 .001 .001 3rd Quarter Ended April 30, 1996 .001 .001 4th Quarter Ended July 31, 1996 .001 .001
Fiscal 1997
Units High Low
1st Quarter Ended October 31, 1996 .04 .03 2nd Quarter Ended January 31, 1997 .04 .03 3rd Quarter Ended April 30, 1997 .04 .02 4th Quarter Ended July 31, 1997 .03 .02
Common Stock
1st Quarter Ended October 31, 1996 .04 .03 2nd Quarter Ended January 31, 1997 .04 .03 3rd Quarter Ended April 30, 1997 .04 .02 4th Quarter Ended July 31, 1997 .03 .02
Class A Warrants
1st Quarter Ended October 31, 1996 .001 .001 2nd Quarter Ended January 31, 1997 .001 .001 3rd Quarter Ended April 30, 1997 .001 .001 4th Quarter Ended July 31, 1997 .001 .001
In April 1997, the Company extended the expiration date of its Class A and Class B Warrants. The expiration date of the Company's Class A Warrants was extended to December 31, 1997; the exercise price of the Class A Warrants remains $0.25. The expiration date of the Company's Class B Warrants was extended from April 30, 1997 to December 31, 1997; the exercise price of the Company's Class B Warrants remains $1.00. Under federal securities laws, the Company is unable to accept the exercise of any Class A or Class B Warrants until such time, if any, as the Company's independent auditors may express an opinion on the Company's financial statements without qualification, and the Company has an effective registration statement covering such warrants.
HOLDERS OF COMMON EQUITY
The approximate number of holders of record of Common Stock of the Company, as of March 16, 1998, was as follows:
Class Number of Holders
Common Stock 467 $.01 par value
Class A Warrants 0
DIVIDEND HISTORY
The Company has not paid or declared any dividends, cash or otherwise, since its inception in 1983. Management of the Company has no intention of paying cash dividends in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information for each of the the year ended July 31, 1997 and for the period from July 28, 1983 (the date of incorporation of the Company) to July 31, 1997 has been derived from the financial statements of the Company audited by Margolies, Fink and Wichrowski, Independent Certified Public Accountants.The following selected financial information for each of the four years ended July 31, 1996 and for the period from July 28, 1983 (the date of incorporation of the Company) to July 31, 1996 has been derived from the financial statements of the Company audited by KPMG Peat Marwick LLP, Independent Certified Public Accountants. The selected data should be read in conjunction with the financial statements, the related notes and the independent auditors' report, which contains an explanatory paragraph that states that the Company's recurring losses and working capital and total stockholders' deficits raise substantial doubt about the Company's ability to continue as a going concern and precludes the expression of an opinion on (i) the financial statements as of and for the years ended July 31, 1997, 1996 and 1995 and, (ii) the cumulative financial statements for the period July 28, 1983 (date of incorporation) to July 31, 1997. The financial statements and the selected financial data do not include any adjustments that might result from the outcome of this uncertainty.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is in the developmental stage and has been principally engaged in research and development activities with the objective of developing and commercializing certain cost-reducing medical device and pharmaceutical technologies. Since inception in July 1983, the Company has derived a total of approximately $3,197,000 in revenues to date from initial developmental phase fees as part of licensing or cooperative development arrangements, royalty payments on sales of licensed antimicrobial products from sublicensees, SBIR grant revenue related to some of its pharmaceutical or device technologies, initial sales of its antimicrobial latex examination gloves, and the sale of two patents and know-how relating to the prevention and treatment of atopic diseases. In 1984, the Company successfully completed an initial public offering to raise working capital. Since that time, management of the Company had been working on a number of development projects which involve experimental and unproven technologies, some of which have and may require many years and substantial expenditures to complete, and which may be unsuccessful. Since March 1, 1994 and continuing to date, research and development efforts have been substaintialy discontinued, or in most cases put on hold, unless and until the Company can develop positive cash flow from its more fully developed technologies or raise additional financing. There can be no assurance that the Company will be able to develop or commercialize its product technologies in the future. Future revenues of the Company may be limited. Such commercialization activities may not result in sales of products on a profitable basis, and the Company may not have sufficient funds available to complete its research and development program or its applications for necessary regulatory clearances and approvals, or to remain in business while any products which may be developed from its technologies are marketed or are readied for the marketplace.
In an effort to commercialize its more fully developed technologies, the Company had focused, from 1990 to March 1994, its research, development and commercialization efforts principally on its infection-reducing, antimicrobial technologies, including the manufacture and marketing through distributors of the Company's antimicrobial gloves and the licensing of other applications of the antimicrobial technology to larger companies. In fiscal 1995 , 1996 and 1997, the Company did not have any sales of its technologies or its antimicrobial medical gloves. During this period, the Company received revenues from royalty payments and development fees pursuant to two licenses with sublicensees of applications of the Company's antimicrobial medical technology.
The report of the Company's independent auditors on the Company's financial statements includes an explanatory paragraph which states that the Company's recurring losses and working capital and total stockholders' deficits raise substantial doubt about the Company's ability to continue as a going concern and precludes and has precluded the expression of an opinion on the Company's financial statements as of and for the years ended July 31, 1997, 1996 and 1995. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Because of the continued working capital deficit, management's plan in order to continue in operation for the next year is to continue to attempt to raise additional capital, while attempting to develop, market, license and sell its products, including its antimicrobial latex surgical and examination gloves, to establish positive cash flow for the Company. Furthermore, the Company will attempt to continue to curtail expenditures such as payroll, research and development projects and other discretionary expenditures, to the extent possible. The Company does not have any commitments to raise additional capital in the future, and there can be no assurance that the Company will be successful in any of its capital-raising efforts or that the Company can avoid liquidation.
In October 1995, the Company received a one-time royalty payment of $600,000 from Arrow, of which 50% was paid in November 1995 to the University pursuant to the 1987 License Agreement. Additionally, in November 1995, the Company received $75,000 from Arrow to help fund the payment of legal costs incurred by the Company in connection with the Patent Interference Proceedings and the Patent Settlement Agreement.
In May 1997, the Company entered in to a second license modification agreement with a manufacturer and marketer of catheters and cardiovascular supplies. In connection with the modifications the Company received a one-time, non-refundable, non-creditable fee of $100,000 of which $50,000 was paid to a university. Revenue, as well as the expense for the amounts paid to the university, are being recognized ratably over the term of the agreement. In consideration for this fee the Company waived development fees and miminum annual royalties due on products sold by the licensee for the specific products added to the agreement under the second license modification for a period of three years. After three years the licensee shall pay development fees of $2,500 per quarter payable in advance during the development phase. After such time as a sale is made the licensee shall pay a running royalty as defined by the agreement, and at a minimum $2,500 payable quarterly in advance.
The discussion below should be reviewed together with the Company's Financial Statements and the Notes thereto.
RESULTS OF OPERATIONS
From inception through July 31, 1997, the Company's principal sources of revenue have consisted of interest earned on short-term investments purchased with the proceeds from the 1984 public sale of Units, license fees, royalties, sale of patents and grants. The Company plans to attempt to raise additional capital while continuing to utilize cash, together with limited revenues from license fees, royalties from sales of licensed products by sublicensees, to fund operations in fiscal 1997.
During the fiscal years ended July 31, 1997, 1996 and 1995, revenues from license fees and royalties were $317,711, $287,968 and $295,829, respectively. All of the Company's revenues in fiscal years 1997, 1996 and 1995 were derived from license fees and royalties received from its two sublicensees. Additionally, in November 1995, the Company received $75,000 from Arrow to help fund the payment of legal costs incurred by the Company in connection with the Patent Interference Proceedings and the Patent Settlement Agreement. At July 31, 1997, the Company had $23,522 remaining in cash.
Operating expenses for the year ended July 31, 1997 consisted principally of general and administrative expenses. General and administrative expenses in the fiscal years ended July 31, 1997, 1996 and 1995 were $370,289, $489,299 and $808,424, respectively. General and administrative expenses have decreased by $100,000 from 1996 to 1997 due to continuing inactivity of the Company. The Company expects this trend to continue thru 1998. In fiscal 1995, the Company incurred significant legal costs associated with the Patent Interference Proceedings and subsequent Patent Settlement Agreement. The decrease in such operating costs in 1996 as compared to 1995 was due primarily to the significant decrease of legal costs as a result of the Patent Settlement Agreement.
The Company had extremely limited expenses of $6,400 related to research and development activities during the fiscal year ended July 31, 1996, which was paid to the University for the antimicrobial coating of tracheal suction catheters for a medical device manufacturer, who has expressed interest in a possible licensing arrangement with the Company. In fiscal 1995, there were no expenses related to research and development activities, although in fiscal 1994, the Company had research and development expenses of $72,923, as a result of finalizing the Research Agreement with the University to further develop the antimicrobial glove technology.
The Company sustained a net loss of $2,232 for the fiscal year ended July 31, 1997, a significant decrease from the net losses of $132,244 and $512,483 for the fiscal year ended July 31, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company had cash and cash equivalents of approximately $23,500, representing a decrease of approximately $26,500 over the July 31, 1996 balance of cash and cash equivalents. This decrease was principally due to the Company's reduction of current liabilities. During the year ended July 31, 1997, the Company used net cash for operations of $26,404 during 1997 as compared to $39,064 in cash generated by operations in 1996. This change in cash flows from operations was primarily due to a net reduction in advance royalty payments. In addition, the Company had a working capital deficit of $924,179 as of July 31, 1997. The Company is still in the developmental stage, and its business operations have only generated a nominal amount of revenues to date. The payment received from Arrow described above has enabled the Company to satisfy certain current and past due obligations to its creditors and to make substantial payments to the University as required under various licenses with the University. Although the Company has not satisfied all of its obligations to the University or the University's patent counsel, the Company is continuing its efforts to resolve such matters. The remaining funds have been, and will continue to be, used for working capital.
Management has continued to curtail expenditures in many areas, including research and development projects and discretionary expenditures, in order to stay in business and to focus the Company's extremely limited resources in what it believes are the most promising areas of the Company's business in the near term. However, there can be no assurance that the Company will have sufficient funds to carry out these plans or to remain in business. In addition, further cost saving measures may be impossible and cost savings measures in the areas of research and development, regulatory clearances and marketing and sales may have an adverse effect on the Company's future operations. If the Company is unsuccessful in raising additional capital during fiscal year 1998, if there is no significant increase in license fees or royalties from sales of sublicensed products or if the University revokes licenses granted to the Company, the Company may be unable to continue as a going concern, even with further cost-cutting measures. To meet its long-term liquidity requirements, the Company must also generate sufficient income through operations or obtain additional financing as required, as to which there can be no assurance. However, there can be no assurance that the Company will be successful in meeting its immediate or long-term liquidity requirements or that the Company can continue as a going-concern.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 are appended to this Report on Form 10-K. A list of the financial statements filed herewith is found at "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K."
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each of the present directors and executive officers of the Company.
All directors hold office until the next annual meeting of stockholders of the Company or until their successors are elected and quality. Due to its extremely limited financial resources, the Company has not held an annual meeting of stockholders since July 1991. Executive officers hold office until their successors are elected and qualified, subject to earlier removal by the Board of Directors. See "Item 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation received by the current Chief Executive Officer of the Company and the former President and Chief Operating Officer of the Company.
(1) Does not include benefits generally available to all employees.
(2) At a special meeting of the Board of Directors of the Company held on March 6, 1996, the Board of Directors granted a non-qualified option to Bruce Hausman to purchase an aggregate of 250,000 shares of Common Stock of the Company at an exercise price of $0.09 per share, based on the current market price at that time, in lieu of cash compensation for Mr. Hausman's services as President and Chief Executive Officer of the Company since May 1995.
(3) On December 7, 1994, Mr. Miller resigned as a Director of the Company and from the Executive Committee and terminated his relationship as an independent consultant to the Company. On December 14, 1994, it was resolved by the Board of Directors that $25,601 be applied to Mr. Miller's outstanding loans as compensation for Mr. Miller's service to the Company from August 1, 1994 to December 31, 1994. The Board also awarded Mr. Miller a bonus of $35,000 in recognition of Mr. Miller's service to the Company from July 1983 through December 1994; such amount was awarded as of January 3, 1995. This amount was also applied to Mr. Miller's then outstanding loans owed to the Company compensation applied against the outstanding balance of his loan from the Company. Pursuant to a consulting arrangement with the Company which began in January 1994, he was compensated as a consultant at the same rate he received as President and his compensation of $31,923 from January 15, 1994 through July 31, 1994 was applied against the balance of his outstanding loan from the Company.
The following table sets forth information concerning the exercise of stock options granted to the former and current executive officers named in the table.
(1) Based on a market price of $0.12 as of October 20, 1995.
(2) Pursuant to a November 1993 consulting agreement, Mr. Hausman received non-qualified stock options to purchase 250,000 shares of the Company's Common Stock at an exercise price of $0.13 per share.
(3) At a special meeting of the Board of Directors of the Company held on March 6, 1996, the Board of Directors granted a non-qualified option to Bruce Hausman to purchase an aggregate of 250,000 shares of Common Stock of the Company at an exercise price of $0.09 per share, based on the current market price at that time, in lieu of cash compensation for Mr. Hausman's services as President and Chief Executive Officer of the Company since May 1995.
(4) On September 2, 1992, the Company granted Mr.Miller a non-qualified stock option to purchase an aggregate of 275,000 shares of Common Stock at an exercise price of $0.01 per share exercisable through September 2, 2002.
OTHER ARRANGEMENTS
In November 1993, the Company entered into a consulting arrangement with Mr. Bruce Hausman, in connection with which Mr. Hausman agreed to serve as a member of the Company's Board of Directors and Executive Committee. Mr. Hausman has received compensation consisting of non-qualified stock options to purchase an aggregate of 250,000 shares of the Company's Common Stock at an exercise price of $0.13 per share. Mr. Hausman is also eligible to receive a cash bonus of up to $60,000 to be granted solely within the discretion of the Board of Directors of the Company as the Company's cash flow permits or upon a change of control of the Company. On May 18, 1995, the Board of Directors appointed Mr. Hausman to serve as President and Chief Executive Officer of the Company. Mr. Hausman receives reimbursement of his reasonable expenses incurred in the conduct of the Company's business. On December 23, 1997 the Board of Directors approved repricing of this option to $.03 per share.
At a special meeting of the Board of Directors of the Company held on March 6, 1996, the Board of Directors granted a non-qualified option to Bruce Hausman to purchase an aggregate of 250,000 shares of Common Stock of the Company at an exercise price of $0.09 per share, based on the current market price at that time, in lieu of cash compensation for Mr. Hausman's services as President and Chief Executive Officer of the Company since May 1995. On December 23, 1997 the Board of Directors approved repricing of this option to $.03 per share.
Mr. Miller's qualified, incentive stock options to purchase an aggregate of 50,000 shares of Common Stock at an exercise price of $0.72, automatically terminated in accordance with their terms on March 7, 1995, three months after Mr. Miller's resignation. Mr. Miller currently holds nonqualified stock options, due to expire in September 2002, to purchase an aggregate of 275,000 shares of Common Stock at an exercise price of $0.01. Such nonqualified options were not affected by Mr. Miller's resignation or the forgiveness of his loan owed to the Company. See Note 7 to Notes to Financial Statements.
Compensation of Directors
Non-salaried members of the Board of Directors are normally entitled to receive a fee of $2,000 per year. The annual fee includes compensation for attendance in person of up to four Board of Directors meetings in any fiscal year, plus $500 for attending in person any Board of Directors meetings in excess of four such meetings in any one fiscal year. During the fiscal year ended July 31, 1997, no annual fees for service on the Board of Directors were paid to any Director, regardless of eligibility to receive such fees. Non-salaried Directors also are entitled to receive $300 for attendance at each meeting of a Committee of the Board of Directors. On January 25, 1989, all members of the Executive Committee eligible to receive compensation for attendance at Executive Committee meetings agreed to waive all fees for attendance at such meetings. Such waiver of fees for attendance has continued to date. For a discussion of certain compensation paid to certain Directors see "Other Arrangements."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information, as of November 13, 1996 with respect to holdings of the Company's Common Stock by each person known by the Company to be the beneficial owner of more than 5% of the total number of shares of Common Stock outstanding as of such date. Each beneficial owner has sole voting and investment power with respect to the shares set forth opposite his name in the following table, except as otherwise disclosed in the footnotes to the table or in the paragraph following the table:
Amount and Nature of Percentage of Name and Address Beneficial Outstanding of Beneficial Owner Ownership(1) Shares
James O. Leonard 18 Kings Lane St. Simons Island, Georgia 31522 808,300 9.36%
Louis R.M. Del Guercio, M.D. 14 Pryer Lane Larchmont, New York 10538 734,300 8.51%
W. David and Venus Anthony 20 Kristen Court Towaco, New Jersey 07082 1,203,500 13.94%(2)
Herbert J. Mitschele, Jr. 141 Daly Road Far Hills, New Jersey 07931 576,800(3) 6.68%
(1) Reflects sole voting and investment power unless otherwise indicated.
(2) Includes 131,000 Class A Warrants. Exercise of a Class A Warrant entitles the holder to one share of Common Stock and one Class B Warrant. Exercise of a Class B Warrant entitles the holder to one share of Common Stock. The amount and nature of beneficial ownership is based on information contained in a Schedule 13D filed by Mr. Anthony, a copy of which was received by the Company on September 8, 1993, and information received orally from Mr. Anthony on November 13, 1996.
(3) Includes 114,400 shares of Common Stock beneficially owned by Robert J. Baer, Inc., of which Mr. Mitschele is a control person, and 4,000 shares of Common Stock beneficially owned jointly by Mr. Mitschele and his wife. The 114,400 shares of Common Stock owned by Robert J. Baer, Inc. consist of 66,400 shares of Common Stock and 24,000 Class A Warrants. Exercise of a Class A Warrant entitles the holder to one share of Common Stock and one Class B Warrant. Exercise of a Class B Warrant entitles the holder to one share of Common Stock. The above table does not include: an aggregate of 18,000 shares of Common Stock beneficially owned by trusts of which Mr. Mitschele's daughters are the beneficiaries and his wife is the trustee. Mr. Mitschele disclaims beneficial ownership of such shares held in trust. The 18,000 shares of Common Stock beneficially owned by these trusts includes 6,000 shares of Common Stock and 6,000 Class A Warrants.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of November 13, 1996, the number of shares of Common Stock of the Company beneficially owned by each current director and by all current directors and officers as a group.
Number of outstanding shares of Common Stock Percentage of beneficially outstanding Name Age owned (1) Shares Louis R.M. Del Guercio, M.D. 68 734,300 8.51% Herbert J. Mitschele, Jr. 68 576,800(2) 6.68% Bruce Hausman, Esq. 67 505,000(3) 5.85%
All Directors and Executive 1,816,100(1)(2)(3) 21.04% Officers as a group(3) (4 persons)
- ------
1. Sole voting and investment power unless otherwise indicated.
2. Includes 114,400 shares of Common Stock beneficially owned by Robert J. Baer, Inc. of which Mr. Mitschele is a control person, and 4,000 shares of Common Stock, beneficially owned jointly by Mr. Mitschele and his wife. The 114,400 shares of Common Stock owned by Robert J. Baer, Inc. consist of 66,400 shares of Common Stock and 24,000 Class A Warrants. Exercise of a Class A Warrant entitles the holder to one share of Common Stock and one Class B Warrant. Exercise of a Class B Warrant entitles the holder to one share of Common Stock. Does not include an aggregate of 18,000 shares of Common Stock beneficially owned by trusts of which Mr. Mitschele's daughters are the beneficiaries and his wife is the trustee. Mr. Mitschele disclaims beneficial ownership of such shares held in trust. The 18,000 shares of Common Stock beneficially owned by these trusts includes 6,000 shares of Common Stock and 6,000 Class A Warrants.
3. This figure includes 5,000 shares owned by Bruce Hausman through a Keough Plan Account and options to purchase an aggregate of 500,000 shares of Common Stock of the Company, which options are currently exercisable.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16 (a) forms they file.
To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company, all Section 16(a) filing requirements applicable to Herbert Mitschele and Louis DelGuercio were timely filed.
The Company has been advised that David and Venus Anthony have purchased an additional 78,000 shares of Common Stock during fiscal year 1996; however, the Company believes that, to date, no Schedule 13D has been filed on behalf of David and Venus Anthony relating to these shares.
Bruce Hausman was untimely with respect to the filing of his Form 5 on which he reported his receipt in March 1996 of options to purchase an aggregate of 250,000 shares of Common Stock. The applicable Form 5 was filed in October 1996. Mr. Hausman's receipt of stock options was the only reportable event for Mr. Hausman in fiscal 1996.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
The Company has purchased a number of patents and related know-how and rights to products from officers and directors of the Company and may be required to make royalty payments as further described below. Since the development of the products using such patents and rights is still uncertain, the Company does not know the value of such agreements. All efforts to market or develop has been discontinued.
The Company has been advised that none of the members of its Board of Directors who is affiliated with universities or research institutions which may receive research funding or fellowship grants from the Company will derive any direct payments from any such funding or fellowship. However, certain of such persons may be deemed to derive indirect benefits from the Company's funding of the research programs described herein to the extent of their involvement in such research programs. Any such indirect benefits are to be distinguished from royalties which the Company has agreed, or will in the future agree, to pay to certain of such persons from the commercial exploitation of the products resulting from any such research which is described above.
The Company has adopted a policy that no officer, director or affiliate may engage in any transactions with the Company or any of its subsidiaries unless such transactions have been approved by a majority of the Company's directors who have no interest in the transactions. The Company anticipates that all related party transactions will be on terms and conditions at least as favorable to the Company as the Company could obtain in dealing with unrelated parties.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
See Index to Financial Statements attached hereto.
(a) The following documents are filed as part of this report.
Exhibit No. Description
3.1(b) Certificate of Incorporation of the Company, as amended.
3.2(a) By-laws of the Company.
4.1(a) Underwriter's Option.
4.2(a) Warrant Agreement among Continental Stock Transfer and Trust Company, the Underwriter and the Company.
4.3(b) Form of Warrant Exercise Fee Agreement among Continental Stock Transfer and Trust Company, the Underwriter and the Company.
9.1(a) Shareholders Agreement among Herbert Mitschele, Anthony J. Crincoli, XOIL Energy Resources, Inc., Harvey S. Shipley Miller, Eric W. Goldman, Dr. Louis R.M. Del Guercio and Anthony W. Szabo, dated as of March 19, 1984.
10.8(a) Restricted Stock Purchase Agreement Respecting Shares of Common Stock with Harvey S.S. Miller and Eric W. Goldman, dated as of March 19, 1984.
10.9(a) Restricted Stock Purchase Agreement Respecting Shares of Class A Stock with Harvey S.S. Miller and Eric W. Goldman, dated as of March 19, 1984.
10.10(a) Restated and Amended Restricted Stock Agreement of Dr. Abraham Gelbart, dated March 19, 1984.
10.11(a) Schedule of Restricted Stock and Restated and Amended Restricted Stock Agreements substantially identical in all material respects to Exhibit 10.10.
10.12(a) Employee Stock Option and Stock Appreciation Plan.
10.13(a) Agreement with New York Medical College concerning development of the Roentgen Densitometer, dated May 3, 1984.
10.14(a) Amendment No. 1 to Restricted Stock Purchase Agreement respecting shares of Common Stock with Harvey S.S. Miller and Eric W. Goldman, dated as of July 12, 1984.
10.15(c) Research Agreement with New York Medical College, dated July 3, 1985, concerning diagnostic hit for rheumatology.
10.16(c) Research and License Agreement with the University, dated January 11, 1985, with respect to antimicrobial compounds.
10.17(c) Correspondence with Drexel University, dated August 6, 1985, with respect to the breast cancer diagnostic system.
10.18(c) Agreement with NEA Tech, dated July 1, 1985, with respect to the infusion pump.
10.19(d) Form of stock option agreement with Dr. Albert M. Kligman.
10.20(d) Letter Agreement with Dr. Albert M. Kligman, dated September 12, 1986, with respect to his membership on the Scientific Advisory Board.
10.21(b) Assignment of certain proprietary rights by Dr. Albert M. Kligman, dated February 4, 1987, regarding acne and wart medication.
10.22(b) Assignment of certain proprietary rights by Dr. Albert M. Kligman, dated February 10, 1987, regarding skin moisturizers.
10.23(b)* Assignment of certain proprietary rights by Dr. Albert M. Kligman, dated January 22, 1987, regarding certain compounds.
10.24(b) Letter Agreement with Dr. Vincent J. Cristofalo, dated May 20, 1987, with respect to his membership on the Scientific Advisory Board.
10.25(b) Letter Agreement with Dr. Charles L. Fox., Jr., dated April 2, 1987.
10.26(b) Form of agreement with The Equity Group, Inc., a financial public relations firm.
10.27(h) Employment Agreement with James O. Leonard, dated December 1, 1988.
10.28(h) Stock Option Agreement with James O. Leonard, dated December 1, 1988.
10.29(i) Letter Agreement with D.H. Blair & Co., Inc., dated July 14, 1989.
10.30(i) Form of Amendment No. 3 to Warrant Agreement with Continental Stock Transfer and Trust Company, dated as of July 23, 1990.
10.31(i) Lease Agreement with I.C.E. Associates, dated May 24, 1989.
10.32(i) Stock Option Agreement with Dr. Baruch S. Blumberg, dated April 25, 1989.
10.33(i) Stock Option Agreement with Lester Sampath, dated April 25, 1989.
10.34(i) Stock Option Agreement with Dr. Charles L. Fox, Jr., dated April 25, 1989.
10.35(i) Stock Option Agreement with Dr. Shanta Modak, dated April 25, 1989.
10.36(i) Stock Option Agreement with Dr. Shanta Modak, dated April 25, 1989.
10.37(i) Stock Option Agreement with Dr. Irving Millman, dated April 25, 1989.
10.38(i) Stock Option Agreement with Dr. Albert M. Kligman, dated April 25, 1989.
10.39(i) Stock Option Agreement with Dr. Gerd Plewig, dated April 25, 1989.
10.40(j) Arrow License Agreement, dated March 28, 1991.
10.41(k) Letter of Intent with Bio Med Sciences, Inc., dated November 13, 1991.
10.42(k) Extension to Letter of Intent with Bio Med Sciences, Inc., dated February 6, 1992.
10.43(k)* License Agreement with Licensee dated May, 1992.
10.44(k) Lease Extension Agreement with ICE Associates, dated May, 1992.
10.45(k) Nondisclosure, Confidentiality and Non-Circumvention Agreement with Oxymedyca, Inc., dated June 22, 1992.
10.46(k)* Patent Purchase Agreement with Beiersdorf AG, dated August 21, 1992.
10.47(k)* Option Agreement with Beiersdorf AG, dated August 24, 1992.
10.48(k) Amendment No. 3 to the Warrant Agreement with Continental Stock Transfer and Trust Company, dated August 27, 1992.
10.49(k) Letter Agreement with Dr. Med. Bodo Melnik, dated September 23, 1992.
10.50(k) Non-qualified Stock Option Agreement with Dr. Med. Bodo Melnik, dated September 23, 1992.
10.51(k) Agreement with Shanta Modak, Ph.D. and the University, dated October 16, 1992.
10.52(k) Letter Agreement with Dr. Med. Gerd Plewig, dated September 23, 1992.
10.53(l) Non-qualified Stock Option Agreement with Harvey S.S. Miller, dated as of September 2, 1992.
10.54(l) Amendment No. 3 to the Warrant Agreement with Continental Stock Transfer and Trust Company, dated August 31, 1993.
10.55(m) Lease Extension Agreement with ICE Associates, dated June 1994.
10.56(l) Purchase Order and Manufacturing Agreement with Sime Health Limited, dated November 25, 1992.
10.57(l) Agreement with Bruce Hausman, dated November 10, 1993.
10.58(m) Research Agreement dated as of March 1, 1993 between Daltex Medical Sciences, Inc. and the University.
10.59(m) Amendment No. 5 to the Warrant Agreement with Continental Stock Transfer and Trust Company, dated September 1, 1994.
10.60(m) Non-Qualified Stock Option Agreement with Dr. Abraham Gelbart, dated December 10, 1993.
10.61(m) Non-Qualified Stock Option Agreement with Diane Fritz, dated December 10, 1993.
10.62(n) Patent Settlement Agreement among Daltex Medical Sciences, Inc., The Trustees of the University, Becton Dickinson and Company and Arrow International, Inc. dated as of January 1, 1995.
10.63(p) Amendment No. 6 to the Warrant Agreement with Continental Stock Transfer and Trust Company, dated as of September 5, 1995.
10.64(p) Modified License Agreement between Daltex Medical Sciences, Inc. and Arrow International, Inc. dated as of October 27, 1995.
10.65(o) Lease Extension Agreement with ICE Associates, dated June 1995.
10.66(q) Amendment No. 7 to the Warrant Agreement with Continental Stock Transfer and Trust Company, dated as of November 28, 1995.
10.67 Lease Extension Agreement with ICE Associates, dated June 1996.
10.68 Non-Qualified Stock Option Agreement between the Company and Bruce Hausman dated as of March 6, 1996.
28.1(b) Incentive Stock Option Plan, as amended.
(a) Reference is made to the exhibits to Form S-1 Registration Statement (File No. 2-90089) which became effective on September 26, 1984.
(b) Reference is made to the exhibits to the Post-Effective Amendment No. 2 to Form S-1 Registration Statements (File Nos. 2-90089 and 2-93465) which was filed on August 3, 1987.
(c) Reference is made to the exhibits to the Form 10-K filed on October 28, 1985.
(d) Reference is made to exhibits to the Form 10-K filed on November 11, 1986.
(e) Reference is made to the exhibits to the Post-Effective Amendment No. 3 to Form S-1 Registration Statements (File Nos. 2-90089 and 2-93465) which became effective on September 14, 1987.
(f) Reference is made to the exhibits to the Annual Report on Form 10-K for the fiscal year ended July 31, 1988.
(g) Reference is made to the exhibits to the Form 10-Q for the quarter ended October 31, 1987.
(h) Reference is made to the exhibits to the Form 10-Q for the quarter ended January 31, 1989.
(i) Reference is made to exhibits to the Annual Report on Form 10-K for the fiscal year ended July 31, 1989.
(j) Reference is made to the exhibits to the Form 10-K for the fiscal year ended July 31, 1991.
(k) Reference is made to the exhibits to the Form 10-K for the fiscal year ended July 31, 1992.
(l) Reference is made to the exhibits to the Form 10-K for the fiscal year ended July 31, 1993.
(m) Reference is made to the exhibits on Form 10-K for the fiscal year ended July 31, 1994.
(n) Reference is made to the exhibit to the Form 8-K filed on June 30, 1995.
(o) Reference is made to the exhibit to the Form 10-Q for the quarter ended April 30, 1995 filed on June 14, 1995.
(p) Reference is made to the exhibits to the Form 10-K for the fiscal year ended July 31, 1995.
(q) Reference is made to the exhibits to the Form 10-Q for the quarter ended October 31, 1995.
* The Registrant has requested confidential treatment from the Securities and Exchange Commission for this document, and, accordingly, has filed this document with the Securities and Exchange Commission.
Reports of the Company on Form 8-K for the fiscal quarter ended July 31, 1995
No Current Reports on Form 8-K were filed by the Company during the fiscal year ended July 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DALTEX MEDICAL SCIENCES, INC.
By: /s/ Bruce Hausman, Esq. ------------------------------------------ Bruce Hausman, Esq. President & Chief Executive Officer
Dated: April 2, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Title Date
/s/Dr. Louis R.M. Del Guercio Director, Chairman April 2, 1998 - ------------------------------- Board of Directors Dr. Louis R.M. Del Guercio
/s/Bruce Hausman, Esq. President, Chief April 2, 1998 - ------------------------------- Executive Officer Bruce Hausman, Esq.
/s/ C. Lawrence Rutstein Director, April 2, 1998 - ------------------------------- C. Lawrence Rutstein
/s/Herbert J. Mitschele, Jr. Director, Secretary, April 2, 1998 - - ------------------------------ Treasurer, Chief Herbert J. Mitschele, Jr. Financial Officer
Independent Auditors' Report
Financial Statements:
Balance Sheets at July 31, 1997 and 1996
Statements of Operations Years ended July 31, 1997, 1996, and 1995, and for the Period from July 28, 1983 (Date of Inception) to July 31, 1997
Statements of Stockholders' Equity (Deficit) Years ended July 31, 1997, 1996, and 1995, and for the Period from July 28, 1983 (Date of Inception) to July 31, 1997
Statements of Cash Flows Years ended July 31, 1997, 1996, and 1995, and for the Period from July 28, 1983 (Date of Inception) to July 31, 1997
Notes to Financial Statements
Independent Auditors' Report
The Board of Directors and Stockholders Daltex Medical Sciences, Inc.:
We have audited the balance sheet of Daltex Medical Sciences, Inc. (A Development Stage Enterprise) as of July 31, 1997 and the related statements of operations, stockholders deficit and cash flows for the year ended July 31, 1997, and for the period from July 28, 1983 (date of inception) to July 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to report on these financial statements based on the results of our audit. The balance sheet of Daltex Medical Sciences, Inc. (A Development Stage Enterprise) as of July 31, 1996, and statement of operations, stockholders deficit and cash flows for the years ended July 31, 1996 and 1995, and for the period from July 28, 1983 (date of inception) to July 31, 1996, were audited by other auditors whose report dated September 19,1996, expressed no opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opionion the 1997 financial statements referred to above present fairly, in all material respects, the results of operations and its cash flows for the year July 31, 1997 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Daltex Medical Sciences, Inc. will continue as a going concern. As discussed in note 2 to the financial statements, the Company has suffered recurring losses from operations and has working capital and total stockholders' deficiencies at July 31, 1997 and 1996. Furthermore, at July 31, 1997, 1996 and 1995 the Company could not demonstrate that it had sufficient liquidity to meet its routine operating costs for the next year. These circumstances raise substantial doubt about the entity's ability to continue as a going concern. Management's plans in regard to these matters are described in note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Because of the significance of the uncertainty discussed in the preceding paragraph, we are unable to express, and we do not express, an opinion on (1) the accompanying 1997 financial statements, or (2) the accompanying statements of operations, stockholders' deficiency, and cash flows for the period from July 28, 1983 (date of inception) to July 31, 1997.
/s/ Margolies, Fink and Wichrowski -----------------------------------------
Pompano Beach, Florida March 24, 1998
A
DALTEX MEDICAL SCIENCES, INC. BALANCE SHEETS JULY 31, 1997 AND 1996
The accompanying notes are an integral part of these financial statements
DALTEX MEDICAL SCIENCES, INC. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 FOR THE PERIOD FROM JULY, 28, 1983 (Date of Inception) to JULY 31, 1997
The accompanying notes are an integral part of these financial statements
DALTEX MEDICAL SCIENCES, INC. STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM JULY, 28, 1983 (Date of Inception) to JULY 31, 1997
The accompanying notes are an integral part of these financial statements
DALTEX MEDICAL SCIENCES, INC. STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM JULY 28, 1983 (Date of Inception) to JULY 31, 1997
The accompanying notes are an integral part of these financial statements
DALTEX MEDICAL SCIENCES, INC. STATEMENT OF STOCKHLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM JULY 28, 1983 (Date of Inception) to JULY 31, 1997
The accompanying notes are an integral part of these financial statements
DALTEX MEDICAL SCIENCES, INC. STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM JULY 28, 1983 (Date of Inception) to JULY 31, 1997
The accompanying notes are an integral part of these financial statements
DALTEX MEDICAL SCIENCES, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 FOR THE PERIOD FROM JULY, 28, 1983 (Date of Inception) to JULY 31, 1997
The accompanying notes are an integral part of these financial statements
DALTEX MEDICAL SCIENCES, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 FOR THE PERIOD FROM JULY, 28, 1983 (Date of Inception) to JULY 31, 1997
The accompanying notes are an integral part of these financial statements
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise) Notes to Financial Statements
1. Summary of Significant Accounting Policies
(a) Organization
Daltex Medical Sciences, Inc. (a development stage enterprise) (the "Company") was organized under the laws of the State of Delaware on July 28, 1983, principally to engage in research and development activities with the objective of developing and commercializing certain cost-reducing medical device and pharmaceutical technologies.
Since inception, the Company has been engaged in organizational activities, including recruitment of officers, employees and members of its Scientific Advisory Board ("SAB"); research and development of medical device and pharmaceutical products, including the testing of prototypes; securing or attempting to secure rights to medical device and pharmaceutical product technologies; licensing, selling and attempting to license certain technologies to domestic and foreign companies; and marketing or attempting to market certain antimicrobial device technology.
(b) Office Equipment
Office equipment was stated at cost. As of July 31, 1997, all such equipment has been fully depreciated and amortized. Depreciation and amortization of office equipment was computed using the straight-line method over the estimated useful lives of the respective assets or over the shorter of the lease term or estimated useful life. Maintenance and repairs are charged to operations as incurred, while enewals and improvements are capitalized.
(c) Cash and Cash Equivalents
The Company considers securities with maturities of three months or less, when purchased, to be cash equivalents. The carrying amount approximates fair value due to the short-term nature of these instruments.
(d) Financial Instruments
The carrying values of the Company's financial instruments at July 31, 1997 approximate their estimated fair values.
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise) Notes to Financial Statements, Continued
1. Summary of Significant Accounting Policies, cont.
(e) Net Loss Per Common Share
Net loss per common share is based on the weighted average number of common shares outstanding and common shares which the Company is obligated to issue pursuant to agreements for which no payment is required (determined to be outstanding as of the date on which they were committed by the Company). Common shares which are issuable upon the exercise of stock options and warrants are excluded from the loss per share computation because the effect of their inclusion would be antidilutive.
(f) Revenue Recognition
Product sales revenue is recognized upon shipment of goods. Contract revenue under license agreements is recognized as earned in accordance with the terms of the related agreements. Payments due under research grants are recognized as revenue as the related research expenses are incurred and in accordance with the specific terms of the respective grants. Payments received in advance of performance under license agreements and research grants are deferred and recognized as revenue when earned.
(g) Research and Development Costs
All research and development costs are expensed as incurred.
(h) Patents
Patent costs were amortized over a maximum of 17 years or the remaining useful life, whichever was shorter. The patents are fully amortized at July 31, 1997.
(i) Income Taxes
The Company utilizes Statement of Financial Accounting Standards No. 109 ("FAS 109"), Accounting for Income Taxes. FAS 109 requires the asset and liability method of accounting for deferred tax assets and liabilities. Such assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and the benefits arising from the realization of operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under FAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized into income during the period that includes the enactment date of the tax rate change.
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise) Notes to Financial Statements, Continued
1. Summary of Significant Accounting Policies, cont.
(j) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. Going Concern
The accompanying financial statements have been prepared on a going concern basis which contemplates the continuation of operations, realization of assets and liquidation of liabilities in the ordinary course of business. The Company has accumulated a deficit as of July 31, 1997 of $7,967,250 ($7,965,018 at July 31, 1996). As of July 31, 1997 and 1996, the Company has $23,523 and $49,926, respectively, in cash and cash equivalents, working capital deficits of $924,179 and $880,697, respectively, and total stockholders' deficiencies of $1,064,554 and $1,062,322, respectively. The limited current cash balances and significant financial obligations raise substantial doubt that the Company will be able to meet its routine operating costs for all of fiscal 1998. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
Management's plan in order to continue in operations for the next year is to actively explore a number of ways of raising additional capital, including loans, equity offerings, private placements, mergers with revenues producing entities, and a sale of the Company's common stock or assets. To date, the Company has received no committments for a sale or merger of the Company, and there can be no assurance that the Company's attempt to sell or merge the Company to raise additional capital will be successful.
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise) Notes to Financial Statements, Continued
3. Office Equipment
Office equipment at July 31, 1997 and 1996 consists of the following:
1997 1996 ---- ----
Office and laboratory equipment $ 28,658 $ 28,658 Furniture and fixtures 27,667 27,667 ------------ ------------
56,325 56,325
Less accumulated depreciation (56,325) (56,325) ------------ ------------
$ - $ - ============ ============
The Company sold its office furniture and fixtures for $2,000 in conjunction with vacating its corporate headquarters in November 1997.
4. Accounts receivable - other
Other receivables includes certain license payments due the Company at fiscal year end, and payment was received subsequent to the respective fiscal year end.
5. Due from Officer
The Company had certain loans from an officer, originating before 1989, totaling $65,000, plus accrued interest and other advances. The nonrecourse loans were collateralized by 30,000 shares of Common Stock of the Company and bore interest at rates between 8% and 11% per annum. On September 2, 1992, the interest rate on such loans was changed to the prime rate in effect when accrued. The loans plus accrued interest were due to be repaid to the Company on October 21, 1994. The officer notified the Company of his intention to forgo future cash compensation, effective November 5, 1993, in order to preserve the Company's remaining working capital, and ultimately to resign from his position at the Company.
On January 15, 1994, the officer resigned but agreed to continue to serve on the Board and as a member of the Executive Committee and to provide consulting services. The officer was being compensated at the same rate as he received as President, and his compensation has been applied against his outstanding loan balance. The Company provided an allowance against the entire balance owed at July 31, 1993. Compensation earned by the former officer in fiscal 1994 totaled approximately $50,000, and, as such, the expense was charged to operations and the aforementioned allowance was accordingly reversed.
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise) Notes to Financial Statements, Continued
5. Due from Officer (continued)
In December 1994, at such time as the officer resigned from the Board and Executive Committee, the Company credited $25,601 against a portion of the loan for services from August 1, 1994 to December 7, 1994 and a bonus was granted for the remaining $35,000 loan balance for services rendered since 1983.
6. Capital Stock
At July 31, 1997 and 1996, the Company's authorized capital stock consisted of 1,000,000 shares of Preferred Stock, par value $1.00 per share (none of which has been issued), and 20,000,000 shares of Common Stock, par value $.01 per share. The holders of the Preferred Stock would have voting rights, dividend rights and conversion rights as authorized by the Board of Directors (the Board) upon issuance of such Preferred Stock.
In September 1984, five stockholders paid the Company an additional $.45 per share ($342,900) for an aggregate of 762,000 shares of Common Stock issued to them in August 1983 in response to a position taken by the National Association of Securities Dealers, Inc. as to underwriting compensation in connection with the Company's public offering. This amount was recorded at July 31, 1984.
In October and November 1984, the Company issued 1,150,000 Units at a price of $6.00 per Unit in connection with an initial public offering. Each Unit consisted of three shares of Common Stock and three Class A Warrants. Exercise of each Class A Warrant, at a price of $3.25, subject to adjustment under certain circumstances, entitled the holder to receive one share of Common Stock and one Class B Warrant until December 31, 1997 (expiration date extended in April 1996); exercise of each Class B Warrant, at a price of $5.00, subject to adjustment under certain circumstances, entitled the holder to receive one share of Common Stock until December 31, 1997 (expiration date extended in April 1996). Under certain circumstances, the Company had the right to call the Class A and Class B Warrants at $.10 per Warrant; the exercise prices for the aforementioned Warrants were reduced in September 1995 from $3.25 to $.25 and $5.00 to $1.00, respectively.
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise) Notes to Financial Statements, Continued
6. Capital Stock (continued)
In March 1985, in connection with a research and development agreement (see note 9), the Company issued 115,310 shares of Common Stock to a director of the Company, a member of its SAB and an associate, and 18,750 shares to a university involved with the research. Such shares had been recorded as "shares to be issued" at July 31, 1984 and were issued in 1985.
In July 1985, the Company issued 50,000 shares of Common Stock for $.01 per share to an officer. The difference between the issue price and the fair value, which was determined by an investment banker who is a related party, on the date of issuance was recorded as compensation expense.
On July 15, 1986, pursuant to a one-year agreement for public relations services, the Company agreed to pay $1,500 each month and issue 2,000 shares of Common Stock each month for the term of the agreement. In 1988, 24,000 shares were issued, as well as options for an additional 6,000 shares of Common Stock, for no consideration.
The Company entered into two agreements in 1987 pursuant to which individuals assigned their rights to patents to the Company. One of these agreements was entered into with a director and member of the SAB whereby the Company has issued 150,000 shares of Common Stock at no consideration. The fair value of such shares was capitalized as patent cost. The Company also agreed to pay the estate of such individual one third of any royalties received by the Company from net sales of products by any licensee. The second agreement was entered into with a member of the SAB and another individual for the assignment of a patent application and certain products to the Company. In consideration, the Company issued 50,000 shares of Common Stock, the fair value of which was capitalized as patent costs, and granted options to purchase an additional 80,000 shares of Common Stock to the SAB member and 25,000 shares of Common Stock to the individual. Such options were issued at prices ranging between $.625 and $3.25, the fair value at the respective dates of grant.
On January 1, 1987, the Company entered into an agreement with six members of its SAB regarding future compensation for their services. Under the terms of the arrangement, each of the members received 40,000 shares of Common Stock of the Company in lieu of an annual retainer of $25,000. As of January 1, 1987, such shares represented an aggregate market value of $150,000, which was recorded as research and development expense over the period of the agreement.
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise) Notes to Financial Statements, Continued
6. Capital Stock (continued)
On December 17, 1986, the Company agreed to establish a trust fund with an aggregate of 25,000 shares of the Company's Common Stock for the children of a former executive who was killed in an automobile accident. Such shares were issued on July 31, 1989. In addition, the Company forgave an outstanding loan of $25,000 and paid the executive's widow a $5,000 death benefit. The fair value of the shares on December 17, 1986, the forgiveness of the loan and the death benefit paid were charged to general and administrative expense for the year ended July 31, 1987. In September 1987, the executive's widow exercised an option to acquire 100,000 shares of Common Stock, such option having previously been granted to her late husband, for a total consideration of $112,500. The transaction was financed by redeeming 38,291 previously held shares of Common Stock whose market value represented the total consideration due. Such shares were recorded as Treasury Stock at July 31, 1988 and were canceled effective August 1, 1988.
Pursuant to the terms of an employment agreement with an officer, dated February 23, 1987, the Company issued, in quarterly installments, an aggregate of 50,000 shares of Common Stock at a purchase price of $.01 per share. At July 31, 1988, the Company had recorded approximately $48,000 of compensation expense which represented the fair value of the vested shares as of the date of grant. In addition, such officer was granted options to acquire 50,000 shares of the Company's Common Stock at $1.94 per share (fair value at date of grant). On October 17, 1988, such officer was issued an additional 50,000 shares of Common Stock at a purchase price of $.01 per share, resulting in $34,000 of compensation expense being recorded during the year ended July 31, 1989.
In May 1988, the Company agreed to issue 35,000 shares of Common Stock at a purchase price of $.01 per share to a director of the Company as compensation for past services performed. The fair value of the shares on such date was charged to general and administrative expense for the year ended July 31, 1988. Such shares were issued during the year ended July 31, 1989.
On September 1, 1988, the Company agreed to issue 10,000 shares of Common Stock at a purchase price of $.01 to a consultant as compensation for services performed. The fair value of the shares on such date was charged to general and administrative expense for the year ended July 31, 1989.
In September 1992, the Company entered into an agreement to issue 75,000 shares of Common Stock to each of the two inventors of certain technology assigned to the Company at a price of $.01 per share (see note 9). The Company recorded a charge in fiscal 1993 of $36,000 related to fair value of such shares. In fiscal 1994, the shares were issued and the subscription receivable was forgiven by the Company.
On March 6, 1996, the Board agreed to issue a law firm 50,000 shares of Common Stock in recognition of valued cooperation over the past several years. Such shares have not been issued as of July 31, 1997 pending certain administrative matters.
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise)
Notes to Financial Statements, Continued
6. Capital Stock (continued)
At July 31, 1997, Common Stock of the Company that is reserved as potentially issuable under certain circumstances is summarized as follows:
7. Stock Options
In March 1984, the Board adopted an Employee Stock Option and Stock Appreciation Plan (the Plan) which provided for the issuance of options for up to 500,000 shares of Common Stock. On June 7, 1990, the Board approved an increase in the number of options which can be issued under the Plan to 2,000,000 shares of Common Stock. In March 1991, the Board revised the number of options to 750,000. The Plan provided that the option price for incentive stock options may not be less than the fair market value (110% of fair market value if the optionee is a 10% or more stockholder) of the stock at the date of grant. The Plan terminated in February 1994. For non-qualified stock options, the option price is determined by a committee appointed by the Board. Under the Plan, no options may be exercisable after ten years from the date of grant. Common shares under option for the years ended July 31, 1997, 1996 and 1995 are summarized as follows:
The remaining options at July 31, 1997 are non-qualified stock options issued outside of the Plan to certain officers, directors, members of the SAB and others. On September 11, 1991, the former president and chief executive officer exercised 400,000 non-qualified options at an aggregate exercise price of $4,000. The difference between the fair market value of the Company's Common Stock and the stock option price has been recognized as compensation expense ($158,000) in the current and preceding fiscal years.
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise)
Notes to Financial Statements, Continued
7. Stock Options (continued)
On September 2, 1992, the then current president and chief operating officer was granted 275,000 non-qualified options exercisable at $.01 per share through September 2002. Noncash compensation expense of $100,375 was recorded in fiscal 1993 related to such former officer's options.
In September 1992, the Company agreed to issue a non-qualified stock option to purchase 200,000 shares of Common Stock at an exercise price of $.10 per share to each of the two inventors of a certain technology assigned to the Company (see note 9). During fiscal 1993, $60,000 of expense was recorded for the difference between market value on the date of grant and the exercise price.
In November 1993, the Company entered into a consulting arrangement with an individual who has agreed to serve as a member of the Company's Board and Executive Committee. The new director will receive compensation consisting of non-qualified stock options to purchase 250,000 shares of Common Stock at an exercise price of $.13 per share or the then fair market value. In accordance with the arrangement, the options vested in November 1994, as the individual was still providing services to the Company. The individual is also eligible to receive a cash bonus of up to $60,000 to be granted solely at the discretion of the Board as the Company's cash flow permits. The bonus is also payable upon a change of control of the Company.
In December 1993, the Company issued a non-qualified stock option to purchase 10,000 shares of Common Stock at an exercise price of $.06 per share to a member of the SAB. During fiscal 1994, $900 of expense was recorded for the difference between market value on the date of grant and the exercise price.
In March 1996, the Company issued a non-qualified stock option to an individual to purchase 250,000 shares of Common Stock at an exercise price of $.09 per share, based on the current market price, in lieu of cash compensation for his services as president and chief executive officer of the Company since May 1995. No compensation was recorded related to such grant.
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise)
Notes to Financial Statements, Continued
8. Income Taxes
The tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets as of July 31, 1997 and 1996 are presented as follows:
Deferred tax assets: 1997 1996 ---- ---- Net operating loss carryforwards $ 2,575,000 $ 2,574,000 Research and development tax credits 65,000 65,000 Noncash compensation charges 156,000 156,000 Other 46,000 46,000 Advanced royalty payments 183,000 196,000 ----------- -----------
Total deferred tax asset 3,025,000 3,037,000
Valuation allowance (3,025,000) (3,037,000) ----------- -----------
Net deferred tax asset $ - $ - ============== ===========
The valuation allowance above has been applied to offset the deferred tax assets to recognize the uncertainty of realizing such tax benefits.
At July 31, 1997, the Company has available net operating loss carryforwards of approximately $6,992,000 and $3,294,000 for federal and state income tax reporting purposes, respectively, which are available to offset future Federal and state taxable income, if any. The Company also has research and development tax credit carryforwards of $65,000 for Federal income tax reporting purposes which are available to reduce Federal income taxes, if any. These carryforwards expire beginning in 1999. The Company made no payments of federal or state income taxes during the years ended July 31, 1997, 1996 and 1995.
9. License Agreement and Research Grants
In March 1991, the Company entered into a definitive license agreement under whereby a leading manufacturer and marketer of catheters and cardiovascular supplies is obligated to pay royalties, including minimum annual royalties, to the Company based upon units sold in several product applications which incorporate the Company's antimicrobial technology. Furthermore, in connection with a patent dispute which was settled in 1995, certain additional royalties are to be remitted to the Company which, in turn, it must remit such to a third party. On October 27, 1995, the Company modified the original license agreement and received a $600,000 payment as advanced royalties for the period from August 31, 1995 through September 1, 2000, of which 50% was immediately payable to a university (see note 11).
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise)
Notes to Financial Statements, Continued
9. License Agreement and Research Grants (continued)
Revenue, as well as the expense for the amounts paid to the university, are being recognized ratably over the term of the agreement; such amounts totaled $120,000 and $60,000, and $110,000 and $55,000, respectively, for the years ended July 31, 1997 and 1996. In February 1997 the Company received $50,000 from a manufacturer to cover legal and administrative expenses associated with a license amendment. In November 1995 the Company received $75,000 from a manufacturer to help fund the payment of legal costs incurred by the Company in connection with certain patent interference proceedings. This amount is included in other income for the years ended July 31, 1997 and 1996, respectively.
The Company entered into another license agreement with a leading manufacturer of medical implants in May 1992. The manufacturer had previously been testing the Company's antimicrobial technology with a range of medical implant products. The Company will receive nonrefundable annual development fees for a predetermined time period and, thereafter, royalties when products are sold using the technology.
In September 1992, the Company entered into patent purchase and option agreements with a German pharmaceutical company and received a nonrefundable payment of $325,000. In May 1993, the German company notified the Company it would not exercise the option to acquire certain skin-care technology. The consideration for the option was included in license fee revenue. The patents were previously assigned to the Company and had no cost basis in the accompanying financial statements. The agreement also provided for an additional cash payment based upon obtaining additional European patents and resolving a challenge raised to a German patent and future challenges raised to other European patents, if any, and future royalties of varying percentages based upon net sales of products, if any. The purchaser was responsible for all costs of developing, manufacturing and marketing products as well as future legal costs associated with the technology. On October 17, 1995, the Company was informed that the purchaser was abandoning the projects for developing products under the two German patents it had acquired from the Company pursuant to the 1992 agreement. Consequently, under the terms of the 1992 agreement, the Company has the right to repurchase the subject patents and certain other technology for the $300,000 non-refundable cash payment received plus approximately $100,000 representing the purchaser's out-of-pocket expenses. The Company had six months to exercise its right to purchase, which it subsequently elected not to pursue.
The two inventors of the technology, who originally assigned the rights to the Company, had each agreed to accept as a form of compensation the right to purchase 75,000 shares of Common Stock at a price of $.01 per share, and to each receive an additional non-qualified stock option to purchase 200,000 shares of Common Stock at an exercise price of $.10 per share exercisable through 1997. A noncash expense was recorded in fiscal 1993 upon completion of these agreements based upon the difference between the fair market value of the Company's Common Stock and the aforementioned purchase and option prices. If the Company receives future royalties on the technology, a total of 33% of the royalties will be due and payable to the inventors.
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise)
Notes to Financial Statements, Continued
9. License Agreement and Research Grants ( continued)
In May 1997, the Company entered in to a second license modification agreement with a manufacturer and marketer of catheters and cardiovascular supplies. In connection with the modifications the Company received a one-time, non-refundable, non-creditable fee of $100,000 of which $50,000 was paid to a university. Revenue, as well as the expense for the amounts paid to the university, are being recognized ratably over the term of the agreement. In consideration for this fee the Company waived development fees and miminum annual royalties due on products sold by the licensee for the specific products added to the agreement under the second license modification for a period of three years. After three years the licensee shall pay development fees of $2,500 per quarter payable in advance during the development phase. After such time as a sale is made the licensee shall pay a running royalty as defined by the agreement, and at a minimum $2,500 payable quarterly in advance.
Certain additional license agreements with varying terms and conditions have been entered into by the Company.
10. Lease
The Company vacated its corporate offices in November 1997. Rent expense incurred by the Company was $22,230 for each the years ended July 31, 1997, 1996 and 1995, respectively.
11. Commitments and Contingencies
The Company has been granted exclusive worldwide commercial licenses to any results from the sponsored research with a certain university. In connection therewith, the Company will share gross revenue on a 50-50 basis with such university if the Company elects to sublicense the manufacture of products developed from such research and development. In the event that the Company elects to manufacture and sell the product itself, royalty payments will be made. At July 31, 1997, $176,605 is owed to the university relative to the licenses, and has been included in accounts payable and accrued expenses.
DALTEX MEDICAL SCIENCES, INC. (A Development Stage Enterprise)
Notes to Financial Statements, Continued
11. Commitments and Contingencies (continued)
In December 1993, the university met with the Company and on December 7, 1993 sent a letter of understanding to the Company requiring that the Company pay $50,000 of the total of $75,000 due the university under the research agreement by December 20, 1993, and placing all further research work for the Company on hold. The Company received advance royalty payments totaling $50,000 from one of its sublicensees in order to meet the immediate research funding obligation owed to the university as required under the letter of understanding, and paid the university the $50,000 due on December 16, 1993. On December 16, 1993, the Company also authorized a final quarter of research to be performed, with the understanding that a payment of $25,000 would be due on January 31, 1994 and the final payment of up to $25,000 for such research would be due by March 1, 1994. In June 1995, $10,000 was paid to the university to cover a portion of such amounts.
In November 1995, payment was made to the university of the remaining $34,289 of research amounts and $300,000 representing its share of the advanced royalty payment (see note 6). The Company has been billed $661,005 by the university's patent counsel for its professional services provided as of July 31, 1997, although the Company is currently disputing a significant portion of these legal fees, they have been included in accounts payable and accrued expenses at July 31, 1997.
Pursuant to the existing license arrangements with the university for the antimicrobial technology, an agreement in principle also contains the negotiated percentage royalty scheduled to be paid by the Company to the University at rates ranging from 2.5% to 5.5% depending upon aggregate net annual sales levels of antimicrobial surgical gloves. The agreement in principle also provides that the royalty rates for antimicrobial examination gloves shall be two-thirds of the scheduled rates for the antimicrobial surgical gloves. The Company paid $3,481 in November 1995 related to such royalties.