U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM SB-2
REGISTRATION UNDER THE SECURITIES ACT OF 1933
EARLY DETECT INC.
-----------------
(Name of small business issuer in its charter)
(Primary Standard Industrial
Nevada 880368729
- ------ ------------ ---------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) I.D. No.)
organization)
2950 N.Glassell Street, Orange, CA 92865 (714) 283-5190
-------------------------------------------------------
(Address and telephone number of principal executive offices)
same as above
(Address of principal place of business or intended principal place of business)
Glenn P. Hannemann, 24 Brena, Irvine, CA 92620 (714) 544-1912
--------------------------------------------------------------
(Name, address and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public: September 1,
2002
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [X]
CALCULATION OF REGISTRATION FEE
==============================================================================================================
Title of each class of Dollar Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered offering price per aggregate offering registration fee
registered unit price
- ---------------------- ------------------- ------------------ ------------------ ----------------
Common Stock $18,000,000 $6.00 $18,000,000 $1,656.00
==============================================================================================================
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS
EARLY DETECT INC.
3,000,000 Shares
Common Stock
Early Detect Inc., a Nevada corporation ("EDI"), is offering 3,000,000
shares of its $0.001 par value common stock ("Shares") to investors at an
offering price of $6.00 per share. The 3,000,000 Shares will be issued to pay
for the costs of this offering and manufacturing, marketing and distribution
activities of EDI and for possible future acquisitions of companies and/or
assets.
The Shares offered are highly speculative and involve a high degree of risk
to public investors and should be purchased only by persons who can afford to
lose their entire investment.
(begin boldface)
These securities have not been approved or disapproved by the U.S.
Securities and Exchange Commission or any state securities commission nor has
the U.S. Securities and Exchange Commission or any state securities commission
passed upon the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
The Shares offered are not listed on any national securities exchange nor
yet with the Nasdaq Stock Market and EDI does not have any trading symbol for
the Shares, although it has received NASD clearance for the symbol "EDIC."
(end boldface)
====================================================================================
Price to Public Underwriting Discounts Proceeds to Issuer 2
and Commissions 1
- -------------- ---------------- ---------------------- ---------------------
Per Share $ 6.00 $ 0.48 $ 5.52
Total Maximum $18,000,000 $1,400,000 $16,600,000
====================================================================================
1 Commissions of up to 8% of the proceeds of this offering will be
payable to participating NASD broker-dealers. See "Plan of
Distribution."
2 Before deducting legal, accounting, printing and miscellaneous
expenses of the Offering, including a 3% non-allocable expense
allowance estimated to total $640,000. (Please see "Plan of
Distribution").
Information contained in this Prospectus is subject to completion or
amendment. The Registration Statement relating to the securities has been filed
with the U.S. Securities and Exchange Commission. The securities may not be sold
nor may offers to buy be accepted prior to the time the Registration Statement
becomes effective. This prospectus shall not constitute an offer to sell nor the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
Subject to Completion. Dated: July 3, 2002
3
Part I - Information Required in Prospectus
Table of Contents
Prospectus Summary.......................................................... 5
Risk Factors................................................................ 5
Use of Proceeds............................................................. 12
Determination of Offering Price............................................. 13
Dilution.................................................................... 13
Plan of Distribution........................................................ 14
Legal Proceedings........................................................... 14
Directors, Executive Officers............................................... 15
Security Ownership of Certain Beneficial Owners............................. 17
Description of Securities................................................... 18
Interest of Named Experts and Counsel....................................... 20
Disclosure of Commission Position........................................... 20
Organization Within Last Five Years......................................... 21
Description of Business..................................................... 21
Management's Discussion and Analysis or Plan of Operation................... 37
Description of Property..................................................... 37
Certain Relationships and Related Transactions.............................. 38
Market for Common Equity and Related Stockholder Matters.................... 40
Executive Compensation...................................................... 40
Financial Statements........................................................ 40
Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure....................................................... 41
4
Prospectus Summary
------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this prospectus. Each prospective investor is urged to
read this prospectus, and the attached exhibits, in their entirety.
The Company and Industry.
- -------------------------
Early Detect Inc. was originally founded and incorporated under the name
Advanced Medical Systems Inc., in the State of Nevada on September 19, 1996, to
develop, manufacture, and market a broad range of in vitro diagnostic ("IVD")
tests for the over the counter (consumer) and professional use markets in the
United States, Canada, and the entire world. The Company was approved to do
business in the State of California on May 14, 2001. By resolution of the Board
of Directors of the Company, the name of the Company was changed to Early Detect
Inc. ("EDI") on June 25, 2002. It is a licensed FDA facility and is licensed and
registered with the State of California, Department of Health. It is also
licensed in Canada through their Health Protection Branch, holding several
licensed products in the names of InstaTest and E-Z Test, formerly known as
KnowNow. We are now positioned to offer low cost products which will finally
afford the consumer a choice in taking control of their own health.
The medical home diagnostic assay industry is a rapidly growing field. The
IVD business worldwide totals about $21 billion while diagnostic testing in
physicians offices, hospitals and clinics, currently account for another $2.5
billion in sales. Sales of home pregnancy tests alone represent a $222 million
industry in the United States, and an estimated $22 million in Canada.
There are over 575,000 physicians, 225,000 pharmacies, and over 125,000
hospitals and clinics in the United States that are presently buying many of
these products from various brokers and suppliers. (Medical Device Executive
--------------------------
Portfolio, June/July 2000)
- ---------
The consumer market place has offered a limited amount of products, such as
pregnancy and ovulation IVD tests, with a few other devices such as blood
pressure and glucose monitors. These low cost tests and devices have been
available for a number of years and are used by consumers in the privacy of
their own homes.
Risk Factors
------------
(begin boldface)
The securities offered hereby are highly speculative in nature and involve
a high degree of risk. They should be purchased only by persons who can afford
to lose their entire investment. Therefore, each prospective investor should,
prior to purchase, consider very carefully the following risk factors among
other things, as well as all other information set forth in this prospectus.
(end boldface)
5
Limited Prior Operations.
- -------------------------
We have had limited prior operations in the United Sates and have embarked
in that market only since August of 1999. Thus, we are subject to all the risks
inherent in the market penetration of a new business. Unanticipated delays,
expenses and other problems such as setbacks in product development, and market
acceptance are frequently encountered in connection with the development of a
business.
Significant Working Capital Requirements.
- -----------------------------------------
The working capital requirements associated with the plan of business will
continue to be significant. We anticipate, based on currently proposed
assumptions relating to operations, that we cannot generate sufficient cash flow
to continue operations for an indefinite period at the current level without
requiring additional financing. We will need to raise additional capital in the
next twelve months, through debt or equity, to fully implement our sales and
marketing strategy and grow. In the event that EDI's plans change or its
assumptions change or prove to be inaccurate or if cash flow from operations
proves to be insufficient to fund operations for the reasons discussed, we would
be required to seek additional financing sooner than currently anticipated or
may be required to significantly curtail or cease its operations.
We Have Only Limited Assets.
- ----------------------------
EDI has only limited assets. As a result, there can be no assurance that we
will be able to generate significant revenues in the future; and there can be no
assurance that EDI will operate at a profitable level. If EDI is unable to
obtain customers for its products and generate sufficient revenues so that it
can profitably operate, EDI's business will not succeed.
Success of EDI Dependent on Management.
- ---------------------------------------
EDI's success is dependent upon the hiring of key personnel. All decisions
with respect to the management of EDI will be made exclusively by the officers
and directors of EDI. Investors, as such, will only have rights associated with
minority ownership interest rights to make decisions which effect EDI. The
success of EDI, to a large extent, will depend on the quality of the directors
and officers of EDI. Accordingly, no person should invest in the Shares unless
he is willing to entrust all aspects of our management to our officers and
directors, as they are configured herein.
Control of EDI by Officers and Directors.
- -----------------------------------------
EDI's officers and directors beneficially own approximately 86% of the
outstanding Shares of EDI's common stock. As a result, such persons, acting
together, have the ability to exercise significant influence over all matters
requiring stockholder approval. Accordingly, it could be difficult if not
impossible for investors to exercise control over the affairs of EDI. Directors
and principal common shareholders who control the majority of the voting rights
6
will be able, by virtue of their stock holdings, to control the affairs and
policies of EDI without the effective voice of investors.
Limitations on Liability and Indemnification of Directors and Officers.
- -----------------------------------------------------------------------
Although the articles of incorporation and the bylaws of EDI provide for
indemnification of officers or directors of EDI, the Nevada General Corporation
Law also provides for permissive indemnification of officers and directors and
EDI may provide indemnification under such provisions. Because of any limitation
on their liability, EDI may be required to defend its officers and directors and
expend EDI funds in that regard.
Potential Conflicts of Interest Involving Management.
- -----------------------------------------------------
Currently, not all of the officers and directors of EDI will devote 100% of
their time to the business of EDI. Therefore, conflicts of interest may arise in
the area of corporate opportunities which cannot be resolved through arm's
length negotiations. All of the potential conflicts of interest will be resolved
only through exercise by the directors of such judgment as is consistent with
their fiduciary duties to EDI. It is the intention of management, so as to
minimize any potential conflicts of interest, to present first to the board of
directors of EDI any proposed investments for its evaluation.
Government Regulation of our Products.
- --------------------------------------
Our products are subject to, presently, both U.S. and Canadian governmental
regulation. Please refer to "Description of Business" below.
Influence of Other External Factors on Prospects for EDI.
- ---------------------------------------------------------
The industry of EDI in general is a speculative venture necessarily
involving some substantial risk. There is no certainty that the expenditures or
acquisitions to be made by EDI will result in a commercially profitable
business. The marketability of its products will be affected by numerous factors
beyond the control of EDI. These factors include market fluctuations and the
general state of the economy (including the rate of inflation, and local
economic conditions), which can affect EDI's spending. Factors which leave less
money in the hands of potential customers of EDI will likely have an adverse
affect on EDI. The exact affect of these factors cannot be accurately predicted,
but the combination of these factors may result in EDI not receiving an adequate
return on invested capital.
Risks Related to Our Business.
- ------------------------------
If the markets for our products do not develop and expand as we anticipate,
demand for our products may decline, which would negatively impact our results
of operations and financial performance.
7
The markets for our products are characterized by rapidly changing
technologies, evolving industry standards and frequent new product
introductions. Our success is expected to depend, in substantial part, on the
timely and successful introduction of new products, upgrades of current products
to comply with emerging industry standards, our ability to acquire technologies
needed to remain competitive and our ability to address competing technologies
and products. In addition, the following factors related to our products and the
markets for them could have an adverse impact on our results of operations and
financial performance:
o if we are unable to maintain a favorable mix of products;
o if the anticipated level of demand for our products by our customers
does not continue. While this demand has been increasing in recent
quarters, there is no assurance that this upward trend can be
sustained. A leveling or declining demand or an unanticipated change
in market demand for products based on a specific technology would
adversely affect our ability to sustain recent operating and financial
performance;
o if we are unable to continue to develop new product lines to address
our customers' diverse needs and the several market segments in which
we participate. This requires a high level of innovation, as well as
the accurate anticipation of technological and market trends; or
o if we are not successful in creating the infrastructure required to
support anticipated growth in product demand.
As our customers' needs for our products increase, we must increase our
manufacturing volumes to meet these needs and satisfy customer demand. Failure
to do so may materially harm our operating results and financial performance.
The manufacture of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments.
Changes in our manufacturing processes or those of our contractors and suppliers
could significantly reduce our manufacturing yields and product reliability. In
some cases, existing manufacturing techniques, which involve substantial manual
labor, may be insufficient to achieve the volume or cost targets of our
customers. We will need to develop new manufacturing processes and techniques to
achieve targeted volume and cost levels. While we continue to devote substantial
efforts to the improvement of our manufacturing techniques and processes, we may
not achieve manufacturing volumes and cost levels in our manufacturing
activities that will fully satisfy customer demands.
Interruptions of supplies from our key suppliers could disrupt production
or impact our ability to increase production and sales. We obtain several
critical components from a limited number of suppliers, some of which are also
are competitors. We do not have long-term or volume purchase agreements with
these suppliers, and may have limited options for alternative supply if these
8
suppliers fail to continue the supply of components.
We face intense competition in our business. We expect that we will face
additional competition from existing competitors and from a number of companies
that may enter our markets. Since some of the markets in which we compete are
characterized by rapid growth and rapid technology changes, smaller niche and
start-up companies may become our principal competitors in the future. We must
invest in research and development, expand our engineering manufacturing and
marketing capabilities, and continue to improve customer service and support in
order to remain competitive. While we expect to undertake the investment and
effort in each of these areas, we cannot assure that we will be able to maintain
or improve our competitive position.
Our competitors may have greater financial, engineering, manufacturing,
marketing or other support resources. Market consolidation may create additional
or stronger competitors and may intensify competition.
We face pricing pressures in our business as a result of intense
competition, emerging new technologies, and manufacturing efficiencies in both
the domestic and the international marketplaces. While we will work toward
reducing our costs to respond to pricing pressures, we may not be able to
achieve proportionate reductions in costs.
We may encounter difficulties, costs or risks in protecting our
intellectual property rights or obtaining rights to additional intellectual
property to permit us to continue or expand our businesses. Other companies,
including some of our large competitors, hold patents in our industries and the
intellectual property rights of others could inhibit our ability to introduce
new products in our field of operations unless we secure licenses on
commercially reasonable terms.
Our future success will be determined in part by our ability to attract and
retain, in a highly competitive marketplace, key scientific and technical
personnel for our research, development and engineering efforts. Our business
also depends on the continued contributions of our executive officers and other
key management and technical personnel. While we believe that we have been
successful in attracting and retaining key personnel, we cannot assure you that
we will continue to be successful in the future.
No Cumulative Voting.
- ---------------------
Holders of the Shares are not entitled to accumulate their votes for the
election of directors or otherwise. Accordingly, the holders of a majority of
the Shares present at a meeting of shareholders will be able to elect all of the
directors of EDI, and the minority shareholders will not be able to elect a
representative to EDI's board of directors.
Absence of Cash Dividends.
- --------------------------
EDI has not paid, and the board of directors does not anticipate paying,
9
cash dividends on EDI Shares for the foreseeable future and intends to retain
any future earnings to finance the growth of EDI's business. Payment of
dividends, if any, will depend, among other factors, on earnings, capital
requirements, and the general operating and financial condition of EDI, and will
be subject to legal limitations on the payment of dividends out of paid-in
capital.
Limited Public Market for EDI's Securities.
- -------------------------------------------
Prior to the Offering, there has been no public market for the Shares of
common stock being offered. There can be no assurance that an active trading
market will develop or that purchasers of the Shares will be able to resell
their securities at prices equal to or greater than the respective initial
public offering prices. The market price of the Shares may be affected
significantly by factors such as announcements by EDI or its competitors,
variations in EDI's results of operations, and market conditions in the retail,
electronic commerce, and internet industries in general. The market price may
also be affected by movements in prices of stock in general. As a result of
these factors, purchasers of the Shares offered hereby may not be able to
liquidate an investment in the Shares readily or at all.
No Assurance of Continued Public Trading Market; Risk of Low Priced Securities.
- -------------------------------------------------------------------------------
There has been no public market for the common stock of EDI. It is intended
that the common stock of EDI will initially be quoted on the Over the Counter
Bulletin Board and, ultimately, on NASDAQ. As a result, in that event, an
investor may find it difficult to dispose of, or to obtain accurate quotations
as to the market value of EDI's securities. In addition, though not anticipated,
the Shares may be subject to the low-priced security or so called "penny stock"
rules that impose additional sales practice requirements on broker-dealers who
sell such securities. The Securities Enforcement and Penny Stock Reform Act of
1999 requires additional disclosure in connection with any trades involving a
stock defined as a penny stock (generally, according to recent regulations
adopted by the U.S. Securities and Exchange Commission, any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
The regulations governing low-priced or penny stocks sometimes limit the ability
of broker-dealers to sell EDI's common stock and thus, ultimately, the ability
of the investors to sell their securities in the secondary market.
Effects of Failure to Maintain Market Makers.
- ---------------------------------------------
If EDI is unable to maintain a National Association of Securities Dealers,
Inc. member broker/dealer as market makers, the liquidity of the common stock
could be impaired, not only in the number of Shares of common stock which could
be bought and sold, but also through possible delays in the timing of
transactions, and lower prices for the common stock than might otherwise
prevail. Furthermore, the lack of market makers could result in persons being
unable to buy or sell Shares of the common stock on any secondary market. There
can be no assurances EDI will be able to maintain such market makers.
10
Offering Price.
- ---------------
The offering price of the common Shares has been determined by the
directors of the Company arbitrarily and without regard to market
considerations.
Forward-Looking Statements.
- ---------------------------
This prospectus contains "forward looking statements" within the meaning of
Rule 175 of the Act, as amended, and Rule 3b-6 of the Securities Act of 1933, as
amended, including statements regarding, among other items, EDI's business
strategies, continued growth in EDI's markets, projections, and anticipated
trends in EDI's business and the industry in which it operates. The words
"believe," "expect," "anticipate," "intends," "forecast," "project," and similar
expressions identify forward-looking statements. These forward-looking
statements are based largely on EDI's expectations and are subject to a number
of risks and uncertainties, certain of which are beyond EDI's control. EDI
cautions that these statements are further qualified by important factors that
could cause actual results to differ materially from those in the
forward-looking statements, including, among others, the following: reduced or
lack of increase in demand for EDI's products, competitive pricing pressures,
changes in the market price of ingredients used in EDI's products and the level
of expenses incurred in EDI's operations. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained herein will in fact transpire or prove to be accurate. EDI disclaims
any intent or obligation to update "forward-looking statements."
11
Use of Proceeds
---------------
The amount of proceeds from this offering will depend on the ultimate
amount of Shares sold. The proceeds of the offering, less the expenses of the
offering, will be used to provide working capital for EDI.
The following table sets forth the estimated use of proceeds from this
offering for the ensuing two years:
Product Inventory $ 2,000,000.00
Physical Plant $ 2,800,000.00
Research & Development/FDA Approval $ 2,300,000.00
Marketing
U.S.A. $ 4,500,000.00
Canada $ 1,000,000.00
General & Administrative $ 1,000,000.00
Working Capital $ 3,000,000.00
--------------
Total $16,600,000.00
Management will notify shareholders of any significant changes in these use
of proceeds within a quarterly newsletter as well as in quarterly and annual
reports. Management anticipates expending these funds for the purposes indicated
above. If expenditures are less than projected, the resulting balances will be
retained and used for general working capital purposes, or allocated according
to the discretion of the board of directors. If less than the maximum offering
is raised, the priority will be placed on Marketing and Inventory. To the extent
that expenditures require the utilization of funds in excess of the amounts
anticipated, supplemental amounts may be drawn from other sources, including
general working capital and/or external financing. The net proceeds of this
offering that are not expended immediately may be deposited in interest or
non-interest bearing accounts, or invested in government obligations,
certificates of deposit, commercial paper, money market mutual funds or similar
investments.
12
Determination of Offering Price
-------------------------------
The cash offering price of the Shares has been determined arbitrarily at
the discretion of the Board.
Dilution
--------
The difference between the $6.00 price per Share of the Shares and the pro
forma net tangible book value per Share of EDI after this Offering constitutes
the dilution to investors in this Offering. Net tangible book value per share is
determined by dividing the net tangible book value of EDI (total tangible assets
less total liabilities) by the number of outstanding shares of Common Stock.
At May 31, 2002, the net tangible book value of EDI was approximately
$208,315.00 or $0.022 per share of Common Stock. After giving effect to the sale
of Shares (less commissions and estimated expenses of this Offering), the pro
forma net tangible book value of EDI at May 31, 2002, would be $16,808,315.00,
or $1.360 per Share, representing an immediate increase in net tangible book
value of $1.338 per Share to existing stockholders and an immediate dilution of
$4.640 to new investors.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per Share basis:
May 31, 2002
------------
Value per share of Common Stock
in Offering $6.00
Net tangible book value before
Offering $0.022
Increase attributable to new
investors $1.338
Pro forma net tangible book
value after Offering $1.360
Dilution to new investors (per share) $4.640
The following table sets forth at May 31, 2002, with respect to existing
stockholders and new investors, a comparison of the number of shares of Common
Stock acquired from EDI, the percentage of ownership of such shares, the total
consideration paid, the percentage of total consideration paid and the average
price per share:
13
Shares Purchased Total Consideration Average Price
---------------- ------------------- -------------
Number Percent Amount Percent Per Share
------ -------------- ------- ---------
Existing Stockholders 9,328,742 75.7% $ 3,283,998 15.4% $0.35
New Investors 3,000,000 24.3% $18,000,000 84.6% $6.00
--------- ----- ----------- ------ -----
Total 12,328,742 100.0% $21,283,998 100.0% $1.73
Plan of Distribution
--------------------
We are presently in negotiations with three registered broker/dealers to
serve as underwriters for the offering of the Shares on a "firm commitment" or
"best efforts all or none" basis. Such negotiations are predicated, in part, on
the filing of this Registration Statement and/or its effectiveness. The ultimate
underwriting arrangement will, in any event, provide for an 8% selling
commission and up to an additional non-allocable expense allowance of up to 3%
of the proceeds raised through the efforts of such underwriter. Additionally, it
is expected that the underwriter will be issued a Common Stock Purchase Warrant
exercisable at the option of the underwriter at an exercise price of 150% of the
initial offering price of the Shares within 90 days of the Effective Date of
this Registration Statement.
Opportunity to Make Inquiries.
- ------------------------------
EDI will make available to each offeree, prior to any sale of the Shares,
the opportunity to ask questions and receive answers from EDI concerning any
aspect of the investment and to obtain any additional information contained in
this prospectus, to the extent that EDI possesses such information or can
acquire it without unreasonable effort or expense.
Execution of Documents.
- -----------------------
Each person desiring to be issued Shares must complete, execute,
acknowledge, and deliver to EDI certain documents. By executing these documents,
the subscriber is agreeing that such subscriber will be a shareholder in EDI and
will be otherwise bound by the Articles of Incorporation and the Bylaws of EDI
in the form as may be attached to this Registration Statement.
Legal Proceedings
-----------------
Except as noted herein, EDI is not a party to any material pending legal
proceedings and, to the best of its knowledge, no such action by or against EDI
has been threatened.
14
Directors, Executive Officers, Promoters,
-----------------------------------------
and Control Persons
-------------------
The names, ages and respective positions of the directors and officers of
EDI are set forth below. All directors serve for a period of one year or until
their successors are elected and qualified. There are no other persons which can
be classified as a promoter, controlling person, or significant employee of EDI.
Mr. Peter George, age 69, is CEO and the Secretary/Treasurer of Advanced
----------------
Medical Systems Inc. Peter George has owned and operated his own multi million
dollar insurance brokerage under the name of Peter George & Company Insurance
Brokers for over 40 years. Peter George was educated in New York City, entered
the Korean War in 1951, serving in the U.S. Navy, and was honorably discharged
in 1955.
Mr. George has represented several high profile accounts during his many
years in the insurance industry including the Teamsters Union and Hilton Hotels.
He helped to create business plans that were adopted by Farmers Insurance Group
in the early 1960's. He was directly responsible for developing Farmers
Insurance Group's successful 30/60 auto policy. He was a pioneer in creating the
Mass Merchandising Plan for auto insurance in the early 1970's for the Teamsters
labor union. During the last six years he has been active in the IVD business
and has come to understand the various functions needed in the IVD industry.
Recognizing the unsatisfied demand for medical home testing products, Peter
George has devoted the past six years of his business career to the planning and
implementation of Advanced Medical Systems Inc.
Mr. George is listed in the 1998 Edition of Who's Who as an entrepreneur.
Mr. George is tireless in his work ethic and is proficient in his ability to
sort out opportunities and this makes his executive capabilities the nucleus of
the company's ability to complete the objectives necessary to deliver the
product on schedule and within budget.
Mr. Nicholas George, age 58, is President of Advanced Medical Systems Inc.
-------------------
Nicholas attended Orange Coast College prior to entering military service and is
a Vietnam Veteran. He operated "Sierra Guide Service" through the 1980's when a
protracted drought curtailed High Sierra skiing. During this period, he
successfully interacted with state agencies, the Bureau of Land Management, and
the U.S. Department of the Interior. He was able to enlist the assistance of
several prominent high profile executives in bringing this recreational activity
to the High Sierras. He lives in Riverside County with his wife and two
children.
Nicholas joined his brother, Peter, in 1984 in the insurance business where
he enjoyed success in his book of business until the outset of the formation of
Advanced Medical Systems Inc. in 1996. The two have worked hand in hand in the
planning, development and implementation of the company. Nicholas' primary
responsibilities are the operation and coordination of the various key elements
relating to the daily life of the firm. He understands how to delegate as well
as how to carry out corporate plans, and his administrative abilities are of
15
great value to the company. His duties will include actions to carry out the
objectives of the board of directors.
Mr. Charles A. Strongo, age 38, BA, MBA Program, from National University
----------------------
in 1999, will be handling the duties of CFO upon funding. Mr. Strongo has over
ten years of business experience in the plastic and IVD industry and an
additional ten years in corporate management. He has sales and marketing
abilities as well as an accounting background, and we feel that his contribution
will be invaluable. He was the President of Medical Clinical Consortium an IVD
manufacturer. He has several years of experience in financial and management
positions.
Mr. Dominic Romangnuolo, age 45, is a graduate of the York University,
-------------------------
having received his BAS degree in 1980, and has been employed in Canada by a
variety of pharmaceutical companies, working his way up from Project Manager to
Marketing Director while employed by Novopharm. Prior to working for Novopharm,
he was self-employed in a related medical device business. He is currently
serving as Marketing and Sales Consultant for EDI. He has many years of
experience in sales and marketing and upon funding will be joining our company
as Vice President of Marketing and Sales.
Dr. Henry J. Smith, Ph.D., age 63, will serve as a member of the Board of
--------------------------
Directors as well as our Medical Director. He has over 30 years experience in
the development and utilization of medical laboratory assays. He is the founder
of Immunology Consultants, Inc., which provided laboratory services in
Immunology and Microbiology. Dr Smith was a Research Fellow in Cancer Research
and received a Ph.D. in Medical Immunology from Leeds University School of
Medicine, in England, in 1965. He also was appointed to the Board of Directors
for the Orange County Boy Scouts Council.
Tasneem A. Khwaja, Ph.D., age 66, Director, if founder of PharmaPrint
------------------
Pharmaceuticals and has served as Secretary of PharmaPrint from 1994 to 2000 and
Chief Scientific Officer since October 1995. From September 1994 to April 1997,
Dr. Khwaja served as Chairman of the Board of Directors of PharmaPrint and from
November 1994 to October 1995 served as President and Chief Executive Officer of
PharmaPrint, a publicly traded NASDAQ company. Dr. Khwaja has been as Associate
Professor to Pathology at the University of Southern California School of
Medicine since 1973. Dr. Khwaja received a Ph.D. in Organic Chemistry and
Chemistry of Nucleic Acids from Cambridge University, in _____.
Mr. Elwood Sprenger, age __, Director, has over 24 years of experience in
-------------------
start-up companies. He has served on the Board of Rochem, a Swiss Company, which
developed and holds the patent for new reverse osmosis systems in water
treatment for use internationally in 27 countries. He was the founder, CEO and
owner of Calistoga Water Company which he started in 1970. After he built up
Calistoga to a company with $25 million in annual sales, he sold the company to
the Perrier Group in 1984. Mr. Sprenger stayed on at Calistoga as President and
CEO and worked with the Perrier Group to help increase sales from $33 million to
over $80 million. In 1990 Mr. Sprenger became a director in The Sahara Water
16
Group, a start-up company, and the company has grown to $20 million in annual
sales. In 1992, he became the CEO and Director of Sole, an Italian natural
spring water bottler, and developed an additional $15 million in annual world
wide sales. Mr. Sprenger attended Adams School of Engineering and became and
engineer in water treatment for the city of San Francisco.
Mr. Philip Dave Thomas, age 67, Director, has over 30 years combined
-------------------------
experience in executive management, national and international securities,
finance, real estate, investment banking and project development domestically
and internationally. In the last 20 years, he has been on the Board of Directors
for such companies as: the Marshall Islands Development Bank, the Century
National Bank of Texas, Banico Bank of Panama, Casa de Seguridad Safe Deposit
Company, Panama, Sole Bottled Water, Spaulding Sports Refresher, PediaPharm
Corporation, PharmaPrint Pharmaceutical, Newport Film Producers, Ozelle
Pharmaceuticals, and many other successful companies. During recent years, as
President of leading investment banking firms he successfully assisted in over
two dozen Private Placement and IPOs. For five years he was the President of the
American Central Stock Exchange, a highly successful $50 million company.
John H. Abeles, M.D., age 56, currently serves as President of Medvest,
--------------
Inc. a Venture Capital Company involved in the initiation and promotion of
venture financing in the medical, biosciences and related fields and the
strategic planning in research and development, company and product evaluation
and corporate development. Dr. Abeles possesses a degree in Pharmacology
(University of Birmingham, England, 1970). He has served, among other roles, as
a Medical Advisor to Marketing and Promotions to Sterling Drugs (U.K.),
Associate Medical Director to Pfizer Labs (N.Y., N.Y.), Assistant V.P. for
Health Care and Pharmaceutical Research to Kidder, Peabody (N.Y., N.Y.) and
Director to Higuchi BioSciences Institute, University of Kansas.
Security Ownership of Certain
-----------------------------
Beneficial Owners and Management
--------------------------------
The following table sets forth information regarding the beneficial
ownership of Shares of EDI's common stock as of May 31, 2002 (9,328,742
outstanding and 9,335,742 issued) by (i) all stockholders know to EDI to be
beneficial owners of more than 5% of the outstanding common stock; and (ii) all
officers and directors of EDI (each person has sole voting power and sole
dispositive power as to all of the Shares shown as beneficially owned by them):
17
=====================================================================================
Title of Class Name and Address of Amount and Nature Percent of Class
Beneficial Owner of Beneficial Owner
- -------------- ----------------------- --------------------- -----------------
Common Stock Peter George 2,997,500 32.1%
12792 Bonita Hts. Drive
Santa Ana, CA 92705
Common Stock Constance George 1,000,000 10.7%
14202 Flower St.
Garden Grove, CA 92843
Common Stock Nicholas George 3,494,000 37.5%
40375 Cal Oaks #D2204
Murietta, CA 92562
Common Stock Charles A. Strongo 54,346 0.6%
2950 N. Glassell St.
Orange, CA 92865
Common Stock Tasneem A. Khwaja 50,000 0.6%
2950 N. Glassell St.
Orange, CA 92865
Common Stock Elwood Sprenger 50,000 0.6%
2950 N. Glassell St.
Orange, CA 92865
Common Stock Philip Dave Thomas 252,500 2.7%
2950 N. Glassell St.
Orange, CA 92865
Common Stock Dominic Romangnuolo 80,346 0.9%
2950 N. Glassell St.
Orange, CA 92865
Common Stock John H. Abeles 50,000 0.6%
2950 N. Glassell St.
Orange, CA 92865
=====================================================================================
Description of Securities
-------------------------
General Description.
- --------------------
The securities being offered are Shares of common stock. EDI's Articles of
Incorporation, as amended, authorize the issuance of 50,000,000 Shares of common
stock, with a $.001 par value. The holders of the Shares: (a) have equal ratable
rights to dividends from funds legally available therefore, when, as, and if
declared by the board of directors of EDI; (b) are entitled to share ratably in
all of the assets of EDI available for distribution upon winding up of the
affairs of EDI; and (c) are entitled to one non-cumulative vote per share on all
matters on which shareholders may vote at all meetings of shareholders. These
securities do not have any of the following rights: (a) special voting rights;
(b) preference as to dividends or interest; (c) preemptive rights to purchase in
new issues of Shares; (d) preference upon liquidation; or (e) any other special
rights or preferences. In addition, the Shares are not convertible into any
other security. There are no restrictions on dividends under any loan, other
financing arrangements or otherwise. As of May 31, 2002, EDI had 9,328,742
Shares of common stock outstanding and 9,335,742 Shares of common stock issued.
The articles of incorporation, as amended, also provide for the issuance of
up to 5,000,000 shares of its non-voting preferred stock, without nominal or par
value. To date, no such shares have been issued or are outstanding.
18
Non-Cumulative Voting.
- ----------------------
The holders of Shares of common stock of EDI do not have cumulative voting
rights, which means that the holders of more than 50% of such outstanding
Shares, voting for the election of directors, can elect all of the directors to
be elected, if they so choose. In such event, the holders of the remaining
Shares will not be able to elect any of EDI's directors.
Dividends.
- ----------
EDI does not currently intend to pay cash dividends. EDI's proposed
dividend policy is to make distributions of its revenues to its stockholders
when EDI's board of directors deems such distributions appropriate. Because EDI
does not intend to make cash distributions, potential shareholders would need to
sell their Shares to realize a return on their investment. There can be no
assurances of the projected values of the Shares, nor can there by any
guarantees of the success of EDI.
Distributions will be made only when, in the judgment of EDI's board of
directors, it is in the best interest of EDI's stockholders to do so. The board
of directors will review, among other things, the need for capital to expand
manufacturing or distribution of its products, product development and projected
sales.
Possible Anti-Takeover Effects of Authorized but Unissued Stock.
- ----------------------------------------------------------------
Upon the completion of this offering, assuming the maximum offering of
3,000,000 Shares are sold, EDI's authorized but unissued capital stock will
consist of 37,664,258 Shares of common stock. One effect of the existence of
authorized but unissued capital stock may be to enable the board of directors to
render more difficult or to discourage an attempt to obtain control of EDI by
means of a merger, tender offer, proxy contest, or otherwise, and thereby to
protect the continuity of EDI's management. If, in the due exercise of its
fiduciary obligations, for example, the board of directors were to determine
that a takeover proposal was not in EDI's best interests, such Shares could be
issued by the board of directors without stockholder approval in one or more
private placements or other transactions that might prevent, or render more
difficult or costly, completion of the takeover transaction by diluting the
voting or other rights of the proposed acquirer or insurgent stockholder or
stockholder group, by creating a substantial voting block in institutional or
other hands that might undertake to support the position of the incumbent board
of directors, by effecting an acquisition that might complicate or preclude the
takeover, or otherwise.
Transfer Agent.
- ---------------
At present, we have not engaged a stock transfer agent regarding EDI Shares
and the Secretary of EDI currently serves in that role. Upon closing of this
offering, or before, EDI will engage the services of a public stock transfer
agent company.
19
Interest of Named Experts and Counsel
-------------------------------------
Other than as may be set forth below, no named expert or counsel was hired
on a contingent basis, will receive a direct or indirect interest in the small
business issuer, or was a promoter, underwriter, voting trustee, director,
officer, or employee of EDI.
Disclosure of Commission Position on
------------------------------------
Indemnification for Securities Act Liabilities
----------------------------------------------
Limitation of Liability.
- ------------------------
Directors of EDI are not liable to EDI corporation or its stockholders for
monetary damages for a breach of fiduciary duties unless the breach involves:
(1) a director's duty of loyalty to the corporation or its stockholders; (2)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law; (3) liability for unlawful payments of dividends
or unlawful stock purchases or redemption by the corporation; or (4) a
transaction from which the director derived an improper personal benefit.
Indemnification.
- ----------------
Although the articles of incorporation and the bylaws of EDI may provide
for indemnification of officer or directors of EDI, the Nevada General
Corporation Law provides for permissive indemnification of officers and
directors and EDI may provide indemnification under such provisions:
Statutory Indemnification of Officers, Directors, Employees and Agents;
- --------------------------------------------------------------------------------
Insurance.
- ----------
(a) A corporation shall have the power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suite or proceeding if
the person acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
20
(b) A corporation shall have the power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all of the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper.
(c) To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of this section, or in defense
of any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
Undertaking.
- ------------
EDI undertakes the following:
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the U.S. Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
Organization Within the Last Five Years
---------------------------------------
The names of our officers and directors are disclosed elsewhere in this
Form SB-2. With the possible exception of Mr. Thomas, none of these individuals,
as promoters, have received anything of value from EDI.
Description of Business
-----------------------
Overview.
- ---------
EDI was founded and incorporated on September 19, 1996, to develop,
manufacture and market at home, in vitro diagnostic tests for both over the
counter and professional use in world wide consumption. We are an FDA licensed
facility and licensed and registered with the California Department of Health
and the Canada Health Protection Branch. All of our licensed products (discussed
21
below) are now branded "EarlyDetect." However, because these products are
licensed does not mean that they have received any regulatory approval, nor has
the trademark "EarlyDetect" yet received approval. (Please see "Governmental
Approvals" below)
The Products.
- -------------
Recent advances in IVD technology have allowed a large variety of test kits
to be developed. As a result of their ease-of-use and their high degree of
accuracy, IVD kits have taken a major position in clinical diagnostic settings
and are being used for detecting a wide variety of diseases and physiological
conditions.
Products developed by us to date include:
o EarlyDetect - Pregnancy Wand Test: A convenient test utilizing new and
----------------------------------
simplified technology. Used by consumers in their homes, and by
hospitals to determine pregnancy in women.
o EarlyDetect - Ovulation Wand Test: An extremely useful test for those
----------------------------------
experiencing difficulty in conceiving. This test series accurately
predicts the onset of ovulation. Widely used by women trying to
conceive, giving them the necessary information for family planning.
o EarlyDetect - Prostate Health Screening Test: (PSA) A ten minute test
----------------------------------------------------
for the presence of elevated prostate specific antigen levels in
males, which is an indicator of prostate cancer or prostate
enlargement. Very important screening device for one of the leading
causes of death in males over the age of 50 years.
o EarlyDetect - Ulcer Bacteria Test: This ten-minute test is an
--------------------------------------
invaluable tool used to determine the presence of the
Helicobactor-Pylori bacteria in the digestive system. The presence of
H-Pylori bacteria is now known to be the root cause of ulcers and
gastric disorders, affecting over four million people annually.
o EarlyDetect - Drug Detection Tests: A five-minute test. This test kit
-----------------------------------
detects the presence of metabolites of Cocaine, Marijuana,
Methamphetamine, Amphetamine, Benzodiazapans, PCP, and Opiates in the
urine. Drug abuse is estimated to cost employers over $500 million in
lost productivity annually. This test is suitable for use by parents,
governmental agencies, schools and employers.
o EarlyDetect - Cholesterol Test: A simple three-minute test to
----------------------------------
determine levels of cholesterol in whole blood. Individuals can
administer this test to monitor their cholesterol levels to aid in
combating heart disease. Heart disease is the leading cause of death
in the United States and Canada as reported by the Heart Association
of America.
22
o EarlyDetect - Glucose Test: (Diabetes) A three-minute test designed to
--------------------------------------
determine levels of Glucose in whole blood. This test, in conjunction
with our Cholesterol test, has been found to be invaluable in
combating heart disease as well as diabetes. Six million people are
affected with non-insulin dependent diabetes (Type II) and are not
aware of their condition.
o EarlyDetect - Colorectal Test: (Colon Disorders) Designed to detect
--------------------------------------------------
blood in the stool. In their early stages, colorectal diseases such as
cancer, ulcers, hemorrhoids, polyps, colitis, diverticulitis and
fissures may not show visible symptoms, even though they may be
producing blood which is hidden in the stool. This test will detect
unseen blood and thereby serve as an early warning signal of the need
for medical attention.
o EarlyDetect - Urinary Tract Infection: (UTI) This test is designed to
---------------------------------------------
determine nitrates in urine, a symptom of urinary tract infection in
both men and women. This painful infection, if left untreated, can
cause damage to the kidney, bladder and reproductive organs.
o EarlyDetect - Blood Pressure Meter: This is a wrist cuff digital
--------------------------------------
display type device using the auto logic technology, providing optimum
accuracy in reading your blood pressure. It also provides pulse
readings and has a 14 day memory, with date and time.
o EarlyDetect - Alco Screen: This is a simple 2-minute saliva test for
--------------------------
the estimation of blood alcohol levels. It will be an aid in
preventing the excess use of alcohol and helps in alerting the public
to their true level of intoxication when using alcohol.
o EarlyDetect - Menopause: This test is a simple urine base test to
--------------------------
determine if menopause has occurred. This test can show a "high
constant" level of follicle-stimulating hormone which indicates
whether menopause has taken place.
o EarlyDetect - Breast Self-Examination Pad: This is a highly sensitive
-------------------------------------------
pad to be used by women to self-examine their breasts on a routine
basis, for the early detection of breast lumps. The test includes a
six minute video demonstrating the correct method of breast self
examination and stresses the need for early detection and treatment of
breast cancer.
o EarlyDetect - HIV & Hepatitis B Whole Blood Tests: These two tests
-----------------------------------------------------
have been undergoing clinical review in the United States and clinical
trials in Canada. We have been encouraged to discontinue our efforts
as these tests appear to be political in nature and have consumed a
great deal of money to no avail. However, we intend to continue
exploring the European and African markets at a later date.
23
o EarlyDetect - Sexually Transmitted Disease (STD's): A test for both
-----------------------------------------------------
men and women to detect the presence of Chlamydia infection. This is
the most common sexually transmitted disease in the United States and
Canada. In the United States, an estimated five to thirteen percent of
all women have a chlamydial infection of the cervix, (which is often
symptomless) as reported by the American Medical Association
Encyclopedia of Medicine.
Other home tests kits for Arthritis, Tuberculosis, Streptococcus (bacteria
infections), Influenza, and Cancer screening are just some of the many products
being considered at this time for future introduction into our line. We intend
to market similar products well into the next 10 years, bringing them on after
they have been developed and tested.
The above-mentioned tests are presently manufactured at some of the leading
pharmaceutical and biotech facilities here in the United States, under contract
to EDI, all having both FDA and ISO 9001 installations. A series of quality
control and quality assurance measures are in place as required by the FDA and
the State of California Health Department, and are closely supervised by our
in-house staff.
The Market.
- -----------
Market Analysis and Competition (United States)
The pregnancy test is one of the major home tests used in the world.
Approximately 30,000 retail drug stores in the U.S. are selling over $220
million of pregnancy tests alone. This rate has been growing at a rate of over
12% per annum. (Please refer to "Prospectus Summary" above). The market for this
product is continuing to grow, as many young people are engaging in sex at a
younger age. Presently there are five major manufacturers of this product, with
most having just two products in their product line. We anticipate at least a
five percent market share in the United States.
The ovulation test market is estimated at $31 million annually and growing
at nearly 9% per annum. More and more women are waiting to have children at a
later age, making it harder for many to conceive. Presently, four major brand
companies offer this test without any additional tests in their product line,
save pregnancy tests. With our extensive line of products, we expect to capture
a significant share of this market.
The Glucose (Diabetes) whole blood test is used to test for abnormal
glucose blood levels. Approximately 2,000 persons per 100,000 people are
affected in the United States with non-insulin dependent diabetes (Type II),
most without knowledge of the disease. This disease, if left untreated, can
cause cardiovascular disorders and cataracts. This product is expected to
produce an estimated $2 million is sales annually upon introduction and
advertising.
The Colorectal test (Colon Disorders) is now available for marketing. It is
24
estimated to grow as awareness of the availability is made with estimates
ranging from $2 million to $3 million in sales annually. Only one other company
is offering this product but has no other supporting products in its line. Sales
by our only competitor are slow, as little or no marketing and advertising has
been given to their product. We intend to dramatically advertise this very
important test because we feel it will help save countless lives throughout the
world.
The Drug Detection test over-the-counter ("OTC") market is estimated to
have been $6 million for year 2001 and will increase to over $500 million by
year 2005, according to corporate executives of Pharmatech, Inc. presently the
only OTC Drug Detection product FDA approved at this time. At present, all law
enforcement and governmental agencies are still using outdated laboratory
testing facilities and must wait for results, often taking one week to ten days.
Our tests are completed onsite within ten minutes. The economical benefits, plus
the savings in time makes our method for testing desirable to law enforcement
and governmental agencies as well as employers waiting to hire employees. Our
market share is estimated to be $3 million annually, commencing in the calendar
year, 2003.
The Cholesterol OTC test is available to test for abnormal levels of
cholesterol in whole blood. There is overwhelming evidence that a high blood
cholesterol level increases the risk of developing arteriosclerosis, and with it
the risk of coronary heart disease or stroke. This heart disease is the leading
cause of death in the United States, as reported by the American Heart
Association. Estimated sales for this test are between $2 million to $4 million
annually.
H-Pylori (Ulcer) whole blood tests are not yet available in the OTC market
place in the United States. Clinical trials are being conducted at this time and
we expect approvals within one year. Nearly four million people are affected by
the H-Pylori bacteria, as reported by the U.S. Department of Health and Human
Services. We anticipate that sales will exceed $5 million annually from this
test in the consumer market place.
Prostate Specific Antigen (PSA) whole blood tests are being made ready for
clinical trials in the United States and will be available within one year. As
reported by the American Cancer Society, over 300,000 men are being diagnosed
each year with prostate cancer and over 40,000 are dying each year from the
disease in the United States. By this information we know that the market size
is staggering. A conservative estimate of sales is between $4 million to $6
million annually.
Market Analysis and Competition (Canada)
- ----------------------------------------
Using information collected for the Unites States market and applying it to
a Canadian market base, which is estimated to be 10% of that of the United
States, we arrive at exciting conclusions. The Canadian market potential for our
current line of products is estimated to be well in excess of $20 million
annually. Verification of this claim is substantiated in large part by
assembling information from a variety of sources. For example, approximately
6,700 retail drug stores in Canada sell some $22 million worth of pregnancy
tests alone (1997 retail market data).
25
Although drawing conclusions from this data is somewhat difficult, it is
more than offset by the fact that there is virtually no competition in the
Canadian market for any of our products, with the exception of the pregnancy and
ovulation kits. We had been listed in over 2,300 retail drug stores throughout
Canada; among them are Wal-Mart, Zellers, London Drug and several other smaller
drug chains. While under contract to our former distributor Novopharm, we had
delivered to our Canadian distributor over $500,000 U.S. dollars of product,
which they have sold for over $2.5 million Canadian dollars. Our newly appointed
distributor estimates that they will have sales exceeding $3 million dollars by
the end of year 2002. The estimates are for continued increase of approximately
$2 million per annum in gross sales or more, over the next five years.
The Pregnancy test is marketed by between four and six other pregnancy
companies. Their tests are priced between $8.99 (on sale) and as high as $17.99.
Our pregnancy product is very competitively priced at between $6.50 and $10.99
depending upon store location and local competition.
The Ovulation tests are used widely by women wishing to conceive. With
women waiting longer to have children, it has become harder for some women to
become pregnant without knowing when they are ovulating. This type of test is an
aid in determining their ovulation surge, thus giving them the necessary
information for family planning.
A Menopause test has been introduced into the Canadian market place, which
assists in determining if menopause has occurred. This is an aid to females
concerned about the hazards of osteoporosis and other similar ailments.
Estimated annual sales are projected at about $500,000 in Canada.
The Drug Detection test market is estimated to produce over $20 million is
sales from the professional market and $1.2 million in sales from the retail
consumer market by 2002. Canada has a large drug problem in some of its major
cities, and has one of the highest HIV and heroin populations in North America.
The Colorectal retail market sales figures have not been estimated due to
the fact that this test is not available until now in Canada. EDI is the first
company to bring this product to the consumer market in Canada. Conservative
estimates are at least $1 million in sales annually.
The Prostate Specific Antigen test has just recently been made available
for the Canadian market by EDI. Potential sales for the Canadian market ranges
from $3 million to $5 million annually. A Canadian Medical Journal states,
"...that if every man over the age of 50 were to be tested for increased levels
of prostate specific antigen it would bankrupt the Canadian Health Plan."
The H-Pylori (Ulcers) whole blood test is now being sold to the general
public in Canada at local pharmacies and retail stores. Preliminary sales are
exceeding our estimates. Nearly four million people are affected by the H-Pylori
bacteria. Expected sales are in the $1 million to $1.5 million range. We view
26
that this will become a very rapidly selling product for the retail consumer
drug market. Clinical and professional sales are not included in this projection
due to a lack of confirming data.
The Cholesterol whole blood consumer test is now being sold in local
pharmacies. The estimated sales revenue from this test in Canada is $1 million
to $2 million annually.
The Glucose (Diabetes) whole blood test is now being introduced in Canada.
It is currently being reviewed by the Canadian Health Protection Branch for
approval. In conjunction with our Cholesterol test, it will be a major sales
item. As yet no sales figures are available, but are expected by the end of year
2002. Our distributor has estimated sales in the area of $1 million to $2
million annually.
All of our other miscellaneous tests collectively should generate at least
$500,000 to $1 million in sales in the Canadian market place starting in year
2002.
Suffice it to say that all published articles obtained on the subject of
home testing are unanimous in their view that this will be a very rapidly
growing segment of the retail drug market for many years to come.
Market Strategy
- ---------------
With the assistance of numerous associates having particular expertise in
the field of over-the-counter drug store retailing and professional
representation, we have put together a very detailed marketing strategy. The key
areas we have addressed are:
a) The setting up of "Home Health Test Centers" which, for the first time
in Canada and the United States, will put all of our various test kits
in one easily located ares of the store. This arrangement will
facilitate consumers in locating and purchasing several of our
products at one time. It will also bring greater attention to the many
products available. Displays will offer brochures covering all of the
products for consumer education. Web site information is provided as
well as consumer assistance toll free telephone lines.
b) Establishing a thorough marketing and advertising campaign with our
complete brand name of "EarlyDetect" products to both interest the
retailer in listing our line of products, and to create pull-through
of these products to the retail customer. Brand recognition or brand
equity being the value an audience places on a product based on its
preference for that product.
c) Marketing to the professional, clinical and governmental markets is
being made by our distributor who by virtue of its respected name in
the pharmaceutical industry is able to offer these products to its
existing drug customers, thus giving us access to this profitable
market.
27
Risk Assessment (Canada)
- ------------------------
We have taken the necessary steps to minimize the risks inherent with a
start-up venture. Our ten products are licensed by Health Protection Branch and
Urinary Tract Infection tests are under current review by Health Canada for
licensing. Except for those pending, our products are currently available to the
general public and are being sold throughout the country in local pharmacies and
retail outlets.
The one remaining area of potential risk centers on product quality. To
this end, we have established a very rigorous testing protocol, both at the
manufacturing level and separately at an approved Canadian and United States
laboratories. The expense of randomly testing each batch of products as it
arrives in Canada has already been built into our product cost. In addition, we
have established an independent Scientific Advisory Panel to advise us in areas
such as Quality Control and Quality Assurance.
Risk Assessment (United States)
- -------------------------------
Safeguards are in place for all of our products, as they are produced in
FDA approved facilities. Mandatory FDA guidelines for manufacturing, assembly
and shipping are adhered to as required by law. Quality assurance (QA)
guidelines as well as good manufacturing practices (GMP) are strictly enforced.
We presently have ten products licensed by the FDA for immediate sales in
the United States: Pregnancy, Ovulation, Colorectal Disease, Cholesterol,
Glucose (Diabetes), Urinary Tract Infection, Alcohol Screen, Drug Detection,
Wrist Cuff Blood Pressure Meter, and our Breast Self-Examination Pad.
Our H-Pylori whole blood test and our Prostate Specific Antigen Test are
being developed for submission to the FDA and we expect that we will have their
approval within the next 18 months.
Financial
- ---------
Pro forma financial projections are summarized below. Please note that
although we already have substantial interest in our products from numerous
foreign countries, we have chosen not to include these sales opportunities in
our projections.
THE COMPANY
- -----------
A private corporation named Advanced Medical Systems Inc. was founded in
September, 1996, under the laws of the State of Nevada, USA and renamed Early
Detect Inc. on June 25, 2002. Nicholas George was elected as President and Peter
George was elected as Secretary/Treasurer and CEO. On December 3, 1996 they
28
formed a private Canadian corporation under the laws of the Yukon Territory in
Canada named Allied Biotechnology Canada, Inc. Nicholas George was elected
Secretary/Treasurer and Peter George was elected President and CEO.
EDI is a manufacturing and distribution company that plans to market a
series of medical diagnostic assays designed for use by hospitals, medical
clinics, and several assays for over-the-counter retail sales in the United
States and Canada, as well as the entire world. At present, subcontractors and
suppliers of the various components perform the manufacturing. These
manufacturers are under long term contract to EDI. Upon funding we intend to
bring these functions in-house for better controls, which will also increase our
profit margins.
U.S. Personnel (For further information, please see "Executive Summary")
- ------------------------------------------------------------------------
Charles Strongo, BA, MBA, has had several years experience in the IVD
product development, sales, and marketing area. His knowledge of international
finance and financial matters bring that vital expertise to the company, where
he will handle the duties of Chief Financial Officer for us.
Henry J. Smith, Ph.D., a Research Fellow in Cancer Research who received a
Ph.D. in Medical Immunology from Leeds University School of Medicine in England,
has over 30 years of experience in the development and utilization of medical
laboratory assays. Dr. Smith has agreed to serve on the company's medical
advisory board as well as on the Board of Directors. Dr. Smith's in depth
experience and ground breaking research is of great importance to our company.
Perry G. Rucker, B.S.M.S., is our Federal Drug Administration and
Regulatory Affairs Director, having over 35 years experience in working with the
FDA and other regulatory bodies. His expertise in this field plus his knowledge
of the various requirements necessary for the development of new products in
this field make him a valuable asset to the company.
Canadian Personnel
- ------------------
Mr. Darrell Cook collaborates with the above U.S. team. He is the Director
of the Provincial Health Laboratory in Vancouver. Testing for our HIV and
Hepatitis B tests were conducted at the St. Paul's Hospital under the direction
of Mr. Cook and his staff. This facility performs most of the HIV testing for
the Provincial Government in the Western Canadian Area.
Mr. Dominic Romangnuolo was previously the marketing manager of our former
distributor Novopharm and joined our company in July, 2001. He serves the
company as Vice President of Sales and Marketing. He has over 20 years
experience in the pharmaceutical marketing and over the counter retail industry.
He has successfully marketed retail products both as an employee and as a
self-employed entrepreneur. His knowledge of this business and his professional
contacts make him a very valuable asset to the company.
29
Current Status of Company/Property
- ----------------------------------
At the present time the company is operating from corporate offices at 2950
Glassell Street in Orange, California. Upon funding, we intend to construct a
plant in the immediate area, which will allow us the controls necessary to
defray cost and expenses and contribute to our profit margin. The company
maintains a temporary office in the Las Vegas, Nevada area where the main
corporate offices will be domiciled.
As of August 31, 2001, a total cash outlay of slightly over $750,000 has
been spent on developing our company. These private funds have been used to pay
for the clinical testing and other associated fees required by Canadian HPB,
consulting fees for our Canadian associates, as well as various travel,
marketing and other business expenses, both in Canada and the United States.
Only two officers presently receive partial cash compensation for services
rendered to the company with the remainder to be deferred to capitalization
hereunder. Salaries will be set and paid at such time as the company's
operations warrant such compensation, and they will be reviewed periodically in
light of performance as well as profitability. It is estimated that the salary
level will be in the range of $100,000-180,000 per officer. Stock options based
on performance will also be offered, to be determined at a later date. (Please
see "Executive Compensation" below).
The Industry
- ------------
The medical home diagnostic assay industry is growing. "Medical advances
make it possible to find out more about the human body from ever-smaller amounts
of body fluids with easy-to-use devices at the same time that consumers are
taking more control over their own health care. What was once the purview of
physician and medical technicians, requiring costly equipment, can easily be
done in the comfort and anonymity of one's own home with inexpensive test kits."
(quoted from Mr. Chuck Hutchcraft, Tribune Staff Writer, Chicago Tribune,
October 7, 1996).
In the last ten years, home diagnostics has become it's own category in
drugstores, so states Gerry Hoeppner, spokesman for Eckerd Corp., a 1,727-store
chain based in Clearwater, Florida, which sells home test kits and 100 similar
items, ranging from blood-pressure machines to other more sophisticated
diagnostics.
"The clinical diagnostics business in the United States totals about $21
billion, and accounts for about three to five percent of total health-care
expenditures. Diagnostics in physicians offices and at home account for another
$2 billion," according to Alene Holzman, Vice President of Sunnyvale,
California-based ChemTrak, makers of a cholesterol test known as Cholestrak.
30
While its share of health-care expenditures is relatively small, the home
diagnostic segment is certain to grow if the past is any indicator. Sales of
home pregnancy tests, for instance, soared 459 percent over a 12-year period,
reaching $186 million by 1998 from $33 million in 1986. Through July, 1998,
consumers spent $191 million on home pregnancy tests." Source: Pharmacy Times,
October 1999.
Diagnostics (in vitro)
- ----------------------
The in vitro diagnostic industry is segmented by the underlying technology
involved in each test. The largest segments of the market are clinical chemistry
and immunodiagnostics, which account for approximately 40% and 25% of the IVD
market, respectively. As stated by Boston Biomedical, the total market for the
IVD industry was estimated at $18.7 billion in 1997, with the top eight
companies representing nearly 60% of the market. Even though growth is predicted
to be 4% per annum, consolidations are increasing. The increase in
consolidations is shown by the take-overs and mergers of the past year:
Roche/Boehringer, Beckman/Coulter, and Abbott/Murex. As these large diagnostic
companies seek greater market share and increased usage of their
instrumentation, the mergers and acquisitions will continue. Additionally, as
consumers become more aware of preventative health care and knowledge of the
value of diagnostic tests, the industry is driven to provide more types of home
tests.
North America accounts for approximately 40% of the $2 billion home
diagnostic industry with Europe accounting for 33%, Japan 13%, and the rest of
the world at approximately 14%
Point of Care (POC)
- -------------------
The two major areas of the POC market are hospitals and small test sites.
Hospitals use drug screen and pregnancy tests in their emergency rooms. The U.S.
hospital POC market was estimated to be over $400 million in 1996, and has been
growing at approximately 15% per annum.
Small test sites are in doctor's offices, nursing homes, and small office
laboratories. The small test site market was estimated at over $550 million in
1996, and has been growing at approximately 6% per annum.
The POC test market is increasing in popularity due to new technology,
which has widened the range of tests and made them easier to use. EDI sees the
importance of POC as a primary focal point for improving the quality, patient
satisfaction, and cost effectiveness of health care delivery. There are
approximately 36,000 laboratories approved to conduct CLIA-waived tests. EDI
offers diagnostic tests, targeted at major focal points, easy to use, and
accurate, at over 99%
31
Future Plans
- ------------
We are now seeking to raise capital by virtue of the public offering
herein. This money will be used to finance the necessary working capital,
inventory purchase, and more importantly, fund the advertising program necessary
to launch our products in the United States. Some of our major products will
need considerable capital resources for clinical trials and development costs in
order to qualify for FDA approval. It is also our intention to establish our own
manufacturing facilities for better cost effectiveness and quality control in
the future.
We have entered into a representation contract for the Latin and South
American countries with Latin America Biotech, Inc. of Panama. This company has
approached most governments in South and Latin America and the response has been
very favorable.
Negotiations with Laboratorios Bajamed, S.A. are underway for distribution
in the Mexican market place. This company is represented in all of the US/Mexico
Border States where millions of tourists cross into Mexico daily. They are also
represented by over 160 broker sales organizations throughout Mexico, and
project their gross sales of our products to be $3 million annually and to
increase within two years to an estimated $5 million annually thereafter.
We are currently in negotiations with a potential distributor, Excan Inc.,
to handle the Caribbean area and are awaiting a purchase order for initial stock
due in the Fourth Quarter of 2002.
We have entered in to a Distribution Contract with Cetalon Corporation
(www.cetalon.com) effective February 1, 2002, for distribution into the Sears
chain of stores both in the United States and Canada, and are awaiting our first
purchase order, in July of 2002. Cetalon Corporation has at this time made
contact with Longs Drug Store chain, which consists of some 3,100 stores and
additional chains are being solicited at this time. We anticipate entry into
several other chains within the next six months through this distributor.
Arrangements are being made to list our products with an affiliate of the Amway
Internet Sales system, as well as the Sears Internet Sales system through this
distributor.
Proprietary Features
- --------------------
Our company has contracted with each of its major suppliers for exclusive
distribution rights in the country of Canada, and for normal business
distribution rights in the United States and other countries. These suppliers
have in turn, their own existing contracts with the patent holders of many of
the various test devices, which will protect our company from any infringement
lawsuits. These contracts are generally for distribution and supply rights.
Some of our suppliers own their respective patented products and we have
contracted with them for continued supply. We have taken the precaution to enter
into several contracts with similar manufacturers as to not rely on just one
source of supply. The company has a long term exclusive contract with three of
the leading OEM manufacturers to furnish existing products and for the
32
development of new products for the future. Upon funding, we intend to file with
the FDA the necessary papers to manufacture and produce our own brand name of
EarlyDetect products in our own facility to assure our continued supply of
products in the future.
Government Approvals
- --------------------
EDI, under its former name, Advanced Medical Systems Inc., is a Canadian
Health Protection Branch (HPB) and United States (FDA) approved manufacturer,
distributor and re-packager of in vitro diagnostic devices, having all the
necessary licenses and permits in both countries. We are also in the process of
filing in the country of Mexico and anticipate having our related license during
the Second Quarter of 2003.
The Medical Device Bureau of the Canadian Health Protection Branch (HPB)
has approved all medical devices outlined in the Prospectus. We have those
approvals on ten of the listed products, and have submitted the Urinary Tract
Infection test, the sole remaining product, to the Canadian HPB and are awaiting
approvals at this time.
Approval by the HPB is essentially a two-step process. The first stage is
termed the Pre-Evaluation stage, requiring investigation trials done either in
Canada at designated governmental laboratories or outside the country at
laboratories maintaining quality control and quality assurance practices
acceptable to HPB. The pre-investigation stage is meant to evaluate the test kit
to make certain it is worth carrying on to the second stage. To date, we have
done this pre-investigation evaluation both outside and within Canada on over
3,000 test kits, both for sensitivity and specificity.
In addition to the testing requirement mentioned above, experiments also
must be conducted to meet other quality control and quality assurance criteria
such as cross interference, reproductability, and stability ad detection limit
analysis. Following accumulation of this data, an application for "Authorization
for Sale for Investigation Testing in Canada" is made which then allows the test
kit to be approved for the second or Notice of Compliance (NOC) stage. The
purpose of this part of the process is to determine the effectiveness and safety
of the device in a real population.
All of our products, consisting of the Pregnancy, Ovulation, Cholesterol,
H-Pylori, Drug Detection, Glucose, Colon Screening, Menopause, Blood Pressure
Monitor and Prostate Specific Antigen (PSA), Alcohol Level Test, and Breast Self
Examination Pad have been approved and licensed by the Canadian Health
Protection Branch and are ready for the market. We have shipped in excess of
$500,000 US dollars of product to our Canadian distributor during the year, from
August 1999 to September, 2001.
MANUFACTURING
- -------------
Trademark
- ---------
The trademark brand name of "EarlyDetect(TM)" has been applied for in the
33
United States under serial number 78/112/080 and is pending at this time. Our
Canadian serial number for Canadian trademark is 1105147. An Internet web site
has been secured and is presently under construction. Our web site address is
www.earlydetect.com after application for the name of KnowNow in the United
- -------------------
States. We later found the name was already owned by another company in Ohio,
thus a new name was required. We have filed with both the Canadian and United
States Trademark authority for the name EarlyDetect. Approval is pending.
A UPC application in the name of Advanced Medical Systems Inc. has been
filed with the Universal Product Code Council in Dayton, Ohio. Our application
has been approved and we have been assigned ID number 6-48224.
Product Liability
- -----------------
Since these products imply medical diagnostic reliability, there are
certain inherent problems facing the company, including lawsuits. We have
already made numerous inquiries regarding obtaining Comprehensive General
Liability and Product Liability insurance for the company. Policies are awaiting
payment to be placed in force. These policies will be written through A+
admitted carriers, and will cover the company's operations in the United States
and Canada. A Directors and Officers liability insurance application has been
submitted and we are awaiting binding of the policy from the carrier. Our
suppliers have been required to and have named our company as additional
insurer's on their policies protecting us from any product liability claims.
We have included in all of our product literature, information advising the
public of the need for a second medical opinion. A toll-free (800) telephone
number will be included in our packaging to direct them to one of the many
self-help and support groups in the county, as well as our web site, for help
with instructions 24 hours a day. In addition, a 24-hour counseling service is
also being incorporated in our plans. We are confident that these precautions
will serve to limit any claims on the company.
MARKETING AND SALES
- -------------------
Market Analysis
- ---------------
Our line of products has been in the Canadian retail market place since the
last quarter of 2000 under the name of "KnowNow." Our primary marketing
objective was to capture a substantial portion of the over-the-counter home test
kit market. To that end, we created a unique marketing concept by establishing
an "In Home Self Testing Center" within the drug store. All of our products are
showcased together in a one-location display. These displays are positioned in
highly visible, high traffic areas of the store, and bring awareness to the
consumer of the many types of home tests available through our company.
While several major drug companies sell one or two types of various test
kits, no other manufacturer offers the comprehensive number of tests that we
34
will have on the market, under one brand name. We believe that by establishing
our new product of EarlyDetect brand in conjunction with a very competitive
pricing strategy, we will gain a major share of the home diagnostic test kit
market.
Our test kits are inexpensive, making them affordable to the world market
while still providing an appropriate profit margin for the company. We have a
substantial line of products to fill existing needs, and will be adding
additional over-the-counter diagnostic products on an ongoing basis. Our
over-the-counter diagnostic tests are designed to provide optimum quality, do
not require refrigeration, are packed for individual or bulk use, and do not
require a trained technician to read the results. The user-friendly tests have
established standardized procedures that involve a minimum number of steps with
quick and accurate results.
Regarding the home consumer market, EDI has conducted research in the area
of product marketing and distribution. The company has entered into an exclusive
distribution contract with a pharmaceutical company in Canada, and sold the
product under the name of KnowNOW. The distributor, Novopharm, was sold in year
2000 and the new management and owners did not support the product line since
they wanted to return to their core business of manufacturing drugs. We were
forced to terminate that contract in August of 2001. Since that contract
termination, we are in the process of entering in to another distribution
agreement with a large distribution company in Canada and have changed the name
of the product to EarlyDetect. We have estimated gross sales of approximately $3
million Canadian dollars for the next calendar year with this new distributor.
(Please see "Certain Transactions")
We have signed a representation contract with Latin American Biotech of
Panama giving them power to negotiate distribution agreements in Latin America
and South America.
To successfully market our diverse group of home test kits has required a
substantial amount of planning. We have to convince both the drugstore owners
and buyers of the need for the EarlyDetect line of home test kits for their
stores. We have to ensure that there will be sufficient public awareness of, and
a demand for, our family of products to generate the desired sales at the retail
level. To accomplish this multi-faceted task, we have put together a summary of
the marketing tools, materials, staff and services that will be needed, as well
as the related costs to obtain them.
A substantial amount of booked print advertising will be put in place and
is essential to convince the retail chain buyer that the products will not sit
on the shelves, but be very much in demand at store level. Finally, to maintain
our relationships with the major chain personnel, we need to become very
involved in the various industry associations, attending trade shows, lunches,
dinners and the like. We anticipate that marketing and advertising funds
generated from sales will more than offset the ongoing costs of these programs.
Sales & Revenue (Canada)
- ------------------------
Product costing is the first component required to build reliable sales and
35
revenue projections. The development of an accurate product cost profile relies
strongly on the abilities of the writer to determine, based on experience, all
the items of cost which form the total direct costs of the product. These
include such items as airfreight, local freight, storage and handling, brokerage
fees, marketing allowances, etc.
The Canadian market for home diagnostic testing is reported in a Frost and
Sullivan Report 2001 of Chain Drug Review article at $65 million. Of this
estimate, pregnancy test kits are currently estimated at $22 million annually
(see "Marketing"). Each of roughly, 6,700 retail drugstores in Canada stocks
approximately five brands of home pregnancy test kits. Extrapolating these
figures results in an average per store sales figure of some five to six test
kits of each brand sold per month. As can be seen in the financial projections
below, we are estimating that after one year, we expect to be selling a total of
two pregnancy kits, per store, per month. The company will support these
products with a substantial marketing and advertising campaign. We are further
assisted through our concept of establishing "In Home Self Testing Centers" in a
majority of the stores we are listed in, after the first 12 months of sales.
Sales estimates for the balance of the test kits have been calculated in a
similar manner. Although there is little or no competition from which to glean
existing sales figures, there are statistics on the prevalence of the various
diseases, which our test kits are able to detect. In addition, discussions with
various industry experts and professionals in the fields where some of these
remaining test kits would be welcomed have given us the basis for our sales
figures.
Sales & Revenue (United States)
- -------------------------------
EDI is presently not in the U.S. market place. However, upon funding, we
anticipate that we will be represented in at least 10,000 drug stores in the
U.S. Preliminary work has been started for entry into the U.S. market place. We
anticipate that we will sign with three of the major drug store chains, and be
represented in these stores within the next year. There are approximately 80,000
major chain drug stores as well as merchandise stores such as Sears, Target and
similar stores, and an additional 18,000 major food chain stores in the U.S.
With the In-Home Self-Testing Center concept, EDI expects to be in over 30,000
stores nationally within five years, based on projections of past
representation.
Independent market surveys show that the average store currently sells
eight pregnancy tests per month per brand name. EDI is conservatively estimating
only two pregnancy tests per store per month for the first year and increasing
one test per month for the next two years, leveling off at years three, four and
five.
The revenues available for this market are shown in our projections. The
concept of the In-Home Self-Testing Center in the U.S. market place gives EDI
the advantage to be the first company to have an entire line of products for
home testing. As mentioned in the product section, the potential sale of these
easy-to-use home tests are staggering.
36
Ownership
- ---------
The company is privately held with the majority of stock owned by Peter
George, and Nicholas George. Other persons own 1,328,742 shares of common stock
for their investment in the company. Stock options totaling approximately five
-------------
percent of the total issue have been granted to key employees and consultants
based upon targets of performance.
Peter George is both Secretary/Treasurer and CEO of EDI and Nicholas George
is President. Peter George will oversee the executive, administrative, and
corporate duties of the company. Nicholas George will be responsible for the
overall operational duties of the company. The company has retained the services
of a number of scientific and medical consultants either under consulting or
management services contracts, to perform the many medical and product research
and development needs for future products.
Management Discussion and Analysis or
-------------------------------------
Plan of Operation
-----------------
The following discussion should be read in conjunction with the financial
statements of EDI and notes thereto contained elsewhere in this registration
statement as well as with the discussion of the business activities discussed
above.
EDI's principal activities have focused on:
o the research and development of the IVD products discussed above
o the development of marketing plans to support such products
o an analysis of products to be offered
o relationship development with manufacturers and distributors of such
products
o the design, development and implementation of proprietary
merchandising and marketing techniques to support the products
o the identification and building of a management team
EDI will need to raise additional capital in the next 12 months in order to
meet its continuing requirements and has entered in to discussions in that
regard.
EDI currently has three employees. Members of the management team and
several support personnel have served without compensation. It is the intention
of EDI to establish a full payroll and benefits with some of the working capital
from this offering for these individuals.
Description of Property
-----------------------
The company is presently conducting its administrative business from an
office located at 2950 N. Glassell Street in Orange, California, and also has an
incidental office at 5751 E. Hacienda, Suite 160, Las Vegas, Nevada. Contracted
assembly and manufacturing facilities are located in the immediate Southern
California area; thus giving the company accesses to those necessary facilities
37
for inspection and quality control. Additional space for administrative
personnel will be established in Southern California with some of the proceeds
from this offering as well as distribution centers, as needed.
Certain Relationships and Related Transactions
----------------------------------------------
Organization and Business.
- --------------------------
EDI was originally incorporated on September 19, 1996, under the name
Advanced Medical Systems Inc. and commenced operations on October 1, 1996. EDI
was formed for the purpose of developing, manufacturing, marketing and
distributing in vitro diagnostic tests for consumer and professional use.
Effective June 25, 2002, the company changed its name to Early Detect Inc.
As of May 31, 2002, the company had 9,328,742 shares of common stock
outstanding at $.001 par value and no shares of preferred stock outstanding at
$.001 par value.
We had been listed in most of the major drug store chains in Canada, such
as Wal-Mart, Zellers, London Drug and a host of other retailers in Canada. A
distribution contract with Cetalon Corporation (operators of Sears, Health
Nutrition and Fitness Centers) governing both the Canadian and U.S. markets is
in place and production for retail sales in the late summer of 2002.
Additionally, new brokerage agreements are being considered with Zenar Group of
Calgary, WO Sales of Ontario and Robert Rose Brokers in Quebec for placement of
our products. Finally, the company is also considering an Independent
Distributor Agreement with ECure Me Corporation wherein ECure Me Corporation
will purchase the distribution rights for our products for a period of three (3)
years for the Territory of Korea and worldwide internet sales. This Agreement
calls for minimum purchase for Korea of $500,000 in year 1, $1,000,000 for year
2 and $3,000,000 in year 3, and Internet minimum purchase of $1,000,000 in year
1.
Related Transactions.
- ---------------------
The company rents its office space and purchases employee health insurance
from Peter George & Co., an insurance brokerage company owned by its Chairman
and Chief Executive Officer (CEO), Peter George. Rent and insurance expense for
the interim period ended May 31, 2002 amounted to $3,600 and $3,240,
respectively.
As of May 31, 2002, Mr. George had loaned $237,143 to the Company from
personal funds and line of credit. (See Notes to Financial Statements.) The
company pays the monthly interest on the line of credit's outstanding balance.
The company receives consulting services from Seashore-Tetrachem, a company
owned by one of its shareholders, for maintaining compliance with regulatory
agencies. Consulting expense for the interim period ended May 31, 2002 amounted
to $750.
38
The company engaged All American Capital (AAC) to act as the promoter in
the Initial Public Offering (IPO) of its stock through registration with the
Securities and Exchange Commission (SEC). AAC, owned by one of the company's
shareholders and Directors, Phillip David Thomas, is to receive installment
payments amounting to $75,000 after the effective date of the filing. AAC is
also entitled to receive additional shares of common stock equaling up to 4.9%
of the IPO stock offered. During 2001, Mr. Thomas transferred and sold a total
of 146,500 shares of common stock to families and third parties.
On March 12, 2002, the company granted 50,000 shares of common stock to one
of its Directors, Tasneem Khwaja, for accepting a position as one of the
Company's board of directors.
On June 21, 2002, the Company granted 50,000 shares of common stock to John
H. Abeles, MD for accepting a postition as one of the Company's board of
directors.
Issuance of Common Stock and Options in Exchange for Services.
- --------------------------------------------------------------
Other than the stock options contained in the Employment Agreements and
Consulting Agreements discussed below, there are no options issued to purchase
any shares of the company.
Options Issued to Employees.
- ----------------------------
On September 19, 2001, we entered into an Employment Agreement with each of
Peter George and Nicholas George as CEO and Treasurer and President
respectively. Each Agreement runs for a period of four years with an annual
salary of $180,000 deferred in substantial part until completion of this
offering. Each Agreement grants Messrs. George an option to purchase up to
100,000 shares of company common stock at $2.50 per share for a period of five
years.
On March 1, 2002 we entered into an Employment Agreement with Charles A.
Strongo as CFO and Vice President of the Company for a period of five years. Mr.
Strongo shall serve at an annual salary of $100,000, one half of which is
deferred pending completion of this offering. Mr. Strongo was also granted
options to purchase up to 100,000 shares of common stock at $5.00 per share for
the term of the Agreement and granted a stock bonus vesting at 67,864 shares of
common stock for each of the first two years of the Agreement.
Consulting Agreement.
- ---------------------
The company entered into an Independent Contractor Agreement with one of
its directors, Henry J. Smith, Ph.D., dated June 26, 2000, for the provision of
services in capital formation and corporate organization at a rate of $125 per
hour of service.
Also, the company entered in to a Consultant Agreement on February 1, 2002,
with one of its directors, Mr. Elwood Sprenger, for the provision of marketing
services at a monthly fee of $3000, and approved expenses. Mr. Sprenger is also
the CEO and majority stockholder of Cetalon Corporation. Additionally, Mr.
Sprenger has been granted an option to purchase up to 100,000 shares of company
stock at the offering price herein for a period of five years.
39
Finally, the company has entered into a Consulting Services Agreement with
Paradigm Health Care Marketing, Inc., owned by Mr. Dominic Romagnuolo, on July
23, 2001, for providing sales and marketing services at the rate of $3500 per
month, plus expenses.
Market for Common Equity and
----------------------------
Related Stockholder Matters
---------------------------
EDI's Shares of common stock and preferred stock are currently not traded
on any market but EDI intends to initially apply to the Over the Counter
Bulletin Board or NASDAQ, or other available markets. Dividends payable on the
Common Stock are limited by Nevada General Corporation Law which does not allow
distributions to stockholders in certain circumstances.
Executive Compensation
----------------------
EDI has entered into employment contracts with three of its executives.
(Please see "Options Issued to Employees" above).
Financial Statements
--------------------
40
Independent Accountant's Report
The Board of Directors
Advanced Medical Systems Inc.
Orange, California
I have reviewed the accompanying balance sheet of Advanced Medical Systems Inc.
as of May 31, 2002, and the related statements of operations, stockholders'
equity, and cash flows for the three-month and nine-month periods then ended.
These financial statements are the responsibility of the Company's management.
I conducted my review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, I do not express such an opinion.
Based on my review, I am not aware of any material modification that should be
made to the accompanying financial statements for them to be in conformity with
generally accepted accounting principles in the United States of America.
Maceda and Company
24 June 2002
F-1
ADVANCED MEDICAL SYSTEMS INC.
Balance Sheet
May 31, 2002
ASSETS
Current Assets
Cash $ 1,524
Inventory (Note 3) 11,320
----------
Total Current Assets 12,844
----------
Property, plant, and equipment, at cost (Note 4) 20,603
Deferred income tax (Note 10) 929,651
Other assets (Note 5) 594
----------
TOTAL ASSETS $ 963,692
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 33,677
Accrued expenses 7,000
Due to officer (Note 6) 237,143
Deferred salaries 476,963
----------
Total Current Liabilities 754,783
----------
Stockholders' Equity
Common stock (Note 8) 9,336
Additional paid-in capital 3,285,062
Expense of initial public offering stock issue (1,078,140)
Deficit (1,147,438)
Treasury stock--at cost, Common stock, 7,000 shares (10,400)
Net (loss) (849,511)
----------
Total Stockholders' Equity 208,909
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 963,692
==========
See Accountant's Review Report
F-2
ADVANCED MEDICAL SYSTEMS INC.
Statement of Operations
For the Three-Month and Nine-Month Periods Ended May 31, 2002
Net sales $ 0
-------------
Cost of sales 0
Selling, general, and administrative expenses 122,774
Advertising 240,610
Amortization 131
Consulting 239,165
Directors' fee 250,000
Interest expense 7,030
Officers' salaries 425,415
-------------
Total costs and expenses 1,285,125
(Loss) before income tax benefit (1,285,125)
Income tax benefit (Note 10) 435,614
-------------
Net (loss) $ (849,511)
=============
Basic and diluted net (loss) per common share (Note 9) $ (0.07)
=============
See Accountant's Review Report
F-3
ADVANCED MEDICAL SYSTEMS INC.
Statement of Stockholders' Equity
For the Three-Month and Nine-Month Periods Ended May 31, 2002
Common Additional Deficit Treasury Total
Stock Paid-in Capital Stock
------------------------------------------------------------------
Balance, September 1, 2001 $ 9,071 $ 1,354,816 $(1,147,438) $(10,400) $ 206,049
Stock issue, 264,500 shares 265 660,985 661,250
Stock options and equity compensation 271,761 271,761
Expense of initial public offering stock issue (80,640) (80,640)
Net (loss) (849,511) (849,511)
------------------------------------------------------------------
Balance, May 31, 2002 $ 9,336 $ 2,206,922 $(1,996,949) $(10,400) $ 208,909
==================================================================
See Accountant's Review Report
F-4
ADVANCED MEDICAL SYSTEMS INC.
Statement of Cash Flows
For the Three-Month and Nine-Month Periods Ended May 31, 2002
Cash flows from operating activities:
Net (loss) $ (849,511)
Adjustments to reconcile net (loss) to net cash (used) by
operating activities:
Advertising 240,000
Consulting 192,096
Depreciation and amortization 1,586
Directors' fee 250,000
Income tax benefit (435,614)
Marketing supplies 5,000
Officers' salaries 130,415
Printing and reproduction 50,000
(Increase) decrease in:
Due from officer 10,922
Inventory (1,205)
Increase (decrease) in:
Accounts payable 11,007
Deferred salaries 224,033
-----------
Net cash (used) by operating activities (171,271)
-----------
Cash flows from investing activities:
Purchase of equipment (10,000)
-----------
Net cash (used) by investing activities (10,000)
-----------
Cash flows from financing activities:
Expense of initial public offering stock issue (80,640)
Borrowings from officer 100,000
Payments to officer (50,800)
Proceeds from stock issue 72,500
-----------
Net cash provided by financing activities 41,060
-----------
Net (decrease) in cash (140,211)
Cash at beginning of year 141,735
-----------
Cash at May 31, 2002 $ 1,524
===========
Supplemental disclosures of cash flow information:
Interest paid $ 6,812
Income tax paid $ 0
In 2001, the Company issued 235,500 shares and granted 273,504 shares of
unrestricted common stock to non-employees and employees for goods and services
received. The total fair value of these shares was $588,750 and $271,761,
respectively.
See Accountant's Review Report
F-5
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements
Note 1: Description of Business and Summary of Significant Accounting Policies
- ------------------------------------------------------------------------------
Nature of Operations
--------------------
A closely held company incorporated in the State of Nevada on September 19,
1996, Advanced Medical Systems Inc. (the "Company") distributes
over-the-counter diagnostic test kits marketed directly at consumers for
home use. On June 25, 2002, the Company filed an amendment with the Nevada
Secretary of State to change its name to Early Detect Inc. At September 1,
2001, the Company distributed the following diagnostic test kits:
pregnancy, ovulation, prostate cancer detection, ulcer bacteria, multi-drug
detection, cholesterol, and glucose (diabetes).
The Company secures distribution agreements with companies that own the
patents, or have licensing agreements with patent owners, on its line of
over-the-counter diagnostic test kits for rights to package and sell in the
market using its brand name. The Company holds licenses with the Health
Protection Bureau in Canada and Department of Health Services in
California. It is also an FDA-licensed distributor, which allows it to
acquire raw materials from other companies that also have licensing rights
on its products. In the long run, it is independent of any one particular
supplier for raw materials.
Since severing relationships with its sole distributor, Novopharm, in
Canada as of August 31, 2001, the Company has not sold any products.
On December 3, 1996, the Company formed a wholly owned subsidiary, Allied
Biotechnology Canada, Inc. (ABC). Incorporated in Canada, ABC was created
to facilitate doing business in the country in case of unforeseen problems
with using a foreign corporation. Since its incorporation, ABC continues to
be an inactive subsidiary, except for the filing of its annual returns.
Expense of maintaining ABC as an entity is absorbed by the Company. ABC has
200 shares of common stock issued and outstanding, all of which are owned
by the Company.
Inventory
---------
The Company records inventory at the lower of cost or market, with cost
being determined using the specific identification method. Costs included
in inventory consist of raw materials.
Property, Plant, and Equipment
------------------------------
The Company records property, plant, and equipment at cost less
depreciation. Depreciation is accounted for on the straight-line method
based on estimated useful lives.
Other Assets
------------
Other assets include trademarks and software. The Company complies with the
provision of SFAS No. 142, Goodwill and Other Intangible Assets. This
Statement changes the accounting for goodwill and other intangible assets
from an amortization method to an impairment-only approach.
F-6
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Revenue Recognition
-------------------
The Company recognizes revenue in the financial statements upon
satisfaction of two events: delivery of the products (FOB shipping point)
and receipt of payment from the distributor. Net sales result from
deducting applicable discounts and returns from gross sales.
The Company complies with the requirements of Staff Accounting Bulletin
101, "Revenue Recognition in Financial Statements" (SAB 101) in recognizing
revenue. The Company requires no modifications to its revenue recognition
policy to comply with SAB 101.
Advertising Costs
-----------------
The Company records advertising costs as an expense at the time it is
incurred. Total advertising costs for the interim period ended May 31, 2002
amounted to $240,610.
Income Taxes
------------
The Company accounts for income taxes using the asset and liability method,
under which deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets, liabilities,
operating losses, and tax credit carryforwards. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that
includes the enactment date. Management provides a valuation allowance
against the deferred tax asset for amounts which are not considered "more
likely than not" to be realized.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Stock-Based Compensation
------------------------
The Company complies with the provision of SFAS No. 123 in accounting for
employee and non-employee stock compensation. Accordingly, the Company
records the fair value of the goods or services received or the fair value
of the equity instruments issued, whichever can be more reliably measured.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of cash and accrued liabilities approximate fair value
because of the short maturity of these instruments.
F-7
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Note 2: Related-Party Transactions
- ----------------------------------
The Company rents its office space and purchases employee health insurance
from Peter George & Co., an insurance brokerage company owned by its
Chairman and Chief Executive Officer (CEO)--Peter George. Rent and
insurance expense for the interim period ended May 31, 2002 amounted to
$3,600 and $3,240, respectively.
As of May 31, 2002, Mr. George had loaned $237,143 to the Company from
personal funds and line of credit (Note 6). The Company pays the monthly
interests on the line of credit's outstanding balance.
The Company receives consultations from Seashore-Tetrachem, a company owned
by one of its shareholders, on maintaining compliance with regulatory
agencies. Consulting expense for the interim period ended May 31, 2002
amounted to $750.
The Company consults with Paradigm Health Care Marketing, Inc. (PHCM) for
marketing and sales support in Canada. One of the Company's shareholders,
Dominic Romangnuolo, owns PHCM. Consulting expense for the interim period
ended May 31, 2002 amounted to $31,500.
In addition to Mr. Romangnuolo's monthly compensation of $3,500, he is
entitled to receive an additional 67,846 shares of common stock on July 23,
2002 per his consulting agreement with the Company (Note 7). As of May 31,
2002, Mr. Romangnuolo owns 80,346 shares of unrestricted common stock.
On February 1, 2002, the Company signed a consulting agreement with one of
its shareholders and Directors, Elwood Sprenger, to provide marketing and
consulting services (Note 11). Consulting expense for the interim period
ended May 31, 2002 amounted to $14,000.
Mr. Sprenger is also the CEO and majority shareholder of Cetalon
Corporation (Note 13).
On March 1, 2002, a shareholder and Director, Charles Strongo, accepted a
position (Note 11) with the Company as its Chief Financial Officer (CFO).
Per the agreement, the Company granted Mr. Strongo 135,572 shares of common
stock with a vesting period of two years (Note 7). As of May 31, 2002, Mr.
Strongo owns 54,346 shares of unrestricted common stock after transfer of
26,000 shares to family and friends on September 1, 2001.
The Company engaged All American Capital (AAC) to act as the promoter in
the Initial Public Offering (IPO) of its stock through registration with
the Securities and Exchange Commission (SEC). One of the Company's
shareholders and Directors, Phillip David Thomas, owns AAC. After
completion of the SEC filing, the Company is to make installment payments
amounting to $75,000 to AAC within a 12-month period. AAC is also entitled
to receive additional shares of common stock equal to 4.9% of the total IPO
stock sold.
During 2001, Mr. Thomas transferred and sold a total of 146,500 shares of
common stock to families and third parties. As of May 31, 2002, he owns
252,500 shares of unrestricted common stock.
F-8
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
On March 12, 2002, the Company granted 50,000 shares of common stock to
Tasneem Khwaja for accepting a position as a member of its board of
directors.
On June 21, 2002, the Company granted 50,000 shares of common stock to John
H. Abeles, MD for accepting a position as a member of its board of
directors.
Note 3: Inventory
- -----------------
The Company does not maintain finished goods on hand. With the exception of
supplemental raw materials, such as band-aids, lancets, alcohol pads, and
the like, it holds raw materials at an FDA-approved independent facility
for assembly. Upon receipt of a purchase order, the Company provides a
shipping order to the independent facility to assemble the requested
finished products. The independent assembly facility ships the finished
products to its destination. At May 31, 2002, inventory is comprised of the
following:
Finished goods $ -0-
Work in process -0-
Raw materials 11,320
----------
Total $ 11,320
==========
Note 4: Property, Plant, and Equipment
- --------------------------------------
At May 31, 2002, property, plant, and equipment are comprised of the
following:
Machinery and equipment $ 2,673
Furniture and fixtures 950
Other equipment 20,000
----------
Total 23,623
Less: accumulated depreciation 3,020
----------
Net property, plant, and equipment $ 20,603
==========
Machinery and equipment are depreciated based on an estimated useful life
of 5 years. Furniture and fixtures and other equipment are depreciated
based on an estimated useful life of 7 years. Depreciation expense for the
interim period ended May 31, 2002 amounted to $1,455.
F-9
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Note 5: Other Assets
- --------------------
Other assets include amortizable trademarks and software with useful lives
of 15 and 3 years, respectively. Amortization is accounted for on the
straight-line method. The Company complies with the provision of SFAS No.
142, Goodwill and Other Intangible Assets. At May 31, 2002, other assets
are comprised of the following:
Trademarks $ 462
Software 430
----------
Total 892
Less: accumulated amortization 298
----------
Net other assets $ 594
==========
Amortization expense for the interim period ended May 31, 2002 amounted to
$131. No impairment loss is recognized in accordance with the provision of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. Estimated amortization expense for the
five succeeding fiscal years is as follows:
2002 $ 174
2003 139
2004 31
2005 31
2006 31
----------
Total $ 406
==========
Note 6: Due to Officer
- ----------------------
As of May 31, 2002, the Company had $237,143 in short-term debts payable to
its Chairman and CEO. From his line of credit, Mr. George loaned cash to
the Company as needed to cover its operating expenses. The Company pays the
interests reflected on the line of credit's monthly billing statement,
which is the required minimum payment. The applicable Annual Percentage
Rate is a variable rate plus a margin of 2.50% points. The variable rate is
based on a weekly average rate of interest on 30-day Certificates of
Deposit as published by the Federal Reserve Bank of New York. The interest
rate is adjusted monthly and ranged from 4.27% to 7.73% in 2001. Interest
expense for the interim period ended May 31, 2002 amounted to $6,234. The
outstanding credit line balance of $192,850 at May 31, 2002 is payable on
demand.
From personal funds, Mr. George had also loaned $44,293 to the Company as
of May 31, 2002. The Company pays 0% interest on this loan, and there is no
formal arrangement between the Company and Mr. George for the settlement of
this loan.
F-10
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Note 7: Stock-Based Compensation
- --------------------------------
Non-Employee Stock Compensation
-------------------------------
In accordance with the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company records equity instruments issued to
non-employees based on the fair value of the goods or services received or
the fair value of equity instruments issued, whichever can be more reliably
measured. Accordingly, the Company recognized $240,000 in advertising
expense, $185,096 in consulting expense, $250,000 in directors' fee, $5,000
in marketing supplies, and $50,000 in printing and reproduction based on
the fair value of the stock issued in 2001. Management measured the fair
value of stock at $2.50 per share based on stock sold at arms-length
transactions with third parties.
On July 23, 2001, the Company granted Mr. Dominic Romangnuolo 135,692
shares of common stock with a vesting period of two years from the date of
grant. The grant-date fair value of the stock was $339,230. For the interim
period ended May 31, 2002, the Company accrued $141,346 in consulting
expense.
Employee Stock Compensation
---------------------------
On March 1, 2002, the Company granted its CFO, Charles Strongo, 135,572
shares of common stock with a vesting period of two years from the date of
grant. The grant-date fair value of the stock was $338,930. For the interim
period ended May 31, 2002, the Company accrued $42,415 in compensation
expense.
Fixed Stock Options
-------------------
The Company granted fully vested stock options to its CEO, President, and
CFO that expire 5 years from the date of grant, at prices not less than the
fair market value on the date of grant. The aggregate purchase price for
options outstanding at May 31, 2002 was approximately $1 million. The
options expire in 2006 and 2007.
A summary of changes in the stock options granted at May 31, 2002 is as
follows:
Weighted-Average
Fixed Options Shares Exercise Price
------------- ------ ---------------
Outstanding, beginning of year 0 $ -0-
Granted 300,000 3.75
Exercised 0 -0-
Expired 0 -0-
Forfeited 0 -0-
-------
Outstanding at May 31, 2002 300,000 3.75
=======
Options exercisable
at May 31, 2002 300,000 3.75
Weighted-average fair value of
options granted during the period
ended May 31, 2002 $ 0.44
F-11
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
The range of exercise price per stock option is $2.50 to $5.00. The
weighted-average remaining contractual life and weighted-average exercise
price is 4.5 years and $3.75, respectively.
Compensation cost recognized in income amounted to $88,000.
Since the Company is nonpublic, Management calculated a minimum value for
each option to arrive at the fair value. The following significant
assumptions were used during the year to estimate the fair values of
options:
Risk-free interest rate 3.9% - 4.43%
Expected life 5 years
Expected volatility None
Expected dividends None
Note 8: Stockholders' Equity
- ----------------------------
At May 31, 2002, the number of authorized, issued, and outstanding shares
and the related par value are as follows:
Common stock, authorized 50,000,000
Common stock, issued 9,335,742
Common stock, outstanding 9,328,742
Common stock, per share par value $ 0.001
Cash dividends paid on common stock $ 0.00
The Company is authorized to issue one class of voting common stock. Each
common stock entitles the stockholder to one voting right.
Note 9: Basic and Diluted Net (Loss) Per Common Share
- -----------------------------------------------------
Basic net (loss) per common share is computed by dividing net (loss) by the
weighted-average number of common stock outstanding during the year. The
weighted average number of outstanding common stock at May 31, 2002 is
approximately 9,223,409.
There were no potential common shares included in the computation of
diluted per-share, because the result would be antidilutive.
F-12
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Note 10: Income Taxes
- ---------------------
At May 31, 2002, the Company had a net operating loss (NOL) carryforwards
of approximately $254,037 for federal income tax purposes. Of that amount,
$17,644, $52,441, and $183,952 will expire in 2018, 2019, and 2021,
respectively. The federal NOL carryforwards resulted from losses generated
in 1998, 1999, and 2001. Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred tax
liabilities and assets as of May 31, 2002 are as follows:
Deferred tax liabilities:
Depreciation and amortization $ 2,168
-------------
Total deferred tax liabilities 2,168
-------------
Deferred tax assets:
Net operating loss carryforwards 86,373
Deferred compensation 139,547
Fair value of stock-based compensation 705,899
-------------
Total deferred tax assets 931,819
-------------
Valuation allowance for deferred tax assets -0-
-------------
Deferred tax assets 931,819
Net deferred tax assets $ 929,651
=============
Management did not provide for a valuation allowance for the interim period
ended May 31, 2002, because it anticipates future taxable income that makes
it more likely than not, the deferred tax assets will be realized.
The Company is not subject to state income tax, but it is subject to
California's annual minimum franchise tax of $800. Significant components
of the provisions for federal and state income taxes are as follows:
Current:
Federal $ -0-
State -0-
-------------
Total current -0-
=============
Deferred:
Federal 435,614
State -0-
-------------
Total deferred 435,614
-------------
Total income tax benefit $ 435,614
=============
The Company computes income tax benefit at a federal statutory rate of
34.0%.
F-13
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Note 11: Commitments and Contingent Liabilities
- -----------------------------------------------
Unused Line of Credit
---------------------
At May 31, 2002, the Company has an outstanding letter of credit for
approximately $50,000. The contract amount approximates its fair value.
Employment Agreements
---------------------
The Company entered into employment agreements with its CEO, President, and
CFO during the fiscal year 2001. The following information summarizes the
significant terms of the agreements:
Officer Term Compensation
------- ---- ------------
CEO 4 years $180,000 per year, indexed annually
President 4 years $180,000 per year, indexed annually
CFO 5 years $100,000 per year, indexed annually
Each agreement entitles the officer to an annual bonus not to exceed 100%
of his annual compensation. In addition, each officer receives up to
100,000 shares of stock options, exercisable over a five-year period from
the date of the employment agreement, at a price ranging from $2.50 and
$5.00 per share (Note 7). The Company may terminate the agreement at any
time, without cause, upon 30 days' written notice to the employee. In that
event, the employee receives six months' salary as severance pay.
Consulting Agreements
---------------------
Management hires outside consultants to perform various professional
services needed by the Company. As of May 31, 2002, the Company had signed
agreements with the following related parties: Mr. Elwood Sprenger, AAC,
and PHCM (Note 2). Terms of each agreement depends on the achievement of
certain defined performance levels or the occurrence of a particular event.
On February 1, 2002, the Company entered into a written agreement with one
of its shareholders and Directors, Elwood Sprenger, to receive marketing
and consulting services (Note 2). Mr. Sprenger is also the CEO and majority
shareholder of Cetalon Corporation (Note13). The agreement is for two years
at $42,000 per year with an option to purchase up to 20,000 shares of
common stock per year, at the IPO price per share, upon attainment of a
mutually agreed-upon annual forecasted sales, up to a maximum of 100,000
shares over five years.
On January 23, 2002, the Company awarded Mr. Sprenger with 50,000 shares of
unrestricted common stock for accepting a position as a member of its board
of directors.
F-14
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Distribution Agreements
-----------------------
The Company enters into distribution agreements with suppliers for rights
to sell its products in the market. These agreements are generally for a
period of five years and renew automatically unless written notice of
intent not to renew are provided by either party. Either party may
terminate the agreement upon 60 days' written notice and upon approval by
both parties. As of May 31, 2002, the Company had distribution agreements
with four suppliers: Syntron Bioresearch, Inc., Pan Probe Inc., Chematics,
Inc., and Biomerica, Inc.
Payroll Taxes
-------------
The Company classified officers' salaries as consulting expense in prior
periods. Federal and California tax agencies consider company officers as
employees subject to employment taxes. As of May 31, 2002, the Company has
not received any notices from taxing authorities regarding delinquent
payroll taxes. Accordingly, since the amount of loss arising from such a
contingency could not be reasonably estimated, Management has not provided
for an accrual in the financial statements.
Stock Issue
-----------
Subsequent to May 31, 2002, the Company had issued 82,000 shares of common
stock to non-employees for either goods or services received.
Note 12: Risks and Uncertainties
- --------------------------------
Business Concentrations
-----------------------
The Company has not sold any products since severing its distribution
agreement with the Canadian distributor, Novopharm, as of August 31, 2001.
If the Company is unable to secure a distribution agreement within a
relatively short period of time, its ability to continue as a going concern
will be severely affected.
The Company depends on the financial health of its Chairman and CEO. Mr.
Peter George funds the needed capital required by the Company to run its
operations. If Mr. George experienced personal financial problems, it could
severely affect the Company's ability to continue as a going concern.
Regulatory Agencies
-------------------
The Company holds licenses issued by the Health Protection Bureau in Canada
to sell its products in the country. If the Company loses its license(s)
for any reasons, it could severely affect the Company's operations.
The Company holds a license from the Department of Health Services in
California to manufacture devices in the State. This license is subject to
strict compliance with the California Health and Safety Code. Any
violations of the Code by the Company could result in revocation of its
license and rights to manufacture devices in California. If that event
occurs, it could halt the Company's production and severely affect its
operations.
F-15
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
The Company holds a license from the Food and Drug Administration (FDA) in
the United States to manufacture and distribute its line of products in the
country. This license also allows the Company to acquire patented raw
materials from other suppliers in the event that its current supplier is
unable to deliver. Losing the Company's FDA license could severely threaten
its operations.
Insurance Coverage
------------------
As of August 31, 2001, the Company's insurance coverage for product
liability had expired. Management chose to forgo the renewal of the
Company's insurance coverage until such a time when it continues
distributing its products in the market. The previous agreement with the
Canadian distributor, however, required that both parties maintained a
$5,000,000 product liability insurance coverage. It also stated that the
Company is directly liable against any complaints or claims arising from
the use of its products. While it is not possible to quantify the potential
impact of such a claim, it is Management's opinion that the occurrence of
this contingency is not probable and that it will not materially affect the
Company's financial condition. Accordingly, the financial statements do not
reflect an accrual for this contingency.
Note 13: Going Concern
- ----------------------
As of August 31, 2001, the Company severed all relationships with its sole
distributor, Novopharm, for cited abuses and violations of their
distribution agreement. Without a customer, the Company faces catastrophic
uncertainties. Its resources are subject to constant depletion by
increasing efforts to generate new distribution channels for its products.
To mitigate the Company's going-concern problems, Management plans to
distribute its own products in Canada and the United States. The Company
entered into an agreement with PHCM, a related party, to assist in selling
and marketing its products in Canada (Note 2). Meanwhile, the Company
prepares for an Initial Public Offering of stock to generate needed funds
for the distribution of its products in Canada and the United States.
On February 8, 2002, the Company signed a 5-year agreement with Cetalon
Corporation, a company owned by one of its Directors and shareholders,
Elwood Sprenger (Note 2), to establish a distribution program and to
maintain product approvals from appropriate government entities. As of the
contract date, the Company had added the following diagnostic test kits to
its line of products: colon disorder, urinary tract infection, menopause,
breast self-examination pad, blood pressure meter, and alcohol level
detection.
In 2001, the Company filed for trademark registration on two new brand
names for its products: EarlyDetect and InstaTest. Moreover, Management
projects net profits in the next five years as a result of its agreement
with Cetalon Corporation. Interests by other companies in distributing the
Company's products contribute also to Management's financial forecast.
F-16
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Note 13: Impact of Recently Issued Accounting Standards
- -------------------------------------------------------
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development, or the normal
operation of a long-lived asset, except for certain obligations of lessees.
SFAS No. 143 requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The provisions of this Statement are
currently not applicable to the Company, and accordingly, SFAS No. 143 has
no impact on the Company's financial statements.
F-17
Independent Auditor's Report
----------------------------
The Board of Directors and Stockholders
Advanced Medical Systems Inc.
Orange, California
I have audited the accompanying balance sheet of Advanced Medical Systems Inc.
as of August 31, 2001, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted my audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that I plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable basis for
my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Advanced Medical Systems Inc. as of
August 31, 2001, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that Advanced
Medical Systems Inc. will continue as a going concern. As more fully described
in Note 12, the Company severed relationships with its sole distributor as of
August 31, 2001. Without a current demand for the Company's products raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to this matter are also described in Note 12. The financial
statements do not include any adjustments to reflect the possible future effects
of the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Maceda and Company
29 April 2002
F-18
ADVANCED MEDICAL SYSTEMS INC.
Balance Sheet
August 31, 2001
ASSETS
Current Assets
Cash $ 141,735
Due from officer (Note 5) 10,922
Inventory (Note 3) 10,114
----------
Total Current Assets 162,771
----------
Property, plant, and equipment, at cost (Note 4) 2,058
Deferred income tax (Note 9) 494,037
Other assets 725
----------
TOTAL ASSETS $ 659,591
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 12,669
Due to officer (Note 5) 187,943
Deferred salaries 252,930
----------
Total Current Liabilities 453,542
----------
Stockholders' Equity
Common stock (Note 7) 9,071
Additional paid-in capital 2,352,316
Expense of initial public offering stock issue (997,500)
Deficit (987,699)
Treasury stock--at cost, Common stock, 7,000 shares (10,400)
Net (loss) (159,739)
----------
Total Stockholders' Equity 206,049
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 659,591
==========
See Accompanying Notes to Financial Statements
F-19
ADVANCED MEDICAL SYSTEMS INC.
Statement of Operations
For the Year Ended August 31, 2001
Net sales $ 480,811
-----------
Cost of sales 194,808
Selling, general, and administrative expenses 332,105
Consulting expense (Note 6) 249,061
Interest expense 14,403
Inventory write-off (Note 3) 15,565
-----------
Total costs and expenses 805,942
-----------
(Loss) before income tax benefit (325,131)
Income tax benefit (Note 9) 165,392
-----------
Net (loss) $ (159,739)
===========
Basic net (loss) per common share (Note 8) $ (0.02)
===========
See Accompanying Notes to Financial Statements
F-20
ADVANCED MEDICAL SYSTEMS INC.
Statement of Stockholders' Equity
For the Year Ended August 31, 2001
Common Additional Deficit Treasury Total
Stock Paid-in Capital Stock
-----------------------------------------------------------------------
Balance, September 1, 2000 $ 8,578 $ 1,106,248 $ (987,699) $ (10,400) $ 116,727
Stock issue, 493,328 shares 493 1,246,068 1,246,561
Expense of initial public offering stock issue (997,500) (997,500)
Net (loss) (159,739) (159,739)
-----------------------------------------------------------------------
Balance, August 31, 2001 $ 9,071 $ 1,354,816 $(1,147,438) $ (10,400) $ 206,049
=======================================================================
See Accompanying Notes to Financial Statements
F-21
ADVANCED MEDICAL SYSTEMS INC.
Statement of Cash Flows
For the Year Ended August 31, 2001
Cash flows from operating activities:
Net (loss) $ (159,739)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Consulting expense 249,061
Deferred income tax (165,392)
Depreciation and amortization 644
(Increase) decrease in:
Due from officer (10,629)
Inventory 26,086
Increase (decrease) in:
Accounts payable 8,283
Deferred salaries 170,750
-----------
Net cash provided by operating activities 119,064
-----------
Cash flows from investing activities:
Purchase of equipment and software (1,053)
-----------
Net cash (used) by investing activities (1,053)
-----------
Cash flows from financing activities:
Borrowings from officer 51,802
Payments to officer (50,312)
-----------
Net cash provided by financing activities 1,490
-----------
Net increase in cash 119,501
Cash at beginning of year 22,234
-----------
Cash at end of year $ 141,735
===========
Supplemental disclosures of cash flow information:
Interest paid $ 14,403
Income tax paid $ 0
In 2000, the Company issued 493,328 shares of common stock to non-employees for
services received. The total fair value of these shares was $1,246,561.
See Accompanying Notes to Financial Statements
F-22
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements
Note 1: Description of Business and Summary of Significant Accounting Policies
- ------------------------------------------------------------------------------
Nature of Operations
--------------------
A closely held company incorporated in the State of Nevada on September 19,
1996, Advanced Medical Systems Inc. (the "Company") distributes
over-the-counter diagnostic test kits marketed directly at consumers for
home use. As of August 31, 2001, the Company distributed the following
diagnostic test kits: pregnancy, ovulation, prostate cancer detection,
ulcer bacteria, multi-drug detection, cholesterol, and glucose (diabetes).
The Company secures distribution agreements with companies that own the
patents, or have licensing agreements with patent owners, on its line of
over-the-counter diagnostic test kits for rights to package and sell in the
market using its brand name: knowNOW. The Company is an FDA-licensed
distributor, which allows it to acquire raw materials from other companies
that also have licensing rights on its products. In the long run, it is
independent of any one particular supplier for raw materials.
The Company sells its complete line of products to a sole distributor in
Canada--the only territory it currently markets its products. Revenue from
the sale of its products to the distributor is measured in U.S. dollars;
foreign exchange rate fluctuations are not a factor in arriving at the
Company's sales revenue.
On December 3, 1996, the Company formed a wholly owned subsidiary, Allied
Biotechnology Canada, Inc. (ABC). Incorporated in Canada, ABC was created
to facilitate doing business in the country in case of unforeseen problems
with using a U.S. company. Since its incorporation, ABC continues to be an
inactive subsidiary, except for the filing of its annual returns. Expense
of maintaining ABC as an entity is absorbed by the Company. As of August
31, 2001, ABC has 200 shares of common stock issued and outstanding, all of
which are owned by the Company.
Inventory
---------
The Company records inventory at the lower of cost or market, with cost
being determined using the specific identification method. Costs included
in inventory consist of raw materials and assembly costs required to
prepare the final products for sale.
Property, Plant, and Equipment
------------------------------
The Company records property, plant, and equipment at cost less
depreciation. Depreciation is accounted for on the straight-line method
based on estimated useful lives.
Other Assets
------------
Other assets include trademarks and other intangible assets. The Company
amortizes trademark costs on a straight-line basis over fifteen years. Also
included in other assets is software cost. The Company amortizes software
cost on a straight-line basis over three years. Accumulated amortization
for trademarks and software are $131 and $36 at August 31, 2001,
respectively. Amortization expense in 2000 amounted to $67.
F-23
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Revenue Recognition
-------------------
The Company recognizes revenue in the financial statements upon
satisfaction of two events: delivery of the products (FOB shipping point)
and receipt of payment from the distributor. Net sales result from
deducting applicable discounts and returns from gross sales.
The Company complies with the requirements of Staff Accounting Bulletin
101, "Revenue Recognition in Financial Statements" (SAB 101) in recognizing
revenue. The Company requires no modifications to its revenue recognition
policy to comply with SAB 101.
Advertising Costs
-----------------
The Company records advertising costs as an expense at the time it is
incurred. Total advertising costs in 2000 amounted to $2,709.
Income Taxes
------------
The Company accounts for income taxes using the asset and liability method,
under which deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets, liabilities,
operating losses, and tax credit carry forwards. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that
includes the enactment date. Management provides a valuation allowance
against the deferred tax asset for amounts which are not considered "more
likely than not" to be realized.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Stock-Based Compensation
------------------------
The Company follows the provision of SFAS No. 123 in accounting for
non-employee stock compensation (Note 6). Accordingly, the Company records
the fair value of the goods or services received or the fair value of the
equity instruments issued, whichever can be more reliably measured.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of cash and accrued liabilities approximate fair value
because of the short maturity of these instruments.
F-24
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Note 2: Related-Party Transactions
- ----------------------------------
The Company rents its office space and purchases employee health insurance
from Peter George & Co., an insurance brokerage company owned by its
Chairman and Chief Executive Officer (CEO)--Peter George. Rent and
insurance expense in 2000 amounted to $4,800 and $2,351, respectively.
As of August 31, 2001, Mr. George had loaned $187,943 to the Company from
personal funds and line of credit (Note 5). The Company pays the monthly
interests on the line of credit's outstanding balance.
At August 31, 2001, Mr. George transferred 1,000,000 and 2,500 shares of
common stock to his daughter and the Company's attorney, respectively.
At August 31, 2001, the Company's President, Nicholas George, transferred
506,000 shares of common stock to relatives and friends.
The Company receives consultations from Seashore-Tetrachem, a company owned
by one of its shareholders, on maintaining compliance with regulatory
agencies. In 2000, payments for these services amounted to $12,750, of
which the Company issued 1,500 shares of unrestricted common stock with a
fair value of $4,500.
The Company consults with Paradigm Health Care Marketing, Inc. (PHCM) for
marketing and sales support in Canada. One of the Company's shareholders,
Dominic Romangnuolo, owns PHCM. Consulting expense in 2000 amounted to
$177,115, of which the Company issued 67,846 shares of unrestricted common
stock with a fair value of $169,615. As of August 31, 2001, Mr. Romangnuolo
owns 80,346 shares of unrestricted common stock.
In 2000, the Company issued 12,482 shares of unrestricted common stock with
a fair value of $37,446 to one of its shareholders, Charles Strongo, for
providing financial and industry expertise to the Company's management. In
2001, Mr. Strongo accepted a position (Note 10 - Employment Agreements)
with the Company as its Chief Financial Officer (CFO). Per agreement, the
Company grants Mr. Strongo 67,864 shares of common stock to be issued on
each anniversary year for the next two years. These shares are contingent
upon continued employment with the Company. As of August 31, 2001, Mr.
Strongo owns 80,346 shares of unrestricted common stock.
The Company engaged All American Capital (AAC) to act as the promoter in
the Initial Public Offering (IPO) of its stock through registration with
the Securities and Exchange Commission (SEC). AAC, owned by one of the
Company's shareholders and Directors, is to receive installment payments
amounting to $75,000 after completion of the SEC filing.
On August 15, 2001, the Company also issued 399,000 shares of unrestricted
common stock with a fair value of $997,500 to AAC per the agreement. These
shares represent a 4.9% ownership interest in the Company at the time of
signing the agreement and are not subject to dilution upon subsequent stock
issuance.
F-25
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Note 3: Inventory
- -----------------
The Company does not maintain finished goods on hand. With the exception of
supplemental raw materials, such as band-aids, lancets, alcohol pads, and
the like, the Company holds raw materials at an FDA-approved independent
facility for assembly. Upon receipt of a purchase order, the Company
provides a shipping order to the independent facility to assemble the
requested finished products. The independent assembly facility ships the
finished products to the distributor. The distributor pays for the shipping
costs. At August 31, 2001, inventory is comprised of the following:
Finished goods $ -0-
Work in process 15,565
Raw materials 10,114
------------
Total current cost 25,679
Less: Inventory write-off (knowNOW) 15,565
------------
Total $ 10,114
============
Effective August 31, 2001, the Company severed all relationships with its
sole distributor for cited abuses and violations of their distribution
agreement, leaving the Company without a customer. Moreover, the brand name
knowNOW is registered to the distributor, making its use unavailable to the
Company. Accordingly, Management had written-off $15,565 of knowNOW
inventory, such as imprinted boxes, inserts, and test kits, at August 31,
2001.
Note 4: Property, Plant, and Equipment
- --------------------------------------
At August 31, 2001, property, plant, and equipment are comprised of the
following:
Machinery and equipment $ 2,673
Furniture and fixtures 950
------------
Total 3,623
Less: accumulated depreciation 1,565
------------
Net property, plant, and equipment $ 2,058
============
Machinery and equipment are depreciated based on an estimated useful life
of 5 years. Furniture and fixtures are depreciated based on an estimated
useful life of 7 years. Depreciation expense in 2000 amounted to $577.
Note 5: Due to/from Officer
- ---------------------------
At August 31, 2001, the Company had short-term debts of $187,943 payable to
its Chairman and CEO. From his line of credit, Mr. George loaned cash to
the Company as needed to cover its operating expenses. The Company pays the
interests reflected on the line of credit's monthly billing statement,
which is the required minimum payment. The applicable Annual Percentage
Rate is a variable rate plus a margin of 2.50% points. The variable rate is
based on a weekly average rate of interest on 30-day Certificates of
Deposit as published by the Federal Reserve Bank of New York. The interest
F-26
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
rates are adjusted monthly and ranged from 5.03% to 7.73% in 2000. Interest
in 2000 amounted to $12,279. The balance of $142,850 at August 31, 2001 is
due on demand.
Using personal funds, Mr. George also loaned $45,093 to the Company as of
August 31, 2001. The Company pays 0% interest on this loan, and it has yet
to make payments against the principal.
There are no formal arrangements between the Company and Mr. George for the
settlement of the Company's debts to him.
As of August 31, 2001, the Company had $10,922 in loan receivable from its
President, Nicholas George. There is no formal arrangement between the
Company and Mr. George for the payment of this amount. In addition, the
Company charges 0% interest on the outstanding balance. Per employment
agreement between the Company and Mr. George, however, any amounts due from
the officer will be deducted against any deferred compensation due to
officer upon termination of employment with the Company.
Note 6: Stock-Based Compensation
- --------------------------------
In accordance with the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company records equity instruments issued to
non-employees based on the fair value of the goods or services received or
the fair value of equity instruments issued, whichever can be more reliably
measured. Accordingly, the Company recognized $249,061 in consulting
expense based on the fair value of the stock issued in 2000. Since the
Company is not publicly traded, Management measured the fair value of stock
issued to non-employees using the price per share--ranging between $2.00
and $3.00--realized on stock sold at arms-length transactions with third
parties.
Note 7: Stockholders' Equity
- ----------------------------
At August 31, 2001, the number of authorized and issued shares and the
related par value are as follows:
Common stock, authorized 50,000,000
Common stock, issued 9,072,242
Common stock, outstanding 9,065,242
Common stock, per share par value $ 0.001
Cash dividends paid on common stock $ 0.00
The Company is authorized to issue one class of voting common stock. Each
common stock entitles the stockholder to one voting right.
F-27
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Note 8: (Loss) per Common Share
- -------------------------------
Basic (loss) per share is computed by dividing net (loss) by the
weighted-average number of common stock outstanding during the year. The
weighted average number of outstanding common stock during the year ended
August 31, 2001 is approximately 8,613,025.
There were no common stock equivalents outstanding at August 31, 2001.
Note 9: Income Taxes
- --------------------
At August 31, 2001, the Company had a net operating loss carryforwards of
approximately $70,085 for federal income tax purposes. Of that amount,
$17,644 and $52,441 will expire in 2018 and 2019, respectively. The federal
carryforwards resulted from losses generated in 1998 and 1999. Deferred
income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of
August 31, 2001 are as follows:
Deferred tax liabilities:
Depreciation and amortization $ 222
------------
Total deferred tax liabilities 222
------------
Deferred tax assets:
Net operating loss carryforwards 23,829
Deferred compensation 57,097
Fair value of common stock issued 413,333
------------
Total deferred tax assets 494,259
------------
Valuation allowance for deferred tax assets -0-
------------
Deferred tax assets 494,259
------------
Net deferred tax assets $ 494,037
============
Management did not provide for a valuation allowance in 2000, because it
anticipates future taxable income that makes it more likely than not, the
deferred tax assets will be realized.
The Company is not subject to state income tax. Beginning in 2001, however,
it will be subject to California's annual minimum franchise tax of $800.
Significant components of the provisions for federal income tax are as
follows:
Current:
Federal $ -0-
------------
Total current -0-
============
Deferred:
Federal 165,392
------------
Total deferred 165,392
------------
Total income tax benefit $ 165,392
============
The Company computes income tax benefit at a federal statutory rate of
34.0%.
F-28
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Note 10: Commitments and Contingent Liabilities
- -----------------------------------------------
Unused Lines of Credit
----------------------
At August 31, 2001, the Company has an outstanding letter of credit for
approximately $50,000. The contract amount approximates its fair value.
Employment Agreements
---------------------
The Company entered into an employment agreement with its CEO, President,
and CFO during the 2001 fiscal year. The following information summarizes
the significant terms of their agreement:
Officer Term Compensation
------- ---- ------------
CEO 4 years $180,000 per year, indexed annually
President 4 years $180,000 per year, indexed annually
CFO 5 years $100,000 per year, indexed annually
The agreement entitles each of the officers to an annual bonus not to
exceed 100% of their annual compensation. In addition, each officer
receives up to 100,000 shares of stock options, exercisable within a
five-year period from the date of the employment agreement, at a price
ranging from $2.50 and $5.00 per share. The Company may terminate the
agreement at any time, without cause, upon 30 days' written notice to the
employee. In that event, the employee receives six months' salary as
severance pay.
Consulting Agreements
---------------------
Management hires outside consultants to perform various professional
services needed by the Company. As of August 31, 2001, the Company had
signed agreements with two related party consultants: AAC and PHCM (Note
2). Terms of each agreement depends on the achievement of certain defined
performance levels or the occurrence of a particular event.
On February 1, 2002, the Company entered into a signed agreement with a
related party to receive marketing and consulting services. One of the
Company's directors, Elwood Sprenger, is also the CEO of Cetalon
Corporation (Note12). The agreement is for two years at $36,000 per year
with an option to purchase up to 20,000 shares of common stock at the IPO
price per share, up to a maximum of 100,000 shares in 5 years. In 2001, the
Company granted Mr. Elwood Sprenger 50,000 shares of unrestricted common
stock for agreeing to be a member of its board of directors.
Distribution Agreements
-----------------------
The Company entered into distribution agreements with suppliers for the
rights to sell its products in the market. These signed agreements are
generally for a period of five years and renew automatically unless written
notice of intent not to renew are provided by either party. Either party
may terminate the agreement upon 60 days' written notice and upon approval
by both parties. As of August 31, 2001, the Company had distribution
agreements with three suppliers: Syntron Bioresearch, Inc., Chematics,
Inc., and Biomerica, Inc.
F-29
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Payroll Taxes
-------------
The Company classifies officers' salaries as consulting expense. Federal
and California tax agencies consider company officers as employees subject
to employment taxes. As of August 31, 2001, the Company has not received
any notices from taxing authorities regarding delinquent payroll taxes.
Accordingly, since the amount of loss arising from such a contingency could
not be reasonably estimated, Management has not provided for an accrual in
the financial statements.
Stock Issue
-----------
In 2001, the Company issued additional shares of common stock to
non-employees for either goods or services received or for cash.
Note 11: Risks and Uncertainties
- --------------------------------
Business Concentrations
-----------------------
The Company sells its products to a sole distributor in Canada. If the
distributor experienced an economic downturn or cash flow problem, the
decline in demand for its products could adversely affect the Company.
The Company currently sells its products only in Canada. Various events--a
recession, decline in disposal income, increase in unemployment rate, and
the like--could have an immediate and severe impact on the demand for the
Company's products.
The Company depends on the financial health of its Chairman and CEO. Mr.
Peter George funds the needed capital the Company requires to run its
operations. If Mr. George experienced personal financial problems, it could
severely affect the Company's ability to continue doing business.
Regulatory Agencies
-------------------
The Company holds licenses issued by the Health Protection Bureau in Canada
to sell its products in the country. If the Company lost its license(s) for
any reasons, it could severely affect the Company's operations.
The Company holds a license from the Department of Health Services in
California to manufacture devices in the State. This license is subject to
strict compliance with the California Health and Safety Code. Any
violations of the Code by the Company could result in revocation of its
license and rights to manufacture devices in California. If that event
occurs, it could halt the Company's production and severely affect its
operations.
The Company holds a license from the Food and Drug Administration (FDA) in
the United States to manufacture and distribute its line of products in the
country. This license also allows the Company to acquire patented raw
materials from other suppliers in the event that its current supplier is
unable to deliver. Losing the Company's FDA license could severely threaten
its operations.
F-30
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Insurance Coverage
------------------
As of August 31, 2001, the Company's insurance coverage for product
liability had expired. Management chose to forgo the renewal of the
Company's insurance coverage until such a time when it continues
distributing its products in the market. The agreement with the Canadian
distributor, however, required that both parties maintained a $5,000,000
product liability insurance coverage. It also stated that the Company is
directly liable against any complaints or claims arising from the use of
its products. While it is not possible to quantify the potential impact of
such a claim, it is Management's opinion that the occurrence of this
contingency is not probable and that it will not materially affect the
Company's financial condition. Accordingly, the financial statements do not
reflect an accrual for this contingency.
Cash Concentration
------------------
The Company maintains its cash account with a national commercial bank. The
FDIC insures up to $100,000 in deposits per bank. At August 31, 2001, the
Company's cash balance in one bank exceeded the FDIC-insured amount by
$41,735.
Note 12: Going Concern
- ----------------------
As of August 31, 2001, the Company severed all relationships with its sole
distributor for cited abuses and violations of their distribution
agreement. Without a customer, the Company faces catastrophic
uncertainties. Its resources are subject to constant depletion by
increasing efforts to generate new distribution channels for its products.
To mitigate the Company's going-concern problems, Management plans to
distribute its own products in Canada and the United States. The Company
entered into an agreement with PHCM, a related party, to assist in selling
and marketing its products in Canada (Note 2). Meanwhile, the Company
prepares for an Initial Public Offering of its stock to generate needed
funds for the distribution of its products in Canada and the United States.
On February 8, 2002, the Company signed a 5-year agreement with Cetalon
Corporation, a company owned by one of its Directors and shareholders,
Elwood Sprenger, to establish a distribution program and to maintain
product approvals from appropriate government entities. As of the contract
date, the Company had added the following diagnostic test kits to its line
of products: colon disorder, urinary tract infection, menopause, breast
self-examination pad, blood pressure meter, electric ear thermometer, and
alcohol level detection.
In 2001, the Company successfully registered two new brand names for its
products: EarlyDetect and InstaTest. Moreover, Management projects net
profits in the next five years as a result of its agreement with Cetalon
Corporation. Interests by other companies in distributing the Company's
products contributed also to Management's optimistic forecast.
F-31
ADVANCED MEDICAL SYSTEMS INC.
Notes to Financial Statements (Continued)
Note 13: Impact of Recently Issued Accounting Standards
- -------------------------------------------------------
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." This Statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, Intangible Assets. FASB Statement No. 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Thus, amortization of goodwill, including goodwill recorded in
past business combinations, will cease upon adoption of this Statement. The
provisions of this Statement are required to be applied starting with
fiscal years beginning after December 15, 2001. Early application is
permitted for entities with fiscal years beginning after March 15, 2001,
provided that the first interim financial statements have not previously
been issued. The Company has not yet adopted the provision of this
Statement. The impact on the Company's financial statements upon adoption
is considered immaterial, however.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development, or the normal
operation of a long-lived asset, except for certain obligations of lessees.
SFAS No. 143 requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The provisions of this Statement are not
applicable to the Company, and accordingly, SFAS No. 123 has no impact on
the Company's financial statements.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement supersedes FASB Statement No. 121 and the
accounting and reporting provisions of APB Opinion No. 30 for the disposal
of a segment of a business. This Statement also amends ARB No. 51,
Consolidated Financial Statements, to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary.
The provisions of this Statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early application encouraged. The
Company has not yet adopted the provisions of this Statement. Adoption of
SFAS No. 144 will not have a material impact on the Company's financial
statements, however.
F-32
Changes In and Disagreements With Accountants
---------------------------------------------
on Accounting and Financial Disclosure
--------------------------------------
There are presently no changes in, or disagreements with respect to, the
Financial Statements provided herein. (Please see "Financial Statements" above.)
41
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Information on this item is set forth in the prospectus under the heading
"Disclosure of Commission Position on Indemnification for Securities Act
Liabilities."
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Information on this item is set forth in the prospectus under the heading
"Use of Proceeds."
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Information as to any prior sales of Shares conducted by the Company is
contained within the Prospectus under the heading "Certain Relationships and
Related Transactions."
ITEM 27. EXHIBITS
The Exhibits required by Item 601 of Regulation S-B, and an index thereto,
are attached.
ITEM 28. UNDERTAKINGS
The undersigned company hereby undertakes to:
(a) (1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and notwithstanding
the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the U.S.
Securities and Exchange Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
42
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat
each posteffective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(d) Provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
43
EXHIBIT INDEX
Number Exhibit Description
- ------ -------------------
3.1 Articles of Incorporation and Certificates of Amendment dated
September 23, 1996, October 14, 1997 and June 21, 2002
3.2 Bylaws of Registrant
5 Opinion Re: Legality of Shares (To be supplied by Amendment)
10.1 Independent Contractor Agreement between Registrant and Henry J.
Smith dated June 26, 2000, and correspondence related thereto
dated November 1, 1997
10.2 Consultant Agreement dated February 1, 2002, between Registrant
and Elwood Sprenger
10.3 Consulting Services Agreement between Registrant and Paradigm
Health Care Marketing, Inc. dated July 23, 2001, and related
Non-Disclosure and Non-Competition Agreement of even date
10.4 Employment Agreement between Registrant and Nicholas George dated
September 19, 2001
10.5 Employment Agreement between Registrant and Peter George dated
September 19, 2001
10.6 Employment Agreement between Registrant and Charles Strongo dated
March 1, 2002
10.7 Consultant, Independent Contractor Agreement between Advanced
Medical Systems Inc. and Tetrachem Inc., dated April 3, 2000.
10.8 Agreement for Business Consulting Services between Advanced
Medical Systems Inc. and American Capital Financial Service,
Inc., dated May 4, 2000.
23.1 Consent of Counsel
23.2 Consent of Accountant
44
Signatures
----------
In accordance with the requirements of the Securities Act of 1933, EDI
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorize, in the
City of Orange, State of California, on June 28, 2002.
Early Detect Inc.
By: /s/ Peter George
-------------------------
Peter George,
Chairman, Chief Executive
Officer
Special Power of Attorney
-------------------------
The undersigned constitute and appoint Peter George their true and lawful
attorney-in-fact and agent with full power of substitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this Form SB-2 registration
statement, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the U.S. Securities and Exchange Commission, granting
such attorney-in-fact the full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or could do in
person, hereby rarifying and confirming all that such attorney-in-fact may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ Peter George Chief Executive Officer, June 28, 2002
- ----------------------- Director
Peter George
/s/ Nicholas George President, June 28, 2002
- ----------------------- Director
Nicholas George
/s/ Charles Strongo Chief Financial Officer, June 28, 2002
- ----------------------- Director
Charles Strongo
45
/s/ Henry J. Smith Director June 28, 2002
- -----------------------
Henry J. Smith, Ph.D.
/s/ Tasneem A. Khwaja Director June 28, 2002
- -----------------------
Tasneem A. Khwaja, Ph.D.
/s/ Elwood Sprenger Director June 28, 2002
- -----------------------
Elwood Sprenger
/s/ Philip Dave Thomas Director June 28, 2002
- -----------------------
Philip Dave Thomas
/s/ John H. Abeles Director June 28, 2002
- -----------------------
John H. Abeles, M.D.
46