U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
Commission file number: 0-28154
SMLX TECHNOLOGIES, INC.
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(Name of small business issuer in its Charter)
Colorado 84-1337509
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
376 Ansin Boulevard, Hallandale, Florida 33009
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(Address of principal executive offices, including zip code)
(954) 455-0110
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(Issuer's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
No Par Value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Issuer's revenues for its most recent fiscal year were $390,410.
As of March 31, 1999, 11,044,444 shares of the Registrant's common stock were
outstanding, and the aggregate market value of the shares held by non-
affiliates was approximately $7,276,500.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Transitional Small Business Disclosure Format (check one): Yes __ No X
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
SMLX Technologies, Inc. (the "Company") was incorporated under Colorado
law on October 26, 1987, under the name The Trader's Edge Ltd. On March 28,
1996, the name was changed to Music Tones Ltd. The Company was generally
inactive through December 31, 1996. On March 28, 1997, the Company's
shareholders approved changing the Company's name to Simplex Medical Systems,
Inc., and on August 20, 1998, the Company's shareholders approved changing the
Company's name to SMLX Technologies, Inc.
In April 1996, the Company filed a registration statement with the
Securities and Exchange Commission on Form 10-SB, which registered its Common
Stock under Section 12(g) of the Securities Exchange Act of 1934, as amended.
On March 5, 1997, the Company completed a reverse acquisition of 100% of
the outstanding common stock of Simplex Medical Systems, Inc., a Florida
corporation ("Simplex-Florida") in exchange for 3,453,000 shares of the
Company's Common Stock which resulted in the shareholders of Simplex-Florida
acquiring approximately 46.04% of the shares outstanding after the
transaction. In connection with the closing of this transaction, several
shareholders agreed to cancel a total of 31,953,000 shares of Common Stock.
As a result, after the acquisition of Simplex-Florida there were a total of
7,500,000 shares outstanding.
Unless the context otherwise requires, the term "Company" herein refers
to the Company and its wholly-owned subsidiaries, Simplex-Florida, Analyte
Diagnostics, Inc. ("ADI"), and IRT Management Corp. ("IRT"). Simplex-Florida
was incorporated in Florida in September 1995, ADI was incorporated in Florida
on June 6, 1995, and IRT was incorporated in Florida on January 14, 1997.
Simplex-Florida changed its name to SMLX Technologies of Florida, Inc. during
November 1998.
DESCRIPTION OF BUSINESS
GENERAL
SMLX is engaged in the business of developing technological solutions for
the medical, dental and other industries and then bringing the technologies to
the marketplace.
THE COMPANY'S PRODUCTS
Our products can be organized as follows:
1. Medical diagnostic tests - Development completed.
Cleared for (a) Rapid saliva tests for HIV, hepatitis, chagas disease,
use in certain prostrate cancer, H. Pylorea (ulcers), and drugs of
foreign abuse.
countries;
not in the
U.S.
2. Medical diagnostic tests - In development.
(a) Rapid saliva tests for mumps, measles and rubella.
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(b) Blood or saliva test or periodontal disease.
3. Drug Delivery Systems - Licensed to Vector Medical
Technologies, Inc.
4. Dental products.
Cleared for (a) Airbrator(R) for polishing, cleaning and abrading teeth.
marketing by
FDA.
(b) Saliva Collector (dental use).
510(k) sub- (c) Airbrator(R) for use in cavity preparation.
mitted to
FDA.
5. Equine products in testing.
(a) Bioven - anti-inflammatory drug (submitted to USDA).
(b) Equine infectious anemia rapid test.
6. Other miscellaneous products.
(a) Flea and tick shampoo for small animals.
(b) Organic garden spray (in final testing).
(c) Flavor enhancement.
(d) Tissue fixatives.
A. THE SALIVA COLLECTION DEVICE. The Company's saliva collector is
designed to replace the more traditional methods of specimen collection for
clinical testing. Blood collection has the obvious disadvantage of being an
invasive procedure with associated fear and pain; but most importantly
requires trained personnel to collect the specimen. Urine and fecal matter
have unsavory characteristics as well as the troublesome handling and disposal
problems associated with these biological specimens. All of these specimens
have the disadvantage of being potentially infectious and are treated as bio-
hazardous materials. Saliva collected by the Company's collector can be used
in all routine laboratory equipment and analyzers; can be used by unskilled
personnel; requires little training in its use; and is well tolerated by
patients. Literature references and data obtained by the Company indicates
that saliva collected by its collection system provides a biological specimen
which compares to blood in many of the routinely tested components, such as
HIV, hepatitis, therapeutic drugs, and drugs of abuse, to name only a few.
Currently, outside the United States, the saliva collector, when married
to the Company's rapid testing devices, provides the user with a rapid point-
of-care test system which requires little training, is stored at room
temperature, needs no complicated lab equipment, and provides results in ten
to 15 minutes. This combination provides users such as public health
officials, prisons and the military with an effective, rapid testing system.
In relatively undeveloped countries, the on-site saliva testing system
provides a means of population screening and effective disease management
through rapid definitive identification of affected individuals.
In clinical tests, it has proven both safe and effective for the
collection of a clinically acceptable sample of saliva from a donor's mouth,
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and the recovery thereof for constituent analysis. Because of the metabolic
constituents of saliva, the sample collector can be used with a number of
diagnostic tests, including analysis for antibodies which indicate certain
diseases (such as HIV, hepatitis, measles and mumps).
During April 1998 the Company received a letter from the FDA stating that
the FDA had reviewed the Company's 510(k) notification regarding the saliva
collector and had approved marketing of the product in the United States for
use as a saliva absorber during dental procedures.
The fluid collection device to be manufactured and distributed by the
Company may also be used with a variety of screening tests for on-site
determination of the presence of pollutants in drinking water, waste streams
and environmentally sensitive habitats.
The countries which have approved or permitted the sale of these test
kits include Hong Kong, Spain, Peru, Costa Rica, Italy, Kuwait, New Zealand,
and Dominican Republic.
B. DRUG DELIVERY SYSTEMS. On April 13, 1999 the Company entered into an
Exclusive Licensing Agreement and Purchase Option Agreement with Vector
Medical Technologies, Inc. pursuant to which the Company agreed to transfer to
a newly-formed, wholly-owned subsidiary, all of its proprietary technical
know-how, patent applications and other assets related to the technologies for
the delivery of drugs and other natural and synthetic materials, and to grant
to Vector an exclusive ten year license to these assets. In return, Vector
agreed to pay to the Company non-refundable advances against future royalties
of $900,000 per year payable monthly in payments of $75,000. The Company will
receive a royalty of 3% to 4% of the net sales derived from the assets
transferred, depending on whether or not the assets giving rise to the sales
are covered by a patent. Vector may pay the advance royalties for a period of
four years subject to the option to purchase the subsidiary. Commencing on
April 13, 2000 Vector has the option to purchase the subsidiary and cease
paying the advance royalties for a purchase price ranging from $3.6 million to
$6.6 million depending on the amount of gross sales attributable to the assets
in the preceding twelve-month period. The 3% to 4% royalty will continue for
the ten year term of the license even if the purchase option is exercised by
Vector.
The subsidiary to be set up will be devoted to research and development
work on the technology transferred to the subsidiary.
C. DENTAL AIRBRATOR(R). The Company has developed and applied for
patents and FDA approval on a disposable handpiece which attaches to standard
air abrasive etching devices used by dentists for tooth bonding procedures.
The product effectively abrades the surface of teeth, but has no effect at all
on soft tissue. Because it is disposable and there is no need for extensive
sterilization procedures, the product expedites the handling of patients.
During April 1997 the Company received a letter from the FDA stating that
the FDA had completed the scientific review portion of the Company's 510(k)
premarket notification regarding the Airbrator(R), and the Airbrator(R) was
cleared for marketing in the United States for the use of abrading the surface
of teeth. Subsequently, in response to the Company's second 510(k) premarket
notification regarding the Airbrator(R), the Company was informed verbally
that the Airbrator(R) was technically cleared for use in cavity preparation
and management expects it to be cleared for marketing once the FDA has
inspected the manufacturing site and determined that it complies with the
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FDA's requirements. The Company is in the process of preparing its facility
and training its personnel to meet the FDA manufacturing requirements.
During July 1997, the Company entered into a Distribution Agreement with
Sybron Dental Specialties, Inc. ("Sybron") which appointed Sybron as the
exclusive worldwide distributor for the Airbrator(R). Several of the terms of
this agreement were amended during December 1997. Sybron paid a $30,000 one-
time license fee to the Company during 1997 for the grant of this
distributorship. This agreement was terminated effective December 31, 1998,
and the Company is currently holding discussions with an international holding
company regarding a license agreement.
D. BIOVEN is an injectable, anti-inflammatory drug which is currently
being tested as a treatment for joint inflammation in horses. These tests are
being conducted at three sites in Florida. One of the Company's officers
developed BIOVEN after fifteen years of extensive research in the field of
immunology. BIOVEN is a result of years of experimentation, evaluation and
historical study in the field of peptide use. The BIOVEN mode of action is
believed to function by reversing the chemical/immunological imbalances that
are present in inflamatory processes.
E. FLAVOR ENHANCEMENT. The Company has developed a proprietary process
which allows the incorporation of flavor essences into an edible support
material using food grade materials and approved printable inks. This process
would allow a new form of advertising sampler which would let a consumer
sample new food and beverages through newspaper ads, point of sale displays or
direct mailings. The encapsulation process and method of manufacturing are
proprietary.
F. FLEA AND TICK SHAMPOO. The Company has developed a proprietary flea
and tick shampoo for small animals, which is being marketed by the Company
under the name Neemodex(R). The active ingredient, Neem Oil, is an extract of
the Neem tree, a tropical evergreen that grows in Asia. This product is all
natural, non-insecticidal, non-toxic and environmentally safe. The Company is
the manufacturer of this product and expects to expand on its formulation line
by adding new pet grooming products in the future.
G. ORGANIC GARDEN SPRAY. The Company has recently acquired the rights
to an organic garden spray which is in the final stages of research and
development and field testing. This product is an all natural insecticide and
fungicide containing Neem Oil. It will be sold ready to use on ornamental and
vegetable plants. It controls aphids, spider mites, whitefly, thrips and
scale insects. It is environmentally safe and can be used on indoor or
outdoor plants.
H. EQUINE INFECTIOUS ANEMIA RAPID TEST. This is a rapid serum test for
equine infectious anemia. It utilizes a procedure that is simpler to run than
the other two available tests (the Coggin's test or the ELISA test), and it
does not require a trained technician to perform. It can be easily performed
at the stables. The Company has completed development of this test and is
currently working with a distributor in Brazil which is seeking approval from
Brazilian regulatory authorities to market the product in Brazil. The Company
plans to submit this test product to the U.S. Department of Agriculture for
their approval in the future.
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RESEARCH AND DEVELOPMENT
The Company spent $178,238 on research and development of new products
during the year ended December 31, 1998, and it expects to spend approximately
three times this in the current fiscal year on development of the products
described above in addition to others.
THE MARKET
The Company believes that the saliva diagnostic market is in its infancy
and could become an extremely large industry. However, no market or
feasibility study has been undertaken by the Company. Commercial development
of immunoassays in diagnostic medicine commenced in the 1960's and has
increased significantly since then, due to the high degree of sensitivity and
specificity of such techniques.
Tests for hepatitis, HIV, mumps, measles, cancer tumor markers, EBV, CMV,
and many other diseases currently use blood as the source of the specimen.
These tests, while effectively performed in the clinical setting, are
expensive, time consuming and, at the least, painful for the patient. The
skill and expertise of the physician or other highly trained individual needed
to obtain the sample of blood for these tests also adds to the high cost of
the testing.
The saliva collection and test system tends to solve these problems and
reduces the overall cost of immunological testing and provides immediate
results. The Company believes that testing with saliva specimens has many
potential advantages compared to testing with blood and urine specimens.
Unlike blood specimens, saliva specimens can be collected at any time in any
location. The sampling procedure is easy to administer and monitor, and may
be conducted on a group basis. The Company believes that, unlike blood
collection, the use of its products will not require special training. Blood
specimen testing requires the use of needles, which may accidentally injure or
infect the technician collecting the specimen or the person giving the
specimen. Saliva specimen collection does not require the use of sharp
objects. Additionally, after collection, blood specimens remain potentially
infectious (for example they can contain live HIV virus) whereas saliva
specimens are believed not to be infectious. The use of saliva specimens also
has advantages compared to the use of urine specimens since the integrity of
the saliva specimen can be maintained, chain of custody concerns can be
addressed and saliva collection can be used without significant invasion of
privacy.
Disadvantages of saliva collection include the stability of saliva as a
specimen and the impact of the subject's diet and enzymes on saliva.
Provisions must be made to assure that a sufficient amount of saliva is
collected, the specimen is adequately stabilized and bacterial growth does not
cause test interference.
Saliva based testing has been recognized by the World Health Organization
("WHO") and the FDA as efficacious and practical. Several tests have been
approved to be used in the clinical market based on saliva samples. Countries
such as Thailand, Brazil, Mexico, Russia and many others have already made
policy changes which allow for the use of saliva tests for HIV in their health
programs.
The market currently is divided into three major components: the
"government" sector; the "captive audience" sector (military, criminal,
institutional, etc.); and the "private" sector or individual patient.
6
International markets for the Company's products include both government
and private business sectors. Subject to government approvals, the Company's
introduction of its saliva collector will be with an HIV diagnostic screening
test. The HIV test kit is initially planned for distribution and use by
governmental public health agencies and by foreign military establishment. In
certain foreign markets, the Company's HIV test kits are expected to be
advertised for sale directly to private physicians and the consuming public.
The Company already has products under evaluation in a number of
countries. Several countries have begun testing the HIV saliva test with the
goal of introducing the product to their military to replace the currently
used blood test. Public health institutions in several foreign countries have
reviewed and tested the Company's HIV saliva collectors. Their goal is to use
the test to screen "at risk" populations in major cities and tourist areas.
These include legal prostitutes, drug addicts, the homosexual population and
the prison population. Results of this testing will be used to develop policy
for the education programs which must be implemented along with testing to
halt the rapid spread of this infection. Additionally, many of these countries
will use the results of this testing and mass screening to plan for the future
health needs of their countries.
GOVERNMENT REGULATION
The development, manufacture, testing and marketing of the Company's
diagnostic products and the Airbrator(R) are subject to regulation by the FDA
and other federal, state and foreign agencies. Under the FDC Act, the FDA
regulates almost all aspects of development, marketing and sale, including the
introduction, clinical trials, advertising, manufacturing, labeling,
distribution of and record keeping for the products in the United States.
Diagnostic products marketed for testing for drug abuse are regulated as
medical devices under the FDC Act for which FDA approval is required. The
Company may attempt to obtain marketing clearance through 510(k) Premarket
Notification for certain of its products used in connection with testing for
drug abuse. Following submission of a 510(k) Premarket Notification, the
manufacturer or distributor may not place the device into commercial
distribution until an order is issued by the FDA. The FDA has no specific time
limit by which it must respond to a 510(k) Premarket Notification. The FDA may
declare that the device is "substantially equivalent" to another legally-
marketed device, and allow the device to be marketed in the United States. The
FDA may, however, determine that the proposed device is not substantially
equivalent, or may require further information, such as additional test data,
before it is able to make a determination.
Other than the dental products, no FDA approval has yet been received for
any of the Company's products and there can be no assurance that such approval
will ultimately be obtained. Although the saliva collection device received
FDA approval in April 1998 for dental use only (see "The Company's Products"
above), the test kit which incorporates the collection device has not been
approved by the FDA for sale within the United States. It is however, the
Company's proposal to export the test kit in compliance with applicable laws
and regulations administered by the FDA. Initially, because the test device
has not been approved for use in the United States, the Company would have to
comply with the FDC Act if it wishes to export the device in its finished
form. To export the completed saliva test kit from the United States, the
Company does not only need to receive permission to export the product into
the foreign country, it also had to submit to the FDA, basic data regarding
the safety of the finished device in order for the agency to determine that
export is not contrary to public health and safety. The FDA cleared the
7
export of the saliva collection device and some of the test kits, provided
that the appropriate regulatory agency of the country to which the product is
exported has approved the importation and use of the product.
During April 1997 the Company received a letter from the FDA stating that
the FDA had completed the scientific review portion of the Company's first
510(k) Premarket Notification regarding the Airbrator(R), and that the
Airbrator(R) was released for marketing in the United States for the use of
abrading, polishing and cleaning the surface of teeth. Subsequently, in
response to the Company's second 510(k) Premarket Notification regarding the
Airbrator(R), the Company was informed verbally that the Airbrator(R) was
technically cleared for use in cavity preparation, and management expects it
to be cleared for marketing once the FDA has inspected the manufacturing site
and determined that it complies with the FDA's requirements. The Company is
in the process of preparing its facility and training its personnel to meet
the FDA manufacturing requirements.
FOREIGN REGULATION
Agencies similar to the FDA regulate medical devices in some foreign
countries, whereas other countries allow unregulated marketing of such
devices. The Company's products will be required to meet the regulations, if
any, of the foreign countries in which they are marketed. Once a product has
been registered in a foreign country, the Company is required to obtain a
certificate of exportability from the FDA before the product can be shipped.
MANUFACTURING
The Company will manufacture the key components of its rapid saliva test
products because of the need to maintain quality control standards coupled
with the need to closely guard the technology. The saliva collector is being
manufactured by a contract manufacturer for the Company.
The two sub-assemblies of the Airbrator(R) are manufactured by East Coast
Plastics, a contract molding company and these components will then be filled,
assembled and packaged by SMLX.
The other products described above will generally be manufactured by the
Company.
The Company believes that most components used in the manufacture of its
current and proposed products are currently available from numerous suppliers
located in the United States, Europe and Asia. However, certain components are
available only from a limited number of suppliers. Although the Company
believes that it will not encounter difficulties in obtaining these
components, there can be no assurance that the Company will be able to enter
into satisfactory agreements or arrangements for the purchase of commercial
quantities of such components.
The Company anticipates that it will not be required to maintain
significant inventory levels of products until the Company's products are
deemed acceptable for sale. The Company does not currently have any material
backlog. Until the Company is able to market its products on a broad basis, it
does not anticipate that its backlog or inventory level will be material. At
that time, the Company intends to cause these products to be manufactured for
it shortly before they are required for shipment. The Company does not
foresee that an extensive period of time will be required from the time of its
manufacturing order to the time of final delivery of its products.
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COMPETITION
The markets in which the Company participates are highly competitive. The
Company is aware of specialized biotechnology firms, universities and other
research institutions which have patented, developed, or are developing
technologies and products which are competitive with the Company's products
and technologies. These entities, most of which are established, have
substantially greater research, marketing and financial resources than the
Company. The Company expects that the number of products competing with its
saliva-based test products will increase as the potential benefits of saliva-
based testing become more widely recognized.
The Company is attempting to develop strategic alliances with companies
to jointly develop diagnostic tests which use saliva and/or blood as the
testing specimen.
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company owns the rights to U.S. Patent Number 5424219 dated June 13,
1995, which relates to the "Method of Performing Assays for Biomolecules and
Solid Supports for Use in Such Methods." The Company has licensed its rights
under this Patent to Polyfiltronics, Inc. (See "License Agreement with
Polyfiltronics, Inc." below.)
The Company presently has pending, two (2) patent applications in the
United States, on certain aspects of its saliva collection testing device.
Since the Company plans to sell its products in foreign markets it intends to
seek foreign patent protection on such products and technologies. The patent
laws of other countries may differ from those of the United States as to the
patentability of the Company's products and technologies and the degree of
protection afforded.
The Company also has one pending patent application in the United States
relating to the dental air abrasion device (Airbrator(R)), and three other
applications for other technologies which the Company is developing. The FTC
has informed the Company's patent counsel of the allowance of the Airbrator(R)
patent, and it should be issued by June 30, 1999.
Much of the technology developed or owned by the Company is subject to
trade secret protection. To reduce the risk of loss of trade secret protection
through disclosure, the Company generally enters into confidentiality
agreements with its employees. There can be no assurance that the Company will
be successful in maintaining such trade secret protection or that others will
not capitalize on certain of the Company's technology.
The Company has also registered four trademarks with the U.S. Patent and
Trademark Office. These include the trademarks "Simplex," "Neemodex,"
"Airbrator(R)," and "Cytech."
LICENSE AGREEMENT WITH POLYFILTRONICS, INC.
In June 1998, the Company entered into an agreement with Polyfiltronics,
Inc. which grants Polyfiltronics an exclusive license of the Company's rights
under a patent owned by the Company relating to a micro titer filter plate
technology and an opaque wall micro strip system. Polyfiltronics paid the
Company $40,000 for the license and certain related tools and molds, and will
pay a royalty to the Company based on a percentage of sales of products using
the technology. The term of the license is for twenty years or the life of
the patent, whichever is shorter.
9
Polyfiltronics is a U.S. subsidiary of Whatman PLC, an English company,
with a worldwide presence in research laboratories, academic and teaching
facilities and industrial laboratories. Polyfiltronics is a technical leader
in filter plate technology. Filter plates are commonly used in medical
diagnostics, forensic medicine, DNA research, drug discovery and other
scientific fields for the analysis of small quantities of chemical or
biological components.
ACQUISITION OF MINORITY INTEREST IN AUTOMATED HEALTH TECHNOLOGIES, INC.
During May 1998, the Company acquired a 19% interest in Automated Health
Technologies, Inc. ("AHT") in exchange for 500,000 shares of the Company's
Common Stock. The shares were exchanged pursuant to the terms of a Share
Exchange Agreement dated May 20, 1998, between the Company and AHT. The Share
Exchange Agreement provides that AHT has the right to require the Company to
exchange an additional 1,000,000 shares of Common Stock for all of the
remaining outstanding shares of AHT under certain conditions. AHT may
exercise this right prior to May 20, 2003, if, at the time of exercise, AHT
has a net worth of at least $200,000, no debt other than up to $25,000 in
trade payables, and year-to-date positive cash flow. In addition, AHT may
exercise this right if it sells the business of its subsidiary - Rx Automation
Incorporated, and escrows $1,000,000 from the proceeds of such a sale. In the
event that AHT exercises its right, the Company and AHT will in good faith
negotiate a merger or other exchange agreement necessary to effect the
additional exchange, and file a registration statement on Form S-4 to register
the transaction.
AHT is a medical services company that processes pharmacy and retail drug
store expired drug returns.
EMPLOYEES
The Company currently has 8 employees. The Company is not subject to any
collective bargaining agreement and believes that its relationships with its
employees are good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company presently maintains its corporate offices and warehouse
facilities at 376 Ansin Boulevard, Hallandale, Florida 33009. The five year
lease on these facilities commenced April 1, 1998, and requires monthly rental
payments of $4,000 plus tax. The Company has the option to renew the lease
for five additional years.
ITEM 3. LEGAL PROCEEDINGS.
Other than the law suits described below, there are no pending legal
proceedings in which the Company is a party, and the Company is not aware of
any threatened legal proceedings involving the Company.
In August 1995, Americare Transtech, Inc. ("Americare"), Americare
Biologicals, Inc. and International Medical Associates, Inc., through their
principal, Joseph D'Angelo ("D'Angelo"), filed a lawsuit against six parties
in the Broward County Circuit Court under case no. 95-011256 (21). The
Complaint was dismissed and subsequently amended on or about May 17, 1996, and
included Simplex-Florida as a defendant in one count of the amended Complaint.
The Complaint alleges that ADI misappropriated Americare's proprietary and
trade secret technology relating to the saliva sample collection system and
non-invasive glucose detection technology. No specified amount of damages was
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alleged other than to claim that the amount exceeded $15,000. Nine
affirmative defenses were filed in response to the allegations. A trial on
this matter was held in December 1998, and the jury found the Company liable
for misappropriation of trade secrets and interference with business
relationships, however, no damages were awarded against the Company. The
Company intends to ask the court to enter the judgment in favor of the Company
since no damages were awarded.
On or about September 3, 1998, Americare, D'Angelo et al amended a
previous complaint which had been filed in the United States District Court
for the Southern District of Florida under Case No. 97-3654-CIV, and added
Simplex-Florida and ADI as defendants. The Complaint alleges patent
infringement, misappropriation of trade secrets, breach of contract, breach of
fiduciary duty as agent, breach of confidential relations, breach of trust,
unfair competition, and conversion. The plaintiff is seeking damages for an
undisclosed amount in excess of $75,000. The Company intends to aggressively
defend the suit and has filed a motion to dismiss because it does not pertain
to anything the Company has ever been involved in.
On or about July 29, 1998, Superior Wholesale Products, Inc. ("SWP")
instituted suit against SMLX, in the Eleventh Judicial Circuit in and for
Miami-Dade County, Florida, alleging breach of contract and interference with
its relationship with a third party. SWP claims that it had entered into a
distribution agreement with SMLX for the distribution of HIV saliva test kits
and that after making a sale to one of SWP's clients in Peru, SMLX illegally
began selling the products directly to the customer. The customer has advised
that it refuses to conduct any business whatsoever with SWP and has instead
contacted SMLX directly to purchase the products. SMLX denies that it has
ever entered into any formal distribution agreement with SWP but had only
intended to do so if SWP was able to obtain the proper import licenses in Peru
which it has failed to do. Further, the intended distribution agreement (not
a formal distribution agreement) names specific parties which excludes the
subject Peruvian customer. SMLX has filed a counterclaim against SWP for
interfering with SMLX's relationship with the Peruvian customer and for
defamation. SWP claims damages in the amount of $2.5 million which SMLX
believes is not only unsubstantiated but frivolous. SMLX intends to
aggressively defend the case and seek damages against SWP for its misconduct.
On or about September 1, 1998, John Faro filed a Complaint against
Simplex Medical Systems, Inc., f/k/a Music Tones Ltd., a Colorado corporation;
Simplex Medical Systems, Inc., a Florida corporation; Nicholas Levandoski;
Henry B. Schur; John Trafton; D.L. Ross a/k/a Debra Ross; and Corporate Stock
Transfer, Inc., a Colorado corporation. The Complaint was filed in Miami-Dade
County Circuit Court under Case Number 98-19091 CA-4. The Complaint contains
eight counts alleging various causes of action which all seek 460,000 shares
of the Company's Common Stock. The Company and two of the individual
defendants have filed a counterclaim against Mr. Faro seeking damages in
excess of $4 million as a result of his legal malpractice, breach of
consulting agreement and interference with the Company's business relations.
On March 31, 1999, a hearing was held on Mr. Faro's emergency motion for an
injunction requiring the Company to issue 460,000 shares to Mr. Faro. The
court denied the motion and found that Mr. Faro was not likely to prevail at
the trail on the matter. The Company intends to seek a summary judgment at a
hearing set for May 24, 1999, and to otherwise aggressively defend the case
and pursue its counterclaim against Mr. Faro.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION. The Company's Common Stock trades in the over-
the-counter market, under the symbol "SMLX". Other than a few sporadic trades
during November 1996, the trading commenced during February 1997. The
following table sets forth the high and low bid prices for the Company's
Common Stock for the periods indicated as reported by the OTC Bulletin Board.
These prices are believed to be inter-dealer quotations and do not include
retail mark-ups, mark-downs, or other fees or commissions, and may not
necessarily represent actual transactions.
QUARTER ENDED HIGH BID LOW BID
-------------- -------- -------
March 31, 1997 $3.3125 $.03125
June 30, 1997 $3.0625 $1.75
September 30, 1997 $2.875 $1.4375
December 31, 1997 $2.3125 $1.1875
March 31, 1998 $1.78125 $ .75
June 30, 1998 $4.3125 $ .625
September 30, 1998 $3.375 $1.03125
December 31, 1998 $1.875 $ .875
(b) HOLDERS. As of April 14, 1999, the Company had approximately 102
shareholders of record. This does not include shareholders who hold stock in
their accounts at broker/dealers.
(c) DIVIDENDS. The Company has never paid a cash dividend on its common
stock and does not expect to pay a cash dividend in the foreseeable future.
(d) RECENT SALES OF UNREGISTERED SECURITIES. None.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
During the twelve months ended December 31, 1998, the Company had
$390,410 in revenue compared to $71,461 in revenue during the prior year. The
increase in revenue was the result of international sales of saliva tests.
These revenues were lower than expected due to the longer than anticipated
delays in getting the Company's registration approval in various countries for
the rapid saliva tests, and the lack of performance on a major contract.
Expenses for the twelve months ended December 31, 1998, increased to
$1,082,323 as compared to $511,179 in the prior year due to having to pay rent
in two locations for five months, while remodeling a new facility to move
into; increased commissions; increased payroll due to the addition of a
President, a lab technician and a marketing manager; hiring a public relations
firm and gearing up for new product information.
12
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company's working capital was $(243,504) as
compared to $(19,021) at December 31, 1997. The decline in working capital
was primarily due to an increase in accounts payable and current portion of
notes payable.
The report of the Company's auditors in the financial statements for the
year ended December 31, 1998, contains a going concern qualification. Since
inception, the Company has experienced losses aggregating $1,624,021 and has
been dependent upon loans from stockholders and other third parties in order
to fund operations to date. Management believes that the funds raised through
the sale of stock and income generated from the sale of several recently
developed products will provide the Company with sufficient cash flow
resources to fund the operations of the Company through the current year.
As of December 31, 1998, the Company had no material commitments for
capital expenditures.
YEAR 2000 COMPLIANCE
The Company has determined that the year 2000 will have no adverse effect
on its internal operations, having only one computer dedicated to data bases
and that computer has always used 4 digit year codes.
Before the end of the second quarter, the Company will have queried all
of its suppliers of services that might have an effect on its business to see
if they will be year 2000 compliant, and if not, make arrangements to switch
suppliers by year end.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements are set forth on pages F-1 through F-18 hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.
13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors and executive officers of the Company and its wholly-owned
subsidiary, their ages and positions held in the Company are as follows:
NAME AGE POSITIONS HELD AND TENURE
- ----------------------------- --- ----------------------------------
Colin N. Jones 77 President and Chairman of the Board
Nicholas G. Levandoski, Ph.D. 62 Vice President - Research and
Development, Secretary, Treasurer
and Director of the Company;
and Director of Research and
Development for Simplex-Florida
Henry B. Schur 54 Vice President - Business Development
and Director of the Company; Vice
President and a Director of
Simplex-Florida
Joel Marcus 58 Director
Kenneth H. Robertson 63 Director
Gerald M. Wochna 55 Director
There is no family relationship between any Director or Executive Officer
of the Company.
The Company has audit, compensation and executive committees, which were
set up on August 20, 1998. The audit committee consists of Joel Marcus and
Gerald Wochna. The compensation committee consists of Joel Marcus, Gerald
Wochna and Kenneth Robertson. The executive committee consists of Colin
Jones, Henry Schur and Kenneth Robertson.
Set forth below are the names of all directors and executive officers of
the Company, all positions and offices with the Company held by each such
person, the period during which he has served as such, and the principal
occupations and employment of such persons during at least the last five
years:
COLIN N. JONES has served as the President and Chairman of the Board of
the Company since April 10, 1998. Mr. Jones served as CEO and Chairman of
Automated Health Technologies from November 1996 to April 1998 and was a
consultant to that firm from February 1996 to November 1996. From July 1994
until January 1996, he served as Chairman, International of INTEC, an
international consulting firm specializing in reengineering. From February
1983 until March 1988, he served as Chairman of Proximity Technologies and
continued as Vice President, International until July 1994 for Franklin
Electronics, which had purchased Proximity Technologies. From June 1974 until
February 1983, he owned and operated his own merger and acquisition firm.
From January 1970 until June 1974, he was President and CEO of Sensormatic
Electronics and remained a consultant until June 1984. From September 1950
until January 1970, he was employed by IBM in various positions with his final
position being Manager of Sales Programs for the Office Products Division.
Mr. Jones received a BSME Degree from the University of Texas in 1949.
14
NICHOLAS LEVANDOSKI has served as the Vice President of Research and
Development, Secretary, Treasurer and a director of the Company since March 5,
1997. He also served as acting President from March 5, 1997 until April 10,
1998. He has served as Director of Research and Development for Simplex-
Florida since June 1995. Mr. Levandoski has extensive research and clinical
experience, including military, industry and hospital environments. Mr.
Levandoski received a B.S. degree in Chemistry/Biology from the University of
Notre Dame in 1958. After a brief period in private industry (Abbott
Laboratories, N. Chicago, Illinois), Mr. Levandoski enlisted and served in the
Medical Service Corps. of the U.S. Army from 1959 to 1962. While on active
duty in Medical Service Corps., Mr. Levandoski enrolled and attended the
graduate school of the University of Denver where he continued his studies in
organic chemistry. Upon release from active duty in 1962, Mr. Levandoski was
hired as the Director of Laboratory of Metabolic Division of the U.S. Army
Research and Nutrition Laboratory, Denver, Colorado, from 1962 to 1964, and he
completed his graduate studies in 1964. He thereafter held responsible
positions in industry, including Cordis Corporation, Miami, Florida, from 1965
to 1971, in the Diagnostic Products Division; Benasil Corporation, Miami,
Florida from 1977 to 1979; and Director of Corporate Compliance (FDA) for
North American Biologicals, Miami, Florida. In 1979, Mr. Levandoski returned
to active duty in the U.S. Army as Executive Officer and Hospital
Administrator for a 1,000-bed general hospital in Miami, Florida. In 1982,
Mr. Levandoski was selected to attend the National War College, Ft. McNair,
Washington, D.C.; and was thereafter assigned to the Pentagon in Washington,
D.C., Division of Reserve Affairs, where he remained until his retirement as a
full Colonel in 1984.
HENRY SCHUR has served as the Company's Vice President of Marketing and a
Director since March 5, 1997. He has served as President of Analyte
Diagnostics, Inc., a wholly owned subsidiary of Simplex-Florida since June
1995. He is the Company's principal scientist and one of the principal
inventors of the Company's products. Mr. Schur has an undergraduate degree in
Health Sciences from Florida International University and post graduate
studies in Business Management at the University of Oklahoma. In the course
of Mr. Schur's professional career, he has occupied responsible positions with
companies engaged in the manufacture of diagnostics products and biochemicals,
including specifically, Arcade, Inc., Chattanooga, Tennessee (1986 to 1987),
and Cordis Corporation, Miami, Florida (1966 to 1968). Mr. Schur, in 1991,
was formerly employed by Americare, with whom Mr. Schur is now in litigation.
Mr. Schur is a principal inventor of a number of the Company's products and
has a number of issued U.S. and foreign patents to his credit.
JOEL MARCUS has served as a Director of the Company since December 1997.
He has been self-employed as a certified public accountant in Florida since
1974 when he became a licensed CPA. Mr. Marcus received a Bachelor of Science
Degree in Business Administration from Hofstra University in New York in 1960
and completed graduate studies at CW Post Tax Institute in 1963.
KENNETH H. ROBERTSON has been a Director of the Company since August
1998. Mr Robertson is President and CEO of Conference-Call USA, Inc., a
successful teleconferencing company which he co-founded in 1987 and sold in
December 1996 to Citizens Utilities, Inc. Following the sale, he has
continued as CEO of that entity, and it has continued to grow under his
leadership. Mr. Robertson has extensive experience in a diverse range of
business activities with special emphasis on sales and financial management.
In 1981 he moved to Florida as President and CEO of Alo-Scherer Healthcare
(now Scherer Healthcare, Inc.) and held that position until 1983 at which time
he resigned and has remained a director of this NASDAQ-listed company. Mr.
15
Robertson received a Bachelor's Degree in Economics from Wabash College in
1956.
GERALD M. WOCHNA has been a Director of the Company since August 1998.
Since 1984, he has been involved in the formation, financing and development
of several small businesses, both individually and as a member/manager of
Robertson & Partners, L.L.C. He is currently a director of Automated Health
Technology. Since 1984, Mr. Wochna has been involved in land development and
the development, construction, leasing and financing of retail, warehouse and
office properties. From 1973 to 1984, he practiced law with a law firm he
established in Boca Raton, Florida. Mr. Wochna continued to practice law on
an "of counsel" basis from 1984 to 1989, when he retired from that profession.
Mr. Wochna received his Bachelor's Degree from John Carroll University,
Cleveland, Ohio in 1964, and he graduated from Cleveland State University Law
School in 1968.
The Company's executive officers hold office until the next annual
meeting of the Directors of the Company. Except as described below, there are
no known arrangements or understandings between any director or executive
officer and any other person pursuant to which any of the above-named
executive officers or directors or nominees was selected as an officer or
director or nominee for director of the Company.
Colin N. Jones, Gerald M. Wochna and Kenneth R. Robertson were nominated
for election as directors of the Company pursuant to the terms of a
Stockholders' Agreement dated May 15, 1998, among the Company and certain
shareholders of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, no persons who were either a
Director, Officer or beneficial owner of more than 10% of the Company's Common
Stock, failed to file on a timely basis reports required by Section 16(a) of
the Exchange Act during the most recent fiscal year except as follows: Colin
Jones filed two Form 4's reporting three stock purchases two and three months
late, and his Form 3 was filed about 3-1/2 months late. Joel Marcus's Form 3
was filed about 2 months late.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information regarding the executive
compensation for the Company's President and each other executive officer
whose total annual salary and bonus exceeded $100,000 for the years ended
December 31, 1998, 1997 and 1996:
16
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------- -------------------------- -------
SECURI-
TIES
UNDERLY-
OTHER RE- ING ALL
ANNUAL STRICTED OPTIONS/ OTHER
NAME AND PRINCIPAL COMPEN- STOCK SARs LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) (NUMBER) PAYOUTS SATION
- ------------------ ---- ------- ----- ------ -------- -------- ------- ------
Colin N. Jones, 1998 $57,231 -- -- -- -- -- --
President<FN1>
Nicholas G. 1998 $75,615 -- -- -- -- -- --
Levandoski, Ph.D. 1997 $43,500 -- $19,400 -- 250,000 -- --
President 1996 $ -- -- $21,956 -- -- -- --
__________________
<FN>
<FN1>
Colin Jones has served as President since April 10, 1998.
</FN>
AGGREGATE OPTION EXERCISES IN YEAR ENDED
DECEMBER 31, 1998 AND DECEMBER 31, 1998 OPTION VALUES
SECURITIES UNDER- VALUE OF UNEXER-
SHARES LYING UNEXERCISED CISED IN-THE
ACQUIRED OPTIONS MONEY OPTIONS/
ON AT 12/31/98 AT 12/31/98
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (NUMBER) REALIZED UNEXERCISABLE UNEXERCISABLE
---- -------- -------- ---------------- ----------------
Colin Jones -0- -0- 200,000 / 0 -0-
OPTIONS GRANTS IN LAST FISCAL YEAR
Individual Grants
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE
---- ------------ ------------ ----------- ----------
Colin Jones 200,000 85% $1.58 4/10/03
EMPLOYMENT AGREEMENTS
Effective July 1, 1998, the Company entered into two-year employment
agreements with Colin Jones, Nicholas Levandoski and Henry Schur, Executive
Officers of the Company. Under these agreements, each of these persons will
receive a base salary of $80,000 per year (which amount is to be reviewed
17
annually) plus one-third of a bonus pool. The bonus pool will be equal to a
percentage of the audited pre-tax profit of the Company, or a minimum of
$40,000, if the corporate achievements set forth below are met. The
determination of the bonus pool is summarized below:
Achievement
Year Profit (Loss)(1) Percentage Estimated Pool
---- ---------------- ---------- --------------
1998 $ (300,000) 12% $ 40,000 (minimum)
1999 $1,200,000 10% $120,000
2000 $2,900,000 8% $232,000 (2)
______________
(1) No bonus pool will be created unless the audited pre-tax profit (loss)
is equal to or better than the achievement level for that year.
(2) Since the employment agreements will end on June 30, 2000, any bonuses
paid for 2000 will be one-half of the amount determined and will not
be paid until completion of the year-end audit.
Each of the employment agreements provide that in the event of a
termination of employment by the Company without cause (as defined in the
agreements), the Company will be required to pay the terminated officer a lump
sum equal to the base salary remaining under the agreement, up to one year,
plus an amount equal to one years' base salary. If such a termination occurs
within six months of a change in control of the Company, the terminated
officer will receive a lump sum equal to the base salary remaining under the
agreement (without a one year limitation) plus one years' base salary.
STOCK OPTION PLAN
During March 1997, the Board of Directors adopted a Stock Option Plan
(the "Plan"), and on March 28, 1997, the Corporation's shareholders approved
the Plan. The Plan authorizes the issuance of options to purchase up to
2,000,000 shares of the Company's Common Stock.
The Plan allows the Board to grant stock options from time to time to
employees, officers, directors and consultants of the Company. The Board has
the power to determine at the time that the option is granted whether the
option will be an Incentive Stock Option (an option which qualifies under
Section 422 of the Internal Revenue Code of 1986) or an option which is not an
Incentive Stock Option. Vesting provisions are determined by the Board at the
time options are granted. The option price for any option will be no less
than the fair market value of the Common Stock on the date the option is
granted and unless otherwise stated on the option, each option is exercisable
for 10 years.
Since all options granted under the Plan must have an exercise price no
less than the fair market value on the date of grant, the Company will not
record any expense upon the grant of options, regardless of whether or not
they are incentive stock options. Generally, there will be no federal income
tax consequences to the Company in connection with Incentive Stock Options
granted under the Plan. With regard to options that are not Incentive Stock
Options, the Company will ordinarily be entitled to deductions for income tax
purposes of the amount that option holders report as ordinary income upon the
exercise of such options, in the year such income is reported.
18
The Company has outstanding options to purchase a total of 855,000 shares
of common stock at prices ranging from $1.56 to $3.26 per share under the
Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of April 15, 1999, the stock ownership
of each person known by the Company to be the beneficial owner of five percent
or more of the Company's Common Stock, each officer and director individually,
and all officers and directors as a group. Each person has sole voting and
investment power over the shares except as noted:
AMOUNT AND
NAME AND ADDRESS NATURE OF BENE- PERCENT
OF BENEFICIAL OWNERS FICIAL OWNERSHIP OF CLASS
- ------------------------- ---------------- --------
Henry B. Schur 1,142,500 (1) 10.7%
376 Ansin Boulevard
Hallandale, FL 33009
Debra L. Ross 1,142,500 (2) 10.7%
376 Ansin Boulevard
Hallandale, FL 33009
Colin N. Jones 230,000 (3) 2.1%
193 Cove Road
West Palm Beach, FL 33413
Nicholas G. Levandoski 250,000 (4) 2.3%
376 Ansin Boulevard
Hallandale, Florida 33009
Joel Marcus 190,000 (5) 1.8%
676 West Prospect Road
Fort Lauderdale, FL 33309
Kenneth H. Robertson 2,600,000 (6) 24.5%
No. 206
855 S. Federal Highway
Boca Raton, FL 33432
Gerald M. Wochna 2,600,000 (7) 24.5%
No. 206
855 S. Federal Highway
Boca Raton, FL 33432
Software & Healthcare 1,000,000 9.4%
Technology Fund, LLC
No. 206
855 S. Federal Highway
Boca Raton, FL 33432
Robertson & Partners, L.L.C. 1,600,000 15.0%
No. 206
855 S. Federal Highway,
Boca Raton, FL 33432
19
International Technologies 700,000 6.6%
Ltd.
c/o William Smith
P.O. Box F-40729
Freeport, Bahamas
All Directors and Executive 4,412,500 39.2%
Officers as a Group
(6 Persons)
_______________________
(1) Includes 862,500 shares held of record by Mr. Schur's wife, Debra Ross,
80,000 shares held by Mr. Schur's daughter, 100,000 shares held in trust
for Mr. Schur's daughter, and 100,000 shares underlying options held by
Mr. Schur.
(2) Includes 862,500 shares held directly by Mrs. Ross, 80,000 shares held
by Mrs. Ross' daughter, 100,000 shares held in trust for Mrs. Ross'
daughter, and 100,000 shares underlying options held by Mrs. Ross'
husband.
(3) Includes 30,000 shares held directly and 200,000 underlying options held
by Mr. Jones.
(4) Represents 250,000 shares underlying stock options held by Mr.
Levandoski.
(5) Includes 90,000 shares held directly and 100,000 shares underlying stock
options held by Mr Marcus.
(6) Represents 1,600,000 shares held by Robertson & Partners, L.L.C. ("R&P")
and 1,000,000 shares held by Software & Healthcare Technology Fund,
L.L.C. ("SHTF"). Mr. Robertson is a majority owner and a manager of R&P
and R&P is the manager of SHTF. Mr. Robertson is also an investor in
SHTF. Mr. Robertson therefore has shared voting and shared investment
control over the 2,600,000 shares.
(7) Represents 1,600,000 shares held by Robertson & Partners, L.L.C. ("R&P")
and 1,000,000 shares held by Software & Healthcare Technology Fund,
L.L.C. ("SHTF"). Mr. Wochna is a 20% owner and a manager of R&P and R&P
is the manager of SHTF. Mr. Wochna, therefore, has shared voting and
shared investment control over the 2,600,000 shares.
Robertson & Partners L.L.C. ("R&P"), a Selling Shareholder, is affiliated
with the Company in that Kenneth H. Robertson, who is a manager and a majority
owner of R&P, is a Director of the Company. Gerald M. Wochna, who is a
manager and 20% owner of R&P, is also a Director of the Company. Software &
Healthcare Technology Fund, LLC ("SHTF"), a Selling Shareholder, is managed by
R&P and Kenneth H. Robertson is an investor in SHTF.
SHTF, R&P, Automated Health Technologies, Inc., Jennifer J. Schur Trust,
Joel Marcus, Debra L. Ross, Jennifer J. Schur, and the Joel Marcus Irrevocable
Trust have agreed to vote the shares which they hold on the conditions and
subject to the terms of a Stockholders' Agreement dated May 15, 1998.
There are no known agreements, the operation of which may at a subsequent
date result in a change in control of the Company.
20
The Company knows of no arrangement or understanding, the operation of
which may at a subsequent date result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ACQUISITION OF SIMPLEX-FLORIDA
On March 5, 1997, the Company completed the acquisition of 100% of the
outstanding common stock of Simplex Medical Systems, Inc. ("Simplex-Florida")
in exchange for 3,453,000 shares of the Company's Common Stock (approximately
46.04% of the shares now outstanding). The shares were exchanged on the basis
of one share of the Company's common stock for one share of Simplex-Florida
common stock. In connection with the closing of this transaction, several
current shareholders submitted for cancellation a total of 31,953,000 shares
of common stock. As a result, after the acquisition of Simplex-Florida, there
are a total of 7,500,000 shares outstanding.
The stock issuances were made pursuant to an Agreement ("Agreement")
between the Company and Simplex-Florida. The terms of the Agreement were the
result of negotiations between the managements of the Company and Simplex-
Florida. However, the Board of Directors did not obtain any independent
"fairness" opinion or other evaluation regarding the terms of the Agreement,
due to the cost of obtaining such opinions or evaluations.
TRANSACTIONS INVOLVING THE COMPANY
On March 20, 1996, the Company issued to each of Mesdames Colleen E.
Schmidt, a Director of the Company, and a Company Director, and Sandra S.
Steinberg, a Director of the Company, 15,000,000 shares of the Company's
common stock, $.0001 par value per share (a total of 30,000,000 shares of
common stock), in consideration, in each case, for the sum of $5,000 in cash
(a total of $10,000 in cash). These shares collateralized two non-interest
bearing promissory notes in the principal amount of $2,500 each (an aggregate
face amount of $5,000), due and payable on May 31, 1996, of which each of
Mesdames Schmidt and Steinberg are the makers and the Company is the holder.
During the year ended December 31, 1997, the Company entered into several
short term notes payable with Joel Marcus, a director of the Company, totaling
$294,990, bearing interest at 10% per annum. Joel Marcus subsequently
assigned these notes to International Technologies Ltd., a shareholder. As a
of December 31, 1997, $284,990 of these notes payable had expired terms. On
April 2, 1998, the Company entered into an agreement with International
Technologies Ltd. to extend the terms of the notes for a three year period
with interest at 10% per annum. These notes will be amortized over the three
year period with payments on principal to be made only if the Company records
pre-tax earnings in excess of the principal amount due. If an additional
extension of time is necessary, this agreement grants an extension until such
time as pre-tax profits are sufficient to amortize the loans over the three
year period.
STOCK SALES IN MAY AND JUNE 1998 AND STOCKHOLDERS' AGREEMENT
On May 15, 1998, the Company sold 1,000,000 shares of Common Stock to
Software & Healthcare Technology Fund, L.L.C. ("SHTF") for $400,000 in cash
and on June 30, 1998, the Company sold 1,600,000 shares of Common Stock to
Robertson & Partners, L.L.C. ("R&P") for $600,000 in cash. These sales were
made pursuant to subscription agreements dated May 15, 1998. R&P is the
managing member of SHTF. The Company also granted SHTF a 20-day right of
first refusal with regard to any offerings of the Company's securities.
21
In connection with these stock sales, SHTF, R&P, Automated Health
Technologies, Inc. ("AHT"), Jennifer Shur, the Jennifer Shur Trust, Joel
Marcus, The Joel Marcus Irrevocable Trust and Debra L. Ross, shareholders of
the Company, entered into a Stockholders' Agreement dated May 15, 1998, which
provides, among other things, that the shareholders who are parties to the
Shareholders' Agreement will vote their shares for certain director nominees
selected by SHTF, R&P and AHT, and in such a manner as is necessary to carry
out the intent of the Stockholders' Agreement. For the Annual Meeting of
Shareholders held on August 20, 1998, the nominees selected were Gerald M.
Wochna, Kenneth H. Robertson and Colin N. Jones. (Colin Jones was added to
the Board on April 10, 1998.) The Stockholders' Agreement also provides that
during the term of that agreement none of the shareholders who are parties
thereto will transfer their shares except in accordance with the terms of the
agreement.
The Company is also a party to the Stockholders' Agreement and has agreed
that it will not sell any of its securities in any transactions unless it
provides the shareholders who are parties to the Stockholders' Agreement a
preemptive right to purchase a pro rata portion of such securities on the same
terms and conditions. This preemptive right will not apply to securities
issued to any officer, director or employee of the Company under a benefit or
compensation plan, or for services or assets (other than cash or notes).
The Company also granted "piggy-back" registration rights to SHTF and R&P
with respect to their shares of Common Stock under certain conditions.
Certain provisions of the Stockholders' Agreement, including those
related to the preemptive rights and piggyback registration rights will
terminate on the later of May 15, 2000, or on the 90th consecutive day on
which the bid price of the Company's Common Stock exceeds $4.00 per share.
The remaining provisions will terminate on May 15, 2005.
22
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 3. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION LOCATION
3.1 Articles of Incorporation, Incorporated by reference to
as Amended Exhibits 2.1, 2.2 and 2.3 to
the Registrant's Form 10-SB
Registration Statement filed
on April 4, 1996
3.2 Bylaws Incorporated by reference to
Exhibit 2.4 to the Registrant's
Form 10-SB Registration State-
ment filed on April 4, 1996
3.3 Articles of Amendment to Incorporated by reference to
Articles of Incorporation Exhibit 3.3 to Registrant's
dated March 28, 1997 Form SB-2 Registration Statement
(SEC File No. 333-67087)
3.4 Articles of Amendment to Incorporated by reference to
Articles of Incorporation Exhibit 3.4 to Registrant's
dated August 20, 1998 Form SB-2 Registration Statement
(SEC File No. 333-67087)
10.1 1997 Stock Option Plan Incorporated by reference to
Exhibit 10.1 to Registrant's
Form SB-2 Registration Statement
(SEC File No. 333-67087)
10.2 Share Exchange Agreement Incorporated by reference to
with Automated Health Exhibit 10.2 to Registrant's
Technologies, Inc. Form SB-2 Registration Statement
(SEC File No. 333-67087)
10.3 Employment Agreement with Incorporated by reference to
Colin N. Jones Exhibit 10.3 to Registrant's
Form SB-2 Registration Statement
(SEC File No. 333-67087)
10.4 Employment Agreement with Incorporated by reference to
Nicholas Levandoski Exhibit 10.4 to Registrant's
Form SB-2 Registration Statement
(SEC File No. 333-67087)
10.5 Employment Agreement with Incorporated by reference to
Henry Schur Exhibit 10.5 to Registrant's
Form SB-2 Registration Statement
(SEC File No. 333-67087)
23
10.6 Software Agreement with Incorporated by reference to
Software & Healthcare Exhibit 10.6 to Registrant's
Technology Fund, L.L.C., Form SB-2 Registration Statement
et al. (SEC File No. 333-67087)
10.7 Business Lease with Incorporated by reference to
Wedgewood Properties, FL, Exhibit 10.7 to Registrant's
Inc. Form SB-2 Registration Statement
(SEC File No. 333-67087)
10.8 Distribution Agreement with Incorporated by reference to
Sybron Dental Specialties, Exhibit 10.8 to Registrant's
Inc., as amended Form SB-2 Registration Statement
(SEC File No. 333-67087)
10.9 Exclusive Licensing Agree- Filed electronically herewith
ment with Vector Medical
Technologies, Inc. dated
April 13, 1999
21 Subsidiaries of the Incorporated by reference to
Registrant Exhibit 21 to Registrant's
Form SB-2 Registration Statement
(SEC File No. 333-67087)
27 Financial Data Schedule Filed herewith electronically
(b) REPORTS ON FORM 8-K. No Reports on Form 8-K were filed during
the
fourth quarter of the Company's fiscal year ended December 31, 1998.
24
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountant F-1
Financial Statements:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders'
Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to the Consolidated Financial Statements F-6
25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors
SMLX Technologies, Inc. and Subsidiaries
Hallandale, Florida
We have audited the accompanying consolidated balance sheets of SMLX
Technologies, Inc. (f/k/a Simplex Medical Systems, Inc.) and Subsidiaries as
of December 31, 1998 and 1997, and the related statements of operations,
changes in stockholders' equity (deficit) and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SMLX
Technologies, Inc. and Subsidiaries as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company incurred a net loss of $868,125
during the year ended December 31, 1998, and, as of that date current
liabilities exceeded current assets by $243,504. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Schmidt, Raines, Trieste,
Dickenson & Adams, P.L.
SCHMIDT, RAINES, TRIESTE,
DICKENSON & ADAMS, P. L.
March 11, 1999, except for Note 19 as to
which the date is April 13, 1999 and
Note 20 as to which the date is May 3,
1999.
Boca Raton, Florida
F-1
SMLX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
ASSETS ------------ ------------
Current assets:
Cash $ 47,594 $ 41,743
Accounts receivable, net of
allowance for uncollectible accounts
of $16,733 and $2,321 for 1998 and
1997, respectively 1,113 3,882
Employee receivables 1,229 -
Prepaid expenses 19,411 -
Inventory 141,572 141,565
------------ ------------
Total current assets 210,919 187,190
------------ ------------
Equipment and leasehold improvements,
less accumulated depreciation 1998
$96,600; 1997 $51,897 385,935 87,451
------------ ------------
Other assets:
Patents and trademarks, less accumulated
amortization of $504 in 1998 and 1997 58,267 66,861
Deposits 8,192 6,692
Other intangible assets, net of
accumulated amortization of $535 1,352 -
Investment in common stock 200,000 -
------------ ------------
267,811 73,553
------------ ------------
$ 864,665 $ 348,194
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 160,755 $ 75,074
Current portion of notes payable 184,970 61,044
Customer and other deposits 108,698 70,093
------------ ------------
Total current liabilities 454,423 206,211
------------ ------------
Notes payable, net of current portion 237,119 288,932
------------ ------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.0001 par value, 100,000,000
shares authorized, 10,600,000 and 7,500,000
shares issued and outstanding at December 31,
1998 and 1997, respectively 1,060 750
Preferred stock, $.0001 par value, 10,000,000
shares authorized, no shares issued or
outstanding 0 0
Additional paid-in capital 1,846,084 658,197
Accumulated deficit (1,674,021) (805,896)
------------ ------------
173,123 (146,949)
------------ ------------
$ 864,665 $ 348,194
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
SMLX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
Revenues, net $ 390,410 $ 71,461
Cost of goods sold 247,001 48,121
------------ ------------
Gross profit 143,409 23,340
Operating expenses:
Selling, general and administrative expenses 1,035,418 485,086
Depreciation and amortization expense 46,905 26,093
------------ ------------
Total operating expenses 1,082,323 511,179
------------ ------------
Net loss from operations (938,914) (487,839)
Other income (expense):
Forfeiture of customer deposits - 167,360
License fees 115,000 30,000
Other income (expense) 17 40
Loss on disposal of assets (1,580) -
Interest expense (42,648) (19,505)
------------ ------------
Total other income (expense) 70,789 177,895
------------ ------------
Net loss before income taxes (868,125) (309,944)
Income taxes -0- -0-
------------ ------------
Net loss $ (868,125) $ (309,944)
============ ============
Loss per common share $ (0.09) $ (0.05)
============ ============
Weighted average number of shares 9,549,315 6,790,389
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
SMLX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Total
Stockholders'
Common Stock Paid-in Accumulated Equity
Issued Amount Capital Deficit (Deficit)
---------- ------ ---------- ----------- -------------
Balance, December 31, 1996 3,453,000 $ 345 $ 658,602 $ (495,952) $ 162,995
Issue of shares in merger
with Music Tones on
March 5, 1997 4,047,000 405 (405) - 0 - - 0 -
Net loss - 0 - - 0 - - 0 - (309,944) (309,944)
---------- ------ ---------- ----------- -------------
Balance, December 31, 1997 7,500,000 750 658,197 (805,896) (146,949)
Shares issued for cash in
March 1998 500,000 50 199,950 - 0 - 200,000
Shares issued for cash in
May 1998 2,100,000 210 799,790 - 0 - 800,000
Shares issued for 19% invest-
ment in the common stock of
a privately held company in
May 1998 500,000 50 199,950 - 0 - 200,000
Stock issuance costs - 0 - - 0 - (11,803) - 0 - (11,803)
Net loss - 0 - - 0 - - 0 - (868,125) (868,125)
---------- ------ ---------- ----------- -------------
Balance, December 31, 1998 10,600,000 $1,060 $1,846,084 $(1,674,021) $ 173,123
========== ====== ========== =========== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
SMLX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
OPERATING ACTIVITIES
Net loss $ (868,125) $ (309,944)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 46,905 26,093
Loss on disposal of assets 1,580 -
Provision for bad debts 14,412 -
Loss on write-off of patents 8,594 -
(Increase) decrease in:
Accounts receivable (11,643) (466)
Prepaid expenses (19,411) -
Inventory (7) (738)
Deposits (1,500) (1,112)
Increase (decrease) in:
Accounts payable and accrued expenses 84,431 51,012
Customer and other deposits 38,605 (68,706)
------------ ------------
Net cash used in operating activities (706,159) (303,861)
INVESTING ACTIVITIES
Advances to employees (1,229) -
Acquisition of other intangible assets (1,887) -
Proceeds from the sale of equipment - 290
Acquisition of fixed assets and patents (345,181) (50,871)
------------ ------------
Net cash used in investing activities (348,297) (50,581)
------------ ------------
FINANCING ACTIVITIES
Proceeds from sale of stock 1,000,000 -
Payments for stock issuance costs (11,803) -
Payments on notes payable (2,890) (2,654)
Proceeds from notes payable 75,000 344,990
------------ ------------
Net cash provided by financing activities 1,060,307 342,336
Net increase (decrease) in cash 5,851 (12,106)
Cash - beginning of year 41,743 53,849
------------ ------------
Cash - end of year $ 47,594 $ 41,743
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
SMLX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
SMLX Technologies, Inc. (f/k/a Simplex Medical Systems, Inc.) was formed
on June 6, 1995 and was in the development stage through December 31, 1997.
The year ended December 31, 1998 is the first year during which it is
considered an operating company. Since inception, SMLX Technologies, Inc.
(the "Company") has been engaged in the development, acquisition, marketing
and manufacture of medical diagnostic and dental products, biological products
for blood banking, bulk pharmaceuticals and specialty chemicals, as well as
seeking regulatory clearance, patent protection, and raising capital to fund
operations.
The Company has patented and proprietary technology in the fields of:
point of use medical and veterinary diagnostics; dental therapeutic devices;
pharmaceutical products; and consumer products. The Company utilizes its own
manufacturing facilities for the production of proprietary or quality
sensitive materials and contracts out the other products and final packaging
to third parties. The Company currently has products approved in several
foreign countries and is actively marketing its products in those areas.
Within the United States, the Company has received FDA registration on one of
its major products.
The financial statements include the accounts of the Company's
wholly-owned subsidiaries, Analyte Diagnostics, Inc. and IRT Management Corp.
Analyte Diagnostics, Inc. was a predecessor corporation to SMLX Technologies,
Inc. which was formed on September 15, 1995. The two companies were merged
into SMLX Technologies, Inc., on October 31, 1995, with all account balances
recorded at cost. At the time, the Company had a 1 to 200 reverse stock
split. Subsequently, the Company had a 2 for 1 stock split. All share
references give effect to the post split plans. IRT Management Corp. was
incorporated on January 14, 1997 with the sole purpose of obtaining FDA
approval on the Company's products.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of SMLX
Technologies, Inc., and its wholly-owned subsidiaries Analyte Diagnostics,
Inc., and IRT Management Corp. All intercompany accounts and transactions
have been eliminated in consolidation.
Inventory
Inventory consists of finished goods as of December 31, 1998 and
1997 and is stated at the lower of cost (first-in, first-out method) or
market.
Equipment
Equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Expenditures for maintenance and repairs are charged against operations as
incurred.
F-6
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Patents and Trademarks
The cost of patents and trademarks acquired are being amortized on a
straight-line basis over their estimated useful lives, ranging from 17 to 40
years, beginning when the trademarks and patents are approved.
Other Intangible Assets
The cost of other intangible assets are being amortized on a
straight-line basis over three years.
Investment in Common Stock
Investments in companies in which the Company has less than a 20%
interest are carried at cost.
Research and Development Costs
Research and development costs are charged to operations when
incurred and are included in operating expenses. The amounts charged to
operations for the years ended December 31, 1998 and 1997 totaled $178,238 and
$103,324, respectively.
Revenue Recognition
Revenue from sales is recognized upon shipment of goods to the
customer. License fee revenue is recognized upon receipt.
Revenue is recognized from the forfeiture of customer deposits based
upon the individual terms contained in the International Distribution
agreements with each customer. These deposits are non-refundable and are
considered forfeited when the customer fails to perform certain requirements
as described in their contract.
Advertising Costs
The Company expenses the production costs of advertising the first
time the advertising takes place.
Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets and certain
identifiable intangibles in order to determine if such assets are impaired.
When an asset is determined to be impaired, it is written down to its
estimated fair market value.
F-7
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Stock Based Compensation
The Company accounts for its stock based compensation in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 123 which allows
the Company to account for all stock based compensation arrangements under
which employees receive shares of the Company's stock under Accounting
Principles Board ("APB") Opinion No. 25 and make the related disclosures under
SFAS 123. Accordingly, no compensation cost has been recognized in the
accompanying financial statements related to stock options.
Earnings per Share
The Company adopted SFAS No. 128, "Earnings Per Share", in 1997.
SFAS 128 establishes accounting standards for the computation, presentation,
and disclosure of earnings per share information for entities with publicly
held common stock or potential common stock.
Capital Structure
The Company adopted SFAS No. 129, "Disclosure of Information about
Capital Structure", in 1997. SFAS 129 establishes disclosure requirements
within the financial statements of the pertinent rights and privileges of the
various securities outstanding.
Comprehensive Income
The Financial Accounting Standards Board recently issued SFAS No.
130, "Comprehensive Income: Financial Statement Presentation". SFAS 130
establishes accounting standards for reporting and presenting comprehensive
income and its components in a set of financial statements. For the purpose
of this standard, comprehensive income is defined as the change in equity of a
company arising from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except
those resulting from investments by and distributions to owners. This
standard is applicable to financial statements with fiscal years beginning
after December 15, 1997. The adoption of SFAS 130 did not have a material
impact on the Company's financial position or results of its operations.
Segment Reporting
The Financial Accounting Standards Board recently issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information".
This standard requires that public companies report certain information about
operating segments, products and services, the geographic areas in which they
operate, and their major customers. This standard is applicable to financial
statements with fiscal years beginning after December 15, 1997. The adoption
of SFAS 131 did not have a material impact on the Company's financial position
or results of its operations.
Net Loss Per Share
Net loss per share is computed on the basis of the weighted average
number of shares actually outstanding during the years ended December 31, 1998
and 1997. Options to purchase 881,000 and 440,000 shares of common stock and
bonds convertible into 125,000 and 50,000 shares of common stock during the
years ended December 31, 1998 and 1997, respectively, were not included in
computing net loss per share because the effect of such inclusion would be to
decrease the reported net loss per share.
F-8
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Income Taxes
The Company accounts for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes". Deferred income taxes are determined based
upon the difference between the financial statement carrying amount and the
tax basis of assets and liabilities using tax rates expected to be in effect
in the years in which the differences are expected to reverse.
NOTE 2 - BASIS OF PRESENTATION AND CONTINUED EXISTENCE
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. Since inception, the Company
has experienced losses aggregating $1,674,021 and has been dependent upon
loans from stockholders and other third parties, as well as sale of stock, in
order to fund operations to date.
Management believes that the funds raised through its exclusive license
agreement with Vector Medical Technologies, Inc. (Note 19), joint venture
agreement with HelveStar, S.A. (Note 20) and income generated from the sale of
several recently developed products will provide the Company with sufficient
cash flow resources to fund the operations of the Company.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the
possible inability of the Company to continue as a going concern.
NOTE 3 - BUSINESS ACQUISITION AND MERGER
On March 5, 1997, the shareholders of the Company received 3,453,000
shares of the outstanding common stock of Music Tones, Ltd. ("MTL"), a
publicly traded inactive company, in exchange for the same number of the
Company's common stock in a reverse acquisition whereby the Company was deemed
to be the acquirer. As of the date of the transaction, MTL had 36,000,000
shares of common stock issued and outstanding. Pursuant to the terms of the
merger, MTL canceled 31,953,000 shares of its common stock which reduced its
issued and outstanding shares to 4,047,000. After the closing, the Company's
shareholders owned approximately 46.04% of the then issued and outstanding
shares of MTL. This transaction has been accounted for as a pooling of
interests. The combined and separate results of MTL and the Company as of the
date of the merger have not been presented and the consolidated financial
statements for the periods presented have not been restated to include the
accounts of MTL because management believes they are immaterial.
NOTE 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of the following at
December 31, 1998 and 1997:
F-9
NOTE 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS (CONTINUED)
Useful Life
(in Years) 1998 1997
------------ --------- ---------
Computer equipment 5 $ 11,569 $ 11,215
Office furniture and equipment 5-7 24,950 6,922
Shop equipment 5-7 169,897 80,291
Computer software 3 1,458 1,246
Molds 5 85,855 39,674
Leasehold improvements 39 188,806 -0-
--------- ---------
482,535 139,348
Less: accumulated depreciation (96,600) (51,897)
--------- ---------
$ 385,935 $ 87,451
========= =========
Depreciation expense totaled $46,367 and $26,093 for the years ended December
31, 1998 and 1997, respectively.
NOTE 5 - NOTES PAYABLE
During the year ended December 31, 1997, the Company entered into several
short term notes payable with a director/shareholder totaling $294,990,
bearing interest at 10% per annum. These notes were subsequently assigned to
another shareholder. On April 2, 1998, the Company entered into an agreement
with the shareholder to extend the terms of the notes for a three year period
with interest at 10% per annum. These notes shall be amortized over the three
year period with payments on principal to be made only if the Company records
pre-tax earnings in excess of the principal amount due. If an additional
extension of time is necessary, this agreement grants an extension until such
a time as pre-tax profits are sufficient to amortize the loans over the three
year period. Accordingly, a portion of these notes payable has been
classified as long-term debt as of December 31, 1998 and 1997.
Notes payable as of December 31, 1998 and 1997 consisted of the
following:
1998 1997
-------- --------
Note payable, vendor, due in monthly payments
of $318, including interest which is calculated
at 18% per annum, final payment due July, 1999;
collateralized by equipment with a net book value
of $5,797 as of December 31, 1998. $ 2,099 $ 4,986
Note payable, shareholder, interest payable at
10% per annum; payable as described above. 294,990 294,990
Convertible note payable, individual, interest
payable at 10% per annum on December 18, 1999
and upon maturity on June 18, 1999; convertible
into common stock at $1.00 per share (See Note
14). 50,000 50,000
Convertible note payable, individual, interest
payable at 10% per annum on January 21, 1999
and upon maturity on July 21, 1999; convertible
into common stock at $1.00 per share (See Note
14). 50,000 -0-
F-10
NOTE 5 - NOTES PAYABLE (CONTINUED)
Convertible note payable, individual, interest
payable at 10% per annum on January 21, 1999
and upon maturity on July 21, 1999; convertible
into common stock at $1.00 per share (See Note
14). 25,000 -0-
-------- --------
Less: current maturities 184,970 61,044
-------- --------
$237,119 $288,932
Aggregate annual maturities of the notes payable at December 31, 1998 are
as follows:
During the year ending December 31,
-----------------------------------
1999 $184,970
2000 94,806
2001 104,733
2002 37,580
--------
$422,089
========
Interest expense totaled $42,648 and $19,505 during the years ended
December 31, 1998 and 1997, respectively.
NOTE 6 - CUSTOMER AND OTHER DEPOSITS
Included in customer and other deposits at December 31, 1998 and 1997 is
$16,100 received from an individual as a deposit on stock to be issued at
$1.00 per share.
NOTE 7 - ADVERTISING COSTS
During the year ended December 31, 1998, the Company employed the
services of a public relations consulting firm to assist them in their
advertising efforts, including designing the Company's brochure and logo.
Advertising expense incurred during the year ended December 31, 1998 totaled
$36,558.
F-11
NOTE 8 - LEASES
The Company is currently renting office and warehouse space in
Hallandale, Florida pursuant a five year lease agreement which began April 1,
1998. This five year lease agreement requires monthly rental payments of
$4,000 plus sales tax. The Company has the option at the end of the lease
term to renew the lease for an additional five years.
Minimum annual rental payments are as follows:
During the year ending December 31,
-----------------------------------
1999 $ 48,000
2000 48,000
2001 48,000
2002 48,000
2003 12,000
--------
$204,000
========
Rent expense for the years ended December 31, 1998 and December 31, 1997
amounted to $50,868 and $27,791, respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS
Notes payable
A director and shareholder loaned the Company a total of $294,990 at
various times during the year ended December 31, 1997 that were subsequently
assigned to another shareholder of the Company. These notes were outstanding
as of December 31, 1998 and 1997 and are discussed in Note 5. Interest
expense incurred in connection with these loans totaled $29,499 and $17,057
for the years ended December 31, 1998 and 1997, respectively.
Stockholders' Agreement
During 1998, the Company entered into a Stockholders' Agreement with
eight shareholders. Among other things, this agreement provides that the
Company will not sell any of its securities in any transactions unless it
provides the shareholders who are parties to the agreement a preemptive right
to purchase a pro rata portion of such securities on the same terms and
conditions. This preemptive right will not apply to securities issued to any
officer, director or employee of the Company under a benefit or compensation
plan or for services or assets, other than cash or notes. In addition, the
Company granted "piggy-back" registration rights to Software & Healthcare
Technology Fund, L.L.C. ("SHTF") and Robertson & Partners, L.L.C. with respect
to their shares of common stock under certain conditions as outlined in the
agreement. These provisions terminate on the later of May 15, 2000 or the
ninetieth consecutive day on which the bid price of the Company's common stock
exceeds $4.00 per share on the publicly traded market. All other provisions
of the agreement terminate on May 15, 2005.
NOTE 10 - SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION
During the years ended December 31, 1998 and 1997 cash paid by the
Company for interest totaled $35,212 and $1,163, respectively.
F-12
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Investment in common stock
The carrying amount of investment in common stock approximates fair value
because it represents the value of the Company's common stock as indicated by
several stock transactions entered into by the Company during the year.
Notes payable
The carrying amount approximates fair value because the same terms and
interest rates could be obtained for similar maturities.
Stock options
It is not practicable to estimate the fair value of the Company's stock
options because they are subject to trading restrictions and lack quoted
market prices.
NOTE 12 - STOCK OPTIONS
In August 1997, the Board of Directors granted certain employees,
directors and consultants of the Company stock options pursuant to the
Company's 1997 Stock Option Plan. A total of 2,000,000 shares of the
Company's stock have been reserved for the options to be granted under this
plan. Eligible participants include any employee, officer, director or
consultant that the Board of Directors, in its sole discretion, designates is
eligible to participate in this Plan. The option exercise price is stated on
the option grant and shall not be less than 100% of the fair market value of
the shares on the date of the grant or the par value, whichever is greater.
Unless otherwise stated on the option, each option is exercisable for ten
years. As of December 31, 1998, the options granted under this plan totaled
880,000 shares exercisable between five and ten years at prices ranging from
$1.50 to $2.81 per share.
In addition to the options outstanding under the Company's 1997 Stock
Option Plan, during October 1998, the Company granted an option to purchase
1,000 shares of the Company's common stock at $1.50 per share through October
2, 2003.
F-13
NOTE 12 - STOCK OPTIONS (CONTINUED)
The following summarizes the status of the Company's stock options for
the years ended December 31, 1998 and 1997:
Weighted-Average
Shares Exercise Price
-------- ----------------
Outstanding at January 1, 1997 -0-
Granted and exercisable 490,000 $1.58
Exercised -0-
Forfeited -0-
------- -----
Outstanding at December 31, 1997 490,000 $1.58
Outstanding at January 1, 1998 -0-
Granted and exercisable 391,000 $2.11
Exercised -0-
Forfeited -0-
------- -----
Outstanding at December 31, 1998 881,000 $1.82
======= =====
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its stock options.
Accordingly, no compensation cost has been recognized in the accompanying
financial statements related to stock options. The weighted average fair
value of options granted during the years ended December 31, 1998 and 1997 was
$.68 and $0.97, respectively. These values were computed using the
Black-Scholes option pricing model with the following assumptions: expected
life of 3 years; expected volatility of 163% and 75% for the years ended
December 31, 1998 and 1997, respectively; and a risk free interest rate of 6%.
Had compensation cost for the Company's stock options been determined based on
the fair value at the grant dates consistent with the method of FASB No. 123,
"Accounting for Stock-Based Compensation", the Company's net loss for the
years ended December 31, 1998 and 1997 would have been $1,134,005 ($.12 per
share) and $785,244 ($0.12 per share), respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
use of highly subjective assumptions. Because the Company's stock options
have characteristics that are significantly different from traded options and
because changes in the valuation assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
NOTE 13 - INCOME TAXES
The Company has incurred tax operating losses and therefore has generated
no income tax liabilities. As of December 31, 1998, the Company has generated
net tax operating loss carryforwards totaling $1,674,021 which are available
to offset future taxable income, if any. These loss carryforwards expire
beginning in 2010. Due to limitations on the utilization of loss
carryforwards resulting from ownership changes and separate return limitations
and the uncertainty that the Company and its subsidiaries will be able to
utilize the net operating losses, a 100% valuation allowance has been recorded
against the deferred tax assets.
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NOTE 13 - INCOME TAXES (CONTINUED)
The following summarizes the components of the net deferred tax asset at
December 31, 1998 and 1997:
1998 1997
--------- ---------
Deferred tax assets:
Net operating loss carryforward $ 569,168 $ 274,005
Valuation allowance (569,168) (274,005)
--------- ---------
Net deferred tax asset $ -0- $ -0-
========= =========
NOTE 14 - STOCKHOLDERS' EQUITY (DEFICIT)
Private placement
During 1996, the Company completed a private placement of 619,525 shares
of common stock for $1 per share and received net proceeds of $605,639.
Shares used for equipment
In February 1996, the Company issued 214,375 shares of its common stock
to a director of the company in exchange for his 100% interest in a private
company which was not active. This company manufactured specialty chemicals
for the pharmaceutical and agricultural industries. The Company received
primarily laboratory equipment as a result of this acquisition. The
transaction has been recorded at the fair value of assets acquired.
Convertible notes payable
On December 18, 1997 the Company issued an unsecured convertible note
payable to an individual in the face amount of $50,000. This note bears
interest at 10% per annum and matures on June 18, 1999. Upon issuance and at
any time on or prior to the maturity date, any unpaid principal and accrued
interest is convertible into fully paid and nonassessable shares of $0.0001
par value common stock at $1.00 per share.
On January 21, 1998 the Company issued an unsecured convertible note
payable to an individual in the face amount of $50,000. This note bears
interest at 10% per annum and matures on July 21, 1999. Upon issuance and at
any time on or prior to the maturity date, any unpaid principal and accrued
interest is convertible into fully paid and nonassessable shares of $0.0001
par value common stock at $1.00 per share.
On January 21, 1998 the Company issued an unsecured convertible note
payable to an individual in the face amount of $25,000. This note bears
interest at 10% per annum and matures on July 21, 1999. Upon issuance and at
any time on or prior to the maturity date, any unpaid principal and accrued
interest is convertible into fully paid and nonassessable shares of $0.0001
par value common stock at $1.00 per share.
F-15
NOTE 14 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Share Exchange Agreement
In connection with a Share Exchange Agreement dated May 20, 1998, the
Company acquired a 19% interest in Automated Health Technologies, Inc.
("AHT"), a privately held company, in exchange for 500,000 shares of the
Company's common stock. This agreement gives AHT shareholders a five year put
option on an additional 1,000,000 shares of the Company's common stock in
exchange for the remaining 81% of AHT's common stock under certain conditions
as outlined in the agreement.
Shares issued for cash
On May 15, 1998, the Company sold 1,000,000 shares of common stock to
SHTF for $400,000 in cash. In addition, the Company sold 1,600,000 shares of
common stock to Robertson & Partners, L.L.C. for $600,000 in cash on June 30,
1998. These sales were made pursuant to subscription agreements dated May 15,
1998. Robertson & Partners, L.L.C. is the managing member of SHTF. The
Company also granted SHTF a 120-day right of first refusal with regard to any
offerings of the Company's securities.
NOTE 15 - LEGAL PROCEEDINGS
The Company was named as one of six co-defendants in a lawsuit filed by
the Company's principal scientist's previous employer, Americare Transtech,
Inc. Americare Transtech, Inc. alleges damages for violation of Florida's
Trade Secret Act with regard to the rights to the patent of the Company's
saliva sample collection system. The jury trial in this case commenced on
November 9, 1998 and concluded on December 30, 1998. While verdicts were
entered against two of the Company's employees, as well as two other
defendants, the jury did not award the Plaintiffs any damages against the
Company. The jury did, however, find the Company liable for misappropriation
of trade secrets and interference with business relationships. An appeal by
the Plaintiffs is expected to be filed. The Company intends to aggressively
defend its position .
Americare Transtech, Inc. and four other parties filed an amended
complaint in October 1998 naming the Company as one of five co-defendants.
This suit alleges patent infringement, misappropriation of trade secrets,
breach of contract, breach of fiduciary duty as agent, breach of confidential
relations, breach of trust, unfair competition, and conversion. Americare is
seeking damages for an undisclosed amount in excess of $75,000. The Company
intends to aggressively defend the suit and has filed a motion to dismiss
because it lacks merit. The Company is currently awaiting the court's ruling
on the motion to dismiss.
In July 1998, Superior Wholesale Products, Inc. ("SWP") instituted a suit
against the Company alleging breach of contract and interference with its
relationship with a third party claiming damages in the amount of $2,500,000.
SWP claims that they entered into an exclusive distribution agreement for the
distribution of the Company's HIV saliva test kits and that the Company
breached this agreement by selling the product directly to one of SWP's
clients. The Company is aggressively defending their position that a
distribution agreement was never finalized because SWP did not perform under
the provisions of the proposed contract. The Company has filed a counterclaim
against SWP for interfering with their relationship with the customer and for
defamation.
F-16
NOTE 15 - LEGAL PROCEEDINGS (CONTINUED)
In September 1998, John Faro filed a complaint against the Company and
four other co-defendants alleging various causes of action and contending that
Mr. Faro is entitled to 460,000 shares of the Company's common stock. The
stock in question was to be issued as part of a consulting agreement between
the Company and Mr. Faro. Prior to canceling the issuance of this stock, the
Company obtained a legal opinion stating that this transfer was erroneous and
should be voided. The Company has filed a counterclaim against Mr. Faro and
intends to aggressively defend its position against Mr. Faro.
NOTE 16 - COMMITMENTS
On July 1, 1998, the Company entered into two-year employment contracts
with its president and two vice presidents. These agreements expire on July
1, 2000 and provide for a minimum annual salary, and incentives based upon the
Company's attainment of specified levels of pre-tax earnings. At December 31,
1998, the total commitment, excluding incentives, was $360,000.
NOTE 17 - CONCENTRATIONS
One major customer comprises approximately 40% ($157,825) of the
Company's total revenues during the year ended December 31, 1998.
One vendor represented approximately 65% ($133,060) of the Company's
total purchases of inventory during the year ended December 31, 1998. The
Company believes that most components used in the manufacture of its current
and proposed products are currently available from numerous suppliers located
in the United States, Europe and Asia. However, certain components are
available only from a limited number of suppliers. Although the Company
believes that it will not encounter difficulties in obtaining these
components, there can be no assurance that the Company will be able to enter
into satisfactory agreements or arrangements for the purchase of commercial
quantities of such components.
NOTE 18 - SUBSEQUENT EVENTS
Marketing agreement
On January 5, 1999, the Company entered into a agreement with Worldwide
Marketing, Inc. ("Worldwide"). This contract states that Worldwide will
assist the Company in obtaining FDA registration approval for its Rapid Saliva
HIV Test Kit for sale in the United States. In exchange for its efforts,
Worldwide will receive 250,000 shares of the Company's common stock which was
placed in escrow upon the signing of the agreement. Upon receipt of FDA
registration approval, as a direct or indirect result of Worldwide's efforts,
they will receive a five year option to acquire up to 250,000 shares of the
Company's authorized common stock, fully diluted, at market price of the stock
based upon the five day prior closing average for the shares traded preceding
the date when approval is granted. This agreement expires within one year
from the date of signing. Provisions for extension based on documented
progress are permitted.
Related Party Issuance of Stock
During December 1998, the Company's' Board of Directors voted to accept
the offer of Robertson & Partners Venture Fund II to purchase an additional
444,445 shares of stock for $200,000 ($0.45 per share). This amount was
received subsequent to year end in $50,000 installments during January through
April 1999.
F-17
NOTE 19 - SUBSEQUENT EVENTS - EXCLUSIVE LICENSING AGREEMENT
On April 13, 1999, the Company entered into an exclusive licensing
agreement with Vector Medical Technologies, Inc. ("Vector"). This agreement
grants Vector exclusive license, subject to the payment of royalties, to
certain drug delivery systems, including intangible and tangible
assets. In exchange for this exclusive license, Vector has agreed to pay the
Company royalties as follows: 4% of its net sales or other net revenues
derived from assets in which the Company holds the patent; and 3% of its net
sales or other net revenues derived from the portion of assets that are not
covered by a patent held by the Company. These royalty payments are due
quarterly within 45 days from the end of each calendar quarter for which
royalties are payable. Vector has also agreed to pay the Company
non-refundable advances against future royalties for a period of four years
from the date of the agreement. These payments shall amount to at least
$900,000 per year, payable in monthly installments of at least $75,000. In
regard to these advances, the companies have agreed to meet at least 90 days
prior to the beginning of each calendar year to consider the ongoing
feasibility of the relationship and to determine the appropriate amount of
non-refundable advances to be made by Vector to the Company. Notwithstanding
any agreement to the contrary, this agreement shall be in existence for 10
years. In the event that Vector fails to make its payments, the agreement
shall be deemed null and void and the exclusive license and option granted
under this agreement shall be terminated without further obligation or
liability of either company. Furthermore, this license agreement gives Vector
the option to purchase 100% of the assets within four years from the date of
the agreement, with any royalty payments credited towards the purchase price.
The total purchase price will vary based on gross sales during the preceding
twelve month period attributable to the assets and ranges between $3.6 and
$6.6 million.
NOTE 20 - SUBSEQUENT EVENTS - JOINT VENTURE AGREEMENT
On May 3, 1999, the Company entered into a joint venture agreement with
HelveStar, S.A., a Swiss technology commercialization, financial and holding
company. This agreement outlines the formation and capitalization of BioStar,
S.A. for the purposes of commercializing, manufacturing, developing, marketing
and selling the Company's present and future technologies and products.
BioStar will initially be funded by HelveStar who will own sixty percent.
This agreement grants BioStar a 99-year exclusive worldwide license for
the commercialization, marketing and production of all of the Company's core
products and technology. However, BioStar will honor all of the Company's
valid existing distributorship agreements. In addition, the Company has
transferred its non-core technologies to BioStar which has agreed to purchase
them for $2,400,000 payable in monthly installments of $100,000 for 24 months
commencing in May 1999.
In the event BioStar fails to make its payments in connection with its
purchase of the non-core technologies, all non-core technologies not paid for
will revert to the Company and the exclusive worldwide licenses related to
certain core technologies will be terminated.
Upon the execution of this agreement, the Company granted HelveStar a
stock option for 900,000 shares of the Company's stock at an exercise price of
$1.58 per share. Within 24 months of the execution of this agreement,
HelveStar shall have the right to purchase a total of 2,250,000 shares of the
Company's stock. The purchase price of the shares on the date of purchase
will be equal to 50% of the closing price of the Company's stock on the latest
price trading date on which at least 5,000 shares were traded.
F-18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: May 28, 1999 SMLX TECHNOLOGIES, INC.
By:/s/ Colin N. Jones
Colin N. Jones, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Colin N. Jones President (Chief Executive May 28, 1999
Colin N. Jones Officer) and Director
/s/ Henry B. Schur Vice President of Marketing May 28, 1999
Henry B. Schur and Director
/s/ Nicholas G. Levandoski Vice President of Research May 28, 1999
Nicholas G. Levandoski, and Development, Secretary,
Ph.D. Treasurer (Chief Financial
and Accounting Officer)
and Director
/s/ Joel Marcus Director May 28, 1999
Joel Marcus
/s/ Kenneth H. Robertson Director May 28, 1999
Kenneth H. Robertson
/s/ Gerald M. Wochna Director May 28, 1999
Gerald M. Wochna