UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
ISOLAGEN, INC.
(Name of small business issuer in its charter)
Delaware 0-12666 87-0458888
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
2500 Wilcrest, 5th Floor
Houston, Texas 77042
(Address of principal executive offices, including zip code)
(713) 780-4754
(Issuer's telephone number, including area code)
[American Financial Holding, Inc.]
(Former name or former address,
if changed since last report)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for any shorter
period that the registrant was required to file the reports), and (2) has been
subject to those filing requirements for the past 90 days. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $105,482.
As of March 15, 2002, the aggregate market value of the issuer's common stock
held by non-affiliates of the issuer based upon the average bid and asked price
of such common stock on the OTC Bulletin Board as of such date was $33,785,040.
As of March 15, 2002, issuer had 15,189,563 shares of issued and outstanding
common stock, par value $0.001.
Documents Incorporated by Reference: None
Transitional Small Business Issuer Format: Yes [ ] No [X]
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.......................................................................3
ITEM 2. DESCRIPTION OF PROPERTIES....................................................................13
ITEM 3. LEGAL PROCEEDINGS............................................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ....................................................................14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................................................14
ITEM 7. FINANCIAL STATEMENTS........................................................................16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....................................................16
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.....................................................................................17
ITEM 10. EXECUTIVE COMPENSATION......................................................................21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..............................................................................23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS........................................23
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............................................................24
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This annual report contains forward-looking statements. These
statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
Isolagen, Inc.'s or its industry's actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by the
forward-looking statements.
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or the negative of these terms
or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially.
Although Isolagen, Inc. believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance, or achievements. Moreover, neither Isolagen,
Inc. nor any other person assumes responsibility for the accuracy and
completeness of these forward-looking statements. Isolagen, Inc. is under no
duty to update any of the forward-looking statements after the date of this
report to conform its prior statements to actual results.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Isolagen, Inc. f/k/a American Financial Holding, Inc., a Delaware
corporation ("Isolagen" or the "Company"), is the parent company of Isolagen
Technologies, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company ("Isolagen Technologies"). Isolagen Technologies is the parent company
of Isolagen Europe Limited, a company organized under the laws of the United
Kingdom and wholly-owned subsidiary of Isolagen Technologies ("Isolagen
Europe"). The common stock, par value $0.001 per share, of the Company ("Common
Stock") is quoted on the Over-the-Counter Bulletin Board under the ticker symbol
"ISLG"
In the early 1990s, Olga Marko, Ph.D. was researching a way to identify
autologous cellular systems ("ACS") which could stimulate a patient's own
collagen production. Ms. Marko developed a process of extracting a patient's own
cells (dermal fibroblasts), growing and expanding those cells in a controlled
environment, and then re-introducing such cells into the skin of the patient's
face, thereby stimulating the growth of the patient's collagen resulting in the
repair of dermal defects (the "Isolagen Process"). With the support of William
K. Boss, Jr., M.D., a board certified plastic surgeon, Isolagen Technologies was
formed on December 28, 1995 with the purpose of researching, marketing and
commercializing the Isolagen Process for cosmetic applications.
In 1995, Dr. Boss began treating a small percentage of his patients
with the Isolagen Process to correct defects (e.g., wrinkles, depressions and
scarring) in the patient's face. Dr. Boss and Ms. Marko solicited the clinical
support of Gregory Keller, M.D., Associate Chief of Head and Neck Plastic
Surgery at the University of California at Los Angeles Medical School and W.
Gregory Chernoff, M.D., a plastic surgeon with practices in California and
Indiana. Between 1995 and 1999 Drs. Boss, Keller and Chernoff, together with
approximately 200 other doctors, utilized the Isolagen Process on approximately
1,100 patients with positive results. The use of the Isolagen Process on such
patients provided evidence to the Company that the Isolagen Process could
effectively grow and re-introduce a patient's own cells with beneficial results.
Of the 1,100 patients treated with the Isolagen Process, totaling approximately
3,400 procedures, the participating physicians documented less than eighteen
adverse reactions. The worst reaction reported was a redness in the injection
site for seven days. Although all these procedures were at least three years ago
and some as long as six years ago, patients still report satisfaction with
results of the procedures to their physicians. The Company believes that since
ACS involves a patient's own cells, the possibility of allergic reaction is
reduced and the therapeutic correction appears to be long lasting with the
patients experiencing gradual and continued improvement as a result of the
natural activity of the patient's own re-introduced cell structure.
In 1997, the U.S. Food and Drug Administration ("FDA") began regulating
the science of biologics. Biologic products like ACS, in contrast to drugs that
are chemically synthesized, are derived from living sources (such as humans,
animals, and microorganisms). From 1995 to 1999, management of Isolagen
Technologies believed that FDA approvals were not required for use of the
Isolagen Process, based on advice from FDA consultants. In 1999, the FDA advised
Isolagen Technologies that use of the Isolagen Process would require FDA
approval, and Isolagen Technologies filed an investigational new drug
application ("IND") covering the Isolagen Process with the FDA. An IND is a
request for authorization from the FDA to administer an investigational drug or
biological product to humans. Such authorization must be secured prior to
commercialization of any new drug or biological product. After its review of
Isolagen Technologies' IND on December 9, 1999 the FDA placed the IND on
clinical hold until the Company's manufacturing
3
processes and procedures were changed to meet these new standards, and FDA
approval is obtained. The use of the Isolagen Process was discontinued after the
FDA placed the IND on hold, and Isolagen Technologies did not have sufficient
funding to pursue regulatory approvals.
On August 10, 2001, the Company, then known as American Financial
Holding, acquired Isolagen Technologies through the merger of its wholly-owned
subsidiary, Isolagen Acquisition Corp., a Delaware corporation ("Merger Sub"),
and an affiliated entity, Gemini IX, Inc., a Delaware corporation ("Gemini"),
with and into Isolagen Technologies (the "Merger"). As a result of the Merger,
Isolagen Technologies became a wholly-owned subsidiary of the Company. On
November 13, 2001, the Company changed its name to Isolagen, Inc. Simultaneously
with the Merger, the Company raised over $2,000,000 in equity, at $1.50 per
share, in a private placement of Common Stock and converted $1,450,000 principal
amount of Company debt and approximately $625,000 of accrued liabilities of the
Company to equity.
In August 2001, the Company engaged Cato Research Limited ("Cato"), a
research and development organization which assists pharmaceutical and
biotechnology companies in navigating the regulatory approval process. With the
assistance of Cato, the Company is preparing a response to the FDA's hold on its
IND and planning Phase II and III clinical trials of the Isolagen Process. See
"Regulatory Process and Clinical Trials." Also in August 2001 the Company formed
Isolagen Europe for the purpose of exploring the utilization of the Isolagen
Process on patients located in the United Kingdom. Management has made inquiry
to the Medicines Control Agency with respect to the Company's proposed use of
the Isolagen Process in cosmetic applications in the U.K. Based on the written
responses received from the Medical Control Agency, management has concluded
that the proposed use in cosmetic applications will not require regulatory
approval.
Strategy and Vision
The Company's goal is to become the industry leader in the research,
development and commercialization of the Isolagen Process and the use of ACS.
The Company has no current commercial operations and will be unable to begin
commercial operations in the United States until it receives all required FDA
approvals. See "Regulatory Process and Clinical Trials." There can be no
assurance that those approvals will be obtained. The Company is also pursuing,
through Isolagen Europe, commercial operations in the U.K. and is pursuing
commercial operations through subsidiaries, joint ventures or license
arrangements in Brazil, Mexico, Australia and elsewhere. There can be no
assurance that any of such operations can be established or that, if
established, they will be financially successful. The Company is investigating
regulatory and other requirements in these countries and evaluating markets and
potential joint venture partners and licensees. The priorities among these
alternatives have not yet been determined. In the future, the Company believes
that it can increase and strengthen its market position in the following ways:
o Expanding and solidifying its relationship with the approximately 200
physicians who have used the Isolagen Process with their patients, as
well as marketing the Company's processes and products to other doctors
(i.e., plastic surgeons, facial plastic surgeons, dermatologists and
aestheticians).
o Continuing its current research into the science of ACS.
o Working with the FDA to obtain the approval of the Isolagen Process and
future developments of the Company.
o Investigating foreign markets such as the U.K. for the Isolagen Process
and future products.
o Developing new applications such as dental applications for the
Isolagen Process beyond cosmetic facial rejuvenation.
o Designing and developing new laboratory facilities in the U.S. and U.K.
The Company's business plan is focused on the following major steps:
o ESTABLISHING AND FORMALIZING STRATEGIC PARTNERING RELATIONSHIPS. The
Company is conducting discussions with identified industry leaders in
the pharmaceutical and medical device industries for
application-specific sales and distribution of the Company's techniques
and products. The Company's aim is to establish relationships with
industry leaders, both domestic and international, which represent the
broadest market appeal for specific Company products and techniques.
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o ACCELERATING CURRENT RESEARCH EFFORTS. The Company is working on
capturing the full benefit of the Isolagen Process and ACS technology
in applications in the cosmetic field. The research capability that has
produced the Isolagen Process could be applicable to other processes
stimulated by ACS technology such as gum rejuvenation and other dental
applications, urology, bone marrow and other pigment-related maladies.
o EXPANDING PRODUCTION FACILITY CAPACITY. The Company will operate a
laboratory facility in Houston, Texas, which will be equipped with
state-of-the-art culture equipment, instrumentation and storage
systems. The Company will implement expansion plans once FDA approval
is granted on its IND.
o EXPANDING SALES, PRODUCTION AND ADMINISTRATIVE RESOURCES. Increased
sales, research, and foreign affiliations will require more resources
of the Company. These will be supplied through third party
relationships and increases to staff as necessary.
o SUPPLEMENTING AND LEVERAGING EXISTING ADVISORY RELATIONSHIPS.
Physicians are a primary channel for introducing and distributing new
products. To facilitate the marketing strategies outlined above,
existing physician and corporate relationships of the Company will be
supplemented and leveraged. Their support is a key building block in
the future growth of the Company.
Market Size and Characteristics
The Isolagen Process of tissue regeneration is directed primarily at
the dermatological and plastic surgery markets.
According to information on the United States market, published at
www.plasticsurgery.org, a website sponsored by the American Society of Plastic
Surgeons ("ASPS") and the Plastic Surgery Educational Foundation ("PSEF"):
o Cosmetic Surgery procedures in 2000 totaled over $7.4 billion;
o Approximately 786,911 Botox injections were done in 2000;
o More than 7.4 million people had cosmetic surgery in 2000;
o More than 1.0 million men chose to have cosmetic plastic surgery
in 2000;
o More than 6.2 million people had reconstructive plastic surgery
in 2000;
o Cosmetic surgery procedures increased 198% between 1992 and
2000;
o More women than ever before had breast augmentation surgery in
2000. Breast augmentation increased 476% since 1992, 42% since
1998, and 12% since 1999;
o Liposuction procedures increased 386% between 1992 and 2000;
o Of all cosmetic procedures performed, chemical peel increased
the most within one year - 32% from 1999;
o An increasing number of men had breast reduction (gynecomastia)
surgery - since 1992, gynecomastia procedures increased 84%;
o Eyelid surgery continues to increase each year. Eyelid surgery
increased 190% since 1992, 44% since 1998 and 21% since 1999;
and
o Tummy tuck procedures increased 227% since 1992;
ASPS and PSEF statistics represent patients having procedures performed
by member surgeons certified by the American Board of Plastic Surgery as well as
other physicians certified by American Board of Medical Specialties' boards.
Recent surveys on the changes of the public's attitude toward plastic
surgery in the past decade have indicated that men and women have become more
accepting of plastic surgical or cosmetic procedures. ASPS finds 46.8% of women
and 33.8% of men consider their attitude toward cosmetic surgery more favorable
than 10 years ago. Only 11.5% and 13.2% respectively view it less favorably.
American Society for Aesthetic Plastic Surgery ("ASAPS") finds that 57% of women
and 53% of men say they approve of cosmetic surgery.
The February 2002 survey by the ASAPS shows that 34% of American women
would consider having cosmetic surgery, either now or in the future. According
to ASAPS, this is a 3% increase compared to the same survey conducted in
February 2001. Seventy-nine percent of all women surveyed said they would not be
embarrassed if people outside their immediate family and close friends knew they
had undergone cosmetic surgery.
5
Facial Rejuvenation
The first application of the Isolagen Process is for facial
rejuvenation, which the Company intends to market as a "Natural Collagen
Supplementation System." The primary benefits of the Natural Collagen
Supplementation System are three-fold:
o Since this is an autologous system (exclusively using a
patient's own cells), the Company believes there is a
substantially reduced possibility of allergic reaction as
compared to bovine collagen and other non-natural fillers.
o The therapeutic correction received is long lasting because the
patient's immune system recognizes the injected cells as the
patient's own and does not reabsorb or reject them as it does
with other foreign materials and proteins.
o Patients experience gradual and continued improvement as a
result of the natural activity of the re-introduced cell
structure.
These three benefits represent substantial advances in facial
rejuvenation since the standard until now has been bovine collagen. Bovine
collagen, a foreign protein derived from cows, is generally fully reabsorbed by
a patient's body within a few months after application, leaving the patient with
no visible signs of correction. As additional treatments with bovine collagen
are performed, there is a gradual build-up of the body's antibodies and the
development of enzymes that compromise the treatment's effectiveness. Combined
with the expense and the continued intrusiveness of ongoing treatments, the
value and benefit of bovine collagen injections is ultimately diminished.
The benefits of the proposed Natural Collagen Supplementation System
outlined above counter the drawbacks to bovine collagen treatments, thereby
extending the market potential for soft tissue regeneration to a broader
population of patients. This broader population includes those who have tried
and discontinued use of bovine collagen and those that never considered
treatments due to potential drawbacks. The Company estimates that the market
potential for soft tissue regeneration treatments in the near-term to be more
than $2.5 billion.
The Isolagen Process in Detail
First a 3 mm punch biopsy is obtained in the scalp area behind the
patient's ear. This area is chosen because of its vascularity, lack of sun
exposure and invisibility of any scar. The biopsy specimen is packed in a
container provided by the Company and shipped overnight to the Company's
laboratory. The specimen is then cultured utilizing the Company's patented ACS
process. This process separates the cell, called a fibroblast, from the rest of
the tissue then multiplies these fibroblasts. Approximately six weeks later 1 ml
is returned to the patient's doctor for an intradermal test in the patient. Two
weeks later 1 to 1.5 ml of the patient's cells are also sent to the doctor for
treatment. Additional amounts of 1 to 1.5 ml are available for re-injection
every two to three weeks. A fibroblast culture from a patient may also be
cryogenically stored by the patient for future use.
Fibroblasts stimulate collagen production. Fibroblasts have a finite
lifespan and finite ability to repair damage. "Younger" fibroblasts are more
effective than "older" fibroblasts from older or more photodamaged patients. The
amount of correction a patient would see depends on a variety of factors,
including the type of facial line, type of scar, age of the patient and the
intrinsic ability of each patient's fibroblasts to create more collagen.
Regulatory Process and Clinical Trials
ACS and the Isolagen Process are subject to extensive government
regulation. Products for human treatment are subject to rigorous pre-clinical
and clinical testing procedures as a condition for approval by the FDA and by
similar authorities in foreign countries. The FDA regulates the manufacture,
distribution and promotion of drugs and medical devices. In 1997, the FDA began
regulating the science of biologics. Biologic products like ACS, in contrast to
drugs that are chemically synthesized, are derived from living sources (such as
humans, animals, and microorganisms). In 1999, Isolagen Technologies filed an
IND with the FDA. An IND is a request for authorization from the FDA to
administer an investigational drug or biological product to humans. Such
authorization must be secured prior to commercialization of any new drug or
biological product. To obtain the approval of the FDA, the Company must submit
an application to the FDA, supported by extensive data, including human clinical
trial data, and documentation to prove the safety and efficacy of the Isolagen
Process.
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In 1995, when the Company began operations, the FDA had no regulations
governing this area of biologics. New regulations were promulgated by the FDA in
1997. After reviewing the new regulations and seeking the advice of consultants,
Isolagen Technologies concluded that the use of the Isolagen Process in cosmetic
applications did not require the approval of the FDA. The FDA disagreed;
Isolagen Technologies filed an IND which was placed on clinical hold until the
Company's manufacturing processes and procedures were changed to meet these new
standards, and FDA approval is obtained.
Isolagen Technologies did not have the financial resources to complete
the FDA process. Following the acquisition by the Company, the Company has
provided that financing, and the Company is tentatively set to submit its
response to the FDA on these clinical hold issues in March 2002. The Company
expects a response from the FDA in May 2002. However, no assurances can be given
that the Company will be able to respond to the FDA or that the FDA will respond
to the Company in the timeframe set forth above. The Company also plans to
submit two IND's: (1) for a Scar Study covering traumatic scars and acne scars
and (2) for a Wrinkle Study. The Company will then request a meeting with the
FDA to determine (1) the necessity for one or two clinical trial(s) for the
filed IND(s) and (2) to reach an agreement with the FDA on the design of the
clinical trial(s). The Company anticipates submitting the IND for the Scar Study
and the Wrinkle Study by December 2004 and anticipates FDA approval of the
entire Isolagen Process for Scar and Wrinkles by December 2004.
The Company has developed rigorous internal standards for testing and
compiling the data necessary for its FDA filings. The Company conducts
feasibility studies for all the medical conditions it proposes to treat prior to
filing applications with the FDA for pivotal trials. This process has allowed
the Company to submit more precise protocols to the FDA, clearly defining the
clinical objectives that the Company wishes to support in the pivotal trial
phase. The Company will engage in an ongoing dialogue with the FDA in an effort
to manage the approval process effectively and efficiently.
All of the projections contained above are contingent upon the response
of the FDA to the reports and IND(s) filed and clinical trials conducted by the
Company. No assurances can be given that any of the foregoing projections,
including but not limited to the anticipated responses of the FDA, will be met
by the Company.
FDA Consultants
In August 2001, the Company's new management team interviewed numerous
FDA consulting firms and attorneys. That search resulted in the engagement of
Cato Research, a well respected FDA consulting firm with extensive experience in
assisting companies facilitate the FDA product approval process ("Cato").
Initially, Cato was engaged by the Company to review all the correspondence
between the FDA and the Company and provide a comprehensive report as to whether
the Isolagen Process is likely to be approved by the FDA. The purpose was to
provide the Company's management with the tools it needed to accurately evaluate
the Company's position with the FDA so it could accurately evaluate the
regulatory obstacles it might face. Upon review of the report, the Company's
management engaged Cato to assist the Company in responding to the FDA's
"on-hold" letter and navigate the Isolagen Process through the FDA approval
process.
Competition
Tissue regeneration companies compete in the dermatology and plastic
surgery markets with substantially different treatments. These include silicone
injections, laser procedures, facial surgical procedures (e.g., facelifts and
eyelid surgeries), fat injections, dermabrasion, collagen injections, and
botulisum toxin injections. Indirect competition comes from facial care
treatment products. Items catering to the growing demand for therapeutic skin
care products are facial scrubs, anti-aging treatments, tonics, astringents and
skin-restoration formulas. Patients who might consider using the Isolagen
Process could also consider the following products (information included under
Key Points is provided by Company management):
PRODUCT DESCRIPTION PRODUCT TYPE KEY POINTS
------- ----------- ------------ ----------
Zyderm/Zyplast Collagen from Collagen implant Reabsorbs in 3 to 6 months in 95+ % of patients.
cowhides of a closed Allergic reaction in approx. 3% of patients.
herd Immediate esthetic effect.
$400-500 per treatment.
FDA approved.
Hylaform Crosslinked Hyaluronan implant Reabsorbs in approx. 1 year.
(Biomatrix) derivative of $550 per injection, approx.
hyaluronan Not FDA approved; clinical trials planned.
Fibrel Collagen from pigs Collagen implant Difficult for physician to use; requires mixing with
(Mentor) patients blood and special equipment.
Reabsorbs in 4 to 6 months.
$400 per treatment.
No significant market demand for product
FDA approved
7
Autologen Skin from patient Collagen Implant Requires large piece of skin 3"x3" to make 3cc for each
(Collagenesis Corp) treatment.
Reabsorbs in 6 to 12 months.
$650-850 treatment.
Dermolagen Skin from cadavers Collagen Implant Source of product limits market appeal significantly.
(Collagenesis Corp) Requires large piece of skin 3"x3" to make 3cc for each
treatment.
Reabsorbs in 6 to 12 months.
$1,000 for three treatments.
Lypocytic Dermal Fat from patient Fat implant Reabsorbs in 6 to 12 months; not a viable correction.
Augmentation Requires harvesting of fat, preparation, and
reintroduction into treatment areas.
Subcutaneous atrophy requires microlipoinjection overlaid
with lypocytic dermal augmentation.
Autologous nature avoids allergic reaction.
$550 to 1,250 per treatment.
Alloderm Acellular human Allograft Treats only deep depressions (subcutaneous tissue).
(Lifecell Corp) dermal graft Dissolves in 1 to 3 years.
Requires surgery to implant.
Potential for complications higher: infection, migration,
scarring.
$2,500 per treatment.
Artecoll Polymethylmethacrylate Artificial implant Treats only deep depressions (subcutaneous tissue).
(Rofil Medical) suspension with Non reversible; implant technique errors are long Lasting.
collagen Potential for complications higher: infection, beading.
Not FDA approved.
Softform Expanded Artificial implant Requires surgery to implant.
(Collagen Corp) polytetra- Potential for complications: infection, rejection, and
flouroetheylene malpositioning.
Used only foe subcutaneous tissue augmentation.
Silicone Droplets Synthetic oil Artificial implant Controversy over safety of human use of silicone.
(Dow Corning) Potential for adulterated product is high due to
availability of non-medical grades of silicone.
Not FDA approved.
Botox Botulinum A exotoxin Muscle paralysis Effect reverses in 3 to 6 months.
(Allergan) Physician technique very important.
2 to 3% of patients experience drooping eyelid.
$450 to 750 per injection.
Not FDA approved.
Ablative Lasers Mechanical device Tissue Long healing period; open sores for 5 to 14 days;
e.g. CO (2) & Erbium vaporization redness up to six months.
causing new tissue Requires surgery and anesthesia.
to form Potential for complications: hypopigmentation, scars,
non-healing wounds.
$1,500 to 7,500
Non-Ablative Lasers Mechanical device Stimulated dermis Multiple treatments 4 to 6
e.g. Nd 1032, Q to form collagen Takes up to six months to realize improvements
switched 1064 YAG Up to $5,000
Microdermabrasion Mechanical device Tissue abridement Minimal efficacy on scars and wrinkles
causing new tissue Good epidermal effect.
to form Requires 6 to 10 treatments.
Up to $2,000
Chemical peels Carbolic acid, TCA, Chemical tissue Long healing period; open sores for 5 to 14 days;
alpha hydroxy acids removal causing redness up to six months.
new tissue to form Laser applications are replacing this technology.
$500 to 5,000.
The Company believes that many of its competitors may have greater
financial and other resources than that Company. Although the Company is not
aware of any similar products to the Isolagen Process that have received
pre-market approval from the FDA, there may be other companies having greater
financial resources than the Company that may develop similar products in the
future.
Competitive Advantage
The Company's competitive advantage is expected from its:
o Patents on the Isolagen Process. See "Intellectual Property."
o Continuing advanced research efforts on the biotechnology of tissue
regeneration.
o Foundation of relationship with approximately 200 physicians who have
used the Isolagen Process.
8
o Support from a Board of Advisors composed of nationally recognized
experts on tissue regeneration. See "Board of Advisors."
INTELLECTUAL PROPERTY
Protecting the proprietary technology of the Company is vitally
important to the Company's future success and competitive position. The Company
currently holds the following patents:
Number Business Line Title Filing Date Patent Date Term
------ ------------- ----- ----------- ----------- ----
5,665,372 Cosmetic Autologous dermal fibroblasts for the June 6, 1996 Sept. 9, 1997 20 Years
United States repair of skin and soft tissue defects
5,660,850 Cosmetic Use of autologous dermal fibroblasts June 6, 1996 Aug. 26, 1997 20 Years
United States for the repair of skin and soft
tissue defects
5,858,390 Cosmetic Use of autologous undifferentiated Sept. 8, 1997 Jan. 12, 1999 20 Years
United States mesenchylmal cells for the repair of
skin and soft tissue defects
5,591,444 Cosmetic Use of autologous dermal fibroblasts July 28, 1995 Jan. 7, 1997 20 Years
United States for the repair of skin and soft
tissue defects
312548 Cosmetic Use of autologous dermal fibroblasts July 3, 1996 March 9, 2000 20 Years
New Zealand for the repair of skin and soft
tissue defects
698440 Cosmetic Use of autologous dermal fibroblasts July 28, 1995 Feb. 11, 1999 20 Years
Australia for the repair of skin and soft
tissue defects
9,083,618 Dental Compositions for regenerating tissue May 2, 1998 Application
United States that has deteriorated and methods for Pending
using such compositions
The Company also has filed one patent application, detailed above, and
is working on several other patent applications. The Company continues to seek
ways to protect its proprietary technology and trade secrets, including entering
into confidentiality or license agreements with its employees, consultants and
corporate partners, and controlling access to and distribution of its
technologies and other proprietary information.
PUBLISHED ARTICLES
The following are published articles regarding the Isolagen Process:
1. Deborah Watson, MD; Gregory S. Keller, MD; Victor Lacombe, MD; Peter
B. Fodor, MD; Jeffrey Rawnsley, MD; Gary P. Lask, MD. Autologous Fibroblasts for
Treatment of Facial Rhytids and Dermal Depression. ARCH Facial Plast Surg/Vol 1,
July-Sep 1999.
2. William K. Boss, Jr., MD, FACS; Hakan Usal, MD; Peter B. Fodor, MD;
Gregory Chernoff, MD; Autologous Cultured Fibroblasts: A Protein Repair System.
Annals of Plastic Surgery, Volume 44/Number 5/May 2000.
3. William K. Boss, Jr., MD; Hakan Usal, MD; Gregory Chernoff, MD;
Gregory S. Keller, MD; Gary P. Lask, MD; Peter B. Fodor, MD. Autologous Cultured
Fibroblasts as Cellular Therapy in Plastic Surgery. Clinics in Plastic Surgery,
Volume 27, Number 4, October 2000.
EMPLOYEES
The Company presently employs ten people on a full-time basis, eight in
Houston, Texas and two in London, England. The Company anticipates hiring
additional employees in the areas of quality assurance, manufacturing, marketing
and research and development as its needs arise. None of these individuals is
covered by a collective bargaining agreement and management considers its
relations with its employees to be good.
Investment Considerations
NEW BUSINESS; LIMITED OPERATING HISTORY; UNCERTAINTY OF FUTURE
PROFITABILITY. The Company is a "start-up" company with a limited operating
history and no significant revenues to date. The Company is attempting to obtain
the necessary working capital for operations through equity offerings and
potentially other private financing, and there can be no assurance it will
obtain such financing. The Company has not yet demonstrated its ability to
generate revenue,
9
and there is no assurance that the Company will produce any material revenues
for the Company or its stockholders, or that the Company will operate on a
profitable basis.
ANTICIPATION OF FUTURE LOSSES AND NEGATIVE CASH FLOW, WHICH MAY LIMIT
OR DELAY ABILITY TO BECOME PROFITABLE. The Company is an early stage company and
expects to expend significant resources on consultants, technology, advertising,
hiring of personnel and startup costs. As a result, the Company has incurred
losses since its inception and expects to experience operating losses and
negative cash flow for the foreseeable future. The Company anticipates its
losses will continue to increase from current levels because it expects to incur
additional costs and expenses related to brand development, consulting costs,
laboratory development costs, FDA clinical trials, marketing and other
promotional activities, the addition of customer service personnel, the
continued development of its web site, its computer network, and development of
relationships with strategic business partners, including but not limited to
doctors who might use the Isolagen Process.
LIMITED PUBLIC TRADING MARKET FOR THE COMMON STOCK. There is presently
a limited public trading market for the Common Stock, and there is no assurance
that any established public trading market will develop for any of the Company's
securities. Without such an active or public trading market, there can be no
assurance of any liquidity or resale value of the Common Stock. The Common Stock
may be illiquid for indefinite periods of time. An investment in the shares of
the Common Stock must be made by persons or concerns who do so for investment
purposes only and without a view to the resale or distribution of the shares
acquired. In addition, an investor must have such knowledge and experience in
financial or business matters that he is capable of evaluating the merits and
risks of an investment in the shares of the Common Stock.
THE DEVELOPMENT OF THE ISOLAGEN PROCESS AND THE COMPANY'S OTHER
PRODUCTS INVOLVES A LENGTHY AND COMPLEX PROCESS, AND THE COMPANY MAY BE UNABLE
TO COMMERCIALIZE THE ISOLAGEN PROCESS OR ANY OF ITS OTHER PROCESSES OR PRODUCTS
CURRENTLY UNDER DEVELOPMENT. Before the Company can commercialize the Isolagen
Process or any other of its development-stage products or processes, the Company
will need to conduct substantial research and development; undertake preclinical
and clinical testing; and pursue regulatory approvals, including but not limited
to FDA approval of its IND for the Isolagen Process. This process involves a
high degree of risk and takes several years. The Company's process and product
development efforts may fail for many reasons, including: failure of the process
or product in preclinical studies; clinical trial data that is insufficient to
support the safety or effectiveness of the process or product; or the failure to
obtain the required regulatory approvals. Specifically, the FDA may withhold
approval of the IND for several years or reject the IND outright. For these
reasons, and others, the Company may not successfully commercialize the Isolagen
Process or any of its other processes or products currently under development.
ANY MARKETABLE PROCESSES OR PRODUCTS THAT THE COMPANY DEVELOPS MAY NOT
BE COMMERCIALLY SUCCESSFUL. Even if the Company obtains regulatory approval for
the Isolagen Process or any of its other development-stage processes or
products, those processes or products may not be accepted by the market. A
number of factors may affect the rate and level of market acceptance of the
Isolagen Process or these processes or products, including: regulation by the
FDA and other government authorities; market acceptance by doctors and hospital
administrators; the effectiveness of the Company's sales force; the
effectiveness of the Company's production and marketing capabilities; the
success of competitive products; and the availability and extent of
reimbursement from third-party payers. If the Isolagen Process or any other
Company processes or products fail to achieve market acceptance, the Company's
profitability and financial condition will suffer.
THE COMPANY'S COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL
INDUSTRIES MAY HAVE SUPERIOR PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING
POSITION. The human healthcare products and services industry is extremely
competitive. The Company's competitors include major pharmaceutical companies
and other biotechnology companies. Most of these competitors have more extensive
research and development, marketing and production capabilities and greater
financial resources than the Company. The Company's future success will depend
on its ability to develop and market effectively its processes and products
against those of its competitors. If the Company's processes and products
receive marketing approval but cannot compete effectively in the marketplace,
the Company's profitability and financial position will suffer.
DIFFICULTIES MANAGING GROWTH COULD ADVERSELY AFFECT THE COMPANY'S
BUSINESS. The Company anticipates a period of rapid growth in its operations in
the next few years that could place a strain on its management, administrative,
operational and financial infrastructure. The Company's ability to manage its
operations and growth requires the continued improvement of operational,
financial and management controls, reporting systems and procedures. In
addition, the Company may find it necessary to hire additional management,
financial and sales and marketing personnel to manage the Company's expanding
operations. If the Company is unable to manage this growth
10
effectively and successfully, the Company's business, operating results and
financial condition may be materially adversely affected.
MANAGEMENT OF GROWTH; LIQUIDITY AND WORKING CAPITAL RESOURCES. The
Company's ability to operate profitably under its current business plan is
largely contingent upon its success in obtaining further sources of debt and
equity capital and upon its continued expansion. No assurances can be given that
the Company will be able to obtain any such additional capital, either through
equity or debt financing, on satisfactory terms or at all. Additionally, no
assurance can be given that any such financing, if obtained, will be adequate to
meet the Company's ultimate capital needs and to support the Company's growth.
If adequate capital cannot be obtained on satisfactory terms, the Company's
operations could be negatively impacted.
UNPREDICTABILITY OF OPERATING EXPENSES. As a result of the Company's
limited operating history and because of the emerging nature of the markets in
which it will compete, the Company's financial data is of limited value in
planning future operating expenses. The Company's expense levels will be based
in part on its expectations concerning future revenues. A significant portion of
the Company's revenue is anticipated to be derived from the Isolagen Process;
however the size and extent of such revenues are wholly dependent upon the
choices and demand of individuals, which are difficult to forecast accurately.
The Company may be unable to adjust its operations in a timely manner to
compensate for any unexpected shortfall in revenues. Accordingly, a significant
shortfall in demand for the Isolagen Process could have an immediate and
material adverse effect on the Company's business, results of operations and
financial condition. Further, business development and marketing expenses may
increase significantly as the Company expands its operations. To the extent that
such expenses precede or are not rapidly followed by increased revenue, the
Company's business, results of operations and financial condition may be
materially adversely affected.
DEPENDENCE ON KEY OFFICERS AND EMPLOYEES. While no assurances can be
given that the Company's current management resources will enable it to succeed
as planned, a loss of one or more of its current officers or key employees could
severely and negatively impact its operations. No assurances can be given that
the Company will not suffer the loss of key human resources for one reason or
another. The Company has employment agreements with certain of its officers, but
some of its key management personnel are employed "at-will" and may elect to
pursue other opportunities at any time. Specifically, the loss of Michael
Macaluso, Chief Executive Officer, or Michael Avignon, President, neither of
which has an employment agreement with the Company, could significantly harm the
Company's business. The Company has no present intention of obtaining key man
life insurance on any of the executive officers or management.
FLUCTUATION OF QUARTERLY OPERATING RESULTS. The Company's quarterly
operating results may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside the Company's control. These
factors include: the level of demand for the Isolagen Process and any other
Company services and products; the Company's ability to attract and retain
personnel with the necessary strategic, technical and creative skills required
for effective operations; the amount and timing of expenditures by customers;
the amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations; government regulation and legal
developments regarding the use of the Isolagen Process; and general economic
conditions. As a strategic response to changes in the competitive environment,
the Company may from time to time make certain pricing, service, technology or
marketing decisions or business or technology acquisitions that could have a
material adverse effect on the Company's quarterly results. Due to all of these
factors, the Company's operating results may fall below the expectations of
securities analysts, stockholders and investors in any future quarter.
VOTING CONTROL BY THE OFFICERS AND DIRECTORS OF THE COMMON STOCK. The
Company's present or future executive officers, directors and controlling
stockholders directly and beneficially hold or will hold most of the outstanding
shares of Common Stock. The Company's officers, directors and controlling
stockholders currently are, and in the foreseeable future will continue to be,
in a position to control the Company by being able to nominate and elect a
majority of the Company's Board of Directors. The Board of Directors establishes
corporate policies and has the sole authority to nominate and elect the
Company's officers to carry out those policies. Prospective investors therefore
will have limited participation in the Company's affairs.
ABSENCE OF CASH DIVIDENDS AND NO CASH DIVIDENDS ANTICIPATED. The future
payment by the Company of cash dividends on the Common Stock rests within the
discretion of its Board of Directors and will depend, among other things, upon
the Company's earnings, its "unencumbered cash," its capital requirements and
its financial condition, as well as other relevant factors. The Company does not
anticipate making any cash distributions on the Common Stock in the foreseeable
future.
NO ASSURANCE OF BRAND NAME AWARENESS. The Company's brand name is new
and unproven. If the Company is unable to effectively promote its brand and
establish a leading position in the biotechnology marketplace,
11
results of operation and financial condition will suffer. Company management
believes that the importance of brand recognition will increase over time. In
order to gain brand recognition, the Company may increase its marketing and
advertising budgets to create and maintain brand loyalty.
THE COMPANY MAY FAIL TO PROTECT ADEQUATELY ITS PROPRIETARY TECHNOLOGY,
WHICH WOULD ALLOW COMPETITORS TO TAKE ADVANTAGE OF ITS RESEARCH AND DEVELOPMENT
EFFORTS. The Company's long-term success largely depends on its ability to
market technologically competitive processes and products. If the Company fails
to obtain or maintain these protections it may not be able to prevent third
parties from using its proprietary rights. The Company's currently pending or
future patent applications may not result in issued patents. In the United
States, patent applications are confidential until patents issue, and because
third parties may have filed patent applications for technology covered by its
pending patent applications without the Company being aware of those
applications, the Company's patent applications may not have priority over any
patent applications of others. In addition, the Company's issued patents may not
contain claims sufficiently broad to protect the Company against third parties
with similar technologies or products or provide the Company with any
competitive advantage. If a third party initiates litigation regarding the
Company's patents, and is successful, a court could revoke the Company's patents
or limit the scope of coverage for those patents.
The U.S. Patent and Trademark Office, commonly referred to as the
USPTO, and the courts have not consistently treated the breadth of claims
allowed in biotechnology patents. If the USPTO or the courts begin to allow
broader claims, the incidence and cost of patent interference proceedings and
the risk of infringement litigation will likely increase. On the other hand, if
the USPTO or the courts begin to allow narrower claims, the value of the
Company's proprietary rights may be limited. Any changes in, or unexpected
interpretations of, the patent laws may adversely affect the Company's ability
to enforce its patent position.
The Company also relies upon trade secrets, proprietary know-how and
continuing technological innovation to remain competitive. The Company protects
this information with reasonable security measures, including the use of
confidentiality agreements with its employees, consultants and corporate
collaborators. It is possible that these individuals will breach these
agreements and that any remedies for a breach will be insufficient to allow the
Company to recover its costs. Furthermore, the Company's trade secrets, know-how
and other technology may otherwise become known or be independently discovered
by its competitors.
THE COMPANY MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION OR
OTHER PROCEEDINGS RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS. A
third party may sue the Company, one of its subsidiaries or one of our strategic
collaborators for infringing a third-party's patent rights. Likewise, the
Company may need to resort to litigation to enforce the Company's patent rights
or to determine the scope and validity of third-party proprietary rights.
The cost to the Company of any litigation or other proceeding relating
to intellectual property rights, even if resolved in the Company's favor, could
be substantial, and the litigation would divert the Company's management's
efforts. Some of the Company's competitors may be able to sustain the costs of
complex patent litigation more effectively than the Company can because they
have substantially greater resources. If the Company does not prevail in this
type of litigation, the Company or its strategic collaborators may be required
to: pay monetary damages; stop commercial activities relating to the affected
products or services; obtain a license in order to continue manufacturing or
marketing the affected products or services; or compete in the market with a
substantially similar product.
Uncertainties resulting from the initiation and continuation of any
litigation could limit the Company's ability to continue some of the Company's
operations. In addition, a court may require that the Company pay expenses or
damages and litigation could disrupt the Company's commercial activities.
THE COMPANY MAY BE LIABLE FOR PRODUCT LIABILITY CLAIMS NOT COVERED BY
INSURANCE. Doctors who use our processes and product, including but not limited
to the Isolagen Process, and patients who have been treated by the Isolagen
Process or any other process or product of the Company may bring product
liability claims against the Company or its subsidiaries. While the Company has
taken, and continue to take, what the Company believes are appropriate
precautions, the Company may be unable to avoid significant liability exposure.
The Company intends to obtain and keep in force product liability insurance
sufficient to protect it from claims; however, the Company may be unable to
obtain insurance in the future, or the Company may be unable to do so on
acceptable terms. Any additional insurance the Company obtains may not provide
adequate coverage against any asserted claims. In addition, regardless of merit
or eventual outcome, product liability claims may result in: diversion of
management's time and attention; expenditure of large amounts of cash on legal
fees, expenses and payment of damages; decreased demand for the Company's
products and services; and injury to the Company's reputation.
12
IF THE COMPANY IS UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES,
THE COMPANY'S PROCESSES, PRODUCTS OR SERVICES MAY BECOME OBSOLETE. The field of
biotechnology is characterized by significant and rapid technological change.
Although the Company attempts to expand its technological capabilities in order
to remain competitive, research and discoveries by others may make the Company's
processes, products or services obsolete. If the Company cannot compete
effectively in the marketplace, the Company's potential for profitability and
financial position will suffer.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS IN
BUSINESS AND DIVERSION OF MANAGEMENT ATTENTION. In the near future, the Company
may make acquisitions of complementary companies, products or technologies. Any
acquisitions will require the assimilation of the operations, products and
personnel of the acquired businesses and the training and motivation of these
individuals. Management may be unable to maintain and improve upon the uniform
standards, controls, procedures and policies of the Company if it fails in this
integration. Acquisitions may cause disruptions in operations and divert
management's attention from day-to-day operations, which could impair the
Company's relationships with current employees, customers and strategic
partners. The Company may also have to, or choose to, incur debt or issue equity
securities to pay for any future acquisitions. The issuance of equity securities
for an acquisition could be substantially dilutive to the Company's
stockholders' holdings. In addition, profitability of the Company may suffer
because of such acquisition-related costs or amortization costs for acquired
goodwill and other intangible assets. If management is unable to fully integrate
acquired businesses, products, technologies or personnel with existing
operations, the Company may not receive the intended benefits of such
acquisitions.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company currently operates out of 2500 Wilcrest, 5th Floor,
Houston, Texas 77042. The Company currently is being granted, at no charge until
August 2003, the use of approximately 5,000 square feet of office space from
some of its officers. The Company, currently, has a research laboratory which
does not comply with current Good Manufacturing Process ("cGMP"), which is
designed to support the non-injectable expansion/propagation of cell lines, as
well as to further explore future patented processes. The Company has also
designed a new cGMP laboratory to process autologous cultured fibroblasts for
the therapeutic injections during our upcoming clinical and pivotal trials. This
will act as the Company's U.S. processing laboratory for all upcoming cosmetic
and dental trials, by meeting FDA facilities' requirements under Center for
Biologics Evaluation and Research.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the ordinary course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following proposals were submitted to a vote of security holders at
the annual meeting of stockholders on November 13, 2001: (1) to amend the
Company's Certificate of Incorporation to change the Company's name to Isolagen,
Inc.; (2) to consider and vote upon the American Financial Holding, Inc. 2001
Stock Option and Appreciation Rights Plan; (3) to amend Article II, Section 2.01
of the Company's Bylaws to provide that the annual meeting of the stockholders
of the Company shall be held at such time as designated by the Board of
Directors; (4) to elect four directors to hold office until such time his or her
successor is dully elected and qualified; and (5) to ratify the appointment of
Pannell Kerr Forster of Texas, P.C. as the Company's independent certified
public accountants. All matters were approved, as summarized below.
Proposal 1 - Amendment to the Company's Certificate of Incorporation
An amendment to the Company's Certificate of Incorporation to change
the Company's name to Isolagen, Inc. was approved by a vote of 9,760,007 for, 0
against, with 430 abstaining and 5,283,193 non-votes.
Proposal 2 - Adoption of the American Financial Holding, Inc. 2001 Stock Option
and Appreciation Rights Plan
The American Financial Holding, Inc. 2001 Stock Option and Appreciation
Rights Plan was approved by a vote of 9,412,904 for, 347,475 against, with 58
abstaining and 5,283,193 non-votes.
13
Proposal 3 - Amendment to the Company's Bylaws
An amendment to the Company's Bylaws was approved by a vote of
9,760,029 for, 0 against, with 408 abstaining and 5,283,193 non-votes.
Proposal 4 - Election of Directors
The following directors were elected to serve on the Company's Board of
Directors for a one year term. No other director's term of office continued
after the meeting
Vote of the Stockholders
Directors For Against Abstaining Non-Votes
--------- --- ------- ---------- ---------
Frank DeLape 9,760,309 35 93 5,283,193
William K. Boss, Jr. 9,760,309 35 93 5,283,193
Michael Macaluso 9,760,309 35 93 5,283,193
Michael Avignon 9,760,309 35 93 5,283,193
Proposal 5 - Ratification of independent accountants.
Pannell Kerr Forster of Texas, P.C. was ratified as the independent
accountants for the fiscal year ended December 31, 2001 by a vote of 9,760,309
for, 0 against, with 128 abstaining and 5,283,193 non-votes.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The common stock is quoted on the Over-the-Counter Bulletin Board under
the symbol "ISLG." The market for the Company's common stock is limited,
volatile, and sporadic. The following table sets forth the high and low bid
prices for the Company's common stock as reported by the OTC Bulletin Board for
the last two fiscal years, and reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Fiscal Years Ended
-------------------------------------------------------
December 31, 2001 December 31, 2000
------------------------- -------------------------
High Low High Low
---------- ---------- ---------- ----------
First Quarter $ 0.11 $ 0.05 $ 0.51 $ 0.06
Second Quarter $ 1.50 $ 0.43 $ 0.70 $ 0.15
Third Quarter $ 2.75 $ 0.92 $ 0.46 $ 0.12
Fourth Quarter $ 7.00 $ 1.05 $ 0.42 $ 0.12
Holders
As of March 15, 2002, the Company had 404 shareholders of record.
Dividends
The Company has never paid dividends on Common Stock. Currently, the
Company anticipates that it will retain earnings, if any, to support operations
and to finance the growth and development of its business and does not
anticipate paying cash or stock dividends on Common Stock in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussions of the Company's results of operations and
financial position should be read in conjunction with the financial statements
and notes pertaining to them that appear elsewhere in this Form 10-KSB.
14
GENERAL
Isolagen, Inc., f/k/a American Financial Holding, Inc., acquired
Isolagen Technologies, Inc. in a stock-for-stock transaction on August 10, 2001.
Simultaneously with the merger, the Company raised over $2 million in equity in
a private placement of common stock and converted $1.45 million principal amount
of the Company's debt and approximately $625,000 of accrued liabilities of the
Company to equity. The net cash proceeds of the private placement will be used
to fund Isolagen's research and development projects, to fund the initial FDA
trials of the Isolagen Process, to explore the viability of entering foreign
markets, to provide additional working capital and for general corporate
purposes.
Isolagen is an emerging biotechnology company specializing in the
development and commercialization of autologous cellular system ("ACS"') for
hard and soft tissue regeneration and other therapies. Isolagen currently holds
four patents with one additional patent pending. Representing breakthrough
technology in the overall approach to cosmetic and medical therapy, ACS is a
process whereby a patient's own cells are extracted, reproduced through
Isolagen's proprietary process, and then reintroduced back into the patient for
specific cosmetic and medical applications. Unlike other collagen development
companies, Isolagen uses only the patient's unique living cells for the source
of its collagen production.
Isolagen's goal is to become the industry leader in the research,
development and commercialization of ACS tissue regeneration.
Isolagen reported a net loss of $1,496,448 for the year ended December
31, 2001 compared to a net loss of $807,076 for the year ended December 31,
2000.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations" ("SFAS No. 141"), which establishes
financial accounting and reporting for business combinations and supersedes APB
Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. SFAS No. 141 requires
that all business combinations be accounted for using one method, the purchase
method. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 is expected to have
no material impact on financial reporting and related disclosures of the
Company.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), which establishes financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, Intangible Assets. SFAS No. 142 addresses how intangible assets
that are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in financial
statements upon their acquisition, and after they have been initially recognized
in the financial statements. The provisions of SFAS No. 142 are effective for
fiscal years beginning after December 15, 2001. The Company will adopt SFAS No.
142 during the first quarter of fiscal 2002, and is in the process of evaluating
the impact of implementation on the financial position of the Company.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long Lived Assets" applicable to financial statements
issued for fiscal years beginning after December 15, 2001. SFAS No. 144 provides
a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset held-for-sale. Classification as held-for-sale is an important distinction
since such assets are not depreciated and are stated at the lower of fair value
and carrying amount. SFAS No. 144 also requires expected future operating losses
from discontinued operations to be displayed in the periods in which the losses
are incurred, rather than as of the measurement date, as presently required. We
do not expect the provisions of SFAS No. 144 to have a significant effect on our
financial position or operating results.
RESULTS OF OPERATIONS
Comparison of fiscal years ending December 31, 2001 and 2000
REVENUES. Revenues increased 126% or $58,858, to $105,482 for the year
ended December 31, 2001, compared to $46,584 in fiscal 2000. The increase in
revenues is primarily attributable to license fees earned for the entire year in
2001 and an increase in sales of Isolagen cream.
15
COST OF SALES. Costs of sales increased 65%, or $7,045, to $17,891 for
the year ended December 31, 2001, compared to $10,846 in fiscal 2000. The
increase in cost of sales is primarily related to the increase in sales of
Isolagen cream.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 105%, or $765,440, to $1,493,819 for the year
ending December 31, 2001, compared to $728,379 in fiscal 2000. The increase is
attributed primarily to consulting expenses and travel expenses. The Company
incurred a non-cash consulting expense in September 2001 for $450,000.
INTEREST EXPENSE. Interest expense decreased 31%, or $37,311, to
$82,015 for the year ended December 31, 2001, compared to $119,326 in fiscal
2000. The decrease is primarily attributable to convertible debt converting to
equity in 2001.
NET LOSS. Net loss for the year ended December 31, 2001, was
$1,496,448, as compared to a net loss of $807,076 for the year ended December
31, 2000. This increase in net loss is attributed primarily to increased
consulting expenses.
Liquidity and Capital Resources
OPERATING ACTIVITIES. Cash used in operating activities during the year
ended December 31, 2001, amounted to $664,203, an increase of 155%, or $403,860
over the $260,343 of cash used in operating activities during fiscal 2000. The
increase is primarily due to decreases in deferred revenue and an increase in
accrued expenses.
INVESTING ACTIVITIES. Cash provided by investing activities during the
year ended December 31, 2001, amounted to $1,000, as compared to $0 of cash
provided by investing activities during fiscal 2000.
FINANCING ACTIVITIES. Isolagen has financed its operating and investing
activities primarily from the proceeds of private placements of its common
stock. During the year December 31, 2001, the Company received $2,060,000 from
cash sales of its common stock, an increase of $2,058,077, as compared to the
$1,923 received from cash sales of common stock during fiscal 2000.
As of December 31, 2001, Isolagen, Inc. had a cash balance of
$1,380,824. The Company believes the existing working capital will be adequate
to meet anticipated capital and liquidity requirements for the next fiscal year.
The long-term viability of the Company is dependent upon successful operation of
its business and the ability to raise additional debt and equity within the near
future.
ITEM 7. FINANCIAL STATEMENTS
The information required under Item 310(a) of Regulation S-B is
included in this report as set forth in the "Index to Financial Statements." See
F-1 for Index to Consolidated Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The accounting firm of Robison, Hill & Co. ("Robison Hill") represented
the Company as its independent accountants and was dismissed by the Company's
Board of Directors on August 22, 2001. Prior to dismissal, there were no
disagreements between the Company and Robison Hill on any matter of accounting
principles or practices, financial statement disclosure, or audit scope or
procedure, which disagreements, if not resolved to the satisfaction of Robison
Hill, would have caused it to make reference to the subject matter of the
disagreement in connection with its reports. There were no reportable events as
defined by Item 304 (a)(1)(iv) of Regulation S-B.
On August 22, 2001, the Company's Board of Directors engaged Pannell
Kerr Forster of Texas P.C. ("PKF of Texas') as the Company's independent
accountants for fiscal year 2001. Prior to engaging PKF of Texas, the Company
did not consult PKF of Texas regarding any matters specified in Item 304(a)(2)
of Regulation S-B.
16
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS, COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
Name Age Title
---- --- -----
Frank DeLape 48 Chairman of the Board of Directors
William K. Boss, Jr. 51 Vice Chairman of the Board of Directors
Michael Macaluso 50 Chief Executive Officer and Director
Michael Avignon 48 President and Director
Olga Marko 58 Senior Vice President and Director of Research
Robert E. Tompkins 49 Vice President of Process Sciences
Jeffrey W. Tomz 30 Chief Financial Officer and Secretary
Jeff Mamaux 33 Controller
Set forth below are descriptions of the backgrounds of the executive
officers and directors of the Company and their principal occupations for the
past five years.
Frank DeLape was appointed to the Board of Directors on June 18, 2001.
He was elected Vice President on August 10, 2001, and he was elected Chairman of
the Board on August 24, 2001. Mr. DeLape is also the Chief Executive Officer at
Benchmark Equity Group, Inc., a position he has held since 1994. Benchmark is a
boutique merchant banking firm that focuses as facilitators and financial
managers for emerging companies. Mr. DeLape was a founder and financier of Think
New Ideas, a NASDAQ NMS listed company, which later sold for over $260 million.
At Benchmark, Mr. DeLape has formed and been instrumental in the growth of
seventeen companies. Prior to Benchmark, Mr. DeLape spent eleven years in the
executive management roles of managing turnarounds for various companies. Mr.
DeLape acted on behalf of the Board of Directors or the sponsoring bank to
recapitalize the companies, return them to profitability or maximize cash
repayment through an orderly liquidation. Mr. DeLape is also the Managing
Partner of Gemini Growth Fund, LP. Gemini Growth Fund, LP is a Small Business
Investment Company licensed by the United States government.
William K. Boss, Jr. was appointed to the Board of Directors on August
10, 2001. He was elected Vice Chairman of the Board of Directors on August 24,
2001. Dr. Boss has been the founder, Chief Executive Officer and Chairman of the
Board of Isolagen Technologies since its inception in 1995. Dr. Boss is a Board
Certified Plastic Surgeon and serves the Hackensack Medical Center as Vice
Chairman of Plastic Surgery. Dr. Boss also serves as an Assistant Clinical
Professor at the University of Medicine and Dentistry in New Jersey.
Michael Macaluso was appointed to the Board of Directors on June 18,
2001. He was elected President of the Company on June 21, 2001, and he was
appointed Chief Executive Officer on August 24, 2001. Mr. Macaluso is a founder
and principal of International Printing and Publishing ("IPP"), a position Mr.
Macaluso has held since 1990. Over the past seventeen years, Mr. Macaluso has
bought, managed and sold numerous companies. In 1990, he was instrumental in the
only financial transaction with Touche Ross' venture fund to acquire three
companies, resulting in the creation of IPP. While at IPP, Mr. Macaluso has
managed all phases of this large commercial printing operation which serves
domestic and international markets. As a result of the merger of Touche Ross and
Deloitte, Mr. Macaluso became a partner with Deloitte Touche in an international
printing firm. Subsequent to the merger, Mr. Macaluso negotiated the buyout of
Deloitte Touche's interest and subsequently sold IPP to a large consolidator.
Mr. Macaluso has excellent communication and negotiating skills, and as a result
has been successful in developing international markets while working with
diverse cultures. As a result of Mr. Macaluso's success in international
manufacturing, GE Finance requested his input on a number of $100 million plus
manufacturing transactions. He has developed sales networks and conducted
business in domestic and international markets. Management believes that Mr.
Macaluso's experience in
17
structuring mergers and acquisitions combined with his excellent communication
and negotiating skills will prove invaluable.
Michael Avignon was appointed to the Board of Directors on June 18,
2001. He was elected Vice President of the Company on August 10, 2001, and he
was appointed President on August 24, 2001. Mr. Avignon is the founder, Chief
Executive Officer and Chairman of the Board of Axces, Inc., a position he has
held since 1994. Axces, Inc. is a telecommunications company, which includes
international marketing and a state-of-the-art call center. Mr. Avignon is also
Chairman and Chief Executive Officer of MTM Holdings Corp. and Managing Member
of Capali, L.L.C., a private investment company. Over the past eighteen years,
Mr. Avignon has bought, built and sold numerous companies and structured
partnerships in both domestic and international markets. This experience will
prove invaluable as the Company attempts to license its products worldwide. Mr.
Avignon has managed decentralized branches in numerous cites around the United
States. Mr. Avignon implemented accounting and management controls which
provided his team with current information so that if change was required, it
could be implemented without delay. Additionally, Mr. Avignon is very
experienced with regulatory agencies, including the Federal Communication
Commission ("FCC") and various state regulatory agencies including the Public
Utility Commission ("PUC") and the Public Service Commission ("PSC"). Management
believes that Mr. Avignon's knowledge in these areas will be critical as the
Company begins the approval process with regulatory bodies around the world.
Olga Marko was appointed Vice President of the Company on August 10,
2001. She assumed the role of Senior Vice President and Director of Research on
August 24, 2001. Ms. Marko has served as Vice President and Director of Research
at Isolagen Technologies since its inception in 1995. Prior to incorporating
Isolagen Technologies with Dr. Boss, Ms. Marko worked for Merck and Company in
the Department of Molecular Pharmacology, Memorial Sloan Kettering and Advanced
Tissue Sciences. Her focus, at Merck, involved new drug development, as well as
mentoring a group of more than 45 scientists, in the area of tissue culture.
During this time, she developed a number of new techniques which improved
transfections and receptor expression. In addition, she also developed unique
stem cell lines from bone marrow, which were related to animal and human origin.
While at Advanced Tissue Sciences, she was instrumental in developing "in
vitro", full thickness skin. She was the first to successfully cultivate
melanocytes in culture while she was at Memorial Sloan Kettering research
institution in New York. Ms. Marko's basic research in academic institutions
included Cancer research, Onco-virology, metastatic involvement, skin cells
biology, and wound/burn treatment. The research in wound/burn treatment was done
in collaboration with the Cornell University Burn Unit and Rockefeller
University. Her industrial experience also included validating the effect of
drugs for AIDS treatment and its immuno responses. Ms. Marko established a
number of very unique cell lines and holds a number of patents as a result of
her work. Ms. Marko has been published in such prestigious, internationally,
multi-faceted journals as Science, Nature and the Proceedings of the National
Academy, as well as many "niche" publications. She has also co-authored a number
of chapters in books relating to tissue culture and medical sciences. Ms. Marko
has over thirty-six years in basic research uncovering numerous opportunities
for the development of cell lines for specific applications. Ms. Marko has a BS
in Biochemistry/Microbiology with graduate work and extensive commercial
experience in Cell Biology. Her experience involves diverse, yet related, fields
including cell biology, transplantation, immunology, biochemistry, molecular
biology and virology.
Robert E. Tompkins, Ph.D. was appointed Vice President of Process
Science in charge of the worldwide development and operation of the Company's
laboratories on September 17, 2001. Dr. Tompkins assumed this position with the
Company after serving as founder, President, Chief Technical Director and Chief
Operating Officer of Scientific Laboratories, Inc. (a consortium of US and
western European environmental and microbiological-related laboratories) since
1988. Dr. Tompkins' has over twenty years of technical expertise, facilities
design/establishment & laboratory management experience.
Jeffrey W. Tomz was appointed Secretary and Treasurer of the Company on
June 21, 2001. He was appointed Chief Financial Officer and Secretary on August
24, 2001. Mr. Tomz is also a Principal at Benchmark Equity Group, Inc. Benchmark
is a boutique merchant banking firm that focuses as facilitators and financial
managers for emerging companies. Mr. Tomz has served and/or is currently serving
on corporate boards of investee companies, as well as Trident III, L.L.C. and
Trident II, L.L.C. Mr. Tomz was a Director of InfoHighway Communication Corp., a
private company that was recently involved in a corporate restructuring with an
equity investment of $45 million, plus an additional $105 million equity
commitment. Prior to joining Benchmark in the fall of 1997, Mr. Tomz began his
career as a certified public accountant with Arthur Andersen Worldwide.
Jeff Mamaux was appointed Controller of the Company on August 24, 2001.
Mr. Mamaux is the Controller of Axces, Inc., a position he has held since 1996.
Axces, Inc. is a telecommunications company. Prior to joining Axces, Mr. Mamaux
was the inventory and cost supervisor for Strategic Materials, Inc.
18
No director is related to any other director or executive officer of
the Company or its subsidiaries, and except as described above, there are no
arrangements or understandings between a director and any other person pursuant
to which such person was elected as director.
Corporate officers are appointed by the Board and serve at the
discretion of the Board. The Board members serve for a period of one year.
European Management and Consultants
Brian Whitley M.Sc., Chief Executive Officer of Isolagen Europe: Mr.
Whitley was appointed Chief Executive Officer of Isolagen Europe on September 1,
2001. Mr. Whitley specializes in biotech start-ups in Europe. He was Managing
Director of GU Manufacturing for six years, a keyhole surgery and heart
instrumentation company, and has held Director posts at bio sensing companies
and surgical companies such as Seward Ltd., Downs Surgical, and Biomedical
Sensors. He was named technical Director of Downs Surgical in 1987. His special
interests are commercializing biotech products and the development, marketing
and sales of cutting edge medical devices for keyhole surgery.
Claire Linge, PhD., Consultant of Isolagen Europe: Dr. Linge has over
18 years experience in cell biology, specializing in tissue culture of human
skin cells: keratinocytes, melanocytes, fibroblasts and adipocytes. Dr. Linge
has expertise in cultured skin production for burns casualties. Dr. Linge is
experienced in the design and equipping of tissue culture facilities. Dr. Linge
is currently employed as Group Leader in Cell Biology at the RAFT Institute of
Plastic Surgery, Mount Veron Hospital, England.
John Pring, Quality Control Manager of Isolagen Europe: Mr. Pring has
over thirty years experience at the National Institute for Biological Standards
and Control in the United Kingdom, most recently as a Director of Research. Mr.
Pring specializing in quality systems for vaccines and blood products. Mr.
Pring's special interests include cell biology, tissue engineering and low
temperature transportation and tracking of biologics. Mr. Pring is experienced
in ISO 9001 and other biological standards.
Laura Eade B.Sc. (Hons), Cell Scientist at Isolagen Europe: Ms. Eade
will be expanding fibroblasts for the cosmetic part of the Isolagen Europe
operation. She has experience in the culturing and maintenance of fibroblast
cells and has researched fibroblast proliferation rates. From 1996 to 2001, Ms.
Eade was a Sale Advisor/Supervisor at Marks & Spencer. Ms. Eade has a BSc (Hons)
Applied Biology 2ii from the University of Hertfordshire.
Board of Advisors
The Company has engaged the following Board of Advisors to advise the
Company's Board of Directors. The Company has executed advisory or consulting
agreements with the members of its Board of Advisors. As consideration for their
services provided to the Company, advisors may receive options to purchase
Common Stock and/or cash fees.
Rena N. D'Souza, Ph.D., DDS., MS; Professor and Director of Research
Department of Orthodontics, The University of Texas, Dental Branch, Houston. Dr.
D'Souza received her Bachelor of Dental Surgery from the University of Bombay,
India, her D.D.S. Advanced Standing Program from The University of Texas Health
Science Center, Dental Branch, Houston and both her Ph.D. and M.S. from The
University of Texas Health Science Center, Houston. Dr. D'Souza honors include:
a) Adjunct Faculty, Department of Internal Medicine, Division of Molecular
Genetics, Medical School, University of Texas Health Science Center, Houston; b)
Adjunct Faculty, Department of Molecular Genetics, University of Texas, MD
Anderson Cancer Center, Houston; c) Adjunct Professor, Medical Faculty,
Department of Restorative Dentistry, Endodontics and Periodontics, University of
Regensburg, Germany; and d) Adjunct Associate Professor, Department of
Endodontics, The University of Texas Health Science Center at San Antonio. Dr.
D'Souza is licensed by the Texas State Board of Dental Examiners.
Otis Bouwsma, Ph.D., DMD; Associate Professor/Director, Advanced
Education Program in Periodontics at The University of Texas Health Science
Center, Dental Branch at Houston. Dr. Bouwsma received his M.S. from Northeast
Louisiana University; his Ph.D. from the University of Georgia Graduate School;
and his D.M.D. from the University of Mississippi School of Dentistry. He has
served on specialty boards with the American Board of Periodontology and the
American Academy of Periodontology. Dr. Bouwsma has been a representative to the
Dental Device Panel of the U.S. Food and Drug Administration and has been
Principal Scientist and Senior Scientist to Johnson & Johnson, Inc. and Procter
& Gamble, Inc., respectively.
19
James T. Mellonig, DDS, MS; Professor, Head Specialist Division and
Director of Advanced Education Program at The University of Texas Health Science
Center at San Antonio. Dr. Mellonig received his D.D.S. from Marquette
University and his M.S. from George Washington University. Dr. Mellonig was the
Chairman of the Department of Periodontology, Professor, Director Postgraduate
Periodontics and Specialty Advisor to the Naval Medical Command, Navy Dental
School. He has served as the President of the American Academy of
Periodontology.
Jack G. Caton, Jr., DDS, MS; Professor, Eastman Department of
Dentistry, and Chief, Division of Periodontics University of Rochester Eastman
Dental Center, Rochester, New York. Dr. Caton received his D.D.S. from the
University of California Dental School, his M.S. from the University of
Rochester. Dr. Caton has served as President of the American Academy of
Periodontology. Dr. Caton has held numerous officer positions including: a)
Director, American Academy of Implant Dentistry Foundation Board, 2001-present;
b) Immediate Past President, American Academy of Periodontology, 2000-2001; c)
President, American Academy of Periodontology, 1999-2000; d) Director, Board of
Directors, American Academy of Periodontology Foundation, 1998-present; e)
President Elect, American Academy of Periodontology, 1998-1999; f) Vice
President, American Academy of Periodontology, 1997-1998; f) Treasurer, American
Academy of Periodontology, 1996-1997; g) Secretary, American Academy of
Periodontology, 1995-1996.
Nicolas Elian, DDS. Dr. Elian received his D.D.S. from New York
University College of Dentistry in 1991 with the following honors: Honors in
Fixed Prosthodontics; The Academy of Dentistry for the Handicapped Certificate
of Recognition for High Achievement in the Undergraduate Curriculum in Dental
Care for the handicapped; and Dr. Athur N. Caplin Scholarship Award in
Recognition of Outstanding Academic the Discipline Removable Prosthodontics. In
1993 he received his certificate in prosthodontics. In 1995 he completed his
fellowship in implant dentistry. Since 1995 Dr. Elian has been on staff at the
Department of Implant Dentistry at NYU and Chief Attending Prosthodontist at
Peninsula Hospital Center. He also serves as Director of The General Practice
Residency at Peninsula Hospital Center. Dr. Elian is involved extensively in the
field of tissue engineering, distraction osteogenesis, and esthetic implant
design. His work on ridge splitting and grafting presented at the 2001 annual
Academy of Osseointegration meeting was the recipient of Best Table Clinic
Award. Dr. Elian is an investigator on several research projects at NYU, and
also participates in multicenter studies, involving such institutions as The
Harvard School of Dental Medicine, and The University of North Carolina. Dr.
Elian lectures frequently on a variety of topic related to implant dentistry.
Presently Dr. Elian is the Director of the International Residency Program in
Implant Dentistry at New York University College of Dentistry.
Professor Maurizio Tonetti DMD, PhD, MMSc, FDS RCPS, Professor of
Periodontology, University College London, Head of Periodontology, Eastman
Dental Clinic. England. Professor Tonetti is considered to be one of the top
periodontologists in Europe. He has pioneered and perfected several novel
treatment approaches in periodontology and implant dentistry. His research
interests include tissue engineering, matrix scaffolds and bioengineering
processes. He is currently appointed as Visiting Professor of Periodontology at
the University of Berne, Switzerland and the University of North Carolina.
Professor Colin Green PhD, DSc (Med), FRCVS, FRCPath, FRCS(hon),
Director of the Northwick Park Institute of Medical Research, England , and head
of Surgical Research. Professor Green is professor of Surgical Science in
University College London and UNESCO Professor of Cryobiology in the Ukraine
Academy of Science. He has over thirty-two years of experience in organ
transplant biology and low temperature biology. Professor Green has published
extensively in the area of wound healing and tissue engineering.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company during or respecting its last fiscal year ended
December 31, 2001, and any written representation referred to in paragraph
(b)(2)(i) of Item 405 of Regulation S-B, no person who, at any time during the
most recent fiscal year, was a director, officer, beneficial owner of more than
10% of any class of equity securities of the Company or any other person known
to be subject to Section 16 of the Exchange Act failed to file, on a timely
basis, reports required by Section 16(a) of the Exchange Act during the most
recently-completed, full fiscal year or prior fiscal year, except as noted in
previous reports on Form 10-K and Form 10-KSB and for the failure of Benchmark
Equity Group, Inc., Michael Macaluso, Michael Avignon, William K. Boss, Jr.,
Olga Marko and Jeffrey W. Tomz to report the acquisition of an aggregate of
8,558,723 shares of common stock.
20
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Annual Compensation Long Tem Compensation
------------------------- ----------------------------------------
Awards Payouts
------------------------- ----------
Other
Annual Restricted Securities All Other
Name and Compens- Stock Underlying LTIP Compens-
Principal Position Year Salary ation Awards Options Payouts Bonus ation
------------------ ---- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Michael Macaluso 2001 -- -- -- 900,000 -- -- --
CEO
Michael Avignon 2001 -- -- -- 900,000 -- -- --
President
Olga Marko 2001 $ 130,000 -- -- -- -- -- --
Senior VP
Robert Tompkins 2001 $ 90,000 -- -- 300,000 -- -- --
VP
Jeffrey Tomz 2001 -- -- -- 150,000 -- -- --
CFO
Jeff Mamaux 2001 -- -- -- 25,000 -- -- --
Controller
The Company anticipates that it will not pay or accrue salaries to
Michael Macaluso, Michael Avignon, Jeffrey W. Tomz and Jeff Mamaux for at least
the next 12 months.
Directors who are also employees of the Company do not receive
compensation for their services as directors. The Company anticipates that, for
an undetermined period, its non-executive directors will not be paid any fees or
cash compensation for service as members of the Board of Directors, but will be
reimbursed for any reasonable out-of-pocket expenses incurred in connection with
attending meetings of the Board.
The Board of Directors has no standing audit or compensation
committees.
STOCK OPTIONS AND WARRANTS
The Company's Board of Directors adopted and shareholders have approved
the Company's 2001 Incentive and Nonstatutory Stock Option Plan (the "Plan")
reserving 5,000,000 shares of Common Stock for the issuance of options to
employees, directors and consultants of the Company. The purpose of the Plan is
to promote the interests of the Company and to motivate, attract and retain the
services of persons upon whose judgment, efforts and contributions the success
of the Company's business depends. A further purpose of the Plan is to align the
personal interests of such persons with the interests of stockholders of the
Company through equity participation in the Company's growth and success. The
Plan provides for granting non-qualified options, incentive stock options and
restricted stock awards, or any combination of the foregoing. As of March 1,
2002, 3,792,500 stock options had been granted under the Plan, of which 6,250
have vested.
21
Options Granted in Last Fiscal Year:
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED TO
UNDERLYING OPTIONS EXERCISE OR EMPLOYEES IN THE EXPIRATION
NAME GRANTED BASE PRICE FISCAL YEAR DATE
---- -------------------- ------------ ------------------ ------------
OFFICERS AND DIRECTORS
Michael Macaluso 900,000 $ 3.00 23.7% 9/1/2011
Michael Avignon 900,000 $ 3.00 23.7% 9/1/2011
Robert E. Tompkins 300,000 $ 1.50 7.9% 9/17/2011
Jeffrey W. Tomz 150,000 $ 3.00 4.0% 9/1/2011
Jeff Mamaux 25,000 $ 3.00 0.7% 9/1/2011
-------------
2,275,000
Option Exercises and Fiscal Year End Option Values:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT DECEMBER 31, 2001 AT DECEMBER 31, 2001(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
OFFICERS AND DIRECTORS
Michael Macaluso -- $ -- -- 900,000 -- $3,600,000
Michael Avignon -- $ -- -- 900,000 -- $3,600,000
Robert E. Tompkins -- $ -- -- 300,000 -- $1,650,000
Jeffrey W. Tomz -- $ -- -- 150,000 -- $ 600,000
Jeff Mamaux -- $ -- -- 25,000 -- $ 100,000
---------- ---------- ---------- ---------- ---------- ----------
-- $ -- -- 2,275,000 -- $9,550,000
(1) The value of unexercised "in-the-money" options equals the difference
between the option exercise price and the closing price of the
Company's stock at year end, multiplied by the number of shares
underlying the options. The closing price of the Company's stock on
December 31, 2001,as reported on the Over-the-Counter Bulletin Board,
was $7.00.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Olga Marko,
William K. Boss, Jr., Brian Whitley, and Robert E. Tompkins.
Ms. Marko entered into an employment agreement with the Company, dated
August 10, 2001, for a term of sixty months at an annual base salary of
$130,000. The base salary shall increase on an annual basis by the same
percentage that the Consumer Price Index has increased during the same time
frame or at the direction of the Board of Directors, whichever is higher. Mrs.
Marko is eligible for an annual bonus to be determined by the Board of Directors
in its sole discretion. If the employment agreement is terminated by the Company
without cause, Mrs. Marko will be entitled to a twelve month severance payment.
Dr. Boss entered into an employment agreement with the Company, dated
August 10, 2001, and later amended on February 28, 2002 as follows: (a) during
the first year of the term, Dr. Boss will receive 60,000 shares of Common Stock;
(b) an annual salary of $50,000 for 2002; and (c) an annual salary of $60,000
for 2003. For this compensation, Dr. Boss agrees to devote 25 mutually agreeable
days per year as requested by the Company (i.e., out-of-town meetings, etc.). If
the employment agreement is terminated by the Company without cause, Dr. Boss
will be entitled to a three-month severance payment.
Mr. Whitley entered into an employment agreement with the Company,
dated September 1, 2001, for a term of sixty (60) months at an annual base
salary as follows: (a) $4,000 per month for September 2001 through December
2001; and (b) $10,000 per month for months subsequent to December 31, 2001. Mr.
Whitley is eligible for an annual bonus to be determined by the Board of
Directors in its sole discretion. If the employment agreement is terminated by
the Company without cause, Mr. Whitley will be entitled to a three month
severance payment.
22
Mr. Tompkins entered into an employment agreement with the Company,
dated September 17, 2001, for a term of thirty-six (36) months at an annual base
salary of $90,000. Mr. Tompkins is eligible for an annual bonus to be determined
by the Board of Directors in its sole discretion. If the employment agreement is
terminated by the Company without cause, Mr. Tompkins will be entitled to a two
month severance payment.
The Company does not have employment agreements with Michael Macaluso,
Michael Avignon, Jeffrey W. Tomz or Jeff Mamaux.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock by all directors, executive officers
and all persons who own beneficially, directly or indirectly, more than 5% of
the Common Stock and all directors, officers and key employees as a group as of
March 15, 2002.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNERSHIP CLASS(2)
---------------------------------------- ------------ ------------
Michael Macaluso (3) 2,025,734 13.3%
Michael Avignon (4) 2,025,734 13.3%
Frank DeLape (5) 1,600,000 10.5%
William K. Boss, Jr. 1,614,055 10.6%
Olga Marko 1,066,000 7.0%
Robert Tompkins -- 0.0%
Jeffrey W. Tomz 227,200 1.5%
Jeff Mamaux -- 0.0%
ALL DIRECTORS AND OFFICERS AS A GROUP 8,558,723 56.3%
Lighthouse Capital Insurance Company 1,000,000 6.6%
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended, and is generally determined by
voting powers and/or investment powers with respect to securities. Unless
otherwise noted, all of such shares of Common Stock listed above are owned
of record by each individual named as beneficial owner and such individual
has sole voting and dispositive power with respect to the shares of Common
Stock owned by each of them. Such person or entity's percentage of
ownership is determined by assuming that any options or convertible
securities held by such person or entity which are exercisable within sixty
(60) days from the date hereof have been exercised or converted as the case
may be.
(2) Based upon 15,189,563 shares of Common Stock being issued and outstanding
as of December 31, 2001 without taking into consideration the exercise or
conversion of any outstanding options or warrants.
(3) Includes 1,000,000 shares of Common Stock beneficially owned by Alyda
Macaluso, Mr. Macaluso's wife.
(4) Includes 1,000,000 shares of Common Stock beneficially owned by Laura
Avignon, Mr. Avignon's wife.
(5) Represents 1,600,000 shares of Common Stock beneficially owned by Benchmark
Equity Group, Inc., which is solely owned by Mr. DeLape. Does not include
1,000,000 shares of Common Stock beneficially held by Lighthouse Capital
Insurance Company, a Cayman Island unlimited licensed insurance company,
which has issued a variable universal life insurance contract of which Mr.
DeLape and his children are remote contingent beneficiaries. Mr. DeLape
disclaims beneficial ownership of such shares held by Lighthouse and does
not have voting or dispositive power with respect to such shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 22, 2001, the Company, then known as American Financial
Holding, entered into a purchase agreement (the "Purchase Agreement") with Alyda
Macaluso, Laura Avignon, and Lighthouse Capital Insurance Co. whereby the
Company issued 15,000,000 million shares of common stock (pre-split) and issued
$150,000 of promissory
23
notes to the purchasers for $300,000 in cash. Under the terms of the Purchase
Agreement, the Company obtained shareholder approval for a 21:4 reverse stock
split, which resulted in the 4,279,449 shares of common stock outstanding at
December 31, 2000 being consolidated into 199,974 post-split shares. In
addition, the 15,000,000 pre-split shares of common stock issued to the
purchasers were consolidated into 700,935 post split shares and the $150,000
promissory notes were automatically converted into 2,299,065 post-split shares
of common stock; thus bringing the total interest in the Company held by the
purchasers to 3,000,000 post-split shares of common stock. Accordingly, the
Purchase Agreement resulted in a change in control of the Company.
On August 10, 2001, the Company acquired Isolagen Technologies through
the merger of its wholly-owned subsidiary, Isolagen Acquisition Corp., a
Delaware corporation ("Merger Sub"), and an affiliated entity, Gemini IX, Inc.,
a Delaware corporation ("Gemini"), with and into Isolagen Technologies (the
"Merger"). As a result of the Merger, Isolagen Technologies became a
wholly-owned subsidiary of the Company. Simultaneously with the Merger, the
Company issued 1,346,669 shares, at $1.50 per share, of the Company's restricted
common stock to Timothy J. Till, Michael Avignon, Michael Macaluso, and BASR
Partnership for consideration totaling $2,020,000 in a private placement and
converted $1,450,000 principal amount of Company debt and approximately $625,000
of accrued liabilities of the Company to equity. On November 13, 2001, the
Company changed its name to Isolagen, Inc.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
Exhibit 2.1* Agreement and Plan of Merger by and among American Financial Holding, Inc., ISO
Acquisition Corp., Isolagen Technologies, Inc., Gemini IX, Inc., and William K.
Boss, Jr., Olga Marko and Dennis McGill as Dated August 1, 2001. (incorporated
by reference to Exhibit 2.1 of the Registrant's Form 8-K as filed on August 22,
2001)
Exhibit 3.1* Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the
Registrant's Form 10-K for the fiscal year ended December 31, 1991)
Exhibit 3.2* Bylaws (incorporated by reference to Exhibit 3.2 of the Registrant's Form 10-K
for the fiscal year ended December 31, 1991)
Exhibit 4.1* Letter of Transmittal for holders of promissory notes of Isolagen Technologies,
Inc. (incorporated by reference to Registrant's Form 8-K as filed on August 22,
2001)
Exhibit 4.2* Letter of Transmittal for stockholders of Isolagen Technologies, Inc.
(incorporated by reference to Registrant's Form 8-K as filed on August 22,
2001)
Exhibit 4.3* Letter of Transmittal for stockholders of Gemini IX, Inc. (incorporated by
reference to Registrant's Form 8-K as filed on August 22, 2001)
Exhibit 4.4 Specimen of common stock certificate
Exhibit 10.1* Purchase Agreement between American Financial Holding, Inc. and Alyda Macaluso,
Laura Avignon, and Lighthouse Capital Insurance Co. dated January 22, 2001
(incorporated by reference to Exhibit 10.6 of the Registrant's Form 10-K as
filed on January 22, 2001)
Exhibit 16.1* Letter from Robison, Hill & Co., dated August 21, 2001 (incorporated by
reference to Exhibit 16.1 of the Registrant's Form 8-K filed on August 22,
2001)
Exhibit 21.1 List of Subsidiaries
*Incorporated by reference as indicated.
(b) REPORTS ON FORM 8-K. DURING THE QUARTER ENDED DECEMBER 31, 2001, THE
COMPANY FILED THE FOLLOWING REPORT ON FORM 8-K:
Date of Event Reported Item Reported
---------------------- -------------
October 4, 2001 Financial statements, pro forma financial information and exhibits
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Isolagen, Inc.
By: /s/ Jeffrey W. Tomz
-------------------------------------
Jeffrey W. Tomz, Chief Financial Officer
Date: March 15, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Frank DeLape Chairman of the Board March 15, 2002
--------------------------- --------------
Frank DeLape
/s/ William K. Boss, Jr. Vice Chairman of the Board March 15, 2002
--------------------------- --------------
William K. Boss, Jr.
/s/ Michael Macaluso Chief Executive Officer and Director March 15, 2002
-------------------------- --------------
Michael Macaluso
/s/ Michael Avignon President and Director March 15, 2002
--------------------------- --------------
Michael Avignon
/s/ Jeffrey W. Tomz Chief Financial Officer March 15, 2002
--------------------------- --------------
Jeffrey W. Tomz
25
Isolagen, Inc.
(A Development Stage Company)
Index to Consolidated Financial Statements
PAGE
----
Report of Independent Public Accountants.............................................................F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000.........................................F-3
Consolidated Statements of Operations for the years ended
December 31, 2001 and 2000...........................................................................F-4
Consolidated Statements of Shareholders' Equity
From inception to December 31, 2001................................................................F-5-7
Consolidated Statements of Cash Flows for the years ended
December 31, 2001 and 2000...........................................................................F-8
Notes to Consolidated Financial Statements....................................................... F-9-16
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Isolagen, Inc.
We have audited the accompanying consolidated balance sheets of Isolagen, Inc.
and Subsidiaries (a Delaware corporation) as of December 31, 2001 and 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended and, cumulatively, for the period from December
28, 1995 (date of inception) to December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Isolagen, Inc. and
Subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for the years then ended and from December 28,
1995 (date of inception) to December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
February 9, 2002
Pannell Kerr Forster of Texas, P.C.
Houston, Texas
F-2
Isolagen, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
December 31, December 31,
2001 2000
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 1,380,824 $ 2,574
Accounts receivable, net of allowance for doubtful
accounts of $-0- and $6,734 at December 31, 2001
and December 31, 2000, respectively 1,067 2,355
------------ ------------
Total current assets 1,381,891 4,929
------------ ------------
Property and equipment, net 7,357 31,947
Other assets 174,666 25,420
------------ ------------
Total assets $ 1,563,914 $ 62,296
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 208,196 $ 148,263
Accrued expenses 23,318 226,833
Notes payable to shareholders -- 105,667
Current portion of convertible debt -- 600,000
Deferred revenue 280,000 360,000
------------ ------------
Total current liabilities 511,514 1,440,763
------------ ------------
Convertible debt, less current portion -- 850,000
------------ ------------
Total liabilities 511,514 2,290,763
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit)
Preferred stock, $.001 par value; 5,000,000
shares authorized -- --
Common stock, $.001 par value; 50,000,000
shares authorized 15,190 1,021
Additional paid-in capital 5,166,205 453,339
Accumulated deficit during development stage (4,128,995) (2,632,547)
Treasury stock, at cost -- (50,280)
------------ ------------
Total shareholders' equity (deficit) 1,052,400 (2,228,467)
------------ ------------
Total liabilities and shareholder's equity $ 1,563,914 $ 62,296
------------ ------------
The accompanying notes are an integral part of these statements
F-3
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
Cumulative
Period from
December 28,
For the Year Ended, 1995 (date of
December 31, inception) to
------------------------------ December 31,
2001 2000 2001
------------ ------------ ------------
Revenues
Sales $ 25,482 $ 6,584 $ 1,390,114
License fees 80,000 40,000 220,000
------------ ------------ ------------
Total revenues 105,482 46,584 1,610,114
Cost of sales 17,891 10,846 402,459
------------ ------------ ------------
Gross profit 87,591 35,738 1,207,655
Selling, general and administrative expenses 1,493,819 728,379 5,045,197
------------ ------------ ------------
Operating loss (1,406,228) (692,641) (3,837,542)
Other income (expense)
Interest income 17 4,891 28,397
Loss on disposal of asset (8,222) -- (8,222)
Interest expense (82,015) (119,326) (311,628)
------------ ------------ ------------
Net loss $ (1,496,448) $ (807,076) $ (4,128,995)
------------ ------------ ------------
Per share information
Net loss per common share - basic and diluted $ (.20) $ (.29) $ (1.17)
------------ ------------ ------------
Weighted average number of basic and diluted
common shares outstanding 7,618,947 2,822,104 3,537,370
------------ ------------ ------------
The accompanying notes are an integral part of these statements
F-4
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity
Common Stock Accumulated Treasury Stock
------------------------- Additional Deficit During -------------------------
Number Paid-In Development Number
of Shares Amount Capital Stage of Shares Amount
---------- ---------- ---------- -------------- ---------- ----------
Issuance of common stock for
cash on 12/28/95 82,000 $ 820 $ -- $ -- -- $ --
Issuance of common stock for
cash on 11/7/96 400 4 49,996 -- -- --
Issuance of common stock for
cash on 11/29/96 80 1 9,999 -- -- --
Issuance of common stock for
cash on 12/19/96 240 2 29,998 -- -- --
Issuance of common stock for
cash on 12/26/96 400 4 49,996 -- -- --
Net loss -- -- -- (270,468) -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, 12/31/96 83,120 831 139,989 (270,468) -- --
Issuance of common stock for
cash on 12/27/97 760 8 94,992 -- -- --
Issuance of common stock for
services on 9/1/97 400 4 36,256 -- -- --
Issuance of common stock for
services on 12/28/97 10,305 103 10,152 -- -- --
Net loss -- -- -- (52,550) -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 94,585 $ 946 $ 281,389 $ (323,018) -- $ --
Total
Shareholders'
Equity (Deficit)
----------------
Issuance of common stock for
cash on 12/28/95 $ 820
Issuance of common stock for
cash on 11/7/96 50,000
Issuance of common stock for
cash on 11/29/96 10,000
Issuance of common stock for
cash on 12/19/96 30,000
Issuance of common stock for
cash on 12/26/96 50,000
Net loss (270,468)
----------
Balance, 12/31/96 (129,648)
Issuance of common stock for
cash on 12/27/97 95,000
Issuance of common stock for
services on 9/1/97 36,260
Issuance of common stock for
services on 12/28/97 10,255
Net loss (52,550)
----------
Balance, December 31, 1997 $ (40,683)
The accompanying notes are an integral part of these statements
F-5
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
Common Stock Accumulated Treasury Stock
------------------------- Additional Deficit During -------------------------
Number Paid-In Development Number
of Shares Amount Capital Stage of Shares Amount
---------- ---------- ---------- -------------- ---------- ----------
Issuance of common stock for
cash on 8/23/98 160 $ 2 $ 20,065 $ -- -- $ --
Repurchase of common stock -- -- -- -- 2,400 (50,280)
on 9/29/98
Net loss -- -- -- (195,675) -- --
---------- ---------- ---------- ----------- ---------- ----------
Balance, 12/31/98 94,745 948 301,454 (518,693) 2,400 (50,280)
Issuance of common stock for
cash on 9/10/99 1,884 19 149,981 -- -- --
Net loss -- -- -- (1,306,778) -- --
---------- ---------- ---------- ----------- ---------- ----------
Balance, 12/31/99 96,629 967 451,435 (1,825,471) 2,400 (50,280)
Issuance of common stock for
cash on 1/18/00 1,923 19 1,904 -- -- --
Issuance of common stock for
services on 3/1/00 2,465 25 -- -- -- --
Issuance of common stock for
services on 4/4/00 996 10 -- -- -- --
Net loss -- -- -- (807,076) -- --
---------- ---------- ---------- ----------- ---------- ----------
Balance, 12/31/00 102,013 $ 1,021 $ 453,339 $(2,632,547) 2,400 $ (50,280)
Total
Shareholders'
Equity (Deficit)
----------------
Issuance of common stock for
cash on 8/23/98 $ 20,067
Repurchase of common stock (50,280)
on 9/29/98
Net loss (195,675)
-----------
Balance, 12/31/98 (266,571)
Issuance of common stock for
cash on 9/10/99 150,000
Net loss (1,306,778)
-----------
Balance, 12/31/99 (1,423,349)
Issuance of common stock for
cash on 1/18/00 1,923
Issuance of common stock for
services on 3/1/00 25
Issuance of common stock for
services on 4/4/00 10
Net loss (807,076)
-----------
Balance, 12/31/00 $(2,228,467)
The accompanying notes are an integral part of these statements
F-6
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
Common Stock Accumulated Treasury Stock
------------------------- Additional Deficit During -------------------------
Number Paid-In Development Number
of Shares Amount Capital Stage of Shares Amount
---------- ---------- ---------- -------------- ---------- ----------
Issuance of common stock for
services on 7/1/01 5,632 $ 56 $ -- $ -- -- $ --
Issuance of common stock for
services on 7/1/01 4,485 45 -- -- -- --
Issuance of common stock for
capitalization of accrued
salaries on 8/10/01 2,512 25 328,100 -- -- --
Issuance of common stock for
conversion of convertible
debt on 8/10/01 62,791 628 1,610,718 -- -- --
Issuance of common stock for
conversion of convertible
shareholder notes payable
on 8/10/01 7,498 75 135,592 -- -- --
Issuance of common stock for
bridge financing on 8/10/01 10,776 108 -- -- -- --
Reverse acquisition and
recapitalization
effective 8/10/01 13,100,217 11,339 (110,166) -- (2,400) 50,280
Issuance of common stock for
cash on 8/10/01 1,346,669 1,347 2,018,653 -- -- --
Issuance of common stock for
services on 8/10/01 60,000 60 -- -- -- --
Issuance of common stock for
cash on 8/28/01 26,667 26 39,974 -- -- --
Issuance of common stock for
services on 9/30/01 314,370 314 471,241 -- -- --
Issuance of common stock for
services on 11/1/01 145,933 146 218,754 -- -- --
Net loss -- -- -- (1,496,448) -- --
----------- ---------- ----------- ----------- ---------- ----------
15,189,563 $ 15,190 $ 5,166,205 $(4,128,995) -- $ --
----------- ---------- ----------- ----------- ---------- ----------
Total
Shareholders'
Equity (Deficit)
----------------
Issuance of common stock for
services on 7/1/01 $ 56
Issuance of common stock for
services on 7/1/01 45
Issuance of common stock for
capitalization of accrued
salaries on 8/10/01 328,125
Issuance of common stock for
conversion of convertible
debt on 8/10/01 1,611,346
Issuance of common stock for
conversion of convertible
shareholder notes payable
on 8/10/01 135,667
Issuance of common stock for
bridge financing on 8/10/01 108
Reverse acquisition and
recapitalization
effective 8/10/01 (48,547)
Issuance of common stock for
cash on 8/10/01 2,020,000
Issuance of common stock for
services on 8/10/01 60
Issuance of common stock for
cash on 8/28/01 40,000
Issuance of common stock for
services on 9/30/01 471,555
Issuance of common stock for
services on 11/1/01 218,900
Net loss (1,496,448)
-----------
$ 1,052,400
-----------
The accompanying notes are an integral part of these statements.
F-7
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cumulative
Period from
December 28,
For the Year Ended 1995 (date of
December 31, inception) to
------------------------------ December 31,
2001 2000 2001
------------ ------------ -------------
Cash flows from operating activities
Net loss $ (1,496,448) $ (807,076) $ (4,108,995)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common stock issued for services 788,970 35 1,052,079
Depreciation 15,368 16,333 67,717
Loss on sale of property and equipment 8,222 -- 8,222
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,288 10,717 (1,067)
Decrease in inventory -- 14,646 --
Decrease in other assets 25,420 4,291 --
Increase (decrease) in accounts payable 59,932 (763) 208,196
Increase in accrued expenses 13,045 141,474 3,318
Increase (decrease) in deferred revenue (80,000) 360,000 280,000
------------ ------------ ------------
Net cash used in operating activities (664,203) (260,343) (2,490,530)
------------ ------------ ------------
Cash flows from investing activities
Purchase of property and equipment -- -- (84,296)
Proceeds from the sale of property
and equipment 1,000 -- 1,000
------------ ------------ ------------
Net cash provided by (used in) 1,000 -- (83,296)
------------ ------------ ------------
operating activities
Cash flows from financing activities
Proceeds from convertible debt -- 200,000 1,450,000
Proceeds from notes payable to shareholders 30,000 -- 135,667
Proceeds from the issuance of common stock 2,060,000 1,923 2,467,810
Merger and acquisition expenses (48,547) -- (48,547)
Repurchase of common stock -- -- (50,280)
------------ ------------ ------------
Net cash provided by financing activities 2,041,453 201,923 3,954,650
------------ ------------ ------------
Net increase in cash and cash equivalents 1,378,250 (58,420) 1,380,824
Cash and cash equivalents, beginning of period 2,574 60,994 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,380,824 $ 2,574 $ 1,380,824
------------ ------------ ------------
Supplemental cash flow information:
Cash paid for interest $ 1,020 $ 68,843 $ 150,283
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
F-8
Isolagen, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION, BUSINESS AND ORGANIZATION
Isolagen, Inc. f/k/a American Financial Holding, Inc., a Delaware
corporation ("Isolagen" or the "Company"), is the parent company of Isolagen
Technologies, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company ("Isolagen Technologies"). Isolagen Technologies is the parent company
of Isolagen Europe Limited, a company organized under the laws of the United
Kingdom and wholly-owned subsidiary of Isolagen Technologies ("Isolagen
Europe"). The common stock, par value $0.001 per share, of the Company ("Common
Stock") is quoted on the Over-the-Counter Bulletin Board under the ticker symbol
"ISLG.OB"
Isolagen was organized to specialize in the development and
commercialization of autologous cellular system ("ACS") for hard and soft tissue
regeneration and other therapies. Isolagen currently holds four patents with one
additional patent pending. Representing breakthrough technology in the overall
approach to cosmetic and medical therapy, ACS is a process whereby a patient's
own cells are extracted, reproduced through Isolagen's proprietary process, and
then reintroduced back into the patient for specific cosmetic and medical
applications. Unlike other collagen development companies, Isolagen uses only
the patient's unique living cells for the source of its collagen production.
Isolagen's goal is to become the industry leader in the research, development
and commercialization of ACS tissue regeneration.
In 1997, the U.S. Food and Drug Administration ("FDA") began regulating
the science of biologics. Biologic products like ACS, in contrast to drugs that
are chemically synthesized, are derived from living sources (such as humans,
animals, and microorganisms). From 1995 to 1999, management of Isolagen
Technologies believed that FDA approvals were not required for use of the
Isolagen Process, based on advice from FDA consultants. In 1999, the FDA advised
Isolagen Technologies that use of the Isolagen Process would require FDA
approval, and Isolagen Technologies filed an investigational new drug
application ("IND") covering the Isolagen Process with the FDA. An IND is a
request for authorization from the FDA to administer an investigational drug or
biological product to humans. Such authorization must be secured prior to
commercialization of any new drug or biological product. After its review of
Isolagen Technologies' IND on December 9, 1999 the FDA placed the IND on
clinical hold until the Company's manufacturing processes and procedures were
changed to meet these new standards, and FDA approval is obtained. The use of
the Isolagen Process was discontinued after the FDA placed the IND on hold, and
Isolagen Technologies did not have sufficient funding to pursue regulatory
approvals.
Through December 31, 2001, the Company has been primarily engaged in
developing its initial product technology, recruiting personnel and raising
capital. In the course of its development activities, the Company has sustained
losses and expects such losses to continue through at least 2002. The Company
will finance its operations primarily through its existing cash, future
financing and revenues.
Acquisition and Merger
On August 10, 2001, the Company, pursuant to an Agreement and Plan of
Merger, dated August 1, 2001, by and among the Company, ISO Acquisition Corp, a
Delaware corporation and wholly-owned subsidiary of the Company ("Merger Sub"),
Isolagen, a Delaware corporation, Gemini IX, Inc., a Delaware corporation
("Gemini"), and William J Boss, Jr., Olga Marko and Dennis McGill, stockholders
of Isolagen (the "Merger Agreement"), acquired in a privately negotiated
transaction 100% of the issued and outstanding capital stock of Isolagen.
Pursuant to the terms of the Merger Agreement, Merger Sub, together with Gemini,
merged with and into Isolagen (the "Merger"), and Isolagen was the surviving
corporation of the Merger. The Company issued an aggregate of 9,756,372 shares
of restricted common stock, par value $0.001 per share, of the Company ("Common
Stock") as consideration for the Merger, to retire certain debts of Isolagen and
in connection with certain bridge loans of Isolagen.
Prior to the Merger, Isolagen had no active business and was seeking
funding to begin U.S. Food and Drug Administration ("FDA") trials of this
process.
F-9
Simultaneous with the Merger, the Company sold 1,346,669 shares of
restricted common stock to certain accredited investors in a private placement
transaction. The consideration paid by such investors for the shares of Common
Stock aggregated $2,020,000 in transactions exempt from the registration
requirements of the Securities Act. The net cash proceeds of this private
placement will be used to fund Isolagen's research and development projects and
the initial FDA trials of the Isolagen process, to explore the viability of
entering foreign markets, to provide working capital and for general corporate
purposes.
Basis of Presentation
The financial statements presented include the consolidated balance
sheet of Isolagen, Inc. and its wholly-owned subsidiary, Isolagen Technologies,
Inc., at December 31, 2001 and the balance sheet of Isolagen Technologies, Inc.
at December 31, 2000. The consolidated statements of operations and cash flows
for the year ended December 31, 2001 include Isolagen Technologies, Inc. for
these periods and Isolagen, Inc. for the period from August 10, 2001 through
December 31, 2001. The consolidated statements of operations and cash flows for
the year ended December 31, 2000 consists of the results of Isolagen
Technologies, Inc. only.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of cash flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Concentration of credit risk
The Company maintains its cash with a major U.S. domestic bank. The
amounts held in this bank exceed the insured limit of $100,000 from time to
time. The terms of these deposits are on demand to minimize risk. The Company
has not incurred losses related to these deposits.
The Company is subject to risks common to companies in the development
stage including, but not limited to, development of new products, development of
markets and distribution channels, dependence on key personnel, and the ability
to obtain additional capital as needed to fund its product plans. The Company
has a limited operating history and has yet to generate any significant revenues
from customers. To date, the Company has been funded by private debt and equity
financings. The Company's ultimate success is dependent upon its ability to
raise additional capital and to successfully develop and market its products.
The products developed by the Company require approvals from the United
States FDA or other international regulatory agencies prior to commercial sales.
There can be no assurance that all of the Company's products will receive the
necessary approvals. If the Company was denied such approvals or such approvals
were delayed, it may have a materially adverse impact on the Company.
Property and equipment
Property and equipment, consisting primarily of lab equipment, computer
equipment, office furniture and fixtures is carried at cost less accumulated
depreciation. Depreciation for financial reporting purposes is provided by the
straight-line method over the estimated useful lives of three to five years
subject to half year convention. The cost of repairs and maintenance is charged
against income as incurred.
Earnings per share data
Basic earnings (loss) per share is calculated based on the weighted
average common shares outstanding during the period. Diluted earnings per share
also gives effect to the dilutive effect of stock options, warrants and
convertible preferred stock (calculated based on the treasury stock method). The
Company does not present diluted earnings per share for years on which it
incurred net losses as the effect of potentially dilutive shares from
convertible debt is antidilutive.
F-10
Shares of Isolagen common stock outstanding prior to the Merger were
deemed converted to its equivalent shares of the Company's common stock using a
conversion factor as defined in the Merger Agreement.
Stock-based compensation
The Company accounts for its stock-based compensation under the
provisions of SFAS No. 123 - "Accounting for Stock Based Compensation." Under
SFAS No. 123, the Company is permitted to either record expenses for stock
options and other employee compensation plans based on their fair value at the
date of grant or to continue to apply its current accounting policy under
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees," ("APB NO. 25"), and recognize compensation expense, if any, based on
the intrinsic value of the equity instrument at the measurement date. The
Company elected to continue following the provisions of APB No. 25.
Income taxes
An asset and liability approach is used for financial accounting and
reporting for income taxes. Deferred income taxes arise from temporary
differences between income tax and financial reporting and principally relate to
recognition of revenue and expenses in different periods for financial and tax
accounting purposes and are measured using currently enacted tax rates and laws.
In addition, a deferred tax asset can be generated by net operating loss
carryforwards ("NOLs"). If it is more likely than not that some portion or all
of a deferred tax asset will not be realized, a valuation allowance is
recognized.
Revenue recognition
The Company recognizes license and other upfront fees on a ratable
basis over the term of the respective agreement. Milestone payments are
recognized upon successful completion of a performance milestone event. Any
amounts received in advance of performance are recorded as deferred revenue.
Research and development expenses
Research and development include direct costs, research-related
overhead, and costs associated with sponsored research which are charged to
operations as incurred.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Recent accounting pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations" ("SFAS No. 141"), which establishes
financial accounting and reporting for business combinations and supersedes APB
Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. SFAS No. 141 requires
that all business combinations be accounted for using one method, the purchase
method. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 is expected to have
no material impact on financial reporting and related disclosures of the
Company.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), which establishes financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, Intangible Assets. SFAS No. 142 addresses how intangible assets
that are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in financial
statements upon their acquisition, and after they have been initially recognized
in the financial statements. The provisions of SFAS No. 142 are effective for
fiscal years beginning after December 15,
F-11
2001. The Company will adopt SFAS No. 142 during the first quarter of fiscal
2002, and is in the process of evaluating the impact of implementation on the
financial position of the Company.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long Lived Assets" applicable to financial statements
issued for fiscal years beginning after December 15, 2001. SFAS No. 144 provides
a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset held-for-sale. Classification as held-for-sale is an important distinction
since such assets are not depreciated and are stated at the lower of fair value
and carrying amount. SFAS No. 144 also requires expected future operating losses
from discontinued operations to be displayed in the periods in which the losses
are incurred, rather than as of the measurement date, as presently required. We
do not expect the provisions of SFAS No. 144 to have a significant effect on our
financial position or operating results.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment is comprised of:
December 31,
--------------------------
2001 2000
---------- ----------
Lab Equipment $ 52,454 $ 52,454
Computer Equipment 6,326 6,326
Office Equipment -- 25,516
---------- ----------
58,780 84,296
Less: Accumulated depreciation (51,423) (52,349)
---------- ----------
Property and equipment, net $ 7,357 $ 31,947
---------- ----------
NOTE 4 - NOTES PAYABLE TO SHAREHOLDERS
At December 31, 2000, the Company had unsecured notes payable to two
shareholders. During 2001, pursuant to the Merger Agreement, these notes were
converted into common stock of Isolagen, Inc.
NOTE 5 - CONVERTIBLE DEBT
At December 31, 2000, the Company had convertible debt to individuals.
During 2001, pursuant to the Merger Agreement, these notes in the amount of
$1,450,000, along with accrued interest totaling $161,346, were converted into
common stock of Isolagen, Inc.
NOTE 6 - FEDERAL INCOME TAXES
The components of the Company's deferred tax assets at December 31,
2001 and 2000 are as follows:
December 31,
--------------------------
2001 2000
---------- ----------
Deferred tax assets:
Loss carryforwards $3,007,506 $ 887,114
Deferred tax liabilities:
Deferred revenue (95,200) (122,400)
---------- ----------
2,912,306 764,714
Less: Valuation allowance (2,912,306) (764,714)
---------- ----------
$ -- $ --
---------- ----------
F-12
As of December 31, 2001, the Company has generated NOLs of
approximately $8,846,000 available to reduce future income taxes. These
carryforwards begin to expire in 2002. A change in ownership, as defined by
federal income tax regulations, could significantly limit the Company's ability
to utilize its carryforwards. Additionally, because federal tax laws limit the
time during which the NOLs may be applied against future taxes, the Company may
not be able to take full advantage of the NOLs to reduce future income taxes if
it fails to generate taxable income prior to expiration of the NOLs. As the
Company has had cumulative losses and there is no assurance of future taxable
income, valuation allowances have been recorded to fully offset the deferred tax
asset at December 31, 2001 and 2000. The valuation allowance increased
$2,147,592 during 2001 due to the inclusion of Isolagen, Inc.'s NOLs acquired
through the Merger and Company's current period net loss.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
SEC Enforcement
On October 9 , 1996, the Company was advised by the Enforcement
Division of the Securities and Exchange Commission (the "Commission") that it is
considering recommending that the Commission bring an enforcement action, which
could include a civil penalty, against the Company in U.S. District Court for
failing to file timely periodic reports in violation of Section 13(a) of the
Securities and Exchange Act of 1934 and the rules thereunder.
In October 1996, the Company also received a request for the voluntary
production of information to the Enforcement Division of the Commission related
to the resignation of Coopers & Lybrand LLP and the termination of Arthur
Andersen LLP and the appointment of Jones, Jensen & Company as the Company's
independent public accountants and the reasons therefore. In addition, the
Company was requested to provide certain information respecting its previous
sales of securities. The Company cooperated in providing information in response
to these inquiries in early 1997. The Company has not been advised of the
outcome of the foregoing, and has had no further contact by the Enforcement
Division of the Commission.
License agreement
Effective July 1, 2000, the Company granted exclusive rights to develop
and market its technologies and products within Japan. Should the development
efforts result in a marketable product, the Company will receive royalties based
on product sales. Upon execution of the license agreement, the Company received
an initial up-front fee of $400,000 which was deferred and will be recognized on
a ratable basis over the five year term of the agreement. For the years ended
December 31, 2001 and 2000, the Company recognized $80,000 and $40,000,
respectively, of contract revenues pursuant to this agreement.
Litigation
The Company is involved in a legal dispute with one of its vendors. The
full amount of disputed invoices is included in accounts payable at December 31,
2001. In the opinion of management, resolution of the dispute should not have a
material adverse impact on the financial condition of the Company.
Employment Agreements
The Company has entered into employment agreements with Olga Marko,
William K. Boss, Jr., Brian Whitley, and Robert E. Tompkins.
Ms. Marko entered into an employment agreement with the Company, dated
August 10, 2001, for a term of sixty months at an annual base salary of
$130,000. The base salary shall increase on an annual basis by the same
percentage that the Consumer Price Index has increased during the same time
frame or at the direction of the Board of Directors, whichever is higher. Mrs.
Marko is eligible for an annual bonus to be determined by the Board of Directors
in its sole discretion. If the employment agreement is terminated by the Company
without cause, Mrs. Marko will be entitled to a twelve month severance payment.
F-13
Dr. Boss entered into an employment agreement with the Company, dated
August 10, 2001, and later amended on February 28, 2002 as follows: (a) during
the first year of the term, Dr. Boss will receive 60,000 shares of Common Stock;
(b) an annual salary of $50,000 for 2002; and (c) an annual salary of $60,000
for 2003. For this compensation, Dr. Boss agrees to devote 25 mutually agreeable
days per year as requested by the Company (i.e., out-of-town meetings, etc.). If
the employment agreement is terminated by the Company without cause, Dr. Boss
will be entitled to a three-month severance payment.
Mr. Whitley entered into an employment agreement with the Company,
dated September 1, 2001, for a term of sixty (60) months at an annual base
salary as follows: (a) $4,000 per month for September 2001 through December
2001; and (b) $10,000 per month for months subsequent to December 31, 2001. Mr.
Whitley is eligible for an annual bonus to be determined by the Board of
Directors in its sole discretion. If the employment agreement is terminated by
the Company without cause, Mr. Whitley will be entitled to a three month
severance payment.
Mr. Tompkins entered into an employment agreement with the Company,
dated September 17, 2001, for a term of thirty-six (36) months at an annual base
salary of $90,000. Mr. Tompkins is eligible for an annual bonus to be determined
by the Board of Directors in its sole discretion. If the employment agreement is
terminated by the Company without cause, Mr. Tompkins will be entitled to a two
month severance payment.
Consulting agreement
Effective August 20, 2001, the Company entered into an agreement with a
third party to provide drug development, regulatory advisory and other services.
Pursuant to the terms of the agreement, the Company issued 133,333 share of
restricted common stock with an assigned value of $200,000 as a retainer fee,
which was capitalized as a prepaid expense. As services are rendered, 80% of the
invoiced amount is payable in cash with the remaining 20% payable through a
reduction in the retainer fee. At December 31, 2001, $174,666 was capitalized as
a prepaid expense related to this agreement.
In addition, the agreement includes a special incentive performance
arrangement. In the event the Company receives FDA approval on or before August
20, 2003 as a result of the consulting services, the Company will issue 250,000
restricted common shares as an incentive bonus. If the regulatory approval is
received after August 20, 2002, but before February 20, 2004, the Company will
issue 100,000 restricted shares as an incentive bonus.
NOTE 8 - EQUITY, STOCK PLAN AND WARRANTS
Effective August 10, 2001, the Company adopted the Isolagen, Inc. 2001
Stock Option and Stock Appreciation Rights Plan (the "Stock Plan"). The Stock
Plan is discretionary and allows for an aggregate of up to 5,000,000 shares of
the Company's common stock to be awarded through incentive and non-qualified
stock options and stock appreciation rights. The Stock Plan is administered by
the Company's Board of Directors, who has exclusive discretion to select
participants who will receive the awards and to determine the type, size and
terms of each award granted.
As allowed by Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", the Company has elected to
continue to follow Accounting Principles Board ("APB") Opinion no. 25,
"Accounting for Stock Issued to Employees", in accounting for its Stock Plan.
Under APB No. 25, the Company does not recognize compensation expense on the
issuance of its stock options because the terms are fixed and the exercise price
equals or exceeds the fair market value of the underlying stock on the grant
date.
F-14
Information regarding the option and warrants for 2001 is as follows:
YEAR ENDED DECEMBER 31,
OPTIONS WARRANTS
---------- ----------
2001 2001
---------- ----------
Outstanding, beginning of year -- --
Granted 3,792,500 450,000
Exercised -- --
Expired or cancelled -- --
---------- ----------
Outstanding, end of year 3,792,500 450,000
---------- ----------
Exercisable, end of year 4,167 --
---------- ----------
Available for grant, end of year 1,207,500 --
---------- ----------
The weighted average and warrant exercise price information for 2001 is
as follows:
YEAR ENDED DECEMBER 31,
OPTIONS WARRANTS
---------- ----------
2001 2001
---------- ----------
Outstanding, beginning of year $ -- $ --
Granted during the year $ 2.70 $ 1.50
Exercised during the year $ -- $ --
Expired or cancelled during the year $ -- $ --
Outstanding at end of year $ 2.70 $ 1.50
Exercisable at end of year $ -- $ 1.50
Significant option and warrant groups outstanding at December 31, 2001,
and related weighted average exercise price and life information is as follows:
WEIGHTED
OPTIONS WARRANTS EXERCISE REMAINING
GRANT DATE OUTSTANDING OUTSTANDING EXERCISABLE PRICE LIFE (YEARS)
---------- ----------- ----------- ----------- ---------- ------------
August 2001 -- 450,000 -- $ 1.50 9.58
September 2001 2,975,000 -- -- $ 2.85 9.67
September 2001 300,000 -- -- $ 1.50 9.71
October 2001 340,000 -- -- $ 1.50 9.75
November 2001 117,500 -- 4,167 $ 2.40 9.83
December 2001 60,000 -- -- $ 3.57 9.92
The weighted average fair value at date of grant for options and
warrants granted during 2001 was $1.12 per option. The fair value of options at
date of grant was estimated using the Black-Scholes model with the following
weighted average assumptions:
YEAR ENDED
DECEMBER 31,
2001
------------
Expected life (years) 6 years
Interest rate 4.0%
Dividend yield --
Forfeiture rate 5%
Volatility 98%
F-15
Had compensation costs for the Company's stock option plan been
determined based on the fair value at the grant date in 2001 consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per share would
have increased to the pro forma amounts indicated below:
YEAR ENDED
DECEMBER 31,
2001
---------------
Net loss - as reported $ (1,496,448)
Net loss - pro forma $ (1,646,012)
Net loss per share - as reported
Basic and diluted $ (.20)
Net loss per share - pro forma
Basic and diluted $ (.22)
NOTE 9 - SUBSEQUENT EVENTS
Subsequent to year-end, the Company entered into a placement agent
agreement with an investment bank with respect to the sale of up to 2,295,000
shares of Series A Convertible Preferred stock at an offering price of $3.50 per
share. Each share of preferred stock will be convertible into two shares of
common stock at any time after issuance and accrues interest at 8% per annum.
The offering of the first 900,000 shares will be on a "best efforts,
all-or-none" basis. If the minimum number of shares are not sold within 90 days
of the commencement of the offering, the Company may elect to extend the
offering for an additional 60 days or terminate it in its entirety. In the event
that the minimum shares are sold within the initial subscription period, the
Company will automatically extend the offering period for up to 60 days or until
the maximum number of shares are sold.
For each 15,000 shares of preferred stock sold, the placement agent
will receive warrants to purchase 6,000 shares of common stock with an exercise
price of $1.93 per share. The warrants are exercisable immediately after grant
and expire five years thereafter.
F-16
EXHIBIT INDEX
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
Exhibit 2.1* Agreement and Plan of Merger by and among American Financial Holding, Inc., ISO
Acquisition Corp., Isolagen Technologies, Inc., Gemini IX, Inc., and William K.
Boss, Jr., Olga Marko and Dennis McGill as Dated August 1, 2001. (incorporated
by reference to Exhibit 2.1 of the Registrant's Form 8-K as filed on August 22,
2001)
Exhibit 3.1* Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the
Registrant's Form 10-K for the fiscal year ended December 31, 1991)
Exhibit 3.2* Bylaws (incorporated by reference to Exhibit 3.2 of the Registrant's Form 10-K
for the fiscal year ended December 31, 1991)
Exhibit 4.1* Letter of Transmittal for holders of promissory notes of Isolagen Technologies,
Inc. (incorporated by reference to Registrant's Form 8-K as filed on August 22,
2001)
Exhibit 4.2* Letter of Transmittal for stockholders of Isolagen Technologies, Inc.
(incorporated by reference to Registrant's Form 8-K as filed on August 22,
2001)
Exhibit 4.3* Letter of Transmittal for stockholders of Gemini IX, Inc. (incorporated by
reference to Registrant's Form 8-K as filed on August 22, 2001)
Exhibit 4.4 Specimen of common stock certificate
Exhibit 10.1* Purchase Agreement between American Financial Holding, Inc. and Alyda Macaluso,
Laura Avignon, and Lighthouse Capital Insurance Co. dated January 22, 2001
(incorporated by reference to Exhibit 10.6 of the Registrant's Form 10-K as
filed on January 22, 2001)
Exhibit 16.1* Letter from Robison, Hill & Co., dated August 21, 2001 (incorporated by
reference to Exhibit 16.1 of the Registrant's Form 8-K filed on August 22,
2001)
Exhibit 21.1 List of Subsidiaries
*Incorporated by reference as indicated.