UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-10909
PHASE III MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2343568
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 South Service Road
Suite 120
Melville, New York 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 574 4955
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and nonvoting common equity held by
non-affiliates of the Registrant as of June 30, 2003 was approximately $ 3.1
million. (For purposes of determining this amount, only directors, executive
officers, and 10% or greater stockholders have been deemed affiliates).
On March 8, 2004, 26,926,460 shares of the Registrant's common stock, par value
$0.001 per share, were outstanding.
Documents incorporated by reference: None
This Annual Report on Form 10-K and the documents incorporated herein contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this
Annual Report, statements that are not statements of current or historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing,
the words "plan," "intend," "may," "will," "expect," "believe," "could,"
"anticipate," "estimate," or "continue" or similar expressions or other
variations or comparable terminology are intended to identify such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Except
as required by law, the Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. BUSINESS
Phase III Medical, Inc. ("Phase III" or the "Company") (formerly known as
Corniche Group Incorporated) provides capital and guidance to companies, within
the medical sector, in exchange for revenues, royalties and other contractual
rights known as "royalty interests", that entitle it to receive a portion of
revenue from the sale of pharmaceuticals, medical devices and biotechnology
products. Previously, the Company was a provider of extended warranties and
service contracts via the Internet at warrantysuperstore.com through June 30,
2002. The business of the Company today comprises the "run off" of its sale of
extended warranties and service contracts via the Internet and the new business
opportunity it is pursuing in the medical/bio-tech sector.
HISTORY
The Company was incorporated under the laws of the State of Delaware in
September 1980 under the name Fidelity Medical Services, Inc. On July 28, 1983
the Company changed its name to Fidelity Medical, Inc. From its inception
through March 1995, the Company was engaged in the development and sale of
medical imaging products through a wholly owned subsidiary. As a result of a
reverse merger on March 2, 1995 with Corniche Distribution Limited and its
subsidiaries, the Company was engaged in the retail sale and wholesale
distribution of stationery and related office products in the United Kingdom.
Effective March 25, 1995 the Company sold its medical imaging products
subsidiary. On September 28, 1995 the Company changed its name to Corniche Group
Incorporated. In February 1996, the Company's United Kingdom operations were
placed in receivership by their creditors. Thereafter through March 1998 the
Company was inactive. On March 4, 1998, the Company entered into a Stock
Purchase Agreement with certain individuals (the "Initial Purchasers") whereby
the Initial Purchasers acquired in aggregate 765,000 shares of a newly created
Series B Convertible Redeemable Preferred Stock. Thereafter the Initial
Purchasers endeavored to establish for the Company new business operations in
the property and casualty specialty insurance and warranty/service contracts
markets. On September 30, 1998 the Company acquired all of the capital stock of
Stamford Insurance Company, Ltd. ("Stamford"). On April 30, 2001 the Company
sold Stamford and is no longer involved in property and casualty specialty
insurance.
On January 7, 2002, the Company entered into a Stock Contribution Exchange
Agreement, as amended (the "Exchange Agreement"), with StrandTek International,
Inc., a Delaware corporation ("StrandTek"), certain of StrandTek's principal
shareholders and certain non-shareholder loan holders of StrandTek (the
"StrandTek Transaction"). Consummation of the StrandTek Transaction was
conditioned upon a number of closing conditions, including the Company obtaining
financing via an equity private placement, which ultimately could not be met and
as a result, the Exchange Agreement was formally terminated by the Company and
StrandTek in June 2002. In January 2002, the Company advanced to StrandTek a
loan of $1,000,000 on an unsecured basis, which was personally guaranteed by
certain of the principal shareholders of StrandTek and a further loan of
$250,000 on February 19, 2002 on an unsecured basis. Such loans bore interest at
7% per annum and were due on July 31, 2002 following termination of the Exchange
Agreement in June 2002.
StrandTek defaulted on the payment of $1,250,000 plus accrued interest due to
the Company on July 31, 2002. As a result, on August 6, 2002, the Company filed
a complaint in the Superior Court of New Jersey entitled Corniche Group
Incorporated v StrandTek International, Inc., a Delaware corporation, StrandTek
International, Inc., a Florida corporation, David M. Veltman, William G. Buckles
Jr., Jerome Bauman and Jan Arnett. The complaint sought recovery of the
$1,250,000 loans, plus interest, costs and fees, and sought recovery against the
individual defendants pursuant to their partial guarantees. On May 9, 2003, the
Company was granted a final judgment in the amount of $1,415,622 from each
corporate defendant, in the amount of $291,405 against each individual defendant
and dismissing defendants' counterclaims.
Because the February 2002 $250,000 loan was unsecured and not guaranteed, the
Company established an allowance of $250,000 at December 31, 2002. The Company
was informed that on April 16, 2003, StrandTek made an assignment for the
benefit of its creditors, so that any collection on its judgment other than on
the personal guarantees is highly unlikely.
Between July 2003 and December 2003, guarantors Veltman, Buckles and Arnett paid
their judgments in full, with payments totaling approximately $295,000, $295,000
and $297,000 respectively. In December 2003, the Company settled with defendant
Bauman for a payment of $100,000. These payments, totaling approximately
$987,000, complete the transaction.
On July 24, 2003, the Company changed its name to Phase III Medical, Inc., which
better describes the Company's current business plan. In connection with the
change of name, the Company changed its trading symbol to "PHSM" from "CNGI".
DISCONTINUED OPERATIONS
Through April 2001 the Company operated a property and casualty reinsurance
business through its wholly owned subsidiary, Stamford Insurance Company, Ltd.
("Stamford"). Stamford is chartered under the laws of, and is licensed to
conduct business as an insurance company by, the Cayman Islands. Stamford
provided reinsurance coverage for one domestic insurance company until the
fourth quarter of 2000 when the relationship with the carrier was terminated.
Stamford was not able to obtain any additional reinsurance relationships. In
light of the inability of Stamford to write new business and difficulty in
forecasting future claims losses in the run off of its prior reinsurance
contract, on April 30, 2001, the Board of Directors of the Company approved the
sale of Stamford to Butler Financial Solutions, LLC for consideration totaling
$372,000. In the six months ended June 30, 2001, the Company recorded a loss of
approximately $479,000 on the sale of Stamford. The closing and transfer of
funds was completed on July 6, 2001.
CURRENT BUSINESS OPERATIONS
The business of the Company today comprises the "run off" of its sale of
extended warranties and service contracts via the Internet and the new business
opportunity it is pursuing as described below under the sub-heading "Recent
Developments".
WarrantySuperstore.com Internet Business
The Company's primary business focus, through June 2002, was the sale of
extended warranties and service contracts over the Internet covering automotive,
home, office, personal electronics, home appliances, computers and garden
equipment. The Company offered its products and services in the United States in
states that permit program marketers to be the obligor on service contracts.
This represented approximately 38 states for automobile service contracts and
most states for other product categories. While the Company managed most
functions relating to its extended warranty and service contracts, it did not
bear the economic risk to repair or replace products nor did it administer the
claims function. The obligation to repair or replace products rested with the
Company's appointed insurance carriers, Great American Insurance Company and
American Home Shield. Great American Insurance Company provided contractual
liability insurance covering the obligation to repair or replace products under
the Company's automobile and consumer products extended warranties and service
contracts and American Home Shield covered all home warranty contracts. The
Company was responsible for the marketing, recording sales, collecting payment
and reporting contract details and paying premiums to the insurance carriers. In
addition, the Company provided information to the insurance carriers' appointed
claims administrators who handle all claims under the Company's contracts,
including the payment of claims.
The Company commenced operations initially by marketing its extended warranty
products directly to the consumer through its web site. During fiscal 2000 the
Company developed enhanced proprietary software to facilitate more efficient
processing and tracking of online warranty transactions. This provided the
Company with the ability to deliver its products over the Internet through a
number of distribution channels by enabling it to supply a number of different
extended warranty service contracts on a co-branded or private label basis to
corporations, by embedding the Company's suite of products on such corporation's
web sites. This new capability was launched in January 2001. It was anticipated
that this would result in substantially reduced direct marketing costs for the
years ending December 31, 2001 and thereafter. As a result the Company had four
distinct distribution channels: (i) direct sales to consumers, (ii) co-branded
distribution, (iii) private label distribution and (iv) manufacturer/retailer
partnerships.
During the first half of fiscal 2001, management became concerned by the slow
progress being made by its warrantysuperstore.com business. Accordingly,
alternative strategies for the Company were evaluated by the Board of Directors,
including the acquisition of new business operations. As a result, the Company
entered into the StrandTek Transaction but, as previously reported, the closing
conditions were not met and the Exchange Agreement was terminated by written
agreement between the parties. In June 2002, management determined, in light of
continuing operating losses, to discontinue its warranty and service contract
business and to seek new business opportunities for the Company.
RECENT DEVELOPMENTS
On February 6, 2003, the Company appointed Mark Weinreb as a member of the Board
of Directors and as its President and Chief Executive Officer. The Company and
Mr. Weinreb had been exploring business plans for the Company that would involve
entering the medical sector by acquiring or participating in one or more biotech
and/or medical companies or technologies, owning one or more drugs or medical
devices that may or may not yet be available to the public, or acquiring rights
to one or more of such drugs or medical devices or the royalty streams
therefrom. Mr. Weinreb was appointed to finalize and execute the Company's new
business plan. The Company will need to recruit management, business development
and technical personnel, and develop its business model. Accordingly, it will be
necessary for the Company to raise new capital. In accordance with its business
plan, the Company raised $514,781 of capital, including $214,781, net of
expenses of $67,719, through the sale of Common Stock, and $295,000, net of
commissions of $30,000, from the sale of notes. In addition, the Company
received a total of approximately $987,000 from the settlement with the
StrandTek guarantors. A significant portion of the Standtek proceeds was used to
pay outstanding liabilities for legal expenses, employment terminations, travel
and entertainment expenses and consultants. The balance of the proceeds was used
for operating expenses and the retirement of certain debt.
On December 12, 2003, the Company signed a royalty agreement with Parallel
Solutions, Inc. "(PSI") to develop a new bioshielding platform technology for
the delivery of therapeutic proteins and small molecule drugs in order to extend
circulating half-life to improve bioavailability and dosing regimen, while
maintaining or improving pharmacologic activity. The agreement provides for PSI
to pay the Company a percentage of the revenue received from the sale of certain
specified products or licensing activity. The Company will provide capital and
guidance to PSI to conduct a proof of concept study to improve an existing
therapeutic protein with the goal of validating the bioshielding technology for
further development and licensing the technology. As of December 31, 2003, the
Company has provided $80,000 to PSI pursuant to the royalty agreement.
On January 19, 2004, the Company entered into a letter of intent with NeoStem,
Inc., a California company, whose primary business is to establish an autologous
adult stem cell bank. If a definitive agreement is reached, Phase III would
provide funding and guidance in connection with the adult stem cell banking
enterprise in exchange for a share of the revenues derived from such enterprise.
No assurances can be given that a definitive revenue sharing agreement will be
finalized, that NeoStem's collection, processing and storage technology will be
successfully implemented, that NeoStem will be able to commercialize its adult
stem cell banking enterprise, or that there will be market acceptance of any
such enterprise sufficient to generate any material revenues for NeoStem or any
material royalty revenues for the Company, or that any stem cell therapeutic
strategies will be successfully developed or commercialized.
RISK FACTORS
The risks described below are not the only risks facing the Company. Additional
risks that the Company does not yet know of or that it currently thinks are
immaterial may also impair its business operations. If any of the risks occur,
its business strategy, financial condition or operating results could be
adversely affected.
PHASE III HAS A HISTORY OF OPERATING LOSSES AND A SUBSTANTIAL ACCUMULATED
EARNINGS DEFICIT AND IT MAY CONTINUE TO INCUR LOSSES.
Since its inception in 1980, the Company has generated only limited revenues
from sales and has incurred substantial net losses of approximately $1,000,000,
$1,200,000 and $2,100,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. At December 31, 2003, the Company had a stockholders' deficit of
approximately $1,500,000. The Company expects to incur additional operating
losses as well as negative cash flow from its new business operations until
revenues from the purchase of royalty interests are received.
THE COMPANY HAS LIQUIDITY PROBLEMS.
At December 31, 2003, the Company had a cash balance of $210,947, deficit
working capital of $793,749 and a stockholders' deficit of $1,502,774. In
addition, the Company sustained losses of $1,044,145, $1,159,838 and $2,033,030
for the three fiscal years ended December 31, 2003, 2002 and 2001, respectively.
The Company's lack of liquidity combined with its history of losses raises
substantial doubt as to the ability of the Company to continue as a going
concern. The financial statements of the Company do not reflect any adjustments
relating to the doubt of its ability to continue as a going concern. On
September 22, 2003, the Company commenced an equity private placement pursuant
to Regulation D to raise up to $4,000,000 through the sale of up to 40,000,000
shares of its Common Stock in increments of $5,000 or 50,000 shares. Such shares
will not be registered and will be subject to restrictions on resale. Only
selected investors which qualify as "accredited investors" as defined in Rule
501(a) under the Securities Act of 1933, as amended, were eligible to purchase
these shares. Through December 31, 2003, the Company sold 2,825,000 shares,
resulting in proceeds to the Company of $214,781, net of offering costs of
$67,719. The Company continues to offer these securities without the assistance
of an investment banker and will collect the full proceeds from any sale. From
January 1, 2004 to March 8, 2004, the Company sold an additional 400,000 shares
of its Common Stock with proceeds to the Company of $40,000 from the amended
private placement. Such shares will not be registered and will be subject to
restrictions on resale. There can be no assurance that the Company will be able
to sell sufficient quantities of these securities and may have to rely on its
ability to borrow money from new and/or existing investors. Management has sold
promissory notes in the aggregate principal amount of $75,000 which bear
interest at 20% per annum to fund the Company until such time as sufficient
proceeds are received from the private placement of its Common Stock.
THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN IS QUESTIONABLE.
At December 31, 2003, the Company's auditors, Holtz Rubenstein & Co., LLP,
qualified its opinion as to the Company's ability to continue as a going
concern. This qualification will make it more difficult for the Company to raise
capital on favorable terms and fund the agreements currently in place.
THE COMPANY WILL CONTINUE TO EXPERIENCE CASH OUTFLOWS.
The Company continues to incur expenses, including the salary of its new
president, rent, legal and accounting fees, insurance and general administrative
expenses. The Company's new business activities are in the development stage and
will therefore result in additional cash outflows in the coming period. The
Company commenced an amended private placement of its Common Stock to raise
additional equity to fund its current liabilities and its on-going cash needs
for working capital, its remaining obligation to PSI of $680,000, as of March
19, 2004 and to develop its planned business operations. There can be no
assurance that it will be successful in such Common Stock offering or in raising
additional funds through the issuance of notes, to satisfy the Company's needs.
Additionally, it is not possible at this time to state when the Company will
achieve a positive cash position, if at all.
THE COMPANY'S LIMITED OPERATING HISTORY MAY IMPAIR ITS ABILITY TO PLAN.
The Company's limited operating history in its planned business activities may
hinder its ability to evaluate its business and entails risks that the Company
may fail to adequately address business issues with which it has limited
experience. There is no way to predict when, if ever, the Company will achieve
profitability or positive cash flow.
BECAUSE OF ITS FINANCIAL POSITION, THERE IS SUBSTANTIAL DOUBT ABOUT ITS ABILITY
TO OPERATE AS A GOING CONCERN.
The Company has no cash generating revenues. As of December 31, 2003, the
Company had a stockholders' deficit of $1,502,774 and had a working capital
deficiency of $793,749. Although the Company recently raised $254,781 in a
Common Stock private placement offering and $75,000 from the issuance of
promissory notes to date, those funds have been substantially spent and the
Company's financial condition still raises substantial doubt about its ability
to operate as a going concern.
THE COMPANY WILL NEED ADDITIONAL FINANCING AND IS UNCERTAIN OF ITS ACCESS TO
CAPITAL FUNDING.
The Company's proposed new business will require substantial capital to identify
and make alliances with one or more pharmaceutical and/or biotechnology
companies based on the Company's current operating plan for its new business. In
addition, the Company's cash requirements may vary materially from those now
planned because of results in research, consulting with experts and modeling
sales forecasts for the potential products of potential business partners.
RISKS RELATING TO THE COMPANY'S PROPOSED NEW BUSINESS
THE COMPANY HAS ONLY ONE BUSINESS PARTNER TO DATE AND IS UNCERTAIN OF ITS FUTURE
PROFITABILITY WITH ITS INTENDED VENTURE TO GENERATE REVENUES FROM SUCH
RELATIONSHIPS.
The Company's ability to achieve profitability in its new business is dependent
in part on the agreements, if any, entered into with business partners.
Currently the Company has entered into one agreement with PSI, and since the
agreement is in its early stages, it is premature to predict any favorable
outcome. There can be no assurance that any additional agreements will be
entered into. The failure to enter into any such necessary agreements could
delay or prevent the Company's new business from achieving profitability and
would have a material adverse effect on the business, financial position and
results of operations of the Company. Further, there can be no assurance that
the Company's operations will become profitable even if the Company enters into
agreements with business partners.
THE PSI ARRANGEMENT MAY NOT BE SUCCESSFUL.
The Company's contract with its first business partner, PSI, demonstrates
certain of the risks of the Company's business. PSI is attempting to develop a
new bioshielding platform technology for the delivery of therapeutic proteins
and small molecule drugs in order to extend circulating half-life to improve
bioavailability and dosing regimen, while maintaining or improving pharmacologic
activity. The Company is providing funding and consulting services for PSI to
conduct a proof of concept study. No assurances can be given that the proof of
concept program will be successful, that any viable technology will arise from
that program, that the Company or PSI will be able to commercialize any product
or technology that is successfully developed, or that there will be market
acceptance of any such product or technology sufficient to generate any material
revenues for the Company. Even if everything is successful, it will be a long
time before the Company receives any royalty revenues from the PSI project.
THERE ARE RISKS RELATING TO POTENTIAL CORPORATE COLLABORATIONS.
The Company's new business strategy includes identifying and partnering with
various pharmaceutical and/or biotechnology companies that are developing a drug
or medical device. There can be no assurance the Company will enter into any
additional relationships with these business partners and, even if the Company
does enter into such relationships, that the arrangements will be on favorable
terms or that the Company's relationship will be successful. In some cases, the
Company will generate income from its relationship with these companies only
after its potential business partners' product has achieved significant
pre-clinical and/or clinical development, has procured requisite regulatory
approvals and/or has established its manufacturing capabilities.
The Company's potential business partners' business strategy may include
entering into collaborations or marketing and distribution arrangements with
corporate partners for the development (including clinical development),
commercialization, marketing and distribution of certain of their product
candidates. The Company's potential business partners may be dependent on such
corporate collaborations to fund clinical testing, to make certain regulatory
filings and to manufacture and market products resulting from the collaboration.
There can be no assurance that such arrangements with a corporate collaboration
will be scientifically, clinically or commercially successful. In the event that
any such arrangements are made and then terminated, such actions could adversely
affect the Company's business partners' ability to develop, commercialize,
market and distribute certain of their product candidates.
If the Company's potential business partners breach or terminate their
agreements with the Company, or fail to develop or commercialize their products
or fail to develop or commercialize their products in a timely manner, the
development of their products may be adversely affected, and thus not create an
economic benefit for the Company.
There can be no assurance that the Company's potential business partners will
not change their strategic focus or pursue alternative technologies or develop
alternative products either on their own or in collaboration with others. The
Company's business will also be affected by the effectiveness of its potential
business partners' corporate partners in marketing their products.
THERE ARE COMPANIES, UNIVERSITIES AND RESEARCH INSTITUTIONS THAT MAY BE
RESEARCHING AND TRYING TO DEVELOP PRODUCTS THAT ARE SIMILAR TO THE PRODUCTS OF
THE COMPANY'S POTENTIAL BUSINESS PARTNERS.
Competition in the medical, pharmaceutical and biotechnology industries, the
sector in which the Company plans to establish new business operations, is
intense. The Company's potential business partners may face competition from
companies with far greater financial, marketing, technical and research
resources, name recognition, distribution channels and market presence than the
Company's potential business partners who are marketing existing products or
developing new products that are similar to the products developed by the
Company's potential business partners. There can be no assurance that the
Company's potential business partners' products will be able to compete
successfully with existing products or products under development by other
companies, universities and other institutions.
THE COMPANY'S POTENTIAL BUSINESS PARTNERS MAY DEPEND ON THIRD PARTIES.
The Company's potential business partners may rely entirely on third parties for
a variety of functions, including certain functions relating to research and
development, manufacturing, clinical trials management, regulatory affairs and
sales, marketing and distribution. There can be no assurance that the Company's
potential business partners will be able to establish and maintain any of these
relationships on acceptable terms or enter into these arrangements without undue
delays or expenditures. In addition, the business partners may require, and seek
to raise, additional capital with third parties in order to develop products and
meet their working capital needs. There is no guarantee that the business
partners will be able to raise such additional capital, and any agreements
previously made between the business partners and the Company may make the
business partners less attractive to third parties in this regard.
THERE ARE UNCERTAINTIES ASSOCIATED WITH PRE-CLINICAL AND CLINICAL TESTING.
The grant of regulatory approvals for the commercial sale of any of the
Company's potential business partners' potential products will depend in part on
the Company's potential business partners and/or their collaborators
successfully conducting extensive pre-clinical and clinical testing to
demonstrate their products safety and efficacy in humans. The results of
pre-clinical studies by the Company's potential business partners and/or their
collaborators may be inconclusive and may not be indicative of results that will
be obtained in human clinical trials. In addition, results attained in early
human clinical trials relating to the products under development by the
Company's potential business partners may not be indicative of results that will
be obtained in later clinical trials. As results of particular pre-clinical
studies and clinical trials are received, the Company's potential business
partners and/or their collaborators may abandon projects with which the Company
assisted in developing which they might otherwise have believed to be promising.
The Company's potential business partners may be involved in developing drugs on
which they plan to file investigational new drug applications ("INDs") with the
FDA or make equivalent filings outside of the United States. There can be no
assurance that necessary pre-clinical studies on these products will be
completed satisfactorily, if at all, or that the Company's potential business
partners otherwise will be able to make their intended filings. Clinical testing
is very expensive, and the Company's potential business partners and/or their
collaborators will have to devote substantial resources for the cost of clinical
trials.
The Company's potential business partners may have no experience in conducting
clinical trials and may have to rely, in part, on academic institutions and on
clinical research organizations to conduct and monitor certain clinical trials.
There can be no assurance that such entities will conduct the clinical trials
successfully.
Failure to commence or complete any planned clinical trials by the Company's
potential business partners would have a material adverse effect on the
Company's new business.
THE COMPANY'S POTENTIAL BUSINESS PARTNERS AND THEIR PRODUCTS WILL BE SUBJECT TO
GOVERNMENT REGULATIONS AND THERE IS NO ASSURANCE OF REGULATORY APPROVAL.
The Company's potential business partners and their products will be subject to
comprehensive regulation by the FDA in the United States and by comparable
authorities in other countries. These national agencies and other federal,
state, and local entities regulate, among other things, the pre-clinical and
clinical testing, safety, effectiveness, approval, manufacture, labeling,
marketing, export, storage, record keeping, advertising, and promotion of the
Company's potential business partners' products.
The process of obtaining FDA approvals can be costly, time consuming, and
subject to unanticipated delays and the Company's potential business partners
may have had only limited experience in filing and pursuing applications
necessary to gain regulatory approvals. There can be no assurance that such
approvals will be granted on a timely basis, or at all.
The Company's potential business partners may also be subject to numerous and
varying foreign regulatory requirements governing the design and conduct of
clinical trials and the managing and marketing of their products. The approval
procedure varies among countries and can involve additional testing, and the
time required to obtain approval may differ from that required to obtain FDA
approval.
There can be no assurance that the Company's potential business partners or
their partners will qualify for regulatory approvals or receive necessary
approvals to commercialize product candidates in any market. Delays in receipt
of or failure to receive regulatory approvals, or the loss of previously
received approvals, would have a material adverse effect on the Company's
potential business partners' business, and therefore, on the Company's business.
THE COMPANY'S NEW VENTURE MAY REQUIRE IT TO REGISTER AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940.
The Company is not registered as an investment company under the Investment
Company Act of 1940, as amended (or any similar state laws) (the "Company Act").
The Company does not believe (i) it is an "investment company" pursuant to the
Company Act, or (ii) that it will hold "securities" pursuant to the Company Act
or the Securities Act of 1933, as amended. However, the Securities and Exchange
Commission ("SEC") may disagree with the Company's position and deem the Company
to be an "investment company" under the Company Act and require the Company to
register as an investment company. If this were to occur, the Company's
day-to-day operations would become subject to the regulatory and disclosure
requirements imposed by the Company Act. The Company does not have the
infrastructure to operate as an investment company. The Company has sought
guidance from the SEC staff with respect to this issue. No assurance can be
given that the staff will respond favorably.
RISKS RELATING TO INTELLECTUAL PROPERTY
IF THE COMPANY OR ITS BUSINESS PARTNERS ARE UNABLE TO OBTAIN PATENT PROTECTION
FOR THE PRODUCTS THAT RESULT FROM THE MEDICAL DEVELOPMENT BUSINESS, THE VALUE OF
THE MEDICAL DEVELOPMENT BUSINESS WILL BE ADVERSELY AFFECTED. IF THE COMPANY OR
ITS BUSINESS PARTNERS INFRINGE PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS OF
THIRD PARTIES, THEY MAY NOT BE ABLE TO DEVELOP AND COMMERCIALIZE THE PRODUCTS
AND SERVICES THAT WILL COMPRISE THE MEDICAL DEVELOPMENT BUSINESS OR THE COST OF
DOING SO MAY INCREASE.
Patent positions of pharmaceutical and biotechnology companies are generally
uncertain and involve complex legal, scientific and factual questions. The
ability of the Company or its business partners to develop and commercialize
products and services depends in significant part on the Company's or its
business partners' ability to (i) obtain patents, (ii) obtain licenses to the
proprietary rights of others on commercially reasonable terms, (iii) operate
without infringing upon the proprietary rights of others, (iv) prevent others
from infringing on the Company's or its business partners' proprietary rights,
and (v) protect trade secrets.
THERE IS SIGNIFICANT UNCERTAINTY ABOUT THE VALIDITY AND PERMISSIBLE SCOPE OF
PATENTS IN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRY, WHICH MAY MAKE IT
DIFFICULT FOR THE COMPANY OR ITS BUSINESS PARTNERS TO OBTAIN PATENT PROTECTION
FOR DISCOVERIES.
The validity and permissible scope of patent claims in the pharmaceutical and
biotechnology fields, including the genomics field, involve important unresolved
legal principles and are the subject of public policy debate in the United
States and abroad. There is also some uncertainty as to whether human clinical
data will be required for issuance of patents for human therapeutics. If the
Company is involved in a project in this field and if such data are required,
the Company's or its business partners' ability to obtain patent protection
could be delayed or otherwise adversely affected.
THIRD PARTIES MAY OWN OR CONTROL PATENTS OR PATENT APPLICATIONS AND REQUIRE THE
COMPANY OR ITS BUSINESS PARTNERS TO SEEK LICENSES, WHICH COULD INCREASE THE
COMPANY'S OR ITS BUSINESS PARTNERS' DEVELOPMENT AND COMMERCIALIZATION COSTS, OR
PREVENT THE COMPANY OR ITS BUSINESS PARTNERS FROM DEVELOPING OR MARKETING THE
COMPANY'S OR ITS BUSINESS PARTNERS' PRODUCTS OR SERVICES.
The Company or its business partners may not have rights under some patents or
patent applications related to some of their existing or proposed products,
processes or services. Third parties may own or control these patents and patent
applications in the United States and abroad. Therefore, in some cases, in order
to develop, manufacture, sell or import some of the Company's or its business
partners' existing and proposed products, processes or services, the Company or
its business partners may choose to seek, or be required to seek, licenses under
third-party patents issued in the United States and abroad or those that might
issue from United States and foreign patent applications. In such event, the
Company or its business partners would be required to pay license fees or
royalties or both to the licensor. If licenses are not available to the Company
or its business partners on acceptable terms, the Company or its business
partners may not be able to develop, manufacture, sell or import these products,
processes or services.
THE COMPANY OR ITS BUSINESS PARTNERS MAY BECOME INVOLVED
IN EXPENSIVE PATENT LITIGATION OR OTHER PROCEEDINGS, WHICH COULD RESULT IN THE
COMPANY OR ITS BUSINESS PARTNERS INCURRING SUBSTANTIAL COSTS AND EXPENSES OR
SUBSTANTIAL LIABILITY FOR DAMAGES OR REQUIRE THE COMPANY OR ITS BUSINESS
PARTNERS TO STOP THEIR DEVELOPMENT AND COMMERCIALIZATION EFFORTS.
There has been substantial litigation and other proceedings regarding the patent
and other intellectual property rights in the pharmaceutical and biotechnology
industries. The Company or its business partners may become a party to patent
litigation or other proceedings regarding intellectual property rights.
The cost to the Company or its business partners of any patent litigation or
other proceeding, even if resolved in the Company's or its business partners'
favor, could be substantial. Some of the Company's or its business partners'
competitors may be able to sustain the cost of such litigation or proceedings
more effectively than the Company or its business partners because of their
substantially greater financial resources. If a patent litigation or other
proceeding is resolved against the Company or its business partners, the Company
or its business partners may be enjoined from developing, manufacturing, selling
or importing their products, processes or services without a license from the
other party and the Company or its business partners may be held liable for
significant damages. The Company or its business partners may not be able to
obtain any required license on commercially acceptable terms or at all.
Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse effect on the
Company's or its business partners' ability to compete in the marketplace.
Patent litigation and other proceedings may also absorb significant management
time.
COMPETITION
Competition in the medical, pharmaceutical and biotechnology industries, the
sector in which the Company plans to establish new business operations, is
intense. The Company's potential business partners may face competition from
companies with far greater financial, marketing, technical and research
resources, name recognition, distribution channels and market presence than the
Company's potential business partners who are marketing existing products or
developing new products that are similar to the products developed by the
Company's potential business partners. There can be no assurance that the
Company's potential business partners' products will be able to compete
successfully with existing products or products under development by other
companies, universities and other institutions.
EMPLOYEES
As of December 31, 2003, the Company had one employee.
ITEM 2. PROPERTIES
On February 21, 2003 the Company leased office space in Melville, New York at an
original annual rental of $18,000. The lease has been extended for an additional
twelve months and expires on March 31, 2005. The annual rental increases to
approximately $19,200 on April 1, 2004 and continues until the expiration date.
This space will be sufficient for the Company's needs until the business plan of
the Company has been successfully executed.
ITEM 3. LEGAL PROCEEDINGS
As discussed in Note 3 of the accompanying notes to the financial statements,
StrandTek defaulted on the payment of $1,250,000 plus accrued interest due to
the Company on July 31, 2002. The Company ceased accruing interest as of July
31, 2002 for financial statement purposes. As a result, on August 6, 2002, the
Company filed a complaint in the Superior Court of New Jersey entitled Corniche
Group Incorporated v StrandTek International, Inc., a Delaware corporation,
StrandTek International, Inc., a Florida corporation, David M. Veltman, William
G. Buckles Jr., Jerome Bauman and Jan Arnett. The complaint sought recovery of
the $1,250,000 loan, plus interest, costs and fees, and sought recovery against
the individual defendants pursuant to their partial guarantees.
Between July 2003 and December 2003, guarantors Veltman, Buckles and Arnett paid
their judgments in full, with payments totaling approximately $295,000, $295,000
and $297,000 respectively. In December 2003, the Company settled with defendant
Bauman for a payment of $100,000. These payments, totaling approximately
$987,000, complete the transaction.
The Company is not aware of any material pending legal proceedings or claims
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. The Company's Common Stock is traded on the OTC
Bulletin Board under the symbol "PHSM" since July 24, 2003. Prior to
that date, the Company's Common Stock traded under the symbol "CNGI."
The following table sets forth the high and low bid prices of the
Company's Common Stock for each quarterly period within the two most
recent fiscal years and the most recent quarter, as reported by Nasdaq
Trading and Market Services. On March 8, 2004, the closing bid price
for the Company's Common Stock was $0.14. Information set forth in the
table below represents inter-dealer prices without retail mark-up,
mark-down, or commission, and may not necessarily represent actual
transactions.
2003 High Low
First Quarter $ 0.13 $ 0.03
Second Quarter 0.15 0.06
Third Quarter 0.31 0.08
Fourth Quarter 0.31 0.11
2002 High Low
First Quarter $ 0.68 $ 0.35
Second Quarter 0.37 0.06
Third Quarter 0.09 0.05
Fourth Quarter 0.10 0.04
(b) Holders. As of March 8, 2004, there were approximately 1,068 holders
of record of the Company's Common Stock. -------
(c) Dividends. Holders of Common Stock are entitled to dividends when, as,
and if declared by the Board of Directors out of funds legally
available therefor. The Company has not paid any cash dividends on its
Common Stock and, for the foreseeable future, intends to retain future
earnings, if any, to finance the operations, development and expansion
of its business. Future dividend policy is subject to the discretion of
the Board of Directors.
SERIES A PREFERRED STOCK
The Certificate of Designation for the Company's Series A Preferred Stock
provides that at any time after December 1, 1999 any holder of Series A
Preferred Stock may require the Company to redeem his shares of Series A
Preferred Stock (if there are funds with which the Company may legally do so) at
a price of $1.00 per share. Notwithstanding the foregoing redemption provisions,
if any dividends on the Series A Preferred Stock are past due, no shares of
Series A Preferred Stock may be redeemed by the Company unless all outstanding
shares of Series A Preferred Stock are simultaneously redeemed. The holders of
Series A Preferred Stock may convert their Series A Preferred Stock into shares
of Common Stock of the Company at a price of $5.20 per share.
On January 29, 2002 notice was given that, pursuant to the Company's Restated
Certificate of Incorporation, as amended, the Company has called for redemption
and will redeem (the "Redemption") on the date of the closing of the StrandTek
Transaction (the "Redemption Date"), all shares of the Company's Series A
Convertible Preferred Stock outstanding on that date at a redemption price of
$1.05, plus accrued and unpaid dividends from July 1, 1995 through and including
the Redemption Date of approximately $0.47 per share. The Redemption, among
other financial, legal and business conditions, was a condition precedent to the
closing of the StrandTek Transaction. Similarly, completion of the Redemption
was subject to closing the StrandTek Transaction. Upon termination of the
StrandTek Transaction, the Company rescinded the Notice of Redemption.
At December 31, 2003, 681,174 shares of Series A Preferred Stock were
outstanding. If the preferred shareholders do not convert their shares into
Common Stock, and if the Company were required to redeem any significant number
of shares of Series A Preferred Stock, the Company's financial condition may be
materially affected.
RECENT SALES OF UNREGISTERED SECURITIES
In September 2002, the Company sold to accredited investors, pursuant to
Regulation D, five 60-day promissory notes in the principal sum of $25,000 each,
resulting in net proceeds to the Company of $117,500, net of offering costs. The
notes bear interest at 15% per annum payable at maturity. The terms of the notes
include a default penalty pursuant to which if the notes are not paid on the due
date, the holder shall have the option to purchase 25,000 shares of the
Company's Common Stock for an aggregate purchase price of $125. If the non
payment continues for 30 days, then on the 30th day, and at the end of each
successive 30-day period until the note is paid in full, the holder has the
option to purchase an additional 25,000 shares of the Company's Common Stock for
an aggregate purchase price of $125. As of December 31, 2003 a total of
1,000,000 of such shares resulting in net proceeds to the Company of $5,000 were
exercised because the notes remain unpaid. Options to purchase an additional
650,000 shares of Common Stock at an aggregate purchase price of $3,250 have
been granted pursuant to the default penalty. Subsequent to December 31, 2003,
200,000 shares of Common Stock were purchased resulting in net proceeds to the
Company of $1,000.
In February 2003, the Company sold to accredited investors, pursuant to
Regulation D, a series of 30-day promissory notes in the aggregate principal sum
of $50,000. The notes bear interest at 20% per annum payable at maturity. In
November 2003, the Company repaid all $50,000 of such promissory notes together
with all accrued interest of $6,854.
On March 17, 2003, the Company commenced a private placement offering, pursuant
to Regulation D, to raise up to $250,000 in 6-month promissory notes in
increments of $5,000 bearing interest at 15% per annum. Only selected investors
which qualify as "accredited investors" as defined in Rule 501(a) under the
Securities Act of 1933, as amended, were eligible to purchase these promissory
notes. The Company raised the full $250,000 through the sale of such promissory
notes, resulting in net proceeds to the Company of $225,000, net of offering
costs. The note contains a default provision which raises the interest rate to
20% if the notes are not paid when due. The Company issued $250,000 of these
notes and as of December 31, 2003, $60,000 of the principle amount of these
notes was in default. All interest payments have been made and are current.
On September 22, 2003, the Company commenced an equity private placement
pursuant to Regulation D to raise up to $4,000,000 through the sale of up to
40,000,000 shares of its Common Stock in increments of $5,000 or 50,000 shares.
Such shares will not be registered and will be subject to restrictions on
resale. Only selected investors which qualify as "accredited investors" as
defined in Rule 501(a) under the Securities Act of 1933, as amended, were
eligible to purchase these shares. The placement closed on December 31, 2003
upon the sale of 2,825,000 shares, resulting in proceeds to the Company of
$214,781, net of offering costs of $67,719.
The Company amended its equity private placement (see Note 7) pursuant to
Regulation D to raise up to $4,000,000 through the sale of up to 40,000,000
shares of Common Stock in increments of $5,000 or 50,000 shares. Such shares
will not be registered and will be subject to restrictions on resale. Only
selected investors which qualify as "accredited investors" as defined in Rule
501(a) under the Securities Act of 1933, as amended, are eligible to purchase
these shares. The initial placement closed on December 31, 2003. The amended
private placement does not include any investment banking fees and therefore all
proceeds, less expenses such as printing, transfer fees, etc., will be paid
directly to the Company. The previous investment banker, Robert M. Cohen &
Company, has been fully paid for its efforts. As of March 8, 2004, 400,000
shares have been sold with proceeds to the Company of $40,000.
In February 2004, the Company sold 30 day 20% notes pursuant to Regulation D in
the amount of $75,000 to two accredited investors to fund current operations. It
is anticipated that these notes will be repaid from the proceeds of the amended
equity private placement. These notes have a default provision that if they are
not paid within 30 days, there is an additional interest payment of $250 per
$25,000 for each 30 day period or part thereof.
In March 2004, the Company sold a 30 day 20% note pursuant to Regulation D in
the amount of $50,000 to a director who qualifies as an accredited investor to
fund current operations. It is anticipated that this note will be repaid when
sufficient proceeds of the amended equity private placement are received.
ITEM 6...SELECTED FINANCIAL DATA
The selected statements of operations and balance sheet data set forth below are
derived from audited financial statements of the Company. The information set
forth below should be read in conjunction with the Company's audited financial
statements and notes thereto. See Item 8 "Financial Statements and Supplementary
Data" and Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operation". On February 4, 1999 the Company changed its fiscal
year-end from March 31 each year to December 31 each year. The selected
financial data set out below has not been retroactively restated to reflect such
change in fiscal year-end date and accordingly is presented as historically
reported in the financial statements of the Company.
Statement of Operations: Year Ended Year Ended Year Ended Year Ended Year Ended
($'000 except net loss per share which is December 31, December 31, December 31, December 31, December 31,
stated in $) 2003 2002 2001 2000 1999
Earned revenues $ 65 $ 81 $ 107 $ 27 $ -
Direct costs 44 60 70 33 -
Gross profit 21 21 37 (6) -
Operating (loss) (894) (1,149) (1,606) (2,516) (1,023)
Loss before discontinued operations and
preferred dividends (1,044) (1,160) (1,792) (2,296) (1,084)
Net loss attributable to common
stockholders (1,068) (1,208) (2,081) (2,075) (1,170)
Basic and diluted earnings per share:
Loss from continuing operations (0.05) (0.05) (0.08) (0.16) (0.16)
Income (loss) from discontinued operations - - (0.01) (0.02) -
Net loss attributable to common
shareholders (0.05) (0.05) (0.09) (0.14) (0.17)
Weighted average number of shares
outstanding 23,509,343 22,344,769 22,284,417 14,902,184 6,905,073
Balance Sheet Data: As of As of As of As of As of
$'000 December 31, December 31, December 31, December 31, December 31,
2003 2002 2001 2000 1999
Working Capital (Deficiency) $ (794) $ (82) $ 1,085 $ 2,079 $ 3,192
Total Assets 312 1,183 1,836 3,757 4,905
Current Liabilities 1,023 1,141 489 458 868
(Accumulated Deficit) (10,762) (9,694) (8,486) (6,406) (4,302)
Total Stockholders' (Deficit)/Equity (1,503) (824) 373 2,450 3,140
Selected Quarterly Financial Data
$'000 Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(except net loss per share Ended Ended Ended Ended Ended Ended Ended Ended Ended
which is stated in $) 12/31/03 9/30/03 6/30/03 3/31/03 12/31/02 9/30/02 6/30/02 3/31/02 12/31/01
Earned Revenues $ 15 $ 15 $ 17 $ 18 $ 19 $ 20 $ 18 $ 24 $ 42
Direct Costs 8 11 12 13 13 14 14 19 17
Gross profit 7 4 5 5 5 6 5 5 25
Operating Loss (369) (197) (205) (123) (357) (225) (201) (366) (449)
Net Loss Attributable to
Common Stockholders (437) (216) (260) (155) (389) (231) * (246) (342) * (725)
Net loss per share (0.02) (0.01) (0.01) (0.01) - (0.01) (0.01) (0.02) (0.03)
$'000 Quarter Quarter Quarter
(except net loss per share Ended Ended Ended
which is stated in $) 9/30/01 6/30/01 3/31/01
Earned Revenues $ 33 $ 21 $ 11
Direct Costs 31 15 7
Gross profit 2 6 4
Operating Loss (386) (353) (418)
Net Loss Attributable to
Common Stockholders (374) (329) (653)
Net loss per share (0.02) (0.01) (0.03)
* Includes write-off of unamortized capitalized software in fiscal 2001 of
$305,333 and property and equipment impairment charges of $54,732 in fiscal
2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the audited
financial statements and notes thereto, included in Item 8 of this report, and
is qualified in its entirety by reference thereto.
GENERAL
During the first half of fiscal 2001, management became concerned by the slow
progress being made by its warrantysuperstore.com business. Accordingly,
alternative strategies for the Company were evaluated by the Board of Directors,
including the acquisition of new business operations. As a result, on January 7,
2002 the Company entered into the StrandTek Transaction as previously reported.
Consummation of the StrandTek Transaction was conditioned upon certain closing
conditions, including the Company obtaining financing via an equity private
placement, which ultimately could not be met and as a result in June 2002, the
Exchange Agreement was formally terminated by written agreement between the
Company and StrandTek. In June 2002, management also determined, in light of
continuing operating losses, to discontinue its warranty and service contract
business and to seek new business opportunities for the Company.
NEW BUSINESS OPPORTUNITIES
Management had been exploring new business opportunities for the Company and on
February 6, 2003, the Company appointed Mark Weinreb as a member of the Board of
Directors and as its President and Chief Executive Officer. The Company and Mr.
Weinreb had been exploring business plans for the Company that may involve,
under the name "Phase III Medical, Inc.", entering the medical sector by
acquiring or participating in one or more biotech and/or medical companies or
technologies, owning one or more drugs or medical devices that may or may not
yet be available to the public, or acquiring rights to one or more of such drugs
or medical devices or the royalty streams therefrom. Mr. Weinreb was appointed
to finalize and execute the Company's new business plan. The Company will need
to recruit management, business development and technical personnel, and develop
its business model. Accordingly, it will be necessary for the Company to raise
new capital. There can be no assurance that any such business plan developed by
the Company will be successful, that the Company will be able to acquire such
new business or rights or raise new capital, or that the terms of any
transaction will be favorable to the Company.
RESULTS OF CONTINUING OPERATIONS
The Company's "Significant Accounting Policies" are described in Note 2 to the
audited financial statements and notes thereto, included in Item 8 of this
report. The Company recognizes revenue from its warranty service contracts
ratably over the length of the contracts executed. Additionally, the Company
purchased insurance to fully cover any losses under the service contracts from a
domestic carrier. The insurance premium expense and other costs related to the
sale are amortized ratably over the life of the contracts.
FISCAL 2003 COMPARED TO FISCAL 2002
The Company generated recognized revenues from the sale of extended warranties
and service contracts via the Internet of $65,000 in fiscal 2003. The revenues
generated in the year were derived almost entirely from revenues deferred over
the life of the contracts sold in prior years. Similarly, direct costs of
$44,000 incurred in fiscal 2003, relate to costs previously deferred over the
life of such contracts.
General and administrative expenses totaled $685,000 during the year ended
December 31, 2003 as compared to $912,000 for fiscal 2002, a decrease of
$227,000 or 24.9%. The decrease was primarily attributable to decreases in
employee termination costs ($145,000), legal ($86,000), travel and entertainment
($65,000), directors fees ($25,000), rents ($33,000) and depreciation ($16,000)
partially offset by increases in insurance ($66,000) and salaries as a result of
the employment agreement by and between the Company and Mark Weinreb ($41,000).
Costs generally were significantly lower as the Company wound down its
operations and closed its office facilities in Texas in July 2002.
The Company realized a loss from the unsecured, un-guaranteed note receivable
from StrandTek of $150,000 in fiscal 2003. Through March 1, 2004, the Company
made payments to PSI of $240,000. The Company's minimum commitment to PSI
pursuant to the royalty agreement with PSI is $1,000,000.
Interest income increased by $18,000 to $89,000 in fiscal 2003 as compared to
fiscal 2002 due to the collection of the StrandTek note receivable and the
additional funds received from the sale of Common Stock and notes. Interest
expense increased in fiscal 2003 to $215,000 from $23,000 in fiscal 2002 due to
the higher level of debt and certain debt being in default and therefore subject
to a higher interest rate. In addition, the Company recorded interest expense in
fiscal 2003 relating to the Series A preferred in the amount of approximately
$24,000 due to a recent accounting pronouncement.
For the reasons cited above, the net loss before preferred stock dividend
decreased to $1,044,000 in fiscal 2003 from the comparable loss of $1,160,000
for fiscal 2002.
FISCAL 2002 COMPARED TO FISCAL 2001
The Company generated recognized revenues from the sale of extended warranties
and service contracts via the Internet of $81,000 in fiscal 2002. The revenues
generated in the year were derived almost entirely from revenues deferred over
the life of the contracts sold in prior years. Similarly, direct costs of
$61,000 incurred in fiscal 2002, relate to costs previously deferred over the
life of such contracts. Revenues in fiscal 2001 totaled $225,000 of which
$107,000 were recognized as earned revenues, the balance deferred over the life
of the contracts sold. Direct costs in fiscal 2001 totaled $71,000.
General and administrative expenses totaled $912,000 during the year ended
December 31, 2002 as compared to $1,643,000 for fiscal 2001, a decrease of
$731,000 or 44.5%. Costs generally were significantly lower as the Company wound
down its operations and closed its office facilities in Texas in July 2002. As a
result, selling, general and administrative expenses in fiscal 2002 are not
comparable to fiscal 2001 when the Company incurred operating expenses such as
advertising and significantly higher payroll costs. One time employee
termination and general closure costs totaling approximately $150,000 were
incurred in fiscal 2002 and an impairment charge of $55,000 was recorded in June
2002 to adjust property and equipment to its net realizable value.
In the year ended December 31, 2002, the Company provided an allowance for the
unsecured, un-guaranteed note receivable from StrandTek of $250,000 plus accrued
interest of $8,103.
Interest income decreased by $36,000 to $71,000 in fiscal 2002 as compared to
fiscal 2001 because interest income from the StrandTek loans, accrued through
July 31, 2002 was less than interest earned from investments in marketable
securities in fiscal 2001. Interest expense increased from $6,000 in the year
ended December 31, 2001 to $23,000 in fiscal 2002 primarily due to the
short-term loans secured in September 2002 to fund the Company's operating
expenses.
For the reasons cited above, net loss before preferred stock dividend decreased
by 35.3% to $1,160,000 in 2002 from the comparable loss of $1,792,000 for fiscal
2001.
LIQUIDITY AND CAPITAL RESOURCES
The following chart represents the net funds provided by or used in operating,
financing and investment activities for each period as
indicated:
Twelve Months Ended
-------------------
December 31, 2003 December 31, 2002
Cash provided by (used in)
operating activities $ (1,021,913) $ 1,005,376
Cash provided by (used in)
investing activities 847,419 (1,247,338)
Cash provided by (used in)
financing activities 366,186 209,949
At December 31, 2003, the Company had a cash balance of $210,947, deficit
working capital of $793,749 and a stockholders' deficit of $1,502,774. In
addition, the Company sustained losses of $1,044,145, $1,159,838 and $2,033,030
for the three fiscal years ended December 31, 2003, 2002 and 2001, respectively.
The Company's lack of liquidity combined with its history of losses raises
substantial doubt as to the ability of the Company to continue as a going
concern. On September 22, 2003 the Company commenced an equity private placement
pursuant to Regulation D to raise up to $4,000,000 through the sale of up to
40,000,000 shares of its Common Stock in increments of $5,000 or 50,000 shares.
Such shares will not be registered and will be subject to restrictions on
resale. Only selected investors which qualify as "accredited investors" as
defined in Rule 501(a) under the Securities Act of 1933, as amended, were
eligible to purchase these shares. Through December 31, 2003, the Company sold
2,825,000 shares, resulting in proceeds to the Company of $214,781, net of
offering costs of $67,719. The Company continues to offer these securities
without the assistance of an investment banker and will collect the full
proceeds from any sale. As of March 8, 2004, the Company has sold 400,000 shares
of its Common Stock with proceeds to the Company of $40,000 from the amended
private placement. There can be no assurance that the Company will be able to
sell sufficient quantities of these securities and may have to rely on its
ability to borrow money from new and/or existing investors. Management has sold
promissory notes which bear interest at 20% per annum to fund the Company until
such time as sufficient proceeds are received from the private placement of its
Common Stock.
The following table reflects a summary of the Company's contractual cash
obligations as of December 31, 2003:
Payments due by period
Contractual Obligations Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Long-term debt obligations $ 9,513 $ 9,513 $ 0 $ 0 $ 0
Notes payable 400,000 400,000 0 0 0
Operating leases 23,700 18,900 4,800 0 0
Employment agreement 438,846 199,500 239,346 0 0
Purchase obligations 920,000 920,000 0 0 0
------- ------- -------- -- --
Total $1,792,059 $1,547,913 $244,146 $ 0 $ 0
========= ========= ======== == ==
INFLATION
The Company does not believe that its operations have been materially influenced
by inflation in the fiscal year ended December 31, 2003, a situation which is
expected to continue for the foreseeable future.
SEASONALITY
The Company does not believe that its operations are seasonal in nature.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required to be
filed under this Item are presented commencing on page F-1 of the Annual Report
on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
As previously reported on the Company's Form 8-K filed January 8, 2004, as
amended on February 3, 2004, on January 6, 2004, upon recommendation and
approval of the Company's and Board of Directors, the Company dismissed Travis,
Wolff & Company, LLP ("Travis Wolff") and engaged Holtz Rubenstein & Co., LLP
("Holtz") as the Company's independent auditors for the fiscal year ended
December 31, 2003.
Travis Wolff's reports on the Company's financial statements for each of the
years ended December 31, 2002 and 2001 contained a qualified opinion as to the
uncertainty of the Company's ability to continue as a going concern. No
modifications were made to the financial statements as a result of this
uncertainty.
During the years ended December 31, 2002 and 2001 and through January 6, 2004,
there were no disagreements with Travis Wolff on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which if not resolved to Travis Wolff's satisfaction, would have
caused them to make reference to the subject matter in connection with their
report on the Company's financial statements for such years; and there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
During the years ended December 31, 2002 and 2001 and through January 6, 2004,
the Company did not consult Holtz with respect to the application of accounting
principles as to a specified transaction, either completed or proposed, or the
type of audit opinion that might be rendered on the Company's financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K.
ITEM. 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the Company's most recently completed fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report) covered by
this report, the Company carried out an evaluation, with the participation of
the Company's management, including the Company's Chief Executive Officer, of
the effectiveness of the Company's disclosure controls and procedures pursuant
to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the
Company's Chief Executive Officer concluded that the Company's disclosure
controls and procedures are effective in ensuring that information required to
be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in the Company's internal controls over financial
reporting that occurred during the Company's last fiscal quarter to which this
report relates that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors and
executive officers of the Company as of March 8, 2004:
Name Age Position
- ---- --- --------
Mark Weinreb 51 Director, President & Chief Executive Officer
Wayne Marasco 50 Director
Joseph Zuckerman 52 Director
Michael Lax 50 Director
Mark Weinreb
Chief Executive Officer
Mr. Weinreb joined the Company on February 6, 2003 as a Director, Chief
Executive Officer and President. In 1976, Mr. Weinreb joined Bio Health
Laboratories, Inc., a state-of-the-art medical diagnostic laboratory providing
clinical testing services for physicians, hospitals, and other medical
laboratories. He progressed to become the laboratory administrator in 1978 and
then an owner and the laboratory's Chief Operating Officer in 1982. Here he
oversaw all technical and business facets, including finance, laboratory science
technology and all the additional support departments. He left Bio Health Labs
in 1989 when he sold the business to a biotechnology company listed on the New
York Stock Exchange. In 1992, Mr. Weinreb founded Big City Bagels, Inc., a
national chain of franchised upscale bagel bakeries and became Chairman and
Chief Executive Officer of such entity. The company went public in 1995 and in
1999 he redirected the company and completed a merger with an Internet service
provider. In 2000, Mr. Weinreb became the Chief Executive Officer of Jestertek,
Inc., a 12-year old software development company pioneering gesture recognition
and control using advanced inter-active proprietary video technology. In 2002,
he left Jestertek after arranging additional financing. Mr. Weinreb received a
Bachelor of Arts degree in 1975 from Northwestern University and a Master of
Science degree in 1982 in Medical Biology, from C.W. Post, Long Island
University.
Wayne Marasco, M.D., Ph.D.
Director
Dr. Marasco joined the Board of Directors of the Company in June 2003. Dr.
Marasco is an Associate Professor in the Department of Cancer Immunology & AIDS
at the Dana-Farber Cancer Institute and Associate Professor of Medicine in the
Department of Medicine, Harvard Medical School. Dr. Marasco is a board-certified
physician specializing in the treatment of infectious diseases. His clinical
sub-specialty is in the treatment of immunocompromised (cancer, bone marrow and
solid organ transplants) and HIV-1 infected patients.
The Marasco research laboratories are primarily focused on the areas of antibody
engineering and gene therapy. New immuno- and genetic- therapies for HIV-1
infection / AIDS, HTLV-1, the etiologic agent in Adult T-cell Leukemia, and
other emerging infectious diseases are being studied. Dr. Marasco's laboratory
is recognized internationally for its pioneering development of intracellular
antibodies (sFv) or "intrabodies" as a new class of molecules for research and
gene therapy applications. He is the author of more than 70 peer reviewed
research publications, numerous chapters, books and monographs and has been an
invited speaker at many national and international conferences in the areas of
antibody engineering, gene therapy and AIDS. Dr. Marasco is also the Scientific
Director of the National Foundation for Cancer Research (NFCR) Center for
Therapeutic Antibody Engineering. The NFCR Center is located at the Dana-Faber
Cancer Institute and will work with investigators globally to develop new human
monoclonal antibody drugs for the treatment of human cancers.
In 1995, Dr. Marasco founded IntraImmune Therapies, Inc., a gene therapy and
antibody engineering company. He served as the Chairman of the Scientific
Advisory Board until the company was acquired by Abgenix in 2000. He has also
served as a scientific advisor to several biotechnology companies working in the
field of antibody engineering, gene discovery and gene therapy. He is an
inventor on numerous issued and pending patent applications.
Joseph Zuckerman, M.D.
Director
Joseph D. Zuckerman joined the Board of Directors of the Company in January
2004. Since 1997, Dr. Zuckerman has been Chairman of the NYU-Hospital for Joint
Diseases Department of Orthopaedic Surgery and the Walter A. L. Thompson
Professor of Orthopaedic Surgery at the New York University School of Medicine.
He is responsible for one of the largest departments of orthopaedic surgery in
the country, providing orthopaedic care at five different hospitals including
Tisch Hospital, the Hospital for Joint Diseases, Bellevue Hospital Center, the
Manhattan Veteran's Administration Medical Center and Jamaica Hospital. He is
also the Director of the Orthopaedic Surgery Residency Program, which trains
more than 60 residents in a five year program.
Dr. Zuckerman holds leadership positions in national organizations and is
President of the American Shoulder and Elbow Surgeons and Chair of the Council
on Education for the American Academy of Orthopaedic Surgeons. He recently
developed and successfully implemented a sponsorship program between the
hospital and the New York Mets. His clinical practice is focused on shoulder
surgery and hip and knee replacement and he is the author or editor of ten
textbooks, 60 chapters and more than 200 articles in the orthopaedic and
scientific literature.
Michael Lax
Director
Michael Lax joined the Board of Directors of the Company in March 2004 and
graduated from the University of Rochester with degrees in Chemical and
Mechanical Engineering. Upon his graduation in 1975, Mr. Lax went to work for
Kodak as a Process and Product Development Engineer. Since 1988, Mr. Lax has
been the President and Chief Executive Officer of Autronic Plastics, Inc. and
its subsidiaries, a plastic manufacturing concern specializing in plastic
product design, mold construction and manufacturing of industrial and precision
components such as medical devices, office products, life safety products and
entertainment packaging. Autronic Plastics, Inc.'s clients include Pfizer,
Borders Books & Music, Blockbuster, Circuit City, Nintendo, and Cooper Lighting
Company. Mr. Lax's 28 years of experience at Autronic Plastics, Inc. have
centered on creative ideation, concept development and managing executions to
ensure that the integrity of the initial designs come alive. Taking the company
in a new direction, Mr. Lax founded Clear-Vu Products in 1990 to further
specialize in the entertainment-packaging sector.
Mr. Lax has been awarded numerous patents for packaging designs, solid state
illumination, and life safety products. In addition, his work and collaborations
have received numerous design awards including a Gold Industrial Design
Excellence Award from the Industrial Designers Society of America.
COMMITTEES OF THE BOARD OF DIRECTORS
Composition of the Board of Directors. Because of the Company's recent
reorganization and implementation of its new business plan, and its ongoing
efforts to engage qualified board members under its new business plan, the
Company does not have a separately designated audit committee or compensation
committee at this time. Accordingly, the Company's Board of Directors has
determined that the Company does not have an audit committee financial expert.
The Company continues to seek new board members in order to implement its
reorganization and new business plan, and appoint a separately designated audit
committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and officers, and persons who own more than 10% of a registered class
of the Company's equity securities, to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission.
These persons are required by the Securities and Exchange Commission to furnish
the Company with copies of all Section 16(a) reports that they file. Based
solely on the Company's review of these reports and written representations
furnished to the Company, the Company believes that in 2003 each of the
reporting persons complied with these filing requirements, except that a report
on Form 4 reporting one transaction in February 2003 with respect to Mark
Weinreb due on February 8, 2003 was not filed until February 17, 2003, a report
on Form 5 reporting four transactions for the year ended December 31, 2002 with
respect to James J. Fyfe due on February 14, 2003 was not filed until June 10,
2003 and a report on Form 5 reporting four transactions for the year ended
December 31, 2002 with respect to Paul L. Harrison due on February 14, 2003 was
not filed until June 10, 2003. These late filings were inadvertent and required
filings were made promptly after noting the failures to file.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer or controller (or persons performing similar functions). A copy of such
Code of Ethics has been filed as Exhibit 14.1 to this Annual Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid during the three
years ended December 31, 2003 to the Company's Chief Executive Officer. No other
executive officer of the Company earned in excess of $100,000 for services
rendered during fiscal 2003.
Summary Compensation Table
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Underlying All Other
Name and Principal Position Notes Year Salary Options/SAR's Compensation
--------------------------- ----- ---- ------ ------------ ------------
Mark Weinreb (1) 2003 $ 157,154 2,500,000 $ 11,000
Chief Executive Officer
(Appointed February 6, 2003)
Notes:
(1) All other compensation comprises monthly automobile allowances.
OPTION GRANTS IN 2003
The following table provides certain information with respect to options granted
to the Company's chief executive officer during the fiscal year ended December
31, 2003:
Option Grants in Last Fiscal Year
Percent of Potential Realizable Value
Total at Assumed Annual Rates of
Number of Options Exercise Market Stock Price Appreciation
Securities Granted to Price Price on for Option Term(1)
Underlying Employees Date of ---------------------------
Options In per Share Grant Expiration
Name Granted(2) Fiscal Year ($) ($) Date 5% 10%
- ---------------------------------- -------------- ---------- ----------- ------------ ------------- ----------------
Mark Weinreb 2,500,000 100% $0.03 $0.03 2/6/13 $128,275 $204,257
====================
- ----------------------
(1) The Securities and Exchange Commission (the "SEC") requires disclosure of the
potential realizable value or present value of each grant. The 5% and 10%
assumed annual rates of compounded stock price appreciation are mandated by
rules of the SEC and do not represent the Company's estimate or projection of
the Company's future Common Stock prices. The disclosure assumes the options
will be held for the full ten-year term prior to exercise. Such options may be
exercised prior to the end of such ten-year term. The actual value, if any, an
executive officer may realize will depend on the excess of the stock price over
the exercise price on the date the option is exercised. There can be no
assurance that the stock price will appreciate at the rates shown in the table.
(2) These options vested immediately.
OPTION EXERCISES AND HOLDINGS
The following table provides information concerning options exercised during
2003 and the value of unexercised options held by each of the executive officers
named in the Summary Compensation Table at December 31, 2003.
Option Values at December 31, 2003
Number of
Securities Underlying
Shares Unexercised Options Value of
Acquired at December 31, 2003 In-the-Money Options at
On (# of shares) December 31, 2003 ($)(1)
Exercise Value --------------------------------- -------------------------------------
Name (# shares) Realized Exercisable Unexercisable Exercisable Unexercisable
--------------------- ------------- ------------- -------------- ------------------ ------------------- -----------------
Mark Weinreb -- -- 2,500,000 -- $300,000 --
==========================================================================================================================
---------------------
(1) Based on $0.15 per share, the closing price of the Company's Common Stock, as reported by the
OTC Bulletin Board, on December 31, 2003.
EMPLOYMENT AGREEMENTS
On February 6, 2003, Mr. Weinreb was appointed President and Chief Executive
Officer of the Company and the Company entered into an employment agreement with
Mr. Weinreb. The employment agreement has an initial term of three years, with
automatic annual extensions unless terminated by the Company or Mr. Weinreb at
least 90 days prior to an applicable anniversary date. The Company has agreed to
pay Mr. Weinreb an annual salary of $180,000 for the initial year of the term,
$198,000 for the second year of the term, and $217,800 for the third year of the
term. In addition, he is entitled to an annual bonus in the amount of $20,000
for the initial year in the event, and concurrently on the date, that the
Company has received debt and/or equity financing in the aggregate amount of at
least $1,000,000 since the beginning of his service, and $20,000 for each
subsequent year of the term, without condition.
In addition, the Company, pursuant to its newly adopted 2003 Equity
Participation Plan, entered into a Stock Option Agreement with Mr. Weinreb (the
"Initial Option Agreement"). Under the Initial Option Agreement, the Company
granted Mr. Weinreb the right and option, exercisable for 10 years, to purchase
up to 2,500,000 shares of the Company's Common Stock at an exercise price of
$0.03 per share and otherwise upon the terms set forth in the Initial Option
Agreement. In addition, in the event that the closing price of the Company's
Common Stock equals or exceeds $0.50 per share for any five consecutive trading
days during the term of the employment agreement (whether during the initial
term or an annual extension), the Company has agreed to grant to Mr. Weinreb, on
the day immediately following the end of the five day period, an option for the
purchase of an additional 2,500,000 shares of the Company's Common Stock for an
exercise price of $0.50 per share, pursuant to the 2003 Equity Participation
Plan and a Stock Option Agreement to be entered into between the Company and Mr.
Weinreb containing substantially the same terms as the Initial Option Agreement,
except for the exercise price and that the option would be treated as an
"incentive stock option" for tax purposes only to the maximum extent permitted
by law (the "Additional Option Agreement"). The Company has agreed to promptly
file with the Securities and Exchange Commission a Registration Statement on
Form S-8 (the "Registration Statement") pursuant to which the issuance of the
shares covered by the 2003 Equity Participation Plan, as well as the resale of
the Common Stock issuable upon exercise of the Initial Option Agreement, are
registered. Additionally, the Company has agreed, following any grant under the
Additional Option Agreement, to promptly file a post-effective amendment to the
Registration Statement pursuant to which the Common Stock issuable upon exercise
thereof shall be registered for resale. Mr. Weinreb has agreed that he will not
resell publicly any shares of the Company's Common Stock obtained upon exercise
of any Initial Agreement or the Additional Option Agreement prior to the first
anniversary of the date of the employment agreement.
In connection with the hiring of Mr. Weinreb and in anticipation of its new
business line, on July 24, 2003, the Company held a meeting of stockholders to
elect two directors, to approve and ratify the Company's 2003 Equity
Participation Plan pursuant to which 15,000,000 shares of the Company's Common
Stock are authorized to be issued, approve an amendment to the Company's
Certificate of Incorporation to increase the authorized number of shares of
Common Stock to 250,000,000, and approve a change of the Company's name to
"Phase III Medical, Inc."
Director Compensation
All current independent directors have individually received options to purchase
300,000 shares of the Company's Common Stock pursuant to the Company's 2003
Equity Participation Plan at prices ranging from $0.05 to $0.15. In addition to
these options, all independent directors are reimbursed for out of pocket travel
expenses and will receive an annual option grant to purchase 50,000 shares of
the Company's Common Stock on the date of the Company's annual stockholder's
meeting; provided; however, that no director may receive more than one grant of
these options in any calendar year. Upon achieving certain target increases in
stock price for a defined period of time during an existing independent
directors tenure, the Company has agreed to grant each director an additional
option to purchase 100,000 shares of the Company's Common Stock substantially
upon the same terms of the options to purchase 300,000 shares of the Company's
Common Stock previously granted, except for the exercise price of such options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as to the number of shares of the
Company's Common Stock beneficially owned, as of March 8, 2004, by (i) each
beneficial owner of more than five percent of the outstanding Common Stock, (ii)
each current named executive officer and director and (iii) all current
executive officers and directors of the Company as a group. All shares are owned
both beneficially and of record unless otherwise indicated. Unless otherwise
indicated, the address of each beneficial owner is c/o Phase III Medical, Inc.,
330 South Service Road, Suite 120, Melville, New York 11747.
Number and Percentage of Shares of Common Stock Owned
Percentage
# of Shares of Common Stock
Name and Address of Beneficial Notes Beneficially Beneficially Owned
Owner Owned (See Note 1)
Joel San Antonio
56 North Stanwich Road
Greenwich, CT 06831 3,752,500 13.9%
Mark Weinreb (2) 2,540,000 9.4%
Wayne Marasco (3) 800,000 3.0%
Michael Lax (3) 300,000 1.1%
Joseph Zuckerman, M.D. (3) 550,000 2.0%
All current directors and officers as a
group (four persons) (2) (3) 4,190,000 15.6%
Notes:
(1) Based on 26,926,460 shares of Common Stock outstanding on March 8, 2004.
(2) Includes 2,500,000 currently exercisable options to purchase Common Stock.
(3) Includes 300,000 currently exercisable options to purchase Common Stock.
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about the Company's Common Stock that may
be issued upon the exercise of options, warrants and rights under the Company's
2003 Equity Participation Plan as of December 31, 2003. This plan was the
Company's only equity compensation plan in existence as of December 31, 2003
(c)
Number of Securities
Remaining Available
For Future Issuance
(a) (b) Under Equity
Number of Securities to Weighted-Average Compensation Plan
be Issued Upon Exercise Exercise Price of (Excluding Securities
of Outstanding Options, Outstanding Options, Reflected In
Plan Category Warrants and Rights Warrants and Rights Column(a))
------------- ------------------------- --------------------- ------------------------
Equity Compensation Plans
Approved by
Shareholders............ 3,700,000 $0.05 11,300,000
Equity Compensation
Plans Not Approved by
Shareholders 0 0 0
------------------------- --------------------- ------------------------
TOTAL 3,700,000 $0.05 11,300,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
All audit and audit-related work and all non-audit work performed by the
Company's independent accountants is approved in advance by the Board of
Directors of the Company, including the proposed fees for such work. The Audit
Committee is informed of each service actually rendered.
Audit Fees. Audit fees billed or expected to be billed to the Company by the
Company's principal accountant for the audit of the financial statements
included in the Company's Annual Reports on Form 10-K, and reviews of the
financial statements included in the Company's Quarterly Reports on Form 10-Q,
for the years ended December 31, 2003 and 2002 totaled approximately $48,185 and
$48,228, respectively.
Audit-Related Fees. The Company was billed $0 and $0 by the Company's principal
accountant for the fiscal years ended December 31, 2003 and 2002, respectively,
for assurance and related services that are reasonably related to the
performance of the audit or review of the Company's financial statements and are
not reported under the caption Audit Fees above.
Tax Fees. The Company was billed or expected to be billed an aggregate of $5,072
and $2,900 by the Company's principal accountant for the fiscal years ended
December 31, 2003 and 2002, respectively, for tax services, principally advice
regarding the preparation of income tax returns.
All Other Fees. The Company incurred fees for the fiscal years ended December
31, 2003 and 2002, respectively, for permitted non-audit services of $3,230 and
$0, respectively.
The Company's Board of Directors pre-approved the Company's engagement of Holtz
Rubenstein & Co., LLP to act as the Company's independent auditor for the fiscal
year ended December 31, 2003. The Company's Board of Directors pre-approved
Travis Wolff & Company, L.L.P. to act as the Company's independent auditor for
the fiscal years ended December 31, 2002 and December 31, 2001. The Company's
independent auditors performed all work only with its full time permanent
employees.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
The following documents are being filed as part of this Report:
(a)(1) Financial Statements:
Reference is made to the Index to Financial Statements and Financial Statement
Schedule on Page F-1.
(a)(2) Financial Statement Schedule.
Reference is made to the Index to Financial Statements and Financial Statement
Schedule on Page F-1.
All other schedules have been omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Financial
Statements or Notes thereto.
(a)(3) Exhibits:
3 (a) Certificate of Incorporation filed September 18, 1980 (1) 3
(b) Amendment to Certificate of Incorporation filed September 29, 1980 (1) 3
(c) Amendment to Certificate of Incorporation filed July 28, 1983 (2) 3(b)
(d) Amendment to Certificate of Incorporation filed February 10, 1984 (2) 3(d)
(e) Amendment to Certificate of Incorporation filed March 31, 1986 (3) 3(e)
(f) Amendment to Certificate of Incorporation filed March 23, 1987 (4) 3(g)
(g) Amendment to Certificate of Incorporation filed June 12, 1990 (5) 3.8
(h) Amendment to Certificate of Incorporation filed September 27, 1991 (6) 3.9
(i) Certificate of Designation filed November 12, 1994 (7) 3.8
(j) Amendment to Certificate of Incorporation filed September 28, 1995 (9) 3(j)
(k) Certificate of Designation for the Series B Preferred Stock
dated May 18, 1998 (10) C 3(f)
(l) Amendment to Certificate of Incorporation dated May 18, 1998 (10) A
(m) Amendment to Certificate of Incorporation filed July 24, 2003 (15) 3.1
(n) By-laws of the Corporation, as amended on April 25, 1991 (6)
4 (a) Form of Underwriter's Warrant (6) 4.9.1
(b) Form of Promissory Note - 1996 Offering (9) 4(b)
(c) Form of Promissory Note - 1997 Offering (9) 4(c)
(d) Form of Common Stock Purchase Warrant - 1996 Offering (9) 4(d)
(e) Form of Common Stock Purchase Warrant - 1997 Offering (9) 4(e)
(f) Form of Promissory Note - September 2002 Offering (13) 4.1
(g) Form of Promissory Note - February 2003 Offering (13) 4.2
(h) Form of Promissory Note - March 2003 Offering (13) 4.3
10 (a) 1992 Stock Option Plan (8) B
(b) Stock Purchase Agreement, dated as of March 4, 1998, between
the Company and the Initial Purchasers named therein (10) B
(c) 1998 Employee Stock Option Plan (10) D
(d) Stock Contribution Exchange Agreement with StrandTek International, Inc.
dated January 7, 2002, as amended on February 11, 2002 (11) 10(o)
(e) Supplemental Disclosure Agreement to Stock Contribution Exchange
Agreement with StrandTek International, Inc. dated January 7, 2002 (11) 10(p)
(f) Employment Agreement dated as of February 6, 2003 by and between
Corniche Group Incorporated and Mark Weinreb (12) 99.2
(g) Stock Option Agreement dated as of February 6, 2003 between
Corniche Group Incorporated and Mark Weinreb (12) 99.3
(h) Corniche Group Incorporated 2003 Equity Participation Plan (12) 99.4
(i) Royalty Agreement, dated as of December 5, 2003, by and between
Parallel Solutions, Inc. and Phase III Medical, Inc. (13)(14) 10.1
(j) Form of Stock Option Agreement (13) 10.2
14 (a) Code of Ethics for Senior Financial Officers (13) 14.1
23 (a) Consent of Holtz Rubenstein & Co., LLP (13) 23.1
31 (a) Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (13) 31.1
32 (a) Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (13) 32.1
Notes:
(1) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's registration statement on
Form S-18, File No. 2-69627, which exhibit is incorporated here by
reference.
(2) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's registration statement on
Form S-2, File No. 2-88712, which exhibit is incorporated here by
reference.
(3) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's registration statement on
Form S-2, File No. 33-4458, which exhibit is incorporated here by
reference.
(4) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's annual report on Form
10-K for the year ended September 30, 1987, which exhibit is
incorporated here by reference.
(5) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's registration statement on
Form S-3, File No. 33-42154, which exhibit is incorporated here by
reference.
(6) Filed with the Securities and Exchange Commission as an exhibit to the
Company's registration statement on Form S-1, File No. 33-42154, which
exhibit is incorporated here by reference.
(7) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's annual report on Form
10-K for the year ended September 30, 1994, which exhibit is
incorporated here by reference.
(8) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the Company's proxy statement dated March 30, 1992,
which exhibit is incorporated here by reference.
(9) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's annual report on Form
10-K for the year ended March 31, 1996, which exhibit is incorporated
here by reference.
(10) Filed with the Securities and Exchange Commission as an exhibit, as
indicated above, to the Company's proxy statement dated April 23, 1998,
which exhibit is incorporated here by reference.
(11) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the Company's annual report on Form
10-K for the year ended December 31, 2001, which exhibit is
incorporated here by reference.
(12) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the current report of the Company on
Form 8-K, dated February 6, 2003, which exhibit is incorporated here by
reference.
(13) Filed herewith.
(14) Certain portions of this exhibit have been omitted based upon a request
for confidential treatment. The omitted portions of this exhibit have
been filed separately with the Securities and Exchange Commission on a
confidential basis.
(15) Filed with the Securities and Exchange Commission as an exhibit,
numbered as indicated above, to the current report of the Company on
Form 8-K, dated July 24, 2003, which exhibit is incorporated here by
reference.
(b) Reports on Form 8-K
On December 12, 2003, the Company filed a Current Report on Form 8-K (under
Items 5 and 7) regarding the Royalty Agreement, dated as of December 5, 2003, by
and between Parallel Solutions, Inc. and Phase III Medical, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Phase III Medical, Inc.
By: /s/ Mark Weinreb
----------------
Mark Weinreb, President
Dated: March 30, 2004.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated:
Signatures Title Date
- ---------- ----- ----
/s/ Mark Weinreb Director, President
- ------------------------------ and Chief Executive Officer March 30, 2004
Mark Weinreb
/s/ Wayne Marasco Director March 30, 2004
- ------------------------------
Wayne Marasco
/s/ Joseph Zuckerman Director March 30, 2004
- ------------------------------
Joseph Zuckerman
/s/ Michael Lax Director March 30, 2004
- ------------------------------
Michael Lax
PHASE III MEDICAL, INC.
Table of Contents
Page
----------------------
Report of Independent Certified Public Accountants -
Holtz Rubenstein & Co., LLP F - 1
Report of Independent Certified Public Accountants -
Travis, Wolff & Company, L.L.P. F - 2
Financial Statements:
Consolidated Balance Sheets at December 31, 2003 and 2002 F - 3
Consolidated Statements of Operations
Years Ended December 31, 2003, 2002 and 2001 F - 4
Consolidated Statements of Stockholder's Equity (Deficit)
Years Ended December 31, 2003, 2002 and 2001 F - 5
Consolidated Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001 F - 6
Notes to Consolidated Financial Statements F - 8 - F - 21
Independent Auditors' Report
Board of Directors and Stockholders
Phase III Medical, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheet of Phase III
Medical, Inc. as of December 31, 2003 and the related consolidated statements of
operations, stockholders' equity (deficit ) and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Phase III Medical,
Inc. as of December 31, 2003 and the results of their operations and their cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
February 3, 2004
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Phase III Medical, Inc.
We have audited the accompanying consolidated balance sheet of Phase III
Medical, Inc. (the "Company") as of December 31, 2002 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 2002 and 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Phase
III Medical, Inc. as of December 31, 2002 and the consolidated results of their
operations and their cash flows for the years ended December 31, 2002 and 2001,
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying consolidated financial statements have been prepared assuming
Phase III Medical, Inc. will continue as a going concern. As discussed in the
accompanying notes to the consolidated financial statements, the Company sold
its insurance subsidiary in July 2001. Additionally, the Company discontinued
sales of its extended warranty service contracts through its website in December
2001. Accordingly, the Company has no operations nor available means to finance
its current expenses and with which to pay its current liabilities. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 13. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/TRAVIS, WOLFF & COMPANY, L.L.P.
Dallas, Texas
March 11, 2003
F-2
PHASE III MEDICAL, INC.
Consolidated Balance Sheets
December 31,
-------------------------
2003 2002
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 210,947 $ 19,255
Notes receivable, net of allowance of $250,000 in 2002 - 1,000,000
Prepaid expenses and other current assets, net of allowance
of $8,103 in 2002 18,024 40,094
------------ -----------
Total current assets 228,971 1,059,349
Property and equipment, net 1,935 -
Deferred acquisition costs 77,782 123,835
Other assets 3,000 -
------------ -----------
$ 311,688 $ 1,183,184
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Interest and dividends payable - preferred stock $ 433,196 $ 385,512
Accounts payable 87,896 344,279
Accrued liabilities 92,115 157,806
Stockholder advances - 106,000
Notes payable 400,000 125,000
Current portion of long-term debt 9,513 22,595
------------ -----------
Total current liabilities 1,022,720 1,141,192
Unearned revenues 110,568 175,200
Series A mandatorily redeemable convertible preferred stock 681,174 681,174
Long-term debt - 9,513
COMMITMENTS AND CONTINGENCIES
Stockholders' equity (deficit):
Preferred stock; authorized, 5,000,000 shares Series B
convertible redeemable preferred stock, liquidation
value, 10 shares of common stock per share, $.01 par
value; authorized, 825,000 shares; issued and
outstanding, 10,000 shares at December 31, 2003 and
at December 31, 2002 100 100
Common stock, $.001par value; authorized, 250,000,000
shares;
issued and outstanding, 26,326,460 at December 31, 2003
and 22,398,710 shares at December 31, 2002 26,327 22,399
Additional paid-in capital 9,232,753 8,847,573
Accumulated deficit (10,761,954) (9,693,967)
------------ -----------
Total stockholders' equity (deficit) (1,502,774) (823,895)
------------ -----------
$ 311,688 $ 1,183,184
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements
F-3
PHASE III MEDICAL, INC.
Consolidated Statements of Operations
Years ended December 31,
-----------------------------------------------------------
2003 2002 2001
-------------------- ----------------- -------------------
Earned revenues $ 64,632 $ 81,348 $ 107,447
Direct Costs (43,608) (60,565) (70,674)
-------------------- ----------------- -------------------
Gross Profit 21,024 20,783 36,773
Selling, general and administrative (685,353) (911,950) (1,642,874)
Purchase of medical royalty stream (80,000) - -
Realized loss on note receivable (150,000) - -
Provision for uncollectible note receivable and
accrued interest - (258,103) -
-------------------- ----------------- -------------------
Operating loss (894,329) (1,149,270) (1,606,101)
Other income (expense):
Unrealized gain on marketable securities - - 18,779
Realized loss on marketable securities - (3,490) -
Property and equipment impairment charge - (54,732) -
Capitalized software impairment charge - - (305,333)
Interest income 88,923 70,676 107,183
Interest expense - Series A mandatorily
redeemable convertible preferred stock (23,842) - -
Interest expense (214,897) (23,022) (6,212)
-------------------- ----------------- -------------------
(149,816) (10,568) (185,583)
-------------------- ----------------- -------------------
Loss before discontinued
operations and preferred dividend (1,044,145) (1,159,838) (1,791,684)
Discontinued operations:
Income from operations - - 237,898
Loss on disposal - - (479,244)
-------------------- ----------------- -------------------
- - (241,346)
-------------------- ----------------- -------------------
Net loss (1,044,145) (1,159,838) (2,033,030)
Preferred dividend (23,842) (47,684) (47,684)
-------------------- ----------------- -------------------
Net Loss attributable to common stockholders $ (1,067,987)$ (1,207,522)$ (2,080,714)
==================== ================= ===================
Basic earnings per share
Loss before discontinued operations (0.05) (0.05) (0.08)
Loss from discontinued operations $ - $ - $ (0.01)
-------------------- ----------------- -------------------
Net loss attributable to common stockholders $ (0.05)$ (0.05)$ (0.09)
==================== ================= ===================
Weighted average common shares outstanding 23,509,343 22,344,769 22,284,417
==================== ================= ===================
The accompanying notes are an integral part of the consolidated financial
statements
F-4
PHASE III MEDICAL, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Series B
Convertible
Preferred Stock Common Stock Additional
--------------- ------------------- Paid-in Accumulated
Shares Amount Shares Amount Capitol Deficit Total
-------- ------ ----------- ------- ---------- ------------ -----------
Balance at December 31, 2000 20,000 $ 200 22,280,210 $22,280 $8,833,156 $ (6,405,731)$ 2,449,905
Issuance of common stock to directors - - 10,500 11 4,531 - 4,542
Series A convertible stock dividends - - - - - (47,684) (47,684)
Net loss - - - - - (2,033,030) (2,033,030)
-------- ------ ----------- ------- ---------- ------------ -----------
Balance at December 31, 2001 20,000 200 22,290,710 22,291 8,837,687 (8,486,445) 373,733
Issuance of common stock to directors - - 8,000 8 1,113 - 1,121
Conversion of Series B convertible
preferred stock into common stock (10,000) (100) 100,000 100 - - -
Series A convertible stock dividends - - - - - (47,684) (47,684)
Stock options granted with debt - - - - 8,773 - 8,773
Net loss - - - - - (1,159,838) (1,159,838)
-------- ------ ----------- ------- ---------- ------------ -----------
Balance at December 31, 2002 10,000 100 22,398,710 22,399 8,847,573 (9,693,967) (823,895)
Issuance of common stock for cash,
net of offering costs - - 2,825,000 2,825 211,956 - 214,781
Issuance of common stock upon
exercise of common stock options - - 1,000,000 1,000 4,000 - 5,000
Issuance of common stock for services - - 100,000 100 2,900 - 3,000
Issuance of common stock to directors - - 2,750 3 300 - 303
Series A convertible stock dividends - - - - - (23,842) (23,842)
Stock options granted with debt - - - - 166,024 - 166,024
Net loss - - - - - (1,044,145) (1,044,145)
-------- ------ ----------- ------- ---------- ------------ -----------
Balance at December 31, 2003 10,000 $ 100 26,326,460 $26,327 $9,232,753 $(10,761,954)$(1,502,774)
======== ====== =========== ======= ========== ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements
F-5
PHASE III MEDICAL, INC.
Consolidated Statements of Cash Flows
Years ended December 31,
-----------------------------------
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities: $(1,044,145)$(1,159,838)$(2,033,030)
Net loss
Adjustments to reconcile net loss to net cash (used in)
Provided by operating activities:
Net income from discontinued operations - - (237,898)
Loss on sale of subsidiary - - 479,244
Property and equipment impairment charge - 54,732 -
Capitalized software impairment charge - - 305,333
Common shares issued and stock options granted for
interest expense and for services rendered 169,327 9,894 4,542
Depreciation 646 16,766 155,436
Series A mandatorily redeemable
convertible preferred stock 23,842 - -
Unearned revenues (64,632) (84,579) 144,971
Deferred acquisition costs 46,053 59,744 (106,629)
Realized loss on note receivable 150,000 - -
Provision for uncollectible note receivable and
accrued interest - 258,103 -
Changes in operating assets and liabilities :
Marketable securities - 1,503,374 872,840
Prepaid expenses and other current assets 22,070 (28,463) 55,557
Other assets (3,000) 4,175 -
Accounts payable, accrued expenses
and other current liabilities (322,074) 371,468 (14,209)
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,021,913) 1,005,376 (373,843)
Cash flows from investing activities:
Acquisition of property and equipment (2,581) (1,133) (9,061)
Notes receivable 850,000 (1,250,000) -
Proceeds from sale of property and equipment - 3,795 -
Proceeds from sale of subsidiary - - 372,000
----------- ----------- -----------
Net cash provided by (used in) investing activities 847,419 (1,247,338) 362,939
Cash flows from financing activities:
Net proceeds from issuance of capital stock 219,781 - -
Stockholder advances (106,000) 106,000 -
Net proceeds from notes payable 275,000 125,000 -
Repayment of long-term debt (22,595) (21,051) (23,432)
----------- ----------- -----------
Net cash provided by (used in) financing activities 366,186 209,949 (23,432)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 191,692 (32,013) (34,336)
Cash and cash equivalents at beginning of year 19,255 51,268 85,604
----------- ----------- -----------
Cash and cash equivalents at end of year $ 210,947 $ 19,255 $ 51,268
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements
F-6
PHASE III MEDICAL, INC.
Consolidated Statements of Cash Flows - continued
Years ended December 31,
------------------------------------------------
2003 2002 2001
---------------- --------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 26,483 $ 8,804 $ 6,212
================ =============== =============
Supplemental schedule of non-cash investing
and financing activities
Issuance of common stock for services rendered $ 3,303 $ 1,121 $ 4,542
================ =============== =============
Compensatory element of stock options $ 166,024 $ 8,773 $ -
================ =============== =============
Net accrual of dividends on Series A preferred stock $ 23,842 $ 47,684 $ 47,684
================ =============== =============
The accompanying notes are an integral part of the consolidated financial
statements
F - 7
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1 - The Company
Phase III Medical, Inc. (hereinafter referred to as the "Company") was known as
Corniche Group Incorporated until it changed its name on July 24, 2003. The
Company was incorporated in Delaware on September 18, 1980 under the name
Fidelity Medical Services, Inc. From its inception through March 1995, the
Company was engaged in the development, design, assembly, marketing, and sale of
medical imaging products. As a result of a reverse merger with Corniche
Distribution Limited and its Subsidiaries ("Corniche") the Company was engaged
in the retail sale and wholesale distribution of stationery products and related
office products, including office furniture, in the United Kingdom. Effective
March 25, 1995, the Company sold its wholly-owned medical imaging products
subsidiary. On September 28, 1995 the Company changed its name to Corniche Group
Incorporated. In February 1996, the Company's United Kingdom operations were
placed in receivership by their creditors. Thereafter, through May 1998, the
Company had no activity. On March 4, 1998, the Company entered into a Stock
Purchase Agreement ("Agreement"), approved by the Company's stockholders on May
18, 1998, with certain individuals (the "Initial Purchasers") whereby the
Initial Purchasers acquired an aggregate of 765,000 shares of a newly created
Series B Convertible Redeemable Preferred Stock, par value $0.01 per share.
Thereafter the Initial Purchasers endeavored to establish for the Company new
business operations in the property and casualty specialty insurance and the
service contract markets. On September 30, 1998, the Company acquired all of the
capital stock of Stamford Insurance Company, Ltd. ("Stamford") from Warrantech
Corporation ("Warrantech") for $37,000 in cash in a transaction accounted for as
a purchase. On April 30, 2001, the Company sold Stamford for a consideration of
$372,000. During 2001, the Company recorded a loss of approximately $479,000 on
the sale of Stamford. The closing was effective May 1, 2001 and transfer of
funds was completed on July 6, 2001.
On January 7, 2002, the Company entered into a Stock Contribution Exchange
Agreement (the "Exchange Agreement") and a Supplemental Disclosure Agreement
(together with the Exchange Agreement, the "Agreements") with Strandtek
International, Inc., a Delaware corporation ("Strandtek"), certain of
Strandtek's principal shareholders and certain non-shareholder loan holders of
Strandtek (the "StrandTek Transaction"). The Exchange Agreement was amended on
February 11, 2002. Had the transactions contemplated by the Agreements closed,
StrandTek would have become a majority owned subsidiary of the Company and the
former shareholders of StrandTek would have controlled the Company. Consummation
of the StrandTek Transaction was conditioned upon a number of closing
conditions, including the Company obtaining financing via an equity private
placement, which ultimately could not be met and, as a result, the Agreements
were formally terminated by the Company and StrandTek in June 2002.
The Company was a provider of extended warranties and service contracts via the
Internet at warrantysuperstore.com through June 30, 2002. In June 2002,
management determined, in light of continuing operating losses, to discontinue
its warranty and service contract business and to seek new business
opportunities for the Company. On February 6, 2003, the Company appointed Mark
Weinreb as a member of the Board of Directors and as its President and Chief
Executive Officer. The Company and Mr. Weinreb have been exploring business
plans for the Company that involve entering the medical sector by acquiring or
participating in one or more biotech and/or medical companies or technologies,
owning one or more drugs or medical devices that may or may not yet be available
to the public, or acquiring rights to one or more of such drugs or medical
devices or the royalty streams therefrom. Mr. Weinreb was appointed to finalize
and execute the Company's new business plan.
F-8
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1 - The Company - (Continued)
On December 12, 2003, the Company signed a royalty agreement with Parallel
Solutions, Inc. "(PSI") to develop a new bioshielding platform technology for
the delivery of therapeutic proteins and small molecule drugs in order to extend
circulating half-life to improve bioavailability and dosing regimen, while
maintaining or improving pharmacologic activity. The agreement provides for PSI
to pay the Company a percentage of the revenue received from the sale of certain
specified products or licensing activity. The company will provide capital and
guidance to PSI to conduct a Proof of Concept Study to improve an existing
therapeutic protein with the goal of validating the bioshielding technology for
further development and licensing the technology. The Company will need to
recruit management, business development and technical personnel, and develop
its business model. Accordingly, it will be necessary for the Company to raise
new capital. There can be no assurance that any such business plan developed by
the Company will be successful, that the Company will be able to acquire such
new business or rights or raise new capital, or that the terms of any
transaction will be favorable to the Company.
The business of the Company today comprises the "run off" of its sale of
extended warranties and service contracts via the Internet and the new business
opportunity it is pursuing in the medical/bio-tech sector.
At December 31, 2003, the Company had a cash balance of $210,947, deficit
working capital of $793,749 and a stockholders' deficit of $1,502,774. In
addition the Company sustained losses of $1,044,145, $1,159,838 and $2,033,030
for the three fiscal years ended December 31, 2003, 2002 and 2001 respectively.
The Company's lack of liquidity combined with its history of losses raises
substantial doubt as to the ability of the Company to continue as a going
concern. The consolidated financial statements of the Company do not reflect any
adjustments relating to the doubt of its ability to continue as a going concern.
Management is presently selling notes which bear interest at 20% per annum to
fund the Company until such time as sufficient proceeds, if any, are received
from the private placement of its common stock. On September 22, 2003 the
Company commenced an equity private placement to raise up to $4 million through
the sale of up to 40 million shares of its Common Stock in increments of $5,000
or 50,000 shares. Through December 31, 2003, the Company sold 2,825,000 shares,
resulting in proceeds to the Company of $214,781. The Company continues to offer
these securities without the assistance of an investment banker and will collect
the full proceeds from any sale. There can be no assurance that the Company will
be able to sell these securities and may have to rely on its ability to borrow
money from new and or existing investors.
Note 2 - Summary of Significant Accounting Policies
(a) Basis of consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its subsidiary
through April 30, 2001. All intercompany amounts and balances have been
eliminated in consolidation.
(b) 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 certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
(c) Cash Equivalents: Short-term cash investments, which have a maturity of
ninety days or less when purchased, are considered cash equivalents in
the consolidated statement of cash flows.
F-9
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2 - Summary of Significant Accounting Policies - (Continued)
(d) Concentrations of Credit-Risk: Financial instruments that potentially
subject the Company to significant concentrations of credit risk
consist principally of cash. The Company places its cash accounts with
high credit quality financial institutions, which at times may be in
excess of the FDIC insurance limit.
(e) Property and Equipment: The cost of property and equipment is
depreciated over the estimated useful lives of the related assets of 3
to 5 years. The cost of computer software programs are amortized over
their estimated useful lives of five years. Depreciation is computed on
the straight-line method. Repairs and maintenance expenditures that do
not extend original asset lives are charged to expense as incurred.
(f) Income Taxes: The Company, in accordance with SFAS 109, "Accounting for
Income Taxes", recognizes (a) the amount of taxes payable or refundable
for the current year and, (b) deferred tax liabilities and assets for
the future tax consequences of events that have been recognized in an
enterprise's financial statement or tax returns.
(g) Pro Forma Effect of Stock Options: Financial Accounting Standards
Board Interpretation No. 44 is an interpretation of APB Opinion No. 25
and SFAS No. 123 which requires that effective July 1, 2000, all
options issued to non-employees after January 12, 2000 be accounted
for under the rules of SFAS No. 123. Options granted to non-employees
after December 15, 1998 through January 12, 2000 are also required to
follow SFAS No. 123 retrospectively from July 1, 2000. The effect of
adoption of the Interpretation was a charge to operations in 2000 of
$2,667 and an increase in additional paid in capital in the same
amount. Assuming the fair market value of the stock at the date of
grant to be $.3125 per share in May 1996, $.40625 per share in May
1997, $.6875 in January 1999 and $1.00 per share in September 1999,
$1.94 in June 2000, $1.097 in September 2000 and $.03 in February
2003, $.05 in May, June and July 2003, and $.18 in September 2003, the
life of the options to be from three to ten years, the expected
volatility at 200%, expected dividends are none, and the risk-free
interest rate of between 4% and 10%, the Company would have recorded
compensation expense of $205,760, $43,593 and $59,129, respectively,
for the years ended December 31, 2003, 2002 and 2001 as calculated by
the Black-Scholes option pricing model.
As such, proforma net loss and net loss per share would be as follows:
2003 2002 2001
--------------- ---------------- ---------------
Net loss as reported $ (1,067,987) $ (1,159,838) $ (2,033,030)
Additional compensation (205,760) (43,593) (59,129)
--------------- ---------------- ---------------
Adjusted net loss $ (1,273,747) $ (1,203,431) $ (2,092,159)
=============== ================ ===============
Net loss per share as reported $ (.05) $ (0.05) $ (0.09)
=============== ================ ===============
Adjusted net loss per share $ (.05) $ (0.05) $ (0.09)
=============== ================ ===============
F-10
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2 - Summary of Significant Accounting Policies - (Continued)
(h) Recent Accounting Pronouncements:
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57 and 107 and Rescission of
FASB Interpretation No. 34". FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit and warranty obligations. It also
clarifies that at the time a company issues a guarantee, a company must
recognize an initial liability for the fair value of the obligations it
assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The provisions of FIN 45
relating to initial recognition and measurement must be applied on a
prospective basis to guarantees issued or modified after December 31,
2002. The adoption of the initial recognition and measurement
provisions did not have a significant impact on the Company's financial
condition or results of operations. The disclosure requirements of FIN
45, which were effective for both interim and annual periods that end
after December 15, 2002. The adoption of FIN No. 45 did not have a
material impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities", to address perceived weaknesses in the accounting
and financial reporting for investments or interests in entities
commonly known as special purpose or off-balance-sheet entities. FIN 46
requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 was required to be applied to preexisting entities of
the Company as of the beginning of the first quarter after June 15,
2003. FIN 46 was required to be applied to all new entities with which
the Company became involved beginning February 1, 2003. The adoption of
FIN No. 46 did not have a material impact on the Company's consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". This Statement
clarifies accounting and reporting for derivative instruments,
including certain embedded derivatives, and for hedging activities
under SFAS No. 133. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The guidance should be applied
prospectively. The adoption of SFAS No. 149 did not have a material
impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement was developed to respond to concerns expressed
by users of financial statements about issuers' classification in the
statement of financial position of certain financial instruments that
have characteristics of both liabilities and equity but that have been
presented either entirely as equity or between the liabilities section
and the equity section of the statement of financial position
"mezzanine equity"). This Statement also addresses questions about the
classification of certain financial instruments that embody obligations
to issue equity shares. SFAS No. 150 aims to eliminate diversity in
practice by requiring certain types of
F-11
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 2 - Summary of Significant Accounting Policies - (Continued)
"freestanding" financial instruments, such as mandatorily redeemable
instruments, to be reported as liabilities. Preferred dividends on
these instruments are now classified as interest expense. Retroactive
reclassification of amounts reported in historical financial statements
for periods prior to the effective date of SFAS No. 150 is not
permitted. The provisions of SFAS No. 150, which also include a number
of new disclosure requirements, was effective for instruments entered
into or modified after May 31, 2003 and pre-existing instruments as of
the beginning of the first interim period that commenced after June 15,
2003. Accordingly, the Company has classified the Series A Convertible
Preferred Stock as a long-term liability in accordance with the
provisions of SFAS No. 150. See Note 9 for a further discussion.
(i) Advertising Costs: The Company expenses advertising costs as incurred.
Advertising costs amounted to $107,117 for the year ended December 31,
2001. There were no advertising costs in 2003 or 2002.
(j) Earnings Per Share: Basic earnings per share is based on the weighted
effect of all common shares issued and outstanding, and is calculated
by dividing net income available to common stockholders by the weighted
average shares outstanding during the period. Diluted earnings per
share, which is calculated by dividing net income available to common
stockholders by the weighted average number of common shares used in
the basic earnings per share calculation plus the number of common
shares that would be issued assuming conversion of all potentially
dilutive securities outstanding, is not presented as it is
anti-dilutive in all periods presented.
(j) Revenue Recognition: Stamford's reinsurance premiums are recognized on
a pro rata basis over the policy term. The deferred policy acquisition
costs are the net cost of acquiring new and renewal insurance
contracts. These costs are charged to expense in proportion to net
premium revenue recognized. The provisions for losses and
loss-adjustment expenses include an amount determined from loss reports
on individual cases and an amount based on past experience for losses
incurred but not reported. Such liabilities are necessarily based on
estimates, and while management believes that the amount is adequate,
the ultimate liability may be in excess of or less than the amounts
provided. The methods for making such estimates and for establishing
the resulting liability are continually reviewed, and any adjustments
are reflected in earnings currently.
The Company had sold via the Internet through partnerships and directly
to consumers, extended warranty service contracts for seven major
consumer products. The Company recognizes revenue ratably over the
length of the contract. The Company purchased insurance to fully cover
any losses under the service contracts from a domestic carrier. The
insurance premium and other costs related to the sale are amortized
over the life of the contract.
(k) Purchase of Royalty Interests: The Company charges payments for the
purchase of future potential royalty interests to expense as paid and
will record revenues when royalty payments are received.
F-12
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 3 - Notes Receivable
In January 2002, the Company advanced to StrandTek a loan of $1 million on an
unsecured basis, which is personally guaranteed by certain of the principal
shareholders of StrandTek and a further loan of $250,000 on February 19, 2002 on
an unsecured basis. Such loans bear interest at 7% per annum and were due on
July 31, 2002 following termination of the Agreements (as discussed in Note 1)
in June 2002. StrandTek failed to pay the notes on the due date and the Company
commenced legal proceedings against StrandTek and the guarantors to recover the
principal, accrued interest and costs of recovery. The Company ceased accruing
interest on July 31, 2002. Subsequent to July 31, 2002, the notes accrue
interest at the default rate of 12% per annum. The Company provided an allowance
for the $250,000
unsecured loan and interest of $8,103 at December 31, 2002. On July 24, 2003 the
Company entered into a Forbearance Agreement with personal guarantors Veltmen
and Buckles pursuant to which they made payments totaling $590,640, including
interest of $90,640. A similar Forbearance Agreement was reached with personal
guarantor Arnett as of July 28, 2003 pursuant to which he paid $287,673,
including interest of $37,673. A Settlement Agreement was reached with personal
guarantor Bauman as of December 23, 2003 pursuant to which he paid $100,000 in
full settlement of the judgment against him in the amount of
$291,406. The payment was received on December 30, 2003 as stated in the
agreement. These payments, totaling approximately $987,000 were paid as full
satisfaction for the outstanding amounts owed to the Company. Accordingly, the
Company recorded a realized loss on these notes of $150,000 in 2003.
Note 4 - Accrued Expenses
Accrued expenses are as follows:
December 31,
-------------------------------------
2003 2002
---------------- ----------------
Professional fees $ 49,009 $ 28,500
Interest on notes payable 27,835 5,446
Employment contract termination - 120,000
Other 15,271 3,860
---------------- ----------------
$ 92,115 $ 157,806
================ ================
Note 5 - Notes Payable
In September 2002, the Company sold to accredited investors five 60-day
promissory notes in the principal sum of $25,000 each, resulting in net proceeds
to the Company of $117,500, net of offering costs. The notes bear interest at
15% per annum payable at maturity. The notes include a default penalty pursuant
to which, if the notes are not paid on the due date, the holder shall have the
option to purchase twenty five thousand shares of the Company's common stock for
an aggregate purchase price of $125. If the non payment continues for 30 days,
then on the 30th day, and at the end of each successive 30-day period until the
note is paid in full, the holder shall have the option to purchase an
F-13
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 5 - Notes Payable - (Continued)
additional twenty five thousand shares of the Company's common stock for an
aggregate purchase price of $125. At December 31, 2003, the Company had reserved
750,000 (2002: 250,000) shares of the Company's common stock for issuance
against exercise of the options granted pursuant to the default penalty and
recognized $166,024 (2002: $8,773) as a charge to interest expense. See Note 7.
On February 11, 2003, the Company commenced a private placement offering to
raise up to $100,000 in 30-day promissory notes in increments of $5,000 bearing
interest at 20% per annum. Only selected investors which qualify as "accredited
investors" as defined in Rule 501(a) under the Securities Act of 1933, as
amended, were eligible to purchase these promissory notes. The Company raised
$50,000 through the sale of such promissory notes, resulting in net proceeds to
the Company of $45,000, net of offering costs. In November 2003, the Company
repaid all $50,000 of such promissory notes together with all accrued interest
of $6,854.
On March 17, 2003, the Company commenced a private placement offering to raise
up to $250,000 in 6-month promissory notes in increments of $5,000 bearing
interest at 15% per annum. Only selected investors which qualify as "accredited
investors" as defined in Rule 501(a) under the Securities Act of 1933, as
amended, were eligible to purchase these promissory notes. The Company raised
the full $250,000 through the sale of such promissory notes, resulting in net
proceeds to the Company of $225,000, net of offering costs. The notes contain a
default provision which raises the interest rate to 20% if the notes are not
paid when due. The Company issued $250,000 of these notes. As of December 31,
2003, $60,000 of the principal amount of these notes were in default. All
interest payments have been made and are current. As of March 15, 2004, all of
these notes are in default and bear interest at 20%.
Note 6 - Series A Mandatorily Redeemable Convertible Preferred Stock
In connection with the settlement of securities class action litigation in 1994,
the Company issued 1,000,000 shares of Series A $0.07 Convertible Preferred
Stock (the "Series A Preferred Stock") with an aggregate value of $1,000,000.
The following summarizes the terms of Series A Preferred Stock as more fully set
forth in the Certificate of Designation. The Series A Preferred Stock has a
liquidation value of $1 per share, is non-voting and convertible into common
stock of the Company at a price of $5.20 per share. Holders of Series A
Preferred Stock are entitled to receive cumulative cash dividends of $0.07 per
share, per year, payable semi-annually. The Series A Preferred Stock is callable
by the Company at a price of $1.05 per share, plus accrued and unpaid dividends.
In addition, if the closing price of the Company's common stock exceeds $13.80
per share for a period of 20 consecutive trade days, the Series A Preferred
Stock is callable by the Company at a price equal to $0.01 per share, plus
accrued and unpaid dividends.
The Certificate of Designation for the Series A Preferred Stock also states that
at any time after December 1, 1999 the holders of the Series A Preferred Stocks
may require the Company to redeem their shares of Series A Preferred Stock (if
there are funds with which the Company may do so) at a price of $1.00 per share.
Notwithstanding any of the foregoing redemption provisions, if any dividends on
the Series A Preferred Stock are past due, no shares of Series A Preferred Stock
may be redeemed by the Company unless all outstanding shares of Series A
Preferred Stock are simultaneously redeemed. During the years ended December 31,
2000 and 1999, 128,880 and 18,711, respectively, shares of Series A Preferred
Stock were converted into 24,743 and 3,586, respectively, shares of common
F-14
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 6 - Series A Mandatorily Redeemable Convertible Preferred Stock -
(Continued)
stock. At December 31, 2003, 2002 and 2001, 681,174 shares of Series A Preferred
Stock were outstanding, and accrued dividends on these outstanding shares were
$433,196, $385,512 and $337,827 respectively.
On January 29, 2002, notice was given that, pursuant to the Company's Restated
Certificate of Incorporation, as amended, the Company called for redemption on
the date of closing the StrandTek Transaction, all shares of Series A Preferred
Stock outstanding on that date at a redemption price of $1.05, plus accrued and
unpaid dividends of approximately $0.47 per share. The redemption, among other
financial, legal and business conditions, was a condition of closing the
StrandTek Transaction. Similarly, the redemption was subject to closing the
StrandTek Transaction. Upon termination of the StrandTek Transaction, the
Company rescinded the notice of redemption.
Note 7 - Stockholders' Equity
(a) Series B Convertible Redeemable Preferred Stock:
The total authorized shares of Series B Convertible Redeemable
Preferred Stock is 825,000. The following summarizes the terms of the
Series B Stock whose terms are more fully set forth in the Certificate
of Designation. The Series B Stock carries a zero coupon and each share
of the Series B Stock is convertible into ten shares of the Company's
common stock. The holder of a share of the Series B Stock is entitled
to ten times any dividends paid on the common stock and such stock has
ten votes per share and votes as one class with the common stock.
The holder of any share of Series B Convertible Redeemable Preferred
Stock has the right, at such holder's option (but not if such share is
called for redemption), exercisable after September 30, 2000, to
convert such share into ten (10) fully paid and non-assessable shares
of common stock (the "Conversion Rate"). The Conversion Rate is subject
to adjustment as stipulated in the Agreement. Upon liquidation, the
Series B Stock would be junior to the Company's Series A Preferred
Stock and would share ratably with the common stock with respect to
liquidating distributions.
During the year ended December 31, 2000, holders of 805,000 shares of
the Series B Preferred Stock converted their shares into 8,050,000
shares of the Company's common stock. During the year ended December
31, 2002, the holders of 10,000 shares of the Series B Preferred Stock
converted their shares into 100,000 shares of the Company's common
stock.
At December 31, 2003 and 2002, 10,000 Series B Preferred Shares were
issued and outstanding. The Company's right to repurchase or redeem
shares of Series B Stock was eliminated in fiscal 1999 pursuant to the
terms of the Agreement and the Certificate of Designation.
(b) Common Stock:
At the 2003 annual meeting, the stockholders approved an amendment
increasing the authorized common stock to 250 million shares from 75
million shares.
F-15
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
(b) Common Stock: -continued
In 2001, the Company issued 10,500 shares of its common stock whose
fair value was $4,542, in 2002 8,000 shares of its common stock whose
fair value was $1,121 and in 2003 2,750 shares of its common stock
whose fair value was $303 to its board members for director's fees.
In 2003, the Company issued 1,000,000 shares of its common stock,
resulting in net proceeds to the Company of $5,000 as a result of the
exercise of stock options granted pursuant to the default provisions of
the 60 day promissory notes discussed in Note 5.
On February 6, 2003, the Company entered into a deferment agreement
with three major creditors pursuant to which liabilities of
approximately $523,887 in aggregate, were deferred, subject to the
success of the Company's debt and equity financing efforts. In
addition, in consideration for the deferral, the Company agreed to
issue 100,000 restricted shares of the Company's common stock, whose
fair value was $3,000. The deferred creditors were paid in full, during
2003 from the recoveries against the StrandTek (see Note 3) personal
guarantors.
On September 22, 2003 the Company commenced an equity private placement
to raise up to $4 million through the sale of up to 40 million shares
of its Common Stock in increments of $5,000 or 50,000 shares. Only
selected investors which qualify as "accredited investors" as defined
in Rule 501(a) under the Securities Act of 1933, as amended, were
eligible to purchase these shares. The placement closed on December 31,
2003 upon the sale of 2,825,000 shares, resulting in proceeds to the
Company of $214,781, net of offering costs of $67,719.
The Company retained Robert M. Cohen & Company as placement agent, on a
best efforts basis, for the offering. The Company agreed to pay the
placement agent an amount equal to 10% of the proceeds of the offering
as commissions for the placement agents' services in addition to
reimbursement of the placement agents' expenses (by way of a 3%
non-accountable expense allowance) and indemnification against
customary liabilities.
(c) Warrants:
The Company has issued common stock purchase warrants from time to time
to investors in private placements, certain vendors, underwriters, and
directors and officers of the Company.
In connection with the September 2003 equity private placement, the
Company issued a 5 year warrant to purchase 282,500 shares of its
Common Stock at an exercise price of $.12 per share to its retained
placement agent, Robert M. Cohen & Company. The warrant contains
"piggyback registration rights. The fair value of these warrants were
$13,500 at December 31, 2003.
A total of 326,500 shares of common stock are reserved for issuance
upon exercise of outstanding warrants as of December 31, 2003 at prices
ranging from $.12 to $8.10 and expiring through December 2008. No
warrants were exercised during any of the periods presented.
F-16
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
(d) Stock Option Plans:
(i) The 1998 Employee Incentive Stock Option Plan provides for the
granting of options to purchase shares of the Company's common stock to
employees. Under the 1998 Plan, the maximum aggregate number of shares
that may be issued under options is 300,000 shares of common stock. The
aggregate fair market value (determined at the time the option is
granted) of the shares for which incentive stock options are
exercisable for the first time under the terms of the 1998 Plan by any
eligible employee during any calendar year cannot exceed $100,000.
Options are exercisable at the fair market value of the common stock on
the date of grant and have five-year terms. The exercise price of each
option is 100% of the fair market value of the underlying stock on the
date the options are granted and are exercisable for a period of ten
years, except that no option will be granted to any employee who, at
the time the option is granted, owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company
or any subsidiary unless (a) at the time the options are granted, the
option exercise price is at least 110% of the fair market value of the
shares of common stock subject to the options and (b) the option by its
terms is not exercisable after the expiration of five years from the
date such option is granted. The Board of Directors' Compensation
Committee administers the 1998 Plan. The 1998 Employee Incentive Stock
Option Plan was superceded by the 2003 Equity Participation Plan in
February 2003. (see below).
(ii) In April 1992, the Company adopted the 1992 Stock Option Plan to
provide for the granting of options to directors. According to the
terms of this plan, each director is granted options to purchase 1,500
shares each year. The maximum amount of the Company's common stock that
may be granted under this plan is 20,000 shares. The plan expired by
its own terms in 2002.
Stock option activity under the 1992 and 1998 Stock Option Plans is as
follows:
Weighted
Number of Average Exercise
Shares Price
------------------ --------------------
Balances at December 31, 2000 403,000 $ 1.45
Granted 75,000 0.37
Expired (1,500) 0.31
Cancelled (175,000) 1.23
------------------ --------------------
Balances at December 31, 2001 301,500 1.30
Granted - -
Expired (1,500) 0.41
Cancelled (300,000) 1.31
------------------ --------------------
Balances at December 31, 2003 and 2002 - $ -
================== ====================
F-17
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
(e) Stock Option Plans:- Continued
Under the 1998 and 1992 plans outstanding options expire 90 days after
termination of the holder's status as employee or director. All
options were granted at an exercise price equal to the fair value of
the common stock at the grant date. Therefore, in accordance with the
provisions of APB Opinion No. 25 related to fixed stock options, no
compensation expense is recognized with respect to options granted or
exercised. Under the alternative fair-value based method defined in
SFAS No. 123, the fair value of all fixed stock options on the grant
date would be recognized as expense over the vesting period.
(iii) At the 2003 annual meeting, the stockholders approved the 2003
Equity Participation Plan. The Company has reserved 15,000,000 shares
of common stock for the grant of incentive stock options and
non-statutory stock options to employees and non-employee directors,
consultants and advisors. Pursuant to such plan the Company entered
into a Stock Option Agreement with Mr. Weinreb (the "Initial Option
Agreement"). Under the Initial Option Agreement, the Company granted
Mr. Weinreb the right and option, exercisable for 10 years, to
purchase up to 2,500,000 shares of the Company's common stock at an
exercise price of $0.03 per share.
Additionally, in the event that the closing price of the Company's
common stock equals or exceeds $0.50 per share for any five
consecutive trading days during the term of the employment agreement
(whether during the initial term or an annual extension), the Company
has agreed to grant Mr. Weinreb, on the day immediately following the
end of the five day period, an option to purchase an additional
2,500,000 shares of the Company's common stock at an exercise price of
$0.50 per share, pursuant to the 2003 Equity Participation Plan.
Mr. Weinreb has agreed that he will not sell any shares of the
Company's common stock obtained upon exercise of the Initial Option
Agreement or Additional Option Agreement prior to the first
anniversary of the date of the employment agreement.
Additionally, the Company has granted options to purchase 1,200,000
shares of Common Stock at exercise prices ranging from $.05 to $.18 to
members of its board of directors and its advisory board. All options
were granted at an exercise price equal to the fair value of the
common stock at the date of grant.
Stock option activity under the 2003 Equity Participation Plan is as
follows:
Range of
Exercise Weighted Average
Number of Shares (1) Price Exercise Price
-------------------------- -------------- ---------------------------
Balance at December 31, 2002 - - -
Granted 3,700,000 $.03 - $.18 $.05
Exercised - - -
Expired - - -
Cancelled - - -
-------------------------- -------------- ---------------------------
Balance at December 31, 2003 3,700,000 $.03 - $.18 $ $.05
============== ===========================
(1) All options are exercisable for a period of ten years.
F-18
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 8 - Income Taxes
Deferred tax assets consisted of the following as of December 31:
2002 2003 2001
-------------------- -------------------- -------------------
Net operating loss carryforwards $ 2,566,000 $ 2,068,000 $ 1,828,000
Depreciation and amortization 1,000 62,000 126,000
Capital loss carryforward 149,000 166,000 166,000
Deferred revenue 38,000 60,000 88,000
Deferred legal and other fees 30,000 158,000 -
Allowance for notes receivable - 88,000 -
Other, net - - -
-------------------- -------------------- -------------------
Net deferred tax assets 2,784,000 2,602,000 2,208,000
Deferred tax asset valuation allowance
(2,784,000) (2,602,000) (2,208,000)
-------------------- -------------------- -------------------
$ - $ - $ -
==================== ==================== ===================
The provision for income taxes is different than the amount computed using the
applicable statutory federal income tax rate with the difference for each year
summarized below:
2003 2002 2001
------------------ ------------------ -----------------
Federal tax benefit at statutory rate (34.0%) (34.0%) (34.0%)
Change in valuation allowance 34.0% 33.0% 33.0%
Permanent difference - 1.0% 1.0%
------------------ ------------------ -----------------
Provision for income taxes 0.00% 0.00% 0.00%
================== ================== =================
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
utilization of net operating loss carryforwards to offset future taxable income
following a corporate ownership change. The Company's ability to utilize its NOL
carryforwards is limited following a change in ownership in excess of fifty
percentage points during any three-year period.
Upon receipt of the proceeds from the last foreign purchasers of the Company's
common stock in January 2000, common stock ownership changed in excess of 50%
during the three-year period then ended. At December 31, 2003, the Company had
net operating loss carryforwards of approximately $7,547,000. Included in the
net operating loss carryforward is approximately $2,121,000 that has been
limited by the ownership change. The tax loss carryforwards expire at various
dates through 2023. The future tax benefit of the net operating loss
carryforwards aggregating approximately $2,566,000 at December 31, 2003 has been
fully reserved as it is not more likely than not that the Company will be able
to use the operating loss in the future.
F-19
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 9 - Segment Information
Until April 30, 2001, the Company operated in two segments; as a reinsuror and
as a seller of extended warranty service contracts through the Internet. The
reinsurance segment has been discontinued with the sale of Stamford (see Note
1), and the Company's remaining revenues are derived from the run-off of its
sale of extended warranties and service contracts via the Internet.
Additionally, the Company is currently establishing a new business in the
medical, bio-tech sector. The Company's operations are conducted entirely in the
U.S. Although the Company has not realized any revenue from its purchase of
royalty revenue interests, the Company will be operating in two segments until
the "run-off" is completed.
Note 10 - Related Party Transactions
The Company processes claims on its warranty contracts through Warrantech
Corporation (Warrantech), in which a principal shareholder of the Company is
also a significant shareholder and Chief Executive Officer, President and
Chairman of the Board of Directors. Warrantech receives an administration fee of
$50 per contract for processing the claim. Total administrative fees paid to
Warrantech in 2003, 2002 and 2001 totaled $0, $0 and $48,506, respectively.
Note 11 - Commitments and Contingencies
On February 21, 2003 the Company leases office space in Melville, New York at an
original annual rental of $18,000. The lease has been extended for an additional
twelve months and expires on March 31, 2005. The annual rental increases to
approximately $19,200 on April 1, 2004 and continues until the expiration date.
On February 6, 2003, the Company entered into an employment agreement with the
President and CEO. The employment agreement has an initial term of three years,
with automatic annual extensions unless terminated by the Company or by the
President at least 90 days prior to an applicable anniversary date. The Company
has agreed to pay the President an annual salary of $180,000 for the initial
year of the term, $198,000 for the second year of the term, and $217,800 for the
third year of the term. In addition, the Company will pay an annual bonus in the
amount of $20,000 for the initial year in the event, and concurrently on the
date, that the Company has received debt and/or equity financing in the
aggregate amount of at least $1,000,000 since the beginning of the President's
service, and $20,000 for each subsequent year of the term, without condition.
On December 5, 2003 the Company entered into a royalty agreement with Parallel
Solutions, Inc. ("PSI") to develop a new bioshielding platform technology for
the delivery of therapeutic proteins and small molecule drugs in order to extend
circulating half-life to improve bioavailability and dosing regimen, while
maintaining or improving pharmacologic activity. The Royalty Agreement provides
for PSI to pay Phase III a percentage of the revenue received from the sale of
certain specified products or licensing activity. Phase III shall provide
capital in nine monthly installments of $80,000, commencing in December 2003,
for a total payment of $720,000 and guidance to PSI to conduct a Proof of
Concept Study to improve an existing therapeutic protein with the goal of
validating the bioshielding technology for further commercial development and
licensing the technology. There can be no assurances that the Company will be
able to raise sufficient capital to pay this obligation or if fully paid, a
royalty will be paid to the Company by PSI under the terms of the agreement.
F-20
PHASE III MEDICAL, INC.
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 12 - Subsequent Events
As described in Note 5, the Company granted purchasers of the Company's
September 2002 60-day promissory notes, options to purchase shares of common
stock if the Company defaulted on the payment of principal or interest on such
promissory notes. For each 30 day period, the purchaser is granted the option to
purchase 25,000 shares of common stock for an aggregate price of $125 on the
30th day. In January 2004, two holders of such promissory notes exercised their
options and purchased 200,000 shares of common stock resulting in net proceeds
to the Company of $1,000.
The Company amended its equity private placement (see Note 7) to raise up to $4
million through the sale of up to 40 million shares of Common Stock in
increments of $5,000 or 50,000 shares. Only selected investors which qualify as
"accredited investors" as defined in Rule 501(a) under the Securities Act of
1933, as amended, are eligible to purchase these shares. The initial placement
closed on December 31, 2003 as stated in Note 9. The amended private placement
does not include any investment banking fees and therefore all proceeds, less
expenses such as printing, transfer fees, etc., will be paid directly to the
Company. The previous investment banker, Robert M. Cohen & Company, has been
fully paid for its efforts
In February 2004, the Company sold 30 day 20% notes in the amount of $75,000 to
two accredited investors to fund current operations. It is anticipated that
these notes will be repaid from the proceeds of the amended equity private
placement. These notes have a default provision that if they are not paid within
30 days, there is an additional interest payment of $250 per $25,000 for each 30
day period or part thereof.
F-21
EXHIBITS FORM 10-K
EXHIBIT 4.1
Form of Promissory Note September 2002
Exhibit 4.1
PROMISSORY NOTE
PRINCIPLE TERMS:
Effective Date:
Maker: Corniche Group Incorporated
Maker's Mailing Address:
Payee:
Annual Interest Rate on Unpaid
Principal from Effective Date: Fifteen percent (15%) per annum
Annual Interest Rate on
Matured Unpaid Amounts: Fifteen percent (15%) per annum
Terms of Payment
(principal and interest): The entire Principal Amount, together
with accrued interest thereon, is
payable in one installment 60 days
from the Effective Date. Maker
reserves the right to prepay this
Promissory Note in any amount at
any time prior to maturity without
penalty
- ------------------------------------------------------------------------------
OTHER TERMS:
1. General. Maker promises to pay to the order of Payee at the place for
payment, and according to the terms of payment, the principal amount plus
interest at the rates stated above under Principle Terms. All unpaid amounts
shall be due by the scheduled payment date.
2. Default Penalty. If there occurs an Event of Default (as defined below in
paragraph 8), then Payee shall have the option to purchase twenty-five thousand
(25,000) shares of common stock of Maker par value $.0001 per share ("Common
Stock") for an aggregate purchase price of one hundred and twenty five and
no/100 dollars ($125.00). If the Event of Default continues for 30 days, then on
the 30th day (and at the end of each successive 30-day period until this
Promissory Note is paid in full), Payee shall have the option to purchase an
additional twenty-five thousand (25,000) shares of common stock of Maker par
value $.0001 per share ("Common Stock") for an aggregate purchase price of one
hundred and twenty-five and no/100 dollars ($125.00) for each additional
purchase of Common Stock.
3. Costs of Collection. If this note is given to an attorney for collection, or
if suit is brought for collection, or if it is collected through probate,
bankruptcy, or other judicial proceeding, then Maker shall pay Payee all costs
of collection, including reasonable attorneys' fees and court costs, in addition
to other amounts due.
4. Savings Clause. Interest on the debt evidenced by this note shall not exceed
the maximum amount of non-usurious interest that may be contracted for, taken,
reserved, charged, or received under law, any interest in excess of that maximum
amount shall be credited on the principal of the debt or, if that has been paid,
refunded. On any acceleration or required or permitted prepayment, any such
excess shall be canceled automatically as if the acceleration or prepayment or,
if already paid, credited on the principal of the debt or, if the principal of
the debt has been paid, refunded. This provision overrides other provisions in
this and all other instruments concerning the debt.
5. Accredited Investor. The Payee hereby certifies that Payee is an "Accredited
Investor" (as that term is defined by Regulation D under the Securities Act of
1933, as amended) by checking the following statements that are applicable to
Payee:
[Please CHECK all of the following statements that are applicable to Payee. At
least one of the following must be checked.]
(a) I am an "Accredited Investor" because I had individual income
of more than $200,000 in each of the two prior calendar years
and I reasonably expect to have individual income in excess of
$200,000 during the current calendar year.
(b) I am an "Accredited Investor" because my spouse and I together
had income of more than $300,000 in each of the two prior
calendar years and we reasonably except to have joint income
in excess of $300,000 during the current calendar year.
(c) I am an "Accredited Investor" because I have an individual net
worth, or my spouse and I have a joint net worth of more than
$1,000,000.
6. Representations of Payee. Payee represents and warrants to
Maker as follows:
(a) Payee has received and examined all information, including
financial statements, of or concerning Maker which Payee
considers necessary to making an informed decision regarding
an investment in the Common Stock. In addition, Payee has had
the opportunity to ask questions of, and receive answers from,
the officers and agents of Maker concerning Maker and to
obtain such information, to the extent such persons possessed
the same or could acquire it without unreasonable effort or
expense, as Payee deemed necessary to verify the accuracy of
the information referred to herein.
(b) Payee is acquiring the Common Stock for his own account, for
investment purposes only, and not with a view to the resale or
distribution of all or any part thereof.
(c) Payee acknowledges that the Common Stock (i) has not been
registered under applicable securities laws, (ii) will be
"restricted securities" as defined in applicable securities
laws, (iii) has been issued in reliance on the statutory
exemptions from registration contemplated by applicable
securities laws based (in part) on the accuracy of Payee's
representations contained herein, (iv) will not be
transferable without registration under applicable securities
laws, unless an exemption from such registration requirements
is available, and (v) certificates representing the Common
Stock will bear a restrictive legend evidencing such
restrictions.
(d) Payee has reviewed and understands Maker's (i) Annual Report
on Form 10-K for the fiscal year ended December 31, 2001; (ii)
Quarterly Report on Form 10-Q for the three and six months
ended June 30, 2002 and (iii) Current Report on Form 8-K dated
June 18, 2002.
7. Governing Law. This Promissory Note, and all rights and remedies hereunder,
will be governed by the laws of the State of New York.
8. Event of Default. An "Event of Default" shall have occurred if Maker fails to
pay any payment of principal or interest on this Note when due.
MAKER:
CORNICHE GROUP INCORPORATED
By:_____________________________
James J. Fyfe, Director
PAYEE:
- --------------------------------
EXHIBIT 4.2
Form of Promissory Note February 2003
Exhibit 4.2
PROMISSORY NOTE
PRINCIPLE TERMS:
Effective Date:
Maker: Corniche Group Incorporated
Maker's Mailing Address: Corniche Group Inc.
330 South Service Road
Suite 120
Melville, New York 11747
Payee:
Place for Payment:
Principal Amount:
Annual Interest Rate on Unpaid Twenty percent (20%) per annum
Principal from Effective Date:
Annual Interest Rate on Twenty percent (20%) per annum.
Matured Unpaid Amounts:
Terms of Payment (principal and interest) The entire Principal Amount,
together with accrued interest
thereon, is payable in one
installment 30 days from the
Effective Date. Maker reserves the
right to prepay this Promissory
Note in any amount at any time
prior to maturity without penalty.
- ------------------------------------------------------------------------------
OTHER TERMS:
1. General. Maker promises to pay to the order of Payee at the place for
payment, and according to the terms of payment, the principal amount
plus interest at the rates stated above under Principal Terms. All
unpaid amounts shall be due by the scheduled payment date.
2. Costs of Collection. If this note is given to an attorney for
collection, or if suit is brought for collection, or if it is collected
through probate, bankruptcy, or other judicial proceeding, then Maker
shall pay Payee all costs of collection, including reasonable
attorneys' fees and court costs, in addition to other amounts due.
3. Savings Clause. Interest on the debt evidenced by this note shall not
exceed the maximum amount of non-usurious interest that may be
contracted for, taken, reserved, charged, or received under law, any
interest in excess of that maximum amount shall be credited on the
principal of the debt or, if that has been paid, refunded. On any
acceleration or required or permitted prepayment, any such excess shall
be canceled automatically as if the acceleration or prepayment or, if
already paid, credited on the principal of the debt or, if the
principal of the debt has been paid, refunded. This provision overrides
other provisions in this and all other instruments concerning the debt.
4. Accredited Investor. The Payee hereby certifies that Payee is an
"Accredited Investor" (as that term is defined by Regulation D under
the Securities Act of 1933, as amended) by checking the following
statements that are applicable to Payee:
[Please CHECK all of the following statements that are applicable to
Payee. At least one of the following must be checked.]
(a) I am an "Accredited Investor" because I had individual income
of more than $200,000 in each of the two prior calendar years
and I reasonably expect to have individual income in excess of
$200,000 during the current calendar year.
(b) I am an "Accredited Investor" because my spouse and I together
had income of more than $300,000 in each of the two prior
calendar years and we reasonably expect to have joint income
in excess of $300,000 during the current calendar year.
(c) I am an "Accredited Investor" because I have an individual net
worth, or my spouse and I have a joint net worth of more than
$1,000,000.
5. Representations of Payee. Payee represents and warrants to Maker as
follows:
(a) Payee has received and examined all information, including
financial statements, of or concerning Maker which Payee
considers necessary to making an informed decision regarding
an investment in this Promissory Note. In addition, Payee has
had the opportunity to ask questions of, and receive answers
from, the officers and agents of Maker concerning Maker and to
obtain such information, to the extent such persons possessed
the same or could acquire it without unreasonable effort or
expense, as Payee deemed necessary to verify the accuracy of
the information referred to herein.
(b) This Promissory Note is one of a series of Promissory Notes in
the aggregate principal amount of up to $100,000. Payee
acknowledges and understands that: (i) Maker will use the
proceeds of this Promissory Note to enable Maker to commence
the establishment of new business operations; (ii) the
proceeds of this Promissory Note will not be sufficient to
provide Maker with the necessary funds to achieve its current
business plan; (iii) Maker does not have sufficient cash
available to repay this Promissory Note; and (iv) Payee bears
the economic risk of never being repaid on this Promissory
Note.
(c) Payee is acquiring this Promissory Note for his own account,
for investment purposes only, and not with a view to the
resale or distribution of all or any part thereof.
(d) Payee acknowledges that this Note (i) has not been registered
under applicable securities laws, (ii) will be a "restricted
security" as defined in applicable securities laws, (iii) has
been issued in reliance on the statutory exemptions from
registration contemplated by applicable securities laws based
(in part) on the accuracy of Payee's representations contained
herein, and (iv) will not be transferable without registration
under applicable securities laws, unless an exemption from
such registration requirements is available.
(e) Payee understands that the Maker currently has no business
operations but plans to establish a business in the medical
sector as more fully described in Maker's Current Report on
Form 8-K dated February 6, 2003.
(f) Payee has reviewed and understands Maker's Current Report on
Form 8-K dated February 6, 2003 and its quarterly report on
the Form 10-Q, three and nine month ended September 30, 2002.
6. Governing Law. This Promissory Note, and all rights and remedies
hereunder, will be governed by the laws of the State of New York,
without regard to conflicts of law principles.
IN WITNESS WHEREOF, Maker has executed and delivered this Promissory Note as of
the Effective Date first stated above.
MAKER: PAYEE:
CORNICHE GROUP INCORPORATED
NAME:_______________________
By:________________________________
______________________________
Name: Mark Weinreb
Title: President and Chief Executive Offic
EXHIBIT 4.3
Form of Promissory Note March 2003
Exhibit 4.3
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. THE NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND MUST BE HELD
INDEFINITELY and MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT
IS SUBSEQUENTLY REGISTERED UNDER SAID ACT OR, IN THE OPINION OF COUNSEL TO THE
COMPANY, AN EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAIABLE.
PROMISSORY NOTE
$ ___________________ Date: _______________ ,
2003
FOR VALUE RECEIVED, Corniche Group Incorporated, a Delaware corporation,
("Maker") promises to pay to _____________________________________ ("Payee"), in
lawful money of the United States of America, the principal sum of
_________________________ ($ __________ ), together with interest thereon
accruing at an annual rate equal to 15%, in the manner provided below. Interest
shall be calculated on the basis of a year of 365 or 366 days, as applicable,
and charged for the actual number of days elapsed.
1. PAYMENTS
1.1 Principal and interest.
Interest on the unpaid principal amount shall be payable monthly
in arrears on the last day of each calendar month, commencing
__________________ , 2003 until the entire principal amount shall
be paid in full. All principal and accrued interest shall be paid
in full on __________ , 2003.
1.2 Manner of Payment
All payments of principal and interest on this Note shall be made
by check at ____________________________ or at such other place
in the United States of America as Payee shall designate to Maker
in writing. If any payment of principal or interest on this Note
is due on a day which is not a Business Day, such payment shall
be due on the next succeeding Business Day. "Business Day" means
any day other than a Saturday, Sunday or legal holiday in the
State of New York.
1.3 Prepayment
Maker may, without premium or penalty, at any time and from time
to time, prepay all or any portion of the outstanding principal
balance due under this Note, provided that each such prepayment
is accompanied by accrued interest on the amount of principal
prepaid calculated to the date of such prepayment. Any partial
prepayments shall be applied first to accrued interest and then
to principal.
2. DEFAULTS
2.1 Events of Default
The occurrence of any one or more of the following events with
respect to Maker shall constitute an event of default hereunder
("Event of Default"):
(a)If Maker shall fail to pay when due any payment of principal
or interest on this Note.
(b)If, pursuant to or within the meaning of the United States
Bankruptcy Code or any other federal or state law relating to
insolvency or relief of debtors (a "Bankruptcy Law"), Maker
shall (i) commence a voluntary case or proceeding; (ii)
consent to the entry of an order for relief against it in an
involuntary case; (iii) consent to the appointment of a
trustee, receiver, assignee, liquidator or similar official;
(iv) make an assignment for the benefit of its creditors; or
(v) admit in writing its inability to pay its debts as they
become due.
(c)If a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that (i) is for relief against Maker
in an involuntary case; (ii) appoints of a trustee, receiver,
assignee, liquidator or similar official for the Maker or
substantially all of the Maker's properties; or (iii) orders
the liquidation of the Maker, and in each case the order is
not dismissed within 90 days.
2.2 Remedies
Upon the occurrence of an Event of Default hereunder (unless all
Events of Default have been cured or waived by Payee), (a) the
interest rate will increase to a default rate of 20% per annum
effective upon such Event of Default, and (b) Payee may, at its
option, (i) by written notice to Maker, declare the entire unpaid
principal balance of this Note, together with all accrued
interest thereon, immediately due and payable, and (ii) exercise
all and any rights and remedies available to it under applicable
law, including, without limitation, the right to collect from
maker all sums due under this Note. Maker shall pay all
reasonable costs and expenses incurred by or on behalf of Payee
in connection with Payee's exercise of any or all of its rights
and remedies under this Note, including, without limitation,
reasonable attorneys' fees and expenses.
3. REPRESENTATIONS BY PAYEE
Payee represents and warrants to Maker as follows:
(a)Payee has received and examined all information, including
financial statements, of or concerning Maker which Payee
considers necessary to making an informed decision regarding
this Note. In addition, Payee has had the opportunity to ask
questions of, and receive answers from, the officers and
agents of Maker concerning Maker and to obtain such
information, to the extent such persons possessed the same
or could acquire it without unreasonable effort or expense,
as Payee deemed necessary to verify the accuracy of the
information referred to herein.
(b) The Payee acknowledges and understands that (i) the Maker
will use the proceeds of this Note to enable Maker to
commence the establishment of new business operations; (ii)
the proceeds of this Note will not be sufficient to provide
Maker with the necessary funds to achieve its current
business plan; (iii) the Maker does not have sufficient cash
available to repay this Note; (iv) this Note will not be
guaranteed nor will it be secured by any assets of Maker nor
senior to any other indebtedness of Maker; (v) the Maker
will pay a commission to Maker's agent, Robert M. Cohen &
Company, Inc. equal to 10% of the principal amount loaned
pursuant to this Note; and (v) Payee bears the economic risk
of never being repaid on this Promissory Note.
(c) The Payee hereby certifies that Payee is an "Accredited
Investor" (as that term is defined by Regulation D under the
Securities Act of 1933, as amended) because at least one of
the following statements is applicable to Payee:
(i) Payee is an Accredited Investor because the Payee
had individual income of more than $200,000 in each of
the two prior calendar years and reasonably
expects to have individual income in excess of
$200,000 during the current calendar year.
(ii) The Payee is an Accredited Investor because the Payee
and his spouse together had income of more than
$300,000 in each of the two prior calendar years
and reasonably expect to have joint income in excess of
$300,000 during the current calendar year.
(iii) The Payee is an Accredited Investor because the Payee
has an individual net worth, or the Payee and his
spouse have a joint net worth of more than $1,000,000.
(d) Payee is acquiring this Note for his own account, for
investment purposes only, and not with a view to the resale
or distribution of all or any part thereof.
(e) Payee acknowledges that this Note (i) has not been
registered under applicable securities laws, (ii) will be a
"restricted security" as defined in applicable securities
laws, (iii) has been issued in reliance on the statutory
exemptions from registration contemplated by applicable
securities laws based (in part) on the accuracy of Payee's
representations contained herein, and (iv) will not be
transferable without registration under applicable
securities laws, unless an exemption from such registration
requirements is available.
(f) Payee has reviewed and understands Maker's (i) Annual Report
on Form 10-K for the fiscal year ended December 31, 2001;
(ii) Quarterly Report on Form10-Q for the three and nine
months ended September 30, 2002; (iii) Current Report on
Form 8-K dated February 6, 2003; and (iv) Current Report on
Form 8-K dated February 28, 2003.
4. MISCELLANEOUS
4.1 Waiver
The rights and remedies of Payee under this Note shall be
cumulative and not alternative. No waiver by Payee of any right or
remedy under this Note shall be effective unless it is in writing
and signed by Payee. Neither the failure nor any delay in
exercising any right, power or privilege under this Note will
operate as a waiver of such right, power or privilege and no
single or partial exercise of any such right, power or privilege
by Payee will preclude any other or further exercise of such
right, power or privilege or the exercise of any other right,
power or privilege. To the maximum amount permitted by applicable
law, (i) no claim or right of Payee arising out of this Note can
be discharged by Payee, in whole or in part, by a waiver or
renunciation of the claim or right unless in a writing, signed by
Payee; (b) no waiver that may be given by Payee will be applicable
except in the specific instance for which it is given; and (c) no
notice to or demand on Maker will be deemed to be a waiver of any
obligation of Maker or of the right of Payee to take further
action without notice or demand as provided in this Note.
Maker acknowledges that this Note and Maker's obligations under
this Note are, and shall at all times continue to be, absolute and
unconditional in all respects, and shall at all times be valid and
enforceable. To the extent permitted by applicable law, Maker
hereby absolutely, unconditionally and irrevocably forever waives
any and all right to assert any defense, set-off, off-set,
counterclaim, cross-claim, or claim of any nature whatsoever with
respect to this Note or Maker's obligations hereunder.
4.2 Notices
Any notice or communication to be given hereunder by any party, to
the other party shall be in writing and shall be deemed to have
been given when personally delivered, or one day after the date
sent by recognized overnight courier or transmitted by facsimile,
which transmission by facsimile has been confirmed or 3 (three)
days after the date sent by registered or certified mail, postage
prepaid, as follows:
If to Maker, addressed to it at:
Corniche Group Incorporated
330 South Service Road
Suite 120
Melville, NY 11747
Attn: Mark Weinreb
Facsimile Number: (631) 574 4956
If to Payee, addressed to:
Name: ______________________________
Address: ___________________________
___________________________
Or persons or addresses as may be designated in writing by
the party to receive such notice.
4.3 Severability
If any provision of this Note is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this
Note will remain in full force and effect. Any provision of this
Note held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or
unenforceable.
4.4 Governing Law.
This Promissory Note will be governed by the laws of the State of
New York without regard to conflicts of laws principles.
4.5 Assignment; Parties in Interest
This Note shall bind Maker and its successors and assigns. This
Note shall not be assigned or transferred by Maker, without the
express prior written consent of Payee, and this Note will inure
to the benefit of Payee and his heirs, estates, representatives,
administrators, successors and assigns.
4.6 Section Headings, Construction
The headings of Sections in this Note are provided for convenience
only and will not affect its construction or interpretation. All
references to "Section" or "Sections" refer to the corresponding
Section or Sections of this Note unless otherwise specified.
All words used in this Note will be construed to be of such gender
or number as the circumstances require. Unless otherwise expressly
provided, the words "hereof" and "hereunder" and similar
references refer to this Note in its entirety and not to any
specific section or subsection hereof.
4.7 Savings Clause
If, at any time, the rate of interest under this Note shall be
deemed by any competent court of law, governmental agency or
tribunal to exceed the maximum rate of interest permitted by the
laws of any applicable jurisdiction or the rules or regulations of
any regulatory authority or agency, then during such time as such
rate of interest would be deemed excessive, that portion of each
interest payment attributable to that portion of such interest
rate that exceeds the maximum rate of interest so permitted shall
be deemed a voluntary prepayment of principal or, if all principal
has been paid, that portion of each interest payment attributable
to that portion of such interest rate that exceeds the maximum
rate of interest so permitted shall be promptly refunded to Maker.
4.8 Waiver of Jury Trial
MAKER AND PAYEE EACH HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED
BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRAIL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS NOTE, IT BEING AGREED THAT ALL
SUCH TRAILS SHALL BE CONDUCTED SOLELY BY A JUDGE. MAKER AND PAYEE
EACH CERTIFY THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF EITHER
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER WOULD NOT,
IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS.
MAKER AND PAYEE EACH AGREE AND ACKNOWLEDGE THAT IT HAS BEEN
REPRESENTED BY INDEPENDENT COUNSEL IN CONNECTION WITH THIS NOTE OR
BEEN ADVISED THAT IT SHOULD BE REPRESENTED BY INDEPENDENT COUNSEL
IN CONNECTION WITH THIS NOTE. IF MAKER OR PAYEE HAS DECIDED NOT TO
BE REPRESENTED BY INDEPENDENT COUNSEL IN CONNECTION WITH THIS
NOTE, IT IRREVOCABLY AND FOREVER WAIVES ANY AND ALL DEFENSES OR
RIGHTS ARISING OUT OF OR RELATED TO SAID DECISION.
IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date
first stated above.
CORNICHE GROUP INCORPORATED
By:
_______________________________
Name: Mark Weinreb
Title: President and Chief
Executive Officer
Accepted and agreed to:
- -----------------------------------
Payee
EXHIBIT 10.1
Royalty Agreement between Parallel Solutions,
Inc. and Phase III Medical, Inc.
Exhibit 10.1
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks. Denote such omissions.
ROYALTY AGREEMENT
THIS ROYALTY AGREEMENT (this "Agreement") is made as of the 5th day of December,
2003 (the "Effective Date") by and between Parallel Solutions, Inc., a Delaware
corporation with offices at 763D Concord Avenue, Cambridge MA 02138 ("PSI"), and
Phase III Medical, Inc., a Delaware corporation with offices at 330 South
Service Road, Suite 120, Melville, New York 11747 ("Phase III") (PSI and Phase
III are referred to individually as a "Party" and collectively as the
"Parties").
NOW, THEREFORE, in consideration of the mutual covenants and premises
herein contained, the parties agree as follows:
Definitions.
"Affiliate".
Affiliate shall mean, with respect to any person, any other person controlling,
controlled by or under common control with such person. For purposes of this
Section, "control" shall mean (a) in the case of corporate entities, direct or
indirect ownership of at least fifty percent (50%) of the stock or shares having
the right to vote for the election of directors, and (b) in the case of
non-corporate entities, direct or indirect ownership of at least fifty percent
(50%) of the equity interest with the power to direct the management and
policies of such non-corporate entities.
"Field". Field shall mean therapeutic protein drugs and/or small molecule drugs
that have been [**] characteristics, including, without limitation, (i) [**] of
the pharmaceutical substance, (ii) [**], (iii) [**], and/or (iv) [**]. The Field
shall not include any other molecules, or applications of [**], including, but
not limited to, [**]. For purposes of clarity, if a [**], so as to confer [**]
characteristics as set forth above, subject to the terms, conditions and
exceptions set forth above, such Product shall be included in the Field.
"Intellectual Property". Intellectual Property shall have the meaning set forth
in Section 8(b). "Net Sales". Net Sales shall mean, with respect to a Product,
the gross amount invoiced by PSI and/or its Affiliates (but not its or their
licensees) on sales of Products for use in the Field by PSI and/or its
Affiliates to unaffiliated third parties, less the following deductions: Trade,
cash and/or quantity discounts actually allowed and taken directly with respect
to such sales, as reflected in the amount invoiced;
Tariffs, duties, excises, sales taxes or other taxes imposed upon and paid
directly by PSI and/or its Affiliates with respect to the production, sale or
use of the Product (excluding national, state or local taxes based on income),
as reflected in the amount invoiced; Amounts paid to third parties to license
patents covering such third party's technology if, in the absence of such
license, the sale by PSI or its Affiliates of a Product would or is likely to,
in the reasonable judgment of PSI, infringe such patents;
Amounts repaid or credited by reason of rejections, defects, recalls or returns
or because of chargebacks, refunds, rebates or retroactive price reductions; and
Freight, insurance and other transportation charges incurred in shipping a
Product, as reflected in the amount invoiced.
"Product". Product shall mean any product in the Field comprised in part of a
[**] molecule.
"Program Patent Rights" shall mean all United States and/or foreign patents and
patent applications, and all substitutions, divisions, continuations,
continuations-in-part, reissues, reexaminations and extensions thereof that
during the term of this Agreement are owned or otherwise controlled by PSI that
relate exclusively to the Field.
"POC Study". POC Study shall have the meaning set forth in Section 3(a).
"Proof of Concept Guidelines". Proof of Concept Guidelines shall mean the
guidelines applicable to the POC Study and set forth in Exhibit A.
"Term". Term shall have the meaning set forth in Section 7(a).
"Valid Claim". Valid Claim means a claim (i) of any issued, unexpired United
States or foreign patent that shall not have been donated to the public,
disclaimed, nor held invalid or unenforceable against the other Party by a court
of competent jurisdiction in an unappealed or unappealable decision, or (ii) of
any United States or foreign patent application that shall not have been
cancelled, withdrawn, abandoned nor been pending for more than seven (7) years.
Development Funding.
- -------------------
In consideration for rights received by Phase III under this Agreement and the
obligations assumed by PSI hereunder with respect to the conduct of the POC
Study, Phase III hereby agrees to pay PSI:
an aggregate sum of [**] Dollars (US$[**]), payable to PSI, for synthetic and in
vitro work carried out by PSI ("PSI Research", which term is further defined in
Exhibit A hereto), [**] Dollars (US $[**]) starting upon the Effective Date and
then every thirty (30) days thereafter (collectively, the "PSI Funding" to be
paid to PSI over such nine month period, hereinafter referred to as the "PSI
Funding Period"); and
amounts reasonably required in order for PSI to complete the in vitro and in
vivo evaluation of target molecules contemplated by the POC Study and the Proof
of Concept Guidelines which are to be carried out by third party subcontractors
engaged by PSI in reasonable consultation with Phase III ("Evaluation Study"),
(collectively, the "Evaluation Funding", and together with the PSI Funding, the
"Development Funding"). Phase III shall pay to each such third party
subcontractor amounts constituting Evaluation Funding within fifteen (15) days
after its receipt from time to time from PSI of a written funding request
specifying the subcontractor, the purpose of the study, and amounts required to
be paid to the subcontractor. So long as Phase III provides as and when required
under this paragraph at least $[**] of Evaluation Funding in addition to all PSI
Funding as required in Section 2.2(a)(i), any right of Phase III under Section
4(a) or Section 4(b) only that is conditioned on it providing Development
Funding or Evaluation Funding shall be deemed fully satisfied. If the POC Study
is successful (as defined in Exhibit A), the Parties acknowledge that funding
will be necessary beyond the Development Funding in order for PSI to develop a
marketable product. At PSI's request, the Parties shall negotiate in good faith
the terms and conditions of an agreement or amendment hereto under which Phase
III provides to PSI such additional development funding; provided that, neither
Party shall be obligated to enter into any such agreement.
The Parties also acknowledge that PSI may enter into a license with a third
party pharmaceutical company that relates exclusively to the Field prior to
Phase III making all contemplated Development Funding payments. In such event,
upon consummation of such a license, and if PSI expressly waives in a signed
writing to Phase III PSI's right to further Development Funding, Phase III shall
have no further obligations to make such payments hereunder, but shall
nevertheless still be entitled to receive its full [**] percent ([**]%) payment
as set forth in Section 4 received by PSI from such third party or otherwise. In
addition to the Development Funding, Phase III shall pay [**] percent ([**]%) of
all legal and regulatory costs incurred by PSI for the prosecution of patent
applications and maintenance of patents related exclusively to the Field and
such other patents related to the Field which Phase III shall determine in
consultation with PSI.
Development Program.
- --------------------
POC Study. (i) Subject to the terms and conditions of this Agreement (including
the payment in full of the Development Funding), PSI shall use commercially
reasonable efforts to perform the activities described in the proof of concept
validation study for development of the [**] therapeutic protein delivery
program as set forth as Exhibit A hereto (the "POC Study") for no longer than
the PSI Funding Period plus the period required to do the Evaluation Studies;
provided that, PSI may elect at its discretion for the three (3) month period
immediately following the PSI Funding Period to continue to conduct the POC
Study. Notwithstanding the foregoing, Evaluation Studies may, subject to payment
in full of Development Funding, continue until complete or otherwise mutually
agreed, regardless of the period of time required to complete such studies. The
POC Study shall conform to the Proof of Concept Guidelines set forth in Exhibit
A. Not later than the date two (2) weeks after execution of this Agreement, PSI
shall deliver to Phase III a more detailed POC Study plan with detailed monthly
benchmarks or activity goals, and PSI shall thereafter use commercially
reasonable efforts to meet the goals and benchmarks in such timetable. In no
event shall PSI have any obligation to conduct any activity outside the scope of
the Required Research (as defined in Exhibit A hereto) of the POC Study, and, in
the event that Phase III fails to pay Development Funding as and when required
in Section 2(a) above, PSI shall have no further obligation to conduct the POC
Study as set forth herein.
(ii) Within thirty (30) days following the conclusion of the
POC Study and receipt by PSI of all relevant subcontractor reports, PSI shall
deliver to Phase III a written report including all subcontractor reports
summarizing the results of the POC Study.
Notice of Transfer. If PSI determines to sell, assign or otherwise transfer
ownership of or title to (a "Transfer") the Program Patent Rights and/or
non-patented intellectual property owned by PSI that relates exclusively to the
Field (collectively, the "Program Rights"), and PSI enters into substantive
negotiations regarding the material terms and conditions of such potential
Transfer with a third party, then PSI shall, on a one-time basis for each such
potential Transfer, provide Phase III with reasonable advance written notice of
the material terms and conditions of such Transfer and reasonable updates
thereto. Such information shall be deemed to be the Confidential Information of
PSI.
Reports. PSI shall provide written progress reports at the completion of each
phase of the POC Study (e.g. [**]). Phase III shall have reasonable access to
the facilities of PSI during normal working hours to review the POC Study upon
reasonable prior notice to PSI.
Researcher. [**], or another capable immunologist or scientist appropriately
skilled in the execution of the listed animal studies and approved by Phase III,
shall be hired or contracted as a consultant by PSI during the three (3) month
evaluation phase of the POC Study to oversee the external in vitro and in vivo
research of the POC Study. PSI shall pay all compensation for such immunologist
or scientist during such period, at no additional cost to Phase III beyond the
amounts described in Section 2 of this Agreement.
Revenue Sharing.
- ---------------
Licensing Income. Subject to Phase III's payment in full (to the extent then
due) of the PSI Funding and, to the extent required pursuant to Section
2(a)(ii), the Evaluation Funding, PSI shall pay to Phase III an amount equal to
[**] percent ([**]%) of "Licensing Income" (in each case, as defined below). The
term "Licensing Income" shall mean (A) amounts received by PSI and/or its
Affiliates from unaffiliated third parties in consideration for the grant of an
express license to manufacture, use, sell or otherwise exploit a Product for use
in the Field, or otherwise to use in the Field the Program Rights, including,
without limitation, all up-front fees, milestone payments, royalties, and other
license fees, but specifically excluding (i) any payments for research and
development activities or for the performance of any manufacturing or other
services, to the extent reasonably related to the fair value of those services,
(ii) proceeds from the purchase of any assets or equity securities of PSI and/or
its Affiliates acquired by a licensee or acquiror, whether by purchase, merger,
consolidation or otherwise, provided that if there is both a license and an
acquisition of assets or securities, only to the extent that the proceeds from
the sale of such assets or securities are reasonably related to the value of
such assets or securities; and (iii) proceeds from any loan or debt transaction
with a licensee, less (B) amounts paid by PSI to third parties to license
patents covering such third party's technology if, in the absence of such
license, the license by PSI or its Affiliates to manufacture, use, sell or
otherwise exploit a Product would or is likely to, in the reasonable judgment of
the Parties, infringe such patents.
Sales Income. Subject to Phase III's payment in full (to the extent then due) of
the PSI Funding and, to the extent required pursuant to Section 2(a)(ii), the
Evaluation Funding, PSI shall pay to Phase III an amount equal to the [**]
percent ([**]%) of the "Benchmark Percentage" (as defined below) of Net Sales.
As used above, the term "Benchmark Percentage" shall mean a mutually agreed
percentage equal to the average percentage royalty charged by companies similar
to PSI for [**] drugs similar to the Products at the time of sale of such
Products; provided, however, if the Parties are unable to reach an agreement on
such percentage within sixty (60) days after either Party requested in writing
that the Parties negotiate concerning such percentage, then either Party may
submit this dispute to a single arbitrator with relevant industry experience
appointed jointly by the Parties, or failing agreement on a joint appointment,
appointed by the President of the American Arbitration Association ("AAA"), and
such arbitrator shall then determine the Benchmark Percentage through an
arbitration conducted in Cambridge, Massachusetts in accordance with the
commercial arbitration rules of the AAA.
Payment Period. The payment obligations described in Section 4(a) and 4(b) above
shall commence on the date hereof and shall continue so long as PSI is receiving
any Licensing Income or Net Sales.
Actions by PSI. In the event that (i) any of the Program Patent Rights is
infringed by a third party, (ii) PSI elects, at its sole discretion, to bring an
action for infringement against such third party, and (iii) Phase III pays to
PSI, from time to time as incurred by PSI, [**] percent ([**]%) of the
out-of-pocket expenses and attorneys' fees of PSI relating to such action, then,
any recovery of damages, including settlement proceeds and royalties, by PSI
from any such action, shall be applied first in satisfaction of any unreimbursed
out-of-pocket expenses and attorneys' fees of the Parties relating to such
action, and then the remaining amounts from any such recovery shall be
considered Licensing Income hereunder subject to Section 4(a) above.
Payments; Reporting
- -------------------
Payment. All payments hereunder (whether pursuant to Section 2 or 4) shall be
made by check or wire transfer to such bank and account as the recipient may
from time to time designate in writing. All payments due hereunder are expressed
in and shall be paid in United States Dollars.
Foreign Exchange. If any amounts due to Phase III under Section 4 hereunder are
initially stated in a currency other than United States Dollars, then, for the
purpose of calculating the amount due, such amounts shall be converted into
United States Dollars at the exchange rate between those two currencies most
recently quoted in the Wall Street Journal in New York as of the last business
day of the calendar quarter for which such amounts are being paid.
Reports and Payments. (i) Monthly. Not later than thirty (30) days after the end
of each month, PSI shall deliver to Phase III a monthly statement, setting forth
the amounts due under Section 4(a) during the preceding month. Together with
such report, PSI will pay Phase III payments accruing during such preceding
month. (ii) Quarterly. Not later than 30 days after the end of each calendar
quarter, PSI shall deliver to Phase III a quarterly statement, setting forth the
amounts due under Section 4(b) during the preceding calendar quarter. Together
with such report, PSI will pay Phase III payments accruing during such preceding
calendar quarter. (iii) All reports and payments of amounts under this Section
5(c) not disputed as to correctness by Phase III within three (3) years after
receipt thereof shall thereafter conclusively be deemed correct for all
purposes.
Responsibility for Taxes. Sales, use or similar taxes now or hereafter imposed
with respect to the transactions contemplated hereunder (but not income taxes or
other taxes imposed upon PSI and measured by the gross or net income of PSI)
shall be the responsibility of Phase III, and if paid or required to be paid by
PSI, the amount thereof shall be added to and become a part of the amounts
payable by Phase III hereunder.
Payable Only Once. The amounts payable under this Agreement shall be imposed
only once with respect to the same unit of a Product.
Audits by Phase III of Licensing Income and Sales Income. PSI shall keep and
shall require its Affiliates to keep within their control, complete and accurate
records of the latest three (3) years of sales or licenses pursuant to which
payments are due to Phase III under Sections 4(a) and (b) above. For the sole
purpose of verifying amounts payable to Phase III, Phase III shall have the
right annually at Phase III's expense to retain an independent certified public
accountant selected by Phase III and reasonably acceptable to PSI, to review
such records in the location(s) where such records are maintained by PSI or its
Affiliates upon thirty (30) days written notice and during regular business
hours. Any information made available during an audit shall be treated as the
confidential information of PSI. Such review by Phase III shall be limited to
one review per calendar year. If the review reflects an underpayment to Phase
III, such underpayment shall be remitted to Phase III within thirty (30) days of
written notice. If the underpayment is equal to or greater than seven percent
(7%) of the amount that was otherwise due, PSI shall pay all of Phase III's
reasonable costs of such review. If the review reflects an overpayment to Phase
III, the amount of such overpayment shall be remitted to PSI within thirty (30)
days of receipt of written notice thereof.
Cooperation.
- ------------
Consulting Services. Phase III shall provide to PSI, without charge, consulting
services in connection with and during the course of the POC Study, to be
determined by the mutual consultation of the parties. During the POC Study and
Post-Study Period, Phase III will be provided with reasonable access to PSI's
chief scientist working on the POC Study.
Licensing. PSI and Phase III shall cooperate to identify potential licensing
partners and to secure licensing or royalty agreements with third parties. PSI
shall use reasonable efforts to consult with Phase III prior to making a
licensing decision, and to consider Phase III's advice in good faith. PSI shall
provide Phase III with reasonable notice prior to PSI entering into a license or
other agreement with respect to a Product with any third party.
Board Observer Rights. During the POC Study and for a period of nine (9) months
after its conclusion (but in no event after the expiration or earlier
termination of the Term), Phase III shall have the right to attend the portions
of convened PSI Board of Directors meetings relating to the POC Study or to
other matters related exclusively to the Field as a non-voting observer, subject
to execution of an appropriate confidentiality agreement. Notwithstanding the
foregoing, in no event shall Phase III have any right to observe or be present
at the portion of any such meetings (i) during which PSI receives or discusses
legal advice of any kind if its presence would impair or compromise
attorney-client privilege or confidentiality, (ii) during discussions relating
to any dispute under this Agreement, or (iii) during discussions regarding any
other matter that PSI deems in the good faith exercise of its reasonable
discretion to be in conflict of interest with Phase III.
Publications. To the extent permitted under publication guidelines and
standards, Phase III shall be identified, either as a co-investigator or as
having funded the study, as appropriate, with PSI in any publication of the
results of the POC Study in peer reviewed scientific journals selected by PSI.
PSI will use reasonable efforts to submit the results of the in vitro and in
vivo studies for publication in a peer-reviewed journal within a reasonable
period after the completion of the POC Study, subject to such delay as is deemed
reasonably necessary by PSI to ensure appropriate patent filings to protect
PSI's intellectual property and competitive position. PSI in good faith will
attempt to have its studies published in journals identified by Phase III.
Publicity. Phase III and PSI must approve all public announcements of the
relationship contemplated by this Agreement jointly, provided that neither
Party's consent shall be required with respect to such announcements or
disclosures that such other Party reasonably determines are necessary to comply
with the federal securities laws, rules and regulations and any other legal
requirements.
Term; Termination.
- -----------------
Term. Unless sooner terminated pursuant to this Section 7, this Agreement will
be effective as of the Effective Date and will remain in effect until the
last-to-expire payment obligation of the Parties hereunder (such period of time
referred to as the "Term").
Termination. In the event that either Party commits a material breach of its
obligations under this Agreement (including, without limitation, an obligation
to make a payment when due), and such Party fails to cure such breach within
thirty (30) days after written notice from the other Party (or in the case of a
breach of a payment obligation with respect to PSI Funding, within fifteen (15)
days), the notifying Party shall have the right to terminate this Agreement at
any time thereafter upon further notice to the breaching Party.
Survival. Sections 8, 19 and 20 shall survive any expiration or earlier
termination of this Agreement.
Insolvency. Each Party acknowledges and agrees that it intends that its
obligations under this Agreement shall survive the insolvency of such Party.
Further, to the extent applicable, all rights and licenses granted under or
pursuant to any section of this Agreement are, and shall otherwise be deemed to
be, for purposes of Section 365(n) of the Bankruptcy Code licenses of rights to
"intellectual property" as defined under Section 101(35A) of the Bankruptcy
Code. The Parties shall retain and may fully exercise all of their respective
rights and elections under the Bankruptcy Code.
Confidential Information.
- ------------------------
Phase III and PSI each agree that all information received by one from the other
pursuant to this Agreement (1) shall be received in strict confidence, (2) shall
be used only for the purposes of this Agreement, and (3) shall not be disclosed
by the recipient Party, its agents or employees without the prior written
consent of the disclosing Party, except to the extent that the recipient Party
can establish competent written proof that such information:
was in the public domain at the time of disclosure;
later became part of the public domain through no act or omission of the
recipient Party, its employees, agents, successors or assigns;
was lawfully disclosed to the recipient Party by a third party having the right
to disclose it without such third party violating its confidentiality
obligations to the disclosing Party; was already known by the recipient Party at
the time of disclosure;
was independently developed by the recipient Party;
is required by law or regulation to be disclosed, provided however, that (a) the
disclosing Party shall first give the other Party written notice and adequate
opportunity to object to such order for disclosure or to request confidential
treatment; and (b) information disclosed pursuant to this Section 8(a)(vi) shall
otherwise remain Confidential Information for the purposes of this Agreement; or
is disclosed to potential investors or lenders on a need-to-know basis and
pursuant to confidentiality agreements no less protective of such information
than the terms and conditions of this Section 8.
PSI understands that Phase III is a publicly held corporation and that trading
in its securities while in possession of material, non-public information
related to Phase III may violate federal and state securities laws.
Intellectual Property. Each Party shall retain all rights to all inventions,
patents, copyrights, trade secrets and other intellectual property
("Intellectual Property") conceived or reduced to practice by such Party prior
to or during the course of this Agreement. The Parties expressly agree that all
Intellectual Property conceived, reduced to practice or otherwise arising from
the POC Study shall be owned exclusively by PSI. Phase III shall have no right
or license implied or otherwise in or to any intellectual property or data owned
or controlled or utilized by PSI, including, without limitation, any
intellectual property conceived in the course of the POC Study. All inventions
and results of the POC Study shall be the Confidential Information of PSI, but
subject to disclosure by Phase III pursuant to 8(a) above.
Representations and Warranties.
- -------------------------------
Representations of Authority. PSI and Phase III each represents and warrants to
the other that as of the Effective Date it has full right, power and authority
to enter into this Agreement and to perform its respective obligations under
this Agreement.
Consents. PSI and Phase III each represents and warrants that
all necessary consents, approvals and authorizations of all government
authorities and other persons required to be obtained by such Party in
connection with execution, delivery and performance of this Agreement have been
and shall be obtained.
No Conflict. PSI and Phase III each represents and warrants that the execution
and delivery of this Agreement, the performance of such Party's obligations
hereunder (i) do not conflict with or violate any requirement of applicable laws
or regulations and (ii) do not and will not conflict with, violate or breach or
constitute a default or require any consent under, any contractual obligations
of such Party.
Intellectual Property. PSI represents and warrants to Phase III as of the
Effective Date that: To PSI's actual knowledge, PSI has the full power and right
to grant to Phase III the rights set forth in this Agreement, free of any liens,
claims, fees, commissions or other encumbrances, other than pursuant to licenses
and any research, development and consulting agreements that have been provided
to Phase III.
To PSI's actual knowledge, without having made an investigation, the operations
of PSI in the Field do not infringe upon or conflict with the Intellectual
Property of any other person in the Field. [**].
To PSI's actual knowledge, all such Intellectual Property owned or licensed by
PSI, has not been challenged in any judicial or administrative proceeding, and
no written claim has been received by PSI, and to its actual knowledge, no claim
is pending or threatened against PSI, to the effect that any such Intellectual
Property owned or licensed by PSI is invalid or unenforceable by PSI.
With respect to the Field, to PSI's actual knowledge, no person nor such
person's business or products has infringed or misappropriated the Intellectual
Property owned or licensed by PSI or currently is infringing or misappropriating
such Intellectual Property owned, purported to be owned or licensed by PSI.
Each present or past employee or officer has executed a written agreement with
PSI that (a) conveys any and all right, title and interest in and to all
Intellectual Property developed by such person in connection with such person's
employment or contract to PSI, (b) requires such person, during and after the
term of employment or contract, to cooperate with PSI in the prosecution of any
patent applications filed in connection with such Intellectual Property, (c)
establishes that to the extent such Person is an author of a copyrighted work
created in connection with such person's employment or contract, such work is
assigned to PSI, (d) includes a representation and covenant by such person that
no process, technique, innovation or other work product provided to PSI is or
will be derived from or otherwise constitute the proprietary information of a
prior employer or contractor, in contravention of any prior confidentiality
agreement, and (e) obligates the employee or contractor to keep any confidential
information, including trade secrets, of PSI confidential both during and after
the term of employment or contract.
To PSI's actual knowledge, it is not necessary for the business of PSI in the
Field to use any Intellectual Property owned by any present or past director,
officer, or employee of PSI. Covenant. PSI shall notify Phase III of patentable
inventions for which PSI files a Program Patent Right. PSI shall use
commercially reasonable efforts during the POC Study and Post-Study Period (i)
to evaluate potentially patentable inventions in the Field, and (ii) to
determine whether to file patent applications covering such inventions, taking
into account relevant factors, including, without limitation, PSI's past
practices, intellectual property strategy, and PSI's financial constraints.
Assignment. Either Party may in its sole discretion assign this Agreement or any
of its rights, interests or obligations hereunder with or without the prior
written approval of the other Party; provided that, the assignee assumes all
obligations of such Party under this Agreement; and, provided further, that if
such assignment is made by PSI in connection with the transfer or sale of all or
substantially all of the business of PSI to which this Agreement relates,
whether by merger, sale of stock, sale of assets (including a transfer of the
Program Rights), or otherwise, it is understood and agreed that (i) the products
of such Acquiring Party conceived, reduced to practice, developed or
independently acquired prior to such acquisition or after such acquisition
without use of the technology acquired from PSI shall not be deemed Products
hereunder, (ii) the intellectual property, technology and other rights of the
Acquiring Party conceived, reduced to practice, developed or independently
acquired prior to such acquisition or after such acquisition without use of the
technology acquired from PSI shall not be deemed to be Program Patent Rights or
otherwise subject to the terms or conditions of this Agreement, and (iii)
following such acquisition, PSI's (or the Acquiring Party's or its successor's)
obligation to pay amounts due under Section 4 hereof shall be assumed and
continue, subject to the terms of this Agreement, so long as PSI or such
Acquiring Party (or its successor) is receiving any Licensing Income or Net
Sales (as provided in paragraph 4(c). This Agreement shall inure to the benefit
of the Parties hereto and be binding on their respective successors and
permitted assigns. It is understood and agreed by the Parties that, upon the
sale or assignment by PSI and/or any of its Affiliates of the Program Rights to
any unaffiliated person or entity (the "Acquiring Party") (whether on a
stand-alone basis or pursuant to a transaction involving the transfer or sale of
all or substantially of the business of PSI to which this Agreement relates,
whether by merger, sale of stock, sale of assets or otherwise), PSI shall assign
this Agreement to the Acquiring Party and the Acquiring Party shall assume the
rights and obligations of PSI under this Agreement.
Severability. If any provision of this Agreement is held to be invalid, illegal,
or unenforceable, in whole or part, such invalidity will not affect any
otherwise valid provision, and all other valid provisions will remain in full
force and effect.
Counterparts. This Agreement may be executed and delivered (including by
facsimile transmission) in one or more counterparts, all of which shall be
considered one and the same agreement and shall become effective when one or
more counterparts have been signed by each of the Parties and delivered to the
other Party, it being understood that all Parties need not sign the same
counterpart.
Titles. The titles and headings preceding the text of the paragraphs of this
Agreement have been inserted solely for convenience of reference and do not
constitute a part of this Agreement or affect its meaning, interpretation or
effect.
Waiver. The failure of any Party to insist in any one or more instances upon
performance of any terms or conditions of this Agreement will not be construed
as a waiver of future performance of any such term, covenant, or condition and
the obligations of any Party with respect to such term, covenant or condition
will continue in full force and effect.
Notices. All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally, sent by facsimile, mailed by
registered or certified mail (return receipt requested) or sent by overnight
courier to the Parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
If to PSI, to
Parallel Solutions, Inc.
763D Concord Avenue
Cambridge MA 02138
Attention: Dermot Liddy, CEO
Telephone: 617-876-2178
Facsimile: 617-876-0728
If to Phase III, to
330 South Service Road, Suite 120
Melville, NY 11747
Attention: Mark Weinreb, President and CEO
Telephone: 631.574.4955
Facsimile: 631.574.4956
Any of the above addresses may be changed at any time by notice given as
provided above; provided, that any such notice of change of address shall be
effective only upon receipt. All notices, requests or instructions given in
accordance herewith shall be deemed given (i) on the date of delivery, if hand
delivered, (ii) on the date of receipt, if sent by facsimile, (iii) three
business days after the date of mailing, if mailed by registered or certified
mail, return receipt requested, and (iv) one business day after the date of
sending, if sent by Federal Express or other recognized overnight courier.
Entire Agreement. This Agreement (which term shall be deemed to include the
Exhibits hereto and the other certificates, documents and instruments delivered
hereunder) constitutes the entire agreement of the Parties hereto with respect
to the subject matter hereof and supersedes all prior agreements, letters of
intent and understandings, both written and oral, among the Parties with respect
to the subject matter hereof. There are no representations or warranties,
agreements, or covenants other than those expressly set forth in this Agreement.
Modification. Except as otherwise provided herein, this Agreement cannot be
amended or modified except by subsequent written agreement among Phase III and
PSI. Governing Law and Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts. Each
PSI and Phase III submits to the exclusive jurisdiction of the state and federal
courts located in the Commonwealth of Massachusetts.
No Consequential Damages. NEITHER PARTY HERETO WILL BE LIABLE FOR SPECIAL,
INCIDENTAL, CONSEQUENTIAL, EXEMPLARY, PUNITIVE, MULTIPLE OR OTHER INDIRECT
DAMAGES ARISING OUT OF THIS AGREEMENT OR THE EXERCISE OF ITS RIGHTS HEREUNDER,
OR FOR LOSS OF PROFITS, LOSS OF DATA OR LOSS OF USE DAMAGES ARISING FROM OR
RELATING TO ANY BREACH OF THIS AGREEMENT WHETHER BASED UPON WARRANTY, CONTRACT,
TORT, STRICT LIABILITY OR OTHERWISE, REGARDLESS OF ANY NOTICE OF SUCH DAMAGES.
Warranty Disclaimer. Except as expressly set forth in Section 9, THE PARTIES
MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND UNDER THIS
AGREEMENT, EITHER EXPRESS OR IMPLIED, AND PARTICULARLY THAT PRODUCTS WILL BE
SUCCESSFULLY DEVELOPED HEREUNDER, AND IF PRODUCTS ARE DEVELOPED, WITH RESPECT TO
SUCH PRODUCTS, AND THE PARTIES DISCLAIM ALL IMPLIED WARRANTIES OF
NON-INFRINGEMENT, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
[Signature Page Follows]
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date and
year first above written.
PARALLEL SOLUTIONS, INC.
By: /s/Dermot Liddy
----------------------
Name: Dermot Liddy
---------------------
Title: CEO.
-------------------
PHASE III MEDICAL, INC.
By: /s/Mark Weinreb
----------------------
Name: Mark Weinreb
--------------------
Title: President & CEO
-------------------
EXHIBIT A
PROOF OF CONCEPT GUIDELINES
For the sake of clarity, both Parties agree that the POC Study shall
consist of Required Research only (as defined below) and that the duration
of this POC Study is no longer than nine (9) months (plus, at PSI's
discretion, an additional three (3) months), absent further mutual
agreement between the Parties. Both Parties also agree that potential
additional research, as further described below, may be added to the POC
Study by mutual agreement of both Parties. The Parties agree that both the
Required Research and any such additional research shall be at the expense
of Phase III Medical to the extent described herein and that such
additional research may involve extending the duration of the POC Study.
The compound that will be tested during the Required Research shall be
[**]. [**]The definition of a successful Required Research study shall be
as follows: The POC Study shall be deemed successful if the results
indicate that [**] than the [**], as determined from [**] with respect to
[**]; and (b) is likely to be [**]. The Parties understand and agree that
there is no requirement or assurance that the Required Research will be
successful.
"Required Research" shall mean PSI Research and Evaluation Study, as those terms
are defined below.
PSI Research
Up to [**] during the duration of the POC Study. The Parties recognize the
possibility that [**]. Both Parties agree that they will [**].
A number of lead compounds may be [**] performed by PSI. Such candidates [**].
These lead compounds will [**]. [**]
(b) Evaluation Study
[**] testing of a lead candidate or candidates as outlined above will [**]. Such
testing shall be [**] to the extent described herein.
[**] testing of the lead candidates in the [**]. Such testing shall be [**] to
the extent described herein.
[**] testing will also include [**]. Such testing shall be [**] to the extent
described herein
[**] testing will include [**]. In this regard, [**]. Such review shall [**] to
the extent described herein.
Potential Additional Research
At Phase III's request and as agreed by PSI, PSI shall [**] the lead candidate
or candidates. The expense for such studies shall be as determined hereafter by
the Parties.
At Phase III's request and as agreed by PSI, PSI shall [**].
Such testing shall [**] as determined hereafter by the Parties.
At Phase III's request, and as agreed by PSI, [**] shall be [**]. The expense
for such studies shall be as determined hereafter by the Parties.
Exhibit 10.2
Form of Stock Option Agreement
Exhibit 10.2
STOCK OPTION AGREEMENT, made as of the 2nd day of March, 2004 (the
"Agreement"), between PHASE III MEDICAL, INC., a Delaware corporation (the
"Company"), and ________________(the "Optionee"). -------------------
WHEREAS, the Company has adopted the 2003 Equity Participation Plan subject
to shareholder approval (the "Plan").
WHEREAS, the Optionee has become a Director of the Company.
WHEREAS, the Company has agreed to grant to the Optionee an option to
purchase Common Shares of the Company pursuant to the Plan.
NOW, THEREFORE, in consideration of the foregoing, the Company hereby
grants to the Optionee the right and option to purchase Common Shares under and
pursuant to the terms and conditions of the Plan and upon and subject to the
following terms and conditions:
1. GRANT OF OPTION. The Company hereby grants to the Optionee the right
and option (the "Option") to purchase up to _________________________Common
Shares of the Company (the "Option Shares") during the period commencing on the
date hereof and terminating at 5:00 P.M. on __________(the "Expiration Date").
2. NATURE OF OPTION. The Option is not intended to meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended,
relating to "incentive stock options".
3. EXERCISE PRICE. The exercise price of each of the Option Shares
shall be ___________(the "Exercise Price"). The Company shall pay all original
issue or transfer taxes on the exercise of the Option.
4. EXERCISE OF OPTIONS. The Option shall be exercised in accordance
with the provisions of the Plan. In addition to the permissible methods of
exercise provided for in the Plan, the Optionee may elect to have the Company
reduce the number of shares otherwise issuable to him upon exercise of the
Option by a number of shares having a fair market value (determined in
accordance with the provisions of the Plan) equal to the Exercise Price of the
Option being exercised (a "Net Exercise"). As soon as practicable after the
receipt of notice of exercise and payment of the Option Price as provided for in
the Plan, or upon a Net Exercise, the Company shall tender to the Optionee
certificates issued in the Optionee's name evidencing the number of Option
Shares covered thereby.
5. TERMINATION OF SERVICE. The Option shall remain exercisable until
the Expiration Date notwithstanding any termination or cessation of service as a
Director with the Company or its subsidiaries for any reason whatsoever.
6. INCORPORATION BY REFERENCE. The terms and conditions of the Plan are
hereby incorporated by reference and made a part hereof.
7. NOTICES. Any notice or other communication given hereunder shall be
deemed sufficient if in writing and hand delivered or sent by registered or
certified mail, return receipt requested, addressed to the Company, 330 South
Service Road, Suite 120, Melville, New York 11747, Attention: President and to
the Optionee at the address indicated below. Notices shall be deemed to have
been given on the date of hand delivery or mailing, except notices of change of
address, which shall be deemed to have been given when received.
8. BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective legal representatives,
successors and assigns.
9. ENTIRE AGREEMENT. This Agreement, together with the Plan, contains
the entire understanding of the parties hereto with respect to the subject
matter hereof and may be modified only by an instrument executed by the party
sought to be charged.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
PHASE III MEDICAL, INC.
By:
-------------------------------------------------
President
Signature of Optionee
Name of Optionee
Address of Optionee:
EXHIBIT 14.1
Code of Ethics for Senior Financial Officers
Exhibit 14.1
CODE OF ETHICS
FOR
SENIOR FINANCIAL OFFICERS
PURPOSE.
The Board of Directors (the "Board") of Phase III Medical, Inc. (the "Company")
has adopted the following Code of Ethics (the "Code") to apply to the Company's
Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer or
Controller, or persons performing similar functions (the "Senior Financial
Officers"). This Code is intended to focus Senior Financial Officers on areas of
ethical risk, provide guidance to help them recognize and deal with ethical
issues, provide mechanisms to report unethical conduct, foster a culture of
honesty and accountability, deter wrongdoing and promote fair and accurate
disclosure and financial reporting.
No code or policy can anticipate every situation that may arise. Accordingly,
this Code is intended to serve as a source of guiding principles. Senior
Financial Officers are encouraged to bring questions about particular
circumstances that may involve one or more of the provisions of this Code to the
attention of the Audit Committee, who may consult with inside or outside legal
counsel as appropriate.
INTRODUCTION
Each Senior Financial Officer is expected to adhere to a high standard of
ethical conduct. The good name of the Company depends on the way Senior
Financial Officers conduct business and the way the public perceives that
conduct. Unethical actions, or the appearance of unethical actions, are not
acceptable. Senior Financial Officers are expected to be guided by the following
principles in carrying out their responsibilities.
- Loyalty. Senior Financial Officers should not be, or appear to be,
subject to influences, interests or relationships that conflict with
the best interests of the Company.
- Compliance with Applicable Laws. Senior Financial Officers are
expected to comply with all laws, rules and regulations applicable to
the Company's activities.
- Observance of Ethical Standards. Senior Financial Officers must adhere
to high ethical standards in the conduct of their duties. These
include honesty and fairness.
INTEGRITY OF RECORDS AND FINANCIAL REPORTING.
Senior Financial Officers are responsible for the accurate and reliable
preparation and maintenance of the Company's financial records. Accurate and
reliable preparation of financial records is of critical importance to proper
management decisions and the fulfillment of the Company's financial, legal and
reporting obligations. Diligence in accurately preparing and maintaining the
Company's records allows the Company to fulfill its reporting obligations and to
provide stockholders, governmental authorities and the general public with full,
fair, accurate, timely and understandable disclosure. Senior Financial Officers
are responsible for establishing and maintaining adequate disclosure controls
and procedures, and internal controls and procedures, including procedures that
are designed to enable the Company to: (a) accurately document and account for
transactions on the books and records of the Company; and (b) maintain reports,
vouchers, bills, invoices, payroll and service records, business measurement and
performance records and other essential data with care and honesty.
Senior Financial Officers shall immediately bring to the attention of the Audit
Committee any information they may have concerning:
Defects, deficiencies, or discrepancies related to the design or operation of
internal controls which may affect the Company's ability to accurately record,
process, summarize, report and disclose its financial data; or Any fraud,
whether or not material, that involves management or other employees who have
roles in the Company's financial reporting, disclosures or internal controls.
CONFLICT OF INTEREST.
Senior Financial Officers must avoid any conflicts of interest between
themselves and the Company. Any situation that involves, or may involve, a
conflict of interest with the Company, should be disclosed promptly to the Audit
Committee, who may consult with inside or outside legal counsel as appropriate.
A "conflict of interest" can occur when an individual's personal interest is
adverse to - or may appear to be adverse to - the interests of the Company as a
whole. Conflicts of interest also arise when an individual, or a member of his
or her family, receives improper personal benefits as a result of his or her
position with the Company.
This Code does not attempt to describe all possible conflicts of interest which
could develop. Some of the more common conflicts from which Senior Financial
Officers must refrain, however, are set forth below:
- Improper conduct and activities. Senior Financial Officers may not
engage in any conduct or activities that are inconsistent with the
Company's best interests or that disrupt or impair the Company's
relationship with any person or entity with which the Company has, or
proposes to enter into, a business or contractual relationship.
- Compensation from non-Company sources. Senior Financial Officers may
not accept compensation for services performed for the Company from
any source other than the Company.
- Gifts. Senior Financial Officers and members of their immediate
families may not accept gifts from persons or entities where any such
gift is being made in order to influence their actions in their
position with the Company, or where acceptance of the gifts could
create the appearance of a conflict of interest.
- Personal use of Company assets. Senior Financial Officers may not use
Company assets, labor or information for personal use, other than
incidental personal use, unless approved by the Audit Committee or as
part of a compensation or expense reimbursement program.
- Financial Interests in other Businesses. Senior Financial Officers
should avoid having an ownership interest in any other enterprises,
such as a customer, supplier or competitor, if that interest
compromises the officer's loyalty to the Company.
CORPORATE OPPORTUNITIES.
Senior Financial Officers are prohibited from: (a) taking for themselves
personally opportunities related to the Company's business without first
presenting those opportunities to the Company and obtaining approval from the
Board; (b) using the Company's property, information, or position for personal
gain; or (c) competing with the Company for business opportunities.
CONFIDENTIALITY.
Senior Financial Officers should maintain the confidentiality of information
entrusted to them by the Company and any other confidential information about
the Company, its business or finances, customers or suppliers, that comes to
them, from whatever source, except when disclosure is authorized or legally
mandated. For purposes of this Code, "confidential information" includes all
non-public information relating to the Company, its business or finances,
customers or suppliers.
COMPLIANCE WITH LAWS, RULES AND REGULATIONS.
Senior Financial Officers shall comply with laws, rules and regulations
applicable to the Company, including insider trading laws, and all other Company
policies.
ENCOURAGING THE REPORTING OF ANY ILLEGAL OR UNETHICAL BEHAVIOR.
Senior Financial Officers must promote ethical behavior and create a culture of
ethical compliance. Senior Financial Officers should foster an environment in
which the Company: (a) encourages employees to talk to supervisors, managers and
other appropriate personnel when in doubt about the best course of action in a
particular situation; (b) encourages employees to report violations of laws,
rules and regulations to appropriate personnel; and (c) informs employees that
the Company will not allow retaliation for reports made in good faith.
CONCLUSION.
Senior Financial Officers should communicate any suspected violations of this
Code promptly to the Audit Committee. The Board or a person or persons
designated by the Board will investigate violations, and appropriate
disciplinary action will be taken in the event of any violation of this Code, up
to and including termination. Only the Audit Committee may grant any waivers of
this policy.
EXHIBIT 23.1
Consent of Holtz Rubenstein & Co., LLP
Exhibit 23.1
Consent of Independent Auditors
We hereby consent to the incorporation by reference into the Registration
Statement on Form S-8 (Registration No. 0-10909) of Phase III Medical, Inc. of
our report dated February 3, 2004 with respect to the consolidated financial
statements of Phase III Medical, Inc. appearing in this Annual Report on Form
10-K of Phase III Medical, Inc. for the year ended December 31, 2003.
/s/ Holtz Rubenstein & Co., LLP
Melville, New York
March 30, 2004
EXHIBIT 31.1
302 Certification
Exhibit 31.1
CERTIFICATION
I, Mark Weinreb, certify that:
1. I have reviewed this Annual Report on Form 10-K of Phase III Medical, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's board of directors and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's board of directors and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 30, 2004
/s/ Mark Weinreb
Mark Weinreb
Chief Executive Officer
EXHIBIT 32.1
906 Certification
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Phase III Medical, Inc. (the "Company")
on Form 10-K for the year ended December 31, 2003 filed with the Securities and
Exchange Commission (the "Report"), I, Mark Weinreb, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition of the Company as of the dates presented and
results of operations of the Company for the periods presented.
Dated: March 30, 2004
/s/ Mark Weinreb
Mark Weinreb
Chief Executive Officer
This certification has been furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.