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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
/ /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 033-78252
AMERICAN DRUG COMPANY
(Exact name of registrant as specified in its charter)
Delaware 13-3729186
(State of Incorporation) (I.R.S. Employer Identification No.)
P.O. Box 73037 N.W., Washington, D.C. 20036
(Address of principle executive offices) (Zip code)
Registrant's telephone number, including area code: (202) 833-9223
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers to item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10- K. /X/
As of March 2, 1998, the aggregate market value of the outstanding shares of the
Registrant's Common Stock, par value $.01 per share, held by non-affiliates was
approximately $586,559 based on the closing price of the Common Stock on the OTC
Bulletin Board, which is operated by the NASDAQ Stock Market on March 2, 1998.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 2, 1998
- ----- ----------------------------
Common Stock, par value $.01 per share 13,020,155 shares
DOCUMENTS INCORPORATED BY REFERENCE: None
1
TABLE OF CONTENTS
PART I Page
Item 1. Business
(a) General Development of Business.............................1
(b) Financial Information About
Industry Segment............................................1
(c) Narrative Description of Business...........................1
(d) Financial Information About Foreign
and Domestic Operations and Export Sales....................4
Item 2. Properties...................................................5
Item 3. Legal Proceedings............................................5
Item 4. Submission of Matters to a Vote of Security Holders..........5
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters...............................6
Item 6. Selected Financial Data......................................7
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................8
Item 8. Financial Statements and Supplementary Data.................12
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure..................36
PART III
Item 10. Directors and Executive Officers of the Registrant.........36
Item 11. Executive Compensation.....................................41
Item 12. Security Ownership of Certain Beneficial
Owners and Management...............................................42
Item 13. Certain Relationships and Related Transactions.............45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................................48
PART I
Item 1. Business
(a) General Development of Business
American Drug Company (the "Company") was organized in 1993, as a
wholly-owned subsidiary of GP Strategies Corporation (formerly National Patent
Development Corporation) ("GP Strategies") to initiate marketing and sales
activities for generic pharmaceutical and medical products in Russia and the
Commonwealth of Independent States (the "CIS"). NPD Trading (USA) Inc. ("NPD
Trading") was formed in January 1990 as a wholly-owned subsidiary of GP
Strategies to provide services to Western businesses in Russia and Eastern
Europe.
In August 1994, GP Strategies entered into a Transfer and Distribution
Agreement with the Company whereby GP Strategies transferred to the Company (the
"Distribution") immediately prior to the closing of the Distribution, all of its
interest in NPD Trading and in two newly-formed, 50% owned joint ventures in
exchange for (i) the issuance by the Company of 6,990,900 shares of Common Stock
to GP Strategies (ii) the issuance of 6,017,775 shares of Common Stock to be
distributed to GP Strategies stockholders, and (iii) the issuance of 6,017,775
warrants to be distributed to GP Strategies stockholders. Each warrant was
initially exercisable for a period of two years from August 5, 1994 at an
exercise price per share of $1.00. In August 1996, the Board of Directors
approved an extension of the Company's warrants until August 5, 1998 and a
reduction of the exercise price to $.50 per share, subject to adjustment in
certain circumstances. The Distribution was at the rate of one share plus one
warrant to purchase one share of common stock for every four then outstanding
shares of common stock of GP Strategies. Upon completion of the Distribution,
the Company became a separate public company from GP Strategies and NPD Trading
became a wholly-owned subsidiary of the Company.
The Company maintains offices in Washington, D.C., New York, Prague and
Moscow.
(b) Financial Information about Industry Segments
This item is not applicable because the Company has only a single line
of business.
(c) Narrative Description of Business
General and Background
The Company develops and assists Western businesses to develop
investment, manufacturing and trade opportunities and business relationships in
Russia, the Czech and Slovak Republics, and other countries of Eastern Europe.
In this regard, it continues and builds upon the 30-year tradition of its
principal stockholder, GP Strategies, of licensing, commercializing and
marketing technologies from this region. The Company believes that its principal
strength lies in the quality of its established relationships with scientists
and commercial organizations both in the United States and in the former Soviet
Union and the Czech and Slovak Republics.
American-Made Generic Pharmaceutical Products
The Company's Initial Products and Operations. In 1993, the Company initiated
activities aimed at the export of American-made generic pharmaceutical and OTC
healthcare products in Russia. These activities were initiated to complement
sales of U.S. and European medical equipment begun by the Company in Russia in
1992. By 1997, the Company had completed registration in Russia of 25 products,
including vitamins, bandages, feminine hygiene products, toothpaste, and
antibiotic creams and ointments. The Company maintained an inventory of these
products in warehouses in Moscow and sold these products through a network of
local distributors throughout the Russian Federation.
In 1997, the Company also established a relationship with a Russian
company ZAO (Akorta) ("Akorta") to provide support for the importation,
clearance and sales of its products. Akorta has the legal authority to sell
products for Russian rubles and transfer those funds, in dollars, to the Company
in the United States. Akorta is a private company owned by employees of the
Company's Moscow office. Subsequent to December 31, 1997, such individuals
ceased to be employees of the Company.
Change in Russian Operations. Despite some initial success, sales of the
Company's generic products declined significantly in 1997. The Company's
inability to maintain and expand sales may be attributed, in part, to
deficiencies in the Russian distribution system. Additionally, the Company did
not compete effectively against international manufacturers of brand name
products, which were able to invest large sums into marketing and distribution
in the expectation of long term rewards.
At the end of 1997, the Company made the decision to concentrate on
marketing and sales of medical equipment and related products, such as hospital
furniture and laboratory supplies and to withdraw from the generic
pharmaceutical and over-the-counter (OTC) healthcare product business because of
significantly declining sales of generic products. Sales activity with respect
to generic drugs will be undertaken solely through the Russian company Akorta.
In the short-term, the Company will attempt to sell its existing inventory of
generic products in Moscow warehouses through Akorta and other third parties. No
additional products will be purchased in the United States.
Consulting Services and Sales of Medical Equipment
In its seven years of operation, NPD Trading has provided a broad range
of business services to a number of American and Western corporations. The
Company's employees have backgrounds in diverse disciplines, such as law,
engineering, international trade and economics. The Company is able to provide
the contacts necessary for interested clients to locate a venture partner and to
establish viable financing. Recognizing that successful conclusion of project
negotiations in this region often depends upon financing, the Company has worked
closely with the U.S. Exim-Bank, OPIC, the World Bank and its affiliates,
including the European Bank for Reconstruction and Development, as well as
private commercial banks. Additionally, the Company advises its clients with
respect to new commercial, tax, currency and other laws of Eastern Europe, as
well as U.S. foreign government regulations and policies which directly affect
business operations.
Projects. The Company has been instrumental in the successful conclusion of a
variety of projects. Summarized below are examples of the type of projects in
which the Company has been involved.
Kamaz Hospital. As is typical of many of the Company's sales to hospitals in
Russia, the Company succeeded in 1997 in providing the hospital within the Kamaz
industrial complex in Tatarstan with a variety of medical equipment and related
products. The equipment was purchased as part of a modernization program which
is being implemented at the hospital. The Company's contracts were executed
within the framework of a larger financing package provided to Kamaz by the
Export-Import Bank of Japan.
ICF Kaiser International. The Company's on-going efforts on behalf of ICF Kaiser
International ("ICF") and their associated company, Kaiser Engineers, secured
for these companies contracts to perform feasibility studies in the areas of
hazardous waste management and steel industry modernization in the Czech
Republic. The Company is providing ICF with technical and commercial assistance
on a contract for a $250 million hot strip mini mill in the Czech Republic. To
date, the Company has received $1 million for this assistance, including
$840,000 received in September 1997. The Company expects to receive another $1
million payment contingent upon the completed construction on the mini mill in
mid-1999.
Competition
The principal competitive factors in the Company's markets are the
experience and expertise of technical personnel, performance, reputation and
price. Most of the Company's competitors have greater financial, technical and
marketing resources than the Company. Additionally, because financing from local
private sources and regional or international public sources is extremely
limited and highly competitive, the Company's projects compete against other
ventures to obtain funds necessary for successful competition.
Clients
The Company has provided financial management and general consulting
support to a number of American and foreign clients. The Company's clients to
date have been principally in the energy, healthcare, environmental, machine
tool and computer industries. Because the Company's consulting business is
project driven, rather than oriented toward on-going consultation, the Company's
major clients vary from year to year. In addition, the successful completion of
a single or a few large projects typically accounts for a majority of the
Company's revenues.
International
The political situation in Russia, where the Company has focused much
of its effort, has in recent years been in constant transition. Since the advent
of the Yeltsin government in December 1991, Russia has experienced a
proliferation of political parties, an increase of nationalist sentiment, a
fragmentation of its economic and political institutions and a dramatic increase
in crime. The viability of the Russian government has been tested by various
political factions gaining strength and two unsuccessful coup d'etats. In 1996,
Presidential elections resulted in Yeltsin's re-election; however, his ongoing
health problems contribute to political unease.
Foreign firms' operations in this region may be subject to numerous
other risks which are not present in domestic operations, including political
strife, the possibility of expropriation, inadequate distribution facilities,
telecommunications deficiencies, restrictions on royalties, dividends and
currency remittances, inflation, fluctuations of foreign currencies, high and
unpredictable levels of taxation, requirements for governmental approvals for
new ventures and local participation in operations. Such problems could have a
material adverse effect on the Company by affecting the Company's direct
operations abroad and by discouraging trade and investment by other western
businesses to whom the Company provides services.
Employees
As a result of the Company's decision to sell generic drugs solely
through Akorta, there has been a reduction of employees in both the Washington,
D.C. office and the Moscow office. As of March 1, 1998, the Company had six
full-time employees and two part-time employees. Several officers of the Company
are also employed by GP Strategies, a principal stockholder of the Company.
Martin M. Pollak, the Company's President, Chief Executive Officer and a
director, is Executive Vice President, Treasurer and a director of GP
Strategies, and will devote approximately one-half of his time to his duties at
GP Strategies; Jerome I. Feldman, Chairman of the Board of, and a consultant to,
the Company, is President, Chief Executive Officer and a director of GP
Strategies; and Scott N. Greenberg, Chief Financial Officer, is Vice President
and Chief Financial Officer and a director of GP Strategies. Messrs. Feldman and
Greenberg will devote a portion of their time to the business of the Company,
for which GP Strategies will charge a management fee. See "Certain Relationships
and Related Transactions - Certain Employment Matters and Management". The
Company believes that its relations with its employees are good. See
"Management."
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
In 1997, export sales represented approximately $1,123,000 of the
Company's revenue.
Item 2. Properties
The following sets forth information with respect to the material
physical properties owned or leased by the Company and its subsidiaries.
The Company maintains offices in Washington, D.C., New York, Prague and
Moscow. In 1997, the Company reduced its office space requirements and rent
expenditures in Washington, Prague and Moscow. The annual rent for such office
spaces will be approximately $22,000 in 1998. The Company's New York office
space is provided to it by GP Strategies pursuant to the Management Services
Agreement. See "Certain Relationships and Related Transactions - Management
Services Agreement." The Company believes that its facilities are sufficient to
meet its needs for the foreseeable future.
Item 3. Legal Proceedings
There are currently no material legal proceedings pending to which the
Company is a party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The following table presents the high and low prices for the Common
Stock for 1997 and 1996. The Company's Common Stock, $.01 par value, is quoted
on the OTC Bulletin Board, which is operated by the NASDAQ Stock Market.
Quarter High Low
1997 First $0.31 $0.13
Second $0.28 $0.16
Third $0.22 $0.09
Fourth $0.17 $0.08
1996 First $0.63 $0.31
Second $0.50 $0.25
Third $0.59 $0.28
Fourth $0.56 $0.25
- ----------
The number of shareholders of record of the Common Stock as of March 2,
1998 was 4,699. On March 2, 1998, the average of the closing bid and asked
prices on the OTC Bulletin Board was $0.10 The Company has not declared any cash
dividends during or since its two most recent fiscal years. The current policy
of the Company's Board of Directors is to retain earnings, if any, to finance
the operation of the Company's business. The payment of cash dividends on the
Common Stock in the future will depend on the Company's earnings, financial
condition and capital needs and on other factors deemed pertinent by the
Company's Board of Directors.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Statement of Operations Data:
Revenue $2,047 $1,104 $ 529 $ 799 $ 752
Cost of goods sold 936 496 155 456 -
General and administrative
expenses 1,385 1,674 1,690 1,355 838
Total expenses 2,904 2,602 2,133 2,101 958
Net loss (857) (1,498) (1,604) (1,302) (206)
Basic and diluted loss per share (.07) (.12) (.12) (.10) (.02)
Dividends - - - - -
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
Current assets $ 514 $ 1,018 $ 550 $ 70 $ 474
Current liabilities 199 152 356 73 464
Non current liabilities 4,933 4,739 2,633 955
Working capital (deficiency) 315 866 194 (3) 10
Total assets 552 1,088 602 161 512
Total stockholders'
(deficiency) equity (4,580) (3,803) (2,387) (867) 48
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Overview
The Company commenced operations in January 1990 as NPD Trading (USA),
Inc., which is now its wholly-owned subsidiary. Since its inception, the Company
has focused on assisting western business to develop trade, manufacturing and
investment opportunities in Russia, the Czech and Slovak Republics and to a
lesser extent, other countries of the CIS. In late 1993, the Company began the
implementation of its plan for the export of American-made generic prescription
drugs and over-the-counter healthcare products in both Russia and the CIS. The
Company received certain regulatory approvals in 1994, 1995 and 1996 to market
its products.
Despite some initial success, sales of the Company's generic products
declined significantly in 1997. The Company's inability to maintain and expand
sales may be attributed, in part, to deficiencies in the Russian distribution
system. Additionally, the Company did not compete effectively against
international manufacturers of brand name products, which were able to invest
large sums into marketing and distribution in the expectation of long term
rewards.
At the end of 1997, the Company made the decision to concentrate on the
marketing and sales of medical equipment and related products, such as hospital
furniture and laboratory supplies and to withdraw from the generic
pharmaceutical and over-the-counter (OTC) healthcare product business because of
significantly declining sales of generic products. Sales activity with respect
to generic drugs will be undertaken solely through the Russian company Akorta.
The Company established a relationship with Akorta to provide support for the
importation, clearance and sales of its products. Akorta has the legal authority
to sell products for Russian rubles and transfer those funds, in dollars, to the
Company in the United states. Akorta is a private company owned by employees of
the Company's Moscow office. In the short-term, the Company will sell its
existing inventory of generic products in Moscow warehouses through Akorta and
other third parties. No additional products will be purchased in the United
States.
Liquidity and Capital Resources
At December 31, 1997, the Company had cash of $225,000 and had borrowed
$2,500,000 pursuant to its $2,500,000 loan agreement from GP Strategies (See
Note 12 to the Consolidated Financial Statements). These proceeds were used as
part of the Company's working capital. Such borrowings will bear interest at the
prime rate, with principal and accrued interest becoming due on August 5, 1999.
In addition, after the Company had borrowed the full $2,500,000 under the loan
agreement during the first quarter of 1996, GP Strategies continued to fund the
operating needs of the Company until July 1996.
As of December 31, 1997, the Company had borrowed $3,933,000 from GP
Strategies. The indebtedness was comprised of (i) $2,500,000 pursuant to a
$2,500,000 loan agreement with GP Strategies (see Note 12 to Consolidated
Financial Statements), (ii) cash advances from GP Strategies totaling $682,000,
and (iii) accrued interest totaling $751,000 at the prime rate. In July 1996,
the Company issued 7% convertible notes in the principal amount of $1,000,000 in
a private offering; the net proceeds to the Company were $950,000 (See Note 6 to
the consolidated financial statements).
At December 31, 1997, the Company's working capital decreased to
$315,000 from $866,000 as of December 31, 1996, primarily as a result of the
Company's operating loss. At December 31, 1997, the Company had no additional
borrowing capacity available under the GP Strategies Loan Agreement.
Historically, the Company's revenues, prior to 1994, were derived
primarily from the consulting fees and commissions of its subsidiary, NPD
Trading, which had been earned principally on a contingency fee basis. The
contingency fee payment structure has affected the Company's liquidity and
results of operations because the Company became entitled to payment only upon
successful completion of a business venture.
The Company believes it can satisfy its working capital needs through
its operating activities, as a result of reductions to their level of operations
and their renewed focus on consulting activities and the sales of medical
equipment. There is no assurance, however, that the Company will have sufficient
working capital to support operations. In this event, the Company will be forced
to further curtail its operations or seek alternate sources of financing.
The Company does not manufacture, and does not anticipate
manufacturing, any of its products. As a consequence, the Company has not made,
and does not anticipate making, any major capital expenditures.
1997 Compared to 1996
Revenues. In 1997, the Company had revenues of $2,047,000, compared to
$1,104,000 in 1996. The increase in revenues from 1997 to 1996 was primarily due
to increased consulting revenues, of primarily $840,000 in the form of a success
fee related to a project with ICF Kaiser International in the Czech Republic as
well as increased sales of medical equipment, partially offset by reduced sales
of generic drugs in the Commonwealth of Independent States.
General and Administrative Expenses. The Company's general and administrative
expenses decreased by $289,000 in 1997 to $1,385,000 from $1,674,000 in 1996.
The decrease in general and administrative expenses in 1997 was primarily due to
reduced consulting, marketing expense and facility costs, partially offset by
costs associated with consulting projects.
Net Loss. The Company's net loss decreased to $857,000 for 1997 from $1,498,000
incurred for 1996 due to increased consulting fees and decreased general and
administrative expenses, partially offset by increased interest expenses.
1996 Compared to 1995
Revenues. In 1996, the Company had revenues of $1,104,000, a net increase of
$575,000 over 1995. This revenue consisted of $842,000 of sales of medical
equipment and generic drugs in the Commonwealth of Independent States and
$262,000 of consulting fees in 1996 as compared to $342,000 and $187,000,
respectively in 1995. The increased consulting revenues are primarily
attributable to a contract between ICF Kaiser, Inc. and the Company's NPD
Trading, Inc. subsidiary.
General and Administrative Expenses. General and Administrative expenses consist
primarily of office rent, salaries, travel and related costs and legal expenses.
Direct costs relating to consulting revenues are included in general and
administrative expenses. The general and administrative expenses decreased from
$1,690,000 in 1995 to $1,674,000 in 1996 or a decrease of $16,000. This decrease
was primarily due to reduced marketing expenses and facility costs.
Net loss. The Company's net loss decreased from $1,604,000 in 1995 to $1,498,000
in 1996 as a result of increased revenues generated and gross margin earned, as
well as reduced general and administrative expenses, offset in part by increased
interest expense, due to increased levels of long-term debt.
Recent tax and accounting developments
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS)) No. 128, "Earnings per
Share" which established standards for computing and presenting earnings per
share (EPS). The Statement simplifies the standards for computing EPS, replaces
the presentation of primary EPS with a presentation of basic EPS and requires
dual presentation of basic and diluted EPS on the face of the income statement.
This Statement was effective for financial statements issued for periods ending
after December 15, 1997 and required restatement of all prior-period EPS data
presented. The adoption of SFAS No. 128 did not have a material impact on
previously reported EPS data.
The Financial Accounting standards Board issued Accounting Standards
(SFAS 130), "Reporting Comprehensive Income", in June 1997 which requires a
statement of comprehensive income to be included in the financial statements for
fiscal years beginning after December 15, 1997. The Company does not believe
that this statement will have an impact on the 1998 financial statements.
In addition, in June of 1997, the FASB issued SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information". SFAS 131 requires
disclosure of certain information about operating segments and about products
and services, geographic areas in which a company operates, and their major
customers. The Company is presently in the process of evaluating the effect that
this new standard will have on disclosures in the Company's financial
statements.
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company is currently evaluating its exposure to this issue, but
believes it does not have significant exposure due to its limited reliance on
information technology systems. However, there can be no assurance that the
systems of other companies on which the Company's systems rely also will be
timely converted or that any such failure to convert by another company would
not have an adverse effect on the Company's systems.
Forward-Looking Statements. This report contains certain forward-looking
statements reflecting management's current views with respect to future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements, including, but not
limited to the Company's ability to reverse its history of operating losses.
Inflation
Inflation is not expected to have a significant impact on the Company's
business.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 13
Financial Statements:
Consolidated Balance Sheets - December 31, 1997 and
1996 14
Consolidated Statements of Operations - Years ended
December 31, 1997, 1996 and 1995 16
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency) - Years ended December 31,
1997, 1996 and 1995 17
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996 and 1995 18
Notes to Consolidated Financial Statements 19
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
American Drug Company:
We have audited the consolidated balance sheets of American Drug Company and
subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity (deficiency) and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 American Drug
Company and subsidiary at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 3 to the consolidated financial
statements. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
New York, New York
March 27, 1998
AMERICAN DRUG COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share information)
December 31, December 31,
1997 1996
ASSETS
Current assets
Cash $ 225 $ 586
Accounts receivable, trade, less allowance
for doubtful accounts of $90 and $60
in 1997 and 1996 139 84
Inventory 149 326
Prepaid expenses and other current assets 1 22
--------- --------
Total current assets 514 1,018
------- ------
Machinery and equipment, at cost 113 113
Less accumulated depreciation (113) (103)
------- -------
10
Organization costs
(net of accumulated amortization
of $50 and $37 in 1997 and 1996) 13
Deferred finance costs
(net of accumulated amortization
of $14 and $4 in 1997 and 1996) 36 46
Other assets 2 1
------- -------
$ 552 $ 1,088
======= =======
See accompanying notes to the consolidated financial statements.
AMERICAN DRUG COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and per share information)
December 31, December 31,
1997 1996
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Customers' deposits 8 $ 28
Accounts payable and accrued expenses 191 124
--------- ----------
Total current liabilities 199 152
--------- --------
7% convertible notes 1,000 1,000
Long-term debt to GP Strategies 3,933 3,739
Stockholders' deficiency
Common stock, authorized 30,000,000 shares,
par value $.01 per share
13,020,155 shares issued and outstanding 130 130
Capital in excess of par value 1,762 1,682
Deficit (6,472) (5,615)
------- -------
Total stockholders' deficiency (4,580) (3,803)
-------- --------
$ 552 $ 1,088
======== =========
See accompanying notes to the consolidated financial statements.
AMERICAN DRUG COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
Year Ended December 31,
1997 1996 1995
------- ------- -------
Revenues
Sales $ 1,123 $ 842 $ 342
Consulting fees and commissions
(including $65, $25 and $45 for 1997,
1996 and 1995 from an affiliate) 912 262 187
Investment income 12
---------
Total revenues 2,047 1,104 529
------- ------- ------
Expenses
Cost of goods sold 936 496 155
General and administrative expenses 1,385 1,674 1,690
Management fee to GP Strategies 120 120 120
Interest expense 463 312 168
--------- ------- -------
Total expenses 2,904 2,602 2,133
-------- ------ ------
Net loss $ (857) $(1,498) $(1,604)
======= ======= =======
Basic and diluted loss per share $ (.07) $ (.12) $ (.12)
======= ======= =======
Weighted average number of
shares outstanding 13,020 13,020 13,020
======= ======= =======
See accompanying notes to the consolidated financial statements.
AMERICAN DRUG COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY)
Years Ended December 31, 1997, 1996 and 1995
(in thousands, except number of shares)
Shares of Capital in Total
Common Stock Common Excess of Deferred Stockholders'
Outstanding Stock Par Value Deficit Compensation Deficiency
Balance at December 31, 1994 13,019,601 $130 $1,682 $(2,513) $(166) $ (867)
- ----------------------------------------------------------------------------------------------------------------------------------
Net loss (1,604) (1,604)
Exercise of warrants 554
Amortization of deferred compensation 84 84
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 13,020,155 130 1,682 (4,117) (82) (2,387)
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss (1,498) (1,498)
Amortization of deferred compensation 82 82
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 13,020,155 130 1,682 (5,615) (3,803)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss (857) (857)
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred compensation 80 80
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 13,020,155 $130 $1,762 $(6,472) $ $(4,580)
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
AMERICAN DRUG COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
1997 1996 1995
Cash flows used in operations:
Net loss $ (857) $(1,498) $(1,604)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 33 37 42
Deferred compensation 80 82 84
Changes in other operating items:
Accounts receivable (55) 20 (104)
Inventory 177 3 (329)
Prepaid expenses and other assets 21 29 (39)
Customers' deposits (20) (208) 236
Accounts payable, accrued expenses
and accrued interest 358 281 230
--------- ---------- ----------
Net cash used in operations (263) (1,254) (1,484)
-------- ------- -------
Cash flows from financing activities:
Net proceeds from issuance of 7% convertible notes 950
Loans from GP Strategies 829 1,495
Repayment of loans from GP Strategies (97)
--------
Net cash (used for) provided by financing activities (97) 1,779 1,495
------- ------- ------
Cash flows from investing activities:
Additions to machinery and equipment (5) (5)
Increase in other assets (1)
----------
Net cash used in investing activities (1) (5) (5)
---------- --------- --------
Net (decrease) increase in cash (361) 520 6
Cash at beginning of period 586 66 60
--------- ------- -------
Cash at end of period $ 225 $ 586 $ 66
======= ========= =======
See accompanying notes to the consolidated financial statements.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. Organization and business
(a) Business
American Drug Company (the "Company") a 54% owned subsidiary
of GP Strategies Corporation, ("GP Strategies") formerly
National Patent Development Corporation, performs marketing
and sales activities for American generic pharmaceutical and
medical products in Russia and the Commonwealth of Independent
States (the "CIS"). NPD Trading (USA), Inc. ("NPD Trading"), a
wholly-owned subsidiary of the Company, provides consulting
services to Western businesses in Russia and Eastern Europe.
NPD Trading develops and assists Western businesses to develop
investment, manufacturing and trade opportunities and business
relationships in Russia, the Czech and Slovak Republics, and
other countries of Eastern Europe.
The Company's activities have been aimed at the export of
American-made generic pharmaceutical (prescription drugs and
over-the-counter personal care products) and other medical
products and equipment to Russia and the CIS. Among the
products currently being sold by the Company are toothpaste,
sanitary napkins, antibiotic ointments, vitamins, bandages and
medical equipment.
At the end of 1997, the Company made the decision to
concentrate on the marketing and sales of medical equipment
and related products, such as hospital furniture and
laboratory supplies and to withdraw from the generic
pharmaceutical and over-the-counter (OTC) healthcare product
business because of significantly declining sales of generic
products. Sales activity with respect to generic drugs will be
undertaken solely through the Russian company ZAO (Akorta)
(See Note 7).
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
1. Organization and business (Continued)
(b) Concentrations of credit risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally
of cash investments and accounts receivable. The Company
places its cash and cash equivalents with major banks and
financial institutions, and therefore limits its credit
exposure. As of December 31, 1997, the Company had
uncollateralized receivables due from three retail
distributors totaling $74,000, which represent approximately
32% of the Company's trade accounts receivable balance. Credit
risk is also manifested in the fact that the Company's sales
are concentrated in Russia and the former Eastern bloc
countries, and are concentrated in the generic medical and
health care industries. Substantially all of the assets and
revenues are derived from foreign operations.
The additions, charges to, and balance of the allowance for doubtful
accounts at December 31, 1997, 1996 and 1995 is as follows (in thousands):
Additions
Balance at Charged to Balanc
Beginning Costs & at End
of Year Expenses Deductions of Year
Year ended December 31, 1997
Allowance for doubtful accounts (a) $60 $30 $ $90
- -----------------------------------------------------------------------------
Year ended December 31, 1996
Allowance for doubtful accounts (a) $20 $40 $ $60
- -----------------------------------------------------------------------------
Year ended December 31, 1995
Allowance for doubtful accounts (a) $20 $ $20
- -----------------------------------------------------------------------------
(a) Deducted from related asset on Balance Sheet.
2. Summary of significant accounting policies
(a) Revenue recognition
Consulting fees and commission revenue are recorded by the
Company when all material terms and conditions of an agreement
have been met. Direct costs relating to consulting revenues
are included in general and administrative expenses. Sales of
equipment and other products are recorded when title passes.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
(b) Principles of consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, NPD Trading.
Investments in 50%-owned affiliates in which the Company does
not have control, including International Anco Corp. and
General Approach Corporation, which have had no significant
activities to date, are accounted for on an equity basis. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(c) Inventories
Inventories are valued at the lower of cost or market,
principally using the first-in, first-out (FIFO) method. At
December 31, 1997 and 1996, the Company had a reserve for slow
moving inventory of $170,000 and $70,000, respectively.
(d) Machinery and equipment
Machinery and equipment are carried at cost. Depreciation is
computed using the straight-line method. When assets are
retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and
any resulting gain or loss is reflected in income for the
period. The cost of maintenance and repairs is charged to
income as incurred, whereas significant renewals and
betterments are capitalized.
(e) Organization and deferred finance costs
The Company capitalized costs relating to the organization of
the Company which are being amortized over a period of three
years. The Company also capitalized costs incurred to obtain
long-term debt financing. Such costs are amortized on a
straight line basis over the term of the related debt and such
amortization is classified as interest expense in the
Consolidated Statements of Operations.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
(f) Income taxes
Income taxes are provided for based on the asset and liability
method of accounting pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under SFAS 109, deferred tax assets and
liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
(g) Statement of cash flows
For purposes of the statement of cash flows, the Company
considers all liquid investments with original maturities of
three months or less to be cash equivalents.
(h) Foreign currency transactions
The Company conducts its business primarily in U.S. dollars.
(i) Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these
estimates.
(j) Financial instruments
The carrying amounts of financial instruments including cash,
trade accounts receivable and trade accounts payable
approximated fair value as of December 31, 1997 because of the
relatively short maturity of these instruments. The carrying
amount of long-term debt to GP Strategies approximated fair
value because interest is charged at market rates. In
addition, the carrying value of the 7% Convertible Notes (See
Note 6) approximated fair value because of the conversion
feature.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (Continued)
(k) Stock option plan
In 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize
as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as
if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(l) Earnings per share
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share", which
established standards for computing and presenting earnings
per share (EPS). The statement simplifies the standards for
computing EPS, replaces the presentation of primary EPS with a
presentation of basic EPS and requires a dual presentation of
basic and diluted EPS on the face of the income statement.
Basic EPS are based upon the weighted average number of common
shares outstanding during the period. Diluted EPS are based
upon the weighted average number of common shares outstanding
during the period assuming the issuance of common shares for
all dilutive potential common shares outstanding. At December
31, 1997, 1996 and 1995 the Company did not include any
potential common stock in its calculation of diluted EPS,
because all options and warrants are anti-dilutive.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
3. Liquidity
The Company has incurred losses since inception, and at December 31,
1997 had a capital deficiency of $4,580,000. At December 31, 1997, the
Company had $225,000 of cash. The Company's cash position is the result
of issuance of 7% Convertible Notes in July 1996, which generated net
proceeds of $950,000 (See Note 6), as well as $840,000 in the form of a
success fee from ICF Kaiser International. As of December 31, 1997, the
Company had borrowed $3,933,000 from GP Strategies. The indebtedness
was comprised of (i) $2,500,000 pursuant to a $2,500,000 loan agreement
with GP Strategies (see Note 12), (ii) cash advances from GP Strategies
totaling $682,000, and (iii) accrued interest of $751,000 at the prime
rate. The Company believes it can satisfy its working capital needs
through its operating activities, as a result of reductions to their
level of operations and their renewed focus on consulting activities
and the sales of medical equipment. There is no assurance, however,
that the Company will have sufficient working capital to support
operations. In this event, the Company will be forced to further
curtail its operations or seek alternate sources of financing.
4. Pensions
The Company's employees are included in the GP Strategies 401(K)
pension plan. The Company pays its allocable share of costs as they
accrue. Such costs, including administrative expenses and the
employer's contributions, amounted to approximately $13,000, $13,000
and $10,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
5. Machinery and equipment
Major classes of machinery and equipment consist of the following (in
thousands):
December 31, Estimated
1997 1996 useful lives
---- ---- ------------
Machinery and equipment $ 16 $ 16 3 years
Furniture and fixtures 97 97 5 years
------- -------
113 113
Less accumulated depreciation (113) (103)
$ $ 10
========= =======
Depreciation expense for the years ended December 31, 1997, 1996 and
1995 was $10,000, $17,000 and $26,000, respectively.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
6. Long-term debt
In July 1996, the Company issued convertible notes (the "Notes") in the
principal amount of $1,000,000 in a private offering (the "Offering").
The Company received net proceeds of $950,000 from the Offering. The
Notes mature on June 30, 2001, bear interest at the rate of 7% per
annum, and are convertible into shares of common stock of the Company
at a conversion price of $.25 per share. In connection with the
Offering, GP Strategies issued warrants to purchase an aggregate of
82,306 shares of GP Strategies common stock, exercisable at a price of
$12.15 per share, provided that the warrants may only be exercised
utilizing the Note. In the event that the closing price of the common
stock of the Company is at least $1.00 per share for at least 20
consecutive trading days, the Notes shall be subject to redemption at
the election of the Company, at a redemption price of 100% of the
principal amount called for redemption, together with accrued interest.
The Company and GP Strategies have agreed that (i) if the Notes are
used to exercise the warrants prior to a default on the Notes, GP
Strategies will receive from the Company, in exchange for the Notes,
shares of the Company's common stock at a price equal to 60% of its
then current market value, and (ii) if the Notes are used to exercise
the warrants after a default on the Notes, GP Strategies will receive
from the Company, in exchange for the Notes shares of the Company's
common stock at a price equal to 25% of its then current market value.
On March 17, 1998, the Company was informed by holders of $500,000 of
the Company's convertible notes that they had converted $500,000 of its
notes into 41,153 shares of GP Strategies common stock.
7. Transactions with affiliates
Transactions with GP Strategies and its subsidiaries, other than loans
and capital contributions received, as disclosed elsewhere in the
financial statements, during the years ended December 31, 1997, 1996,
and 1995 are summarized below (in thousands):
December 31,
---------------------------------
1997 1996 1995
---- ---- ----
Consulting fees from affiliate $ 65 $ 25 $ 45
===== ===== ======
Transactions with GP Strategies
Management fees $120 $120 $120
Interest expense 291 277 168
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
7. Transactions with affiliates (Continued)
Since inception, the Company has been financed by GP Strategies, by
means of capital contributions, short-term non-interest bearing
advances and currently long-term interest bearing obligations. The
Company received $2,500,000 under its $2,500,000 loan agreement with GP
Strategies, plus additional funding totaling $682,000 through December
31, 1997 (See Note 12). Accrued interest on this loan amounts to
$751,000 at December 31, 1997. During the first quarter of 1994, GP
Strategies issued options valued at $125,000 to the Company's Chairman,
who is also the President of GP Strategies, to acquire 250,000 shares
of the Company's common stock owned by GP Strategies. This issuance,
which was in consideration of services rendered and to be rendered on
behalf of the Company, has been recorded by the Company as a
contribution by GP Strategies to the Company's capital in excess of par
value, and as deferred compensation.
The management fee charged to the Company by GP Strategies covers
services provided by GP Strategies such as management, legal, tax,
accounting, insurance and employee benefit administration services.
The Company provided services to GSE Systems, Inc. (GSES), an affiliate
of GP Strategies, in assisting that affiliate to obtain a contract to
provide the Temelin Nuclear Power Plant and the St. Petersburg Nuclear
Power Plant with full scope simulators. GSES is a successor to General
Physics International Engineering and Simulation, Inc. Revenues from
this affiliate amounted to $65,000, $25,000 and $45,000, respectively,
for the years ended December 31, 1997, 1996, and 1995.
In 1994 the Company commenced paying $150,000 annually as compensation
to an officer of GP Strategies, in view of the additional time
allocated by this officer to the Company.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
7. Transactions with affiliates (Continued)
As of January 1, 1994, the Company and GP Strategies entered into a
three-year Management Services Agreement pursuant to which certain
direct and indirect services will be provided to the Company by GP
Strategies. The services to be provided by GP Strategies include legal,
tax, accounting, insurance and employee benefit administration
services. The Company has agreed to pay GP Strategies a fee of $10,000
per month during the first year of the agreement, and to negotiate with
GP Strategies a mutually agreeable fee thereafter. The Agreement is
automatically renewable for successive one-year terms unless one of the
parties notifies the other in writing at least six months prior to the
end of the initial term of any renewal thereof. The Agreement was
renewed for 1997 and 1998.
During 1997, certain employees of the Company established a Russian
company named ZAO (Akorta) ("Akorta"). Subsequent to year end such
individuals ceased to be employees of the Company. Sales to Akorta
during 1997 were $63,000. In addition, Akorta operates a warehouse at
which $122,000 of inventory is stored at December 31, 1997.
8. Income taxes
On August 5, 1994, GP Strategies made a distribution of the Company's
common stock to shareholders of GP Strategies. As a result, on that
date, the Company ceased to be included in GP Strategies' consolidated
Federal income tax return, as its equity interest in the Company fell
below 80%. For periods subsequent to August 5, 1994, the Company files
its own consolidated Federal income tax return, including its
wholly-owned subsidiary.
The Company's tax net operating loss for the first eight months of 1994
was included in the consolidated Federal income tax return of GP
Strategies, as was the Company's loss for 1993. The policy of GP
Strategies is to allocate a portion of the Federal tax liability, if
any, of the consolidated group to the various subsidiaries.
For the year ended December 31, 1993 and through the distribution of
shares in August 1994, the consolidated group was not in a tax paying
position for Federal income tax purposes, and accordingly, no income
taxes were allocated to the Company. Under SFAS No. 109, the Company
would record income taxes if it had earnings on a stand-alone basis,
although the consolidated group was not in a tax paying position.
Because the Company and its subsidiary have had net losses since
inception, no Federal or state income taxes have been provided for any
year.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
8. Income taxes (Continued)
Under SFAS No. 109, a valuation allowance is provided when it is more
likely than not that some portion of deferred tax assets will not be
realized. The Company has determined, based upon the Company's history
of operating losses, that 100% valuation reserves are required as of
December 31, 1997 and 1996.
As of December 31, 1997 and 1996, the Company had approximately
$1,700,000 and $1,417,000, respectively, of deferred tax assets and no
deferred tax liabilities. The tax effects that gave rise to these
deferred tax assets and the valuation allowance consist of the
following (in thousands):
December 31, December 31,
1997 1996
Deferred tax assets
Organization costs $ 7 $ 6
Allowance for doubtful accounts 34 23
Net operating loss carryforwards 1,525 1,287
Machinery and equipment 9 6
Deferred compensation 125 95
------- -------
1,700 1,417
Deferred tax liabilities
Net deferred tax assets 1,700 1,417
Valuation allowance (1,700) (1,417)
------- ---------
Net deferred tax assets after
valuation allowance $ $
========== ========
The change in the valuation allowance for the years ended December 31,
1997 and 1996 amounted to an increase of $283,000 and $557,000,
respectively, primarily attributable to the net operating losses.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
8. Income taxes (Continued)
From January 29, 1990 through August 5, 1994, the Company reported
approximately $2,100,000 in net operating losses in GP Strategies'
consolidated Federal Income Tax Return. As a result of the loss
allocation rules contained in the Federal income tax consolidated
return regulations, approximately $263,000 of net operating loss
carryforwards expiring between 2005 and 2008 are allocable to the
Company upon ceasing to be a member of GP Strategies' consolidated
return group. As agreed between GP Strategies and the Company, GP
Strategies will not compensate the Company for any use by the GP
Strategies Group of the net operating losses of the Company.
For periods subsequent to August 5, 1994, and through the year ended
December 31, 1996, the Company had net operating losses of
approximately $3,124,000, which expire in years 2009 through 2011. For
the year ended December 31, 1997, the Company had a net operating loss
of approximately $626,000, which expires in the year 2012. At December
31, 1997, the Company has total net operating loss carryforwards of
approximately $4,013,000. The loss carryforwards expire at various
dates from 2005 through 2012, as reflected above.
9. Employment and consulting agreement
(a) Employment agreement
As of January 1, 1994, the Company entered into an employment agreement
with its President and Chief Executive Officer. Pursuant to the
Employment Agreement, the officer will devote approximately one-half of
his time to serve as the Company's Chief Executive Officer and
President. The agreement has a three-year term with an option to renew
for successive one-year periods. It provides that the officer will
receive, in connection with services rendered to the Company, a base
salary in the amount of $150,000, subject to adjustment by the
Compensation Committee of the Board of Directors. In addition, the
officer received options to purchase an aggregate of 500,000 shares of
Common Stock at an exercise price per share of $.50 under the Company's
Stock Option Plan.
Upon termination by the Company other than "for cause," disability or
retirement, or by the officer "for good reason," the officer is
entitled to receive as severance pay an amount equal to his full base
salary at the rate then in effect, multiplied by the greater of (i) the
number of years remaining in the employment term, or (ii) three. In
addition, the officer would receive an amount in cash equal to the
aggregate difference between the exercise price of his unexercised
options and the closing price of the Common Stock on the date of
termination.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
9. Employment and consulting agreement (Continued)
(b) Consulting agreement
As of January 1, 1994, the Company entered into a consulting agreement
with its Chairman of the Board. Pursuant to the agreement, the Chairman
will serve as a consultant to the Company for a period of three years.
In lieu of consulting fees or other payments, the Company granted the
Chairman options to purchase an aggregate of 250,000 shares of Common
Stock at an exercise price per share of $.50, which options vest in
equal installments over a three year period commencing August 5, 1994.
These options, which are non-transferable, expire by their terms in
January 2004 or on such earlier date as the Chairman shall cease to
render services to the Company. In addition, the Chairman, who is the
President of GP Strategies, has been granted options to purchase an
additional 250,000 shares of Common Stock from GP Strategies, pursuant
to the GP Strategies American Drug Company Stock Option Plan, on the
same terms and subject to the same conditions as those granted to him
by the Company. The consulting agreement may be renewed at the option
of the Company for successive one year periods. The consulting
agreement has been renewed for an additional one year term with no
additional compensation. The Company has valued these services at
$80,000 for the year ended December 31, 1997 and has recorded it as
deferred compensation expense.
The Company believes the estimated fair value of the services of the
Chairman for the initial three year period beginning January 1, 1994 to
be approximately $250,000. The Company has estimated the intrinsic fair
value of the options granted to the Chairman by the Company and by GP
Strategies to be approximately $250,000 in the aggregate. Such amount,
which includes the $125,000 reflected as a capital contribution from GP
Strategies (see Note 7), has been recorded as deferred compensation and
as capital in excess of par value. The deferred compensation is being
amortized over the three year vesting period of the options.
Amortization for the years ended December 31, 1996 and 1995 amounted to
$82,000 and $84,000, respectively, and is included in general and
administrative expenses. The unamortized balance of deferred
compensation was reflected as a deduction from stockholders' equity.
10. Major customers and customers' deposits
Several customers each accounted for more than 10% of the Company's
revenues as follows:
1997 Two customers accounted for 41% and 27 % of revenues,
respectively. 1996 One customer accounted for 18% of revenue. 1995 Two
customers accounted for 15% and 10% of revenues, respectively.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
10. Major customers and customers' deposits (Continued)
Of the aforementioned customers, GSES, an affiliate of GP Strategies,
accounted for 3%, 2% and 9%, respectively, of revenue in 1997, 1996 and
1995.
Export sales represented approximately $1,123,000, $842,000 and
$342,000 of the Company's revenues in 1997, 1996 and 1995.
11. Stock options and warrants
(a) Stock option plan
On January 1, 1994, the Company's Board of Directors and sole
stockholder adopted the American Drug Company 1994 Stock Option Plan
(the "Stock Option Plan"), which became effective August 5, 1994. Under
the Stock Option Plan, a total of 2,000,000 shares of Common Stock have
been reserved for issuance, subject to adjustment in the event of stock
splits, stock dividends, recapitalizations, reclassifications or other
capital adjustments. Unless designated as "incentive stock options"
intended to qualify under Section 422 of the Code, options granted
under the Stock Option Plan are intended to be nonqualified options.
Options may be granted to any director, officer or other key employee
of the Company and its subsidiary, and to consultants and other
individuals providing services to the Company.
The Compensation Committee of the Board of Directors will administer
the Stock Option Plan and will determine, among other things, the
persons to be granted options, the number of shares to be subject to
each option, the exercise price and vesting schedule of each option,
whether to accelerate the exercise date of the option for any reason,
and whether to cause the Company to make loans which enable an optionee
to pay the purchase price of any option. No options are transferable by
the optionee other than by will.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
11. Stock options and warrants (Continued)
(a) Stock option plan (Continued)
The term of any option granted under the Stock Option Plan will not
exceed ten years from the date of the grant of the option and, in the
case of incentive stock options granted to a 10% or greater holder in
the total voting stock of the Company, three years from the date of
grant. The exercise price of any option will not be less than the fair
market value of the Common Stock on the date of grant or, in the case
of incentive stock options granted to a 10% or greater holder in the
total voting stock, 110% of such fair market value.
At December 31, 1997, the per share weighted-average fair value of
stock options granted during 1996 was $.40, on the date of grant using
the modified Black Scholes option-pricing model with the following
weighted-average assumptions: 1996 - expected dividend yield 0%,
risk-free interest rate of 6.6%, expected volatility of 105.6%, and an
expected life of 5 years. There were no stock options granted during
the year ended December 31, 1997.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
1997 1996
---- ----
Net loss As reported $(857) $(1,498)
Pro forma (869) (1,510)
Basic and diluted
loss per share As reported (.07) (.12)
Pro forma (.07) (.12)
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
11. Stock options and warrants (Continued)
Pro forma net income reflects only options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected
over the options' vesting period of 5 years and compensation cost for
options granted prior to January 1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
Balance at December 31, 1994 1,620,000 $ .50
Granted
Exercised
Forfeited 110,000 .50
Expired
Balance at December 31, 1995 1,510,000 .50
Granted 90,000 .50
Exercised
Forfeited
Expired
Balance at December 31, 1996 1,600,000 .50
Granted
Exercised
Forfeited
Expired 60,000 .50
------------- ------
Balance at December 31, 1997 1,540,000 .50
=========== ======
At December 31, 1997 and 1996, the range of exercise prices and
weighted-average remaining contractual life of outstanding options was
$.50 and $.50 and 3 years and 4 years, respectively.
At December 31, 1997, 1996 and 1995, the number of options exercisable
was 1,509,996, 1,539,999 and 1,006,652, respectively, and the
weighted-average exercise price of those options was $.50, $.50 and
$.50, respectively.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
11. Stock options and warrants (Continued)
(b) Warrants to purchase common stock
In August 1994, GP Strategies entered into a Transfer and Distribution
Agreement with the Company whereby GP Strategies transferred to the
Company (the "Distribution") immediately prior to the closing of the
Distribution, all of its interest in NPD Trading and in two
newly-formed, 50% owned joint ventures in exchange for (i) the issuance
by the Company of 6,990,900 shares of Common Stock to GP Strategies
(ii) the issuance of 6,017,775 shares of Common Stock to be distributed
to GP Strategies stockholders, and (iii) the issuance of 6,017,775
warrants to be distributed to GP Strategies stockholders. Each warrant
was initially exercisable for a period of two years from August 5, 1994
at an exercise price per share of $1.00. In August 1996, the Board of
Directors approved an extension of the Company's warrants until August
5, 1998 and a reduction of the exercise price to $.50 per share,
subject to adjustment in certain circumstances. The Distribution was at
the rate of one share plus one warrant to purchase one share of common
stock for every four then outstanding shares of common stock of GP
Strategies. Upon completion of the Distribution, the Company became a
separate public company from GP Strategies and NPD Trading became a
wholly-owned subsidiary of the Company.
In connection with the Distribution, 6,017,775 warrants were issued to
shareholders of GP Strategies. Since August 1994, 2,380 warrants were
exercised. At December 31, 1997, there were 6,015,395 shares reserved
for issuance to permit the exercise in full of all outstanding
warrants.
The Company has the right to cancel the warrants if the closing price
of the Company's common stock as quoted by the OTC Bulletin Board
during any ten consecutive trading days shall equal or exceed $1.00 per
share.
12. Loans and advances from GP Strategies
In August 1994, GP Strategies entered into a $2.5 million loan
agreement with NPD Trading, under which GP Strategies would fund the
loan with either securities or cash, at its option. NPD Trading
purchased GP Strategies common stock from time to time by issuing a
note to GP Strategies (the "Note"). At December 31, 1997, the Company
had borrowed the full $2,500,000 under its loan agreement with GP
Strategies and therefore had no remaining borrowing availability under
this agreement. During 1997, GP Strategies advanced additional funds to
the Company, and the total amount due to GP Strategies, including
accrued interest of $751,000, totaled $3,933,000 at December 31, 1997.
Such amount is due on August 5, 1999.
AMERICAN DRUG COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
13. Commitments and contingencies
The Company has several noncancellable leases which cover real property
and machinery and equipment. Such leases expire at various dates
through 1998 and, in some cases, contain options to extend their terms.
Minimum rentals under long-term operating leases are as follows:
Real Machinery &
(in thousands) property equipment Total
1998 $22 $2 $24
During 1997, 1996 and 1995, the Company incurred $158,000, $164,000 and
$207,000, respectively, of rental expenses.
Item 9. Changes in and Disagreements with Accountants and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Management
Directors and Executive Officers
The following table sets forth certain information concerning directors and
executive officers of the Company.
Name Age Position
Martin M. Pollak 70 Chief Executive Officer,
President and Director
Jerome I. Feldman 69 Chairman of the Board
Scott N. Greenberg 41 Chief Financial Officer
Donald J. Hasfurther 48 Vice President - Washington
Sergey Efuni, M.D., Ph. D. 37 Managing Director - Moscow
Edward Dunay 71 Director
John D. Scanlan 69 Director
Arthur T. Downey 59 Director
Martin M. Pollak. Mr. Pollak serves as Chief Executive Officer, President and a
director of the Company and has served as Executive Vice President, Treasurer
and a director of GP Strategies, the company which he co-founded, since 1959. He
has been involved in business in Eastern Europe and the Soviet Union for over 30
years. He has been a director of Interferon Sciences, Inc. since 1981 and
Chairman of the Board from 1981 to 1996; a director of GTS Duratek, Inc. from
1983 to 1996; a director of General Physics Corporation since 1987 and Chairman
of the Board since 1988; and Chairman of the Board of SGLG, Inc. since 1991. He
has complemented his business activities by chairing the U.S. section of the
U.S.-Czech and Slovak Economic Council for the past eight years and has been a
trustee on the Board of Trustees of the Worcester Foundation for Experimental
Biology and was a director of Brandon Systems Corporation from 1986 to 1996.
Jerome I. Feldman. Mr. Feldman serves as Chairman of the Board of, and a
consultant to the Company and has served as President and Chief Executive
Officer of GP Strategies, the company which he co-founded, since 1959. He has
been a director since 1981 and Chairman of the Executive Committee of Interferon
Sciences, Inc. from 1981 to 1996; a director of GTS Duratek, Inc. from 1981 to
1996; Chairman of the Executive Committee since 1988 and Chief Executive Officer
since 1994 and a director of General Physics Corporation since 1987; and
Chairman of the Executive Committee and a director of SGLG, Inc. since 1991. Mr.
Feldman also serves as Trustee of the New England Colleges Fund and of Bard
College.
Scott N. Greenberg. Mr. Greenberg has been the Company's Chief Financial Officer
since its inception. He has been Vice President and Chief Financial Officer of
GP Strategies since 1989, a director since 1987 ; a director of General Physics
Corporation since 1987; a director of SGLG, Inc. since 1991; and a director of
Interferon Sciences, Inc. since 1996.
Donald J. Hasfurther. Mr. Hasfurther has served as Vice President of the Company
since 1990. Prior to joining the Company, Mr. Hasfurther served as director for
East/West Trade at the U.S. Chamber of Commerce for 13 years, during which time
he was Executive Director for four bilateral economic councils with Hungary,
Poland, Romania and Czechoslovakia. Prior to working at the U.S. Chamber of
Commerce, he served as an international economist with the Bureau of East/West
Trade at the U.S. Department of Commerce.
Sergey Efuni., Ph.D. Dr. Efuni joined the Company in 1994. From 1992 to 1994 he
served as Representative of Lederle International with responsibilities for
developing that company's sales network in Russia, Kazakahstan and Uzbekistan. A
medical doctor by training, Dr. Efuni has also provided consulting and marketing
assistance to Sanofi of France and established two Russian trading companies
dealing with pharmaceuticals from 1991 to 1992. Dr. Efuni served as Senior
Scientific Researcher at the Institute of Immunology in Moscow from 1989 to
1992.
Edward Dunay. Mr. Dunay became director of the Company in 1994. In 1979, he
formed Edward Dunay Associates, Ltd., an investment advisory firm, of which he
is still President. Mr. Dunay also served as President of the City Athletic Club
from 1991 to 1996. From 1984 to 1992 he was director of Hamilton Savings Bank
and served as Vice Chairman of its Audit Committee. From 1974 to 1979, Mr. Dunay
served as President of Ladenberg, Thallmann & Co., members of the New York Stock
Exchange.
John D. Scanlan. Ambassador Scanlan became a director of the Company in 1994.
His diplomatic career of 35 years was concentrated in Soviet and East European
affairs. He served in Moscow, Warsaw, Poznan and Belgrade, was Deputy Assistant
Secretary of State with responsibility for the Soviet Union and Eastern Europe
from 1981 to 1982, Ambassador-designate to Poland from 1982 to 1985, and
Ambassador to Yugoslavia from 1985 to 1989. Since June 1991, he has been
employed by ICN Pharmaceutical, Inc. first as Vice President for Eastern Europe
and since April 1994 as a Senior Consultant. Ambassador Scanlan is a member of
the Council on Ethnic Accord and an advisory board member of the Central and
East European Law Initiative of the American Bar Association.
Arthur T. Downey. Mr. Downey became a director of the Company in 1996. He is
Vice President and Counsel of Baker Hughes Incorporated, a Houston based $3
billion industrial equipment manufacturer, and he manages the Washington office
of Baker Hughes. For fifteen years prior to joining Baker Hughes, he was a
partner in two large national firms, representing domestic and foreign companies
in the international trade and investment area. Mr. Downey also served during
most of that time as Adjunct Professor at Georgetown University Law Center where
he taught international law and business transactions. Mr. Downey also had
governmental service prior to his corporate and law firm activity. He served as
Deputy Assistant Secretary of Commerce for East-West Trade, and also on the
White House National Security Council staff. He began his career with service at
the State Department (in Washington and Berlin).
The Company's Board of Directors contains three independent members.
The Board of Directors held two meetings in 1997, at which all of the directors
attended at least 75% of the meetings. All members hold office until the next
annual meeting of stockholders or until their successors are duly elected and
qualified. Executive officers serve at the pleasure of the Board of Directors.
Committees of the Board of Directors
The Compensation Committee consists of Messrs. Pollak and Feldman. The
Compensation Committee reviews and recommends remuneration arrangements for
executive officers and for members of the Board of Directors, adopts
compensation plans in which officers and directors are eligible to participate
and grants stock options under the Company's Stock Option Plan. During 1997,
Messrs. Pollak and Feldman participated in deliberations of the Board of
Directors concerning compensation of executive officers.
The Executive Committee consisting of Messrs. Pollak and Feldman meets
on call and has authority to act on most matters during intervals between board
meetings.
The Audit Committee reviews the internal controls of the Company and
the objectivity of its financial reporting. It meets with appropriate Company
financial personnel and the Company's independent certified public accountants
in connection with these reviews. This committee recommends to the Board the
appointment of the independent certified public accountants to serve as auditors
for the following year in examining the books and records of the Company. The
Audit Committee currently consists John D. Scanlan, Edward Dunay and Arthur T.
Downey. Director's Compensation
The Company pays each director who is not an employee of, or consultant
to, the Company a fee of $1,000 for each meeting of the Board of Directors
attended, and reimburses each such director for out-of-pocket expenses incurred
in attending such meetings.
Employment Agreement
As of January 1, 1994, the Company entered into an employment agreement
with its President and Chief Executive Officer, Martin M. Pollak. Pursuant to
the Employment Agreement, Mr. Pollak will devote approximately one-half of his
time to serve as the Company's Chief Executive Officer and President. The
agreement had an initial three-year term, which was automatically renewed for an
additional one-year. It provides that Mr. Pollak will receive, in connection
with services rendered to the Company, a base salary in the amount of $150,000,
subject to adjustment by the Compensation Committee of the Board of Directors.
In addition, Mr. Pollak has options to purchase an aggregate of 500,000 shares
of Common Stock at an exercise price per share of $.50, under the Company's
Stock Option Plan. These options vest in equal installments over a three-year
period which commenced on August 5, 1994, and will expire in January 2004, or on
such earlier date as Mr. Pollak leaves the employment of the Company for any
reason. They are intended to be non-qualified stock options and are
non-transferable.
Mr. Pollak's Employment Agreement provides that his employment will
terminate upon his death, physical or mental disability or retirement, and
permits the Company to terminate his employment "for cause" (i.e., he fails to
perform required duties or engages in gross misconduct). In addition, Mr. Pollak
may voluntarily terminate his employment "for good reason" which involves his
good faith determination that due to a "change in control" of the Company, he is
not able to effectively discharge his duties. A "change in control" includes (i)
the acquisition of beneficial ownership of 30% or more of the Company's voting
securities by any person other than Mr. Pollak or GP Strategies, or (ii) certain
changes in the composition of the Board of Directors of the Company.
Upon termination by the Company "for cause," all obligations of the
Company under the Employment Agreement cease. Upon termination by the Company
other than "for Cause," disability or retirement, or by Mr. Pollak "for good
reason," Mr. Pollak is entitled to receive as severance pay an amount equal to
his full base salary at the rate then in effect, multiplied by the greater of
(i) the number of years remaining in the employment term, or (ii) three. In
addition, Mr. Pollak would receive an amount in cash equal to the aggregate
difference between the exercise price of his unexercised options and the closing
price of the Common Stock on the date of termination.
Consulting Agreements
As of January 1, 1994, the Company entered into a consulting agreement
with its Chairman of the Board, Jerome I. Feldman. Pursuant to the agreement,
Mr. Feldman will serve as a consultant to the Company for a period of three
years. The Consulting Agreement was renewed by the Company for an additional one
year term, with no additional compensation to be paid to Mr. Feldman. In
connection with services rendered and to be rendered by Mr. Feldman to the
Company, which the Company values at approximately $250,000, and in lieu of
consulting fees or other payments, Mr. Feldman was granted options to purchase
(i) an aggregate of 250,000 shares of Common Stock under the Company's Stock
Option Plan at an exercise price per share of $.50, which options vest in equal
installments over a three year period which commenced on August 5, 1994 and (ii)
an additional 250,000 shares of Common Stock from GP Strategies, pursuant to the
GP Strategies American Drug Company Stock Option Plan, on the same terms as
those granted to him by the Company. All such options will expire by their terms
in January 2004 or on such earlier date as Mr. Feldman shall cease to render
services to the Company. They are non-transferable by him. Mr.
Feldman's consulting agreement may be renewed at the option of the Company for
successive one year periods.
Item 11. Executive Compensation
The following table and notes sets forth information concerning the
compensation paid or awarded to the Chief Executive Officer for 1997:
SUMMARY COMPENSATION TABLE
Annual
Compensation
Long Term All Other
Name and Principal Salary Bonus Awards Compensation
Position Year ($) ($) Options ($)
- --------------------------------------------------------------------------------
Martin M. Pollak 1997 322,613(1) -0- -0- 3,800(2)
President and Chief 1996 310,731(1) -0- -0- 3,500(2)
Executive Officer 1995 314,376(1) -0- -0- 3,500(2)
Donald Hasfurther 1997 108,976 15,000 -0- 3,102(3)
Vice President 1996 98,335 -0- -0- 2,792(3)
1995 95,400 -0- -0- 2,733(3)
(1) For 1995, 1996 and 1997, $150,000, or approximately 50%, of Mr. Pollak's
compensation was paid by GP Strategies, as a consequence of his service to both
companies. See "Management - Employment Agreement."
(2) Constitutes matching contributions made by GP Strategies and the Company
equally on behalf of Mr. Pollak pursuant to GP Strategies' 401(k) Savings Plan
which became effective on March 1, 1992.
(3) Includes $2,180, $1,967 and $1,908 for 1997, 1996 and 1995, respectively, as
a matching contribution by the Company to the 401(k) Savings Plan, $922, $825
and $825 for 1997, 1996 and 1995, respectively, for Group Term Life Insurance
paid by the Company.
The following table and notes set forth information for the named executive
officers regarding the exercise of stock options during 1997 and unexercised
options held at the end of 1997.
AGGREGATED OPTION EXERCISES AT DECEMBER 31, 1997
AND YEAR-END OPTION VALUES
Number of
Unexercised Value of Unexercised
Options at In-the-Money Options
December 31,
1997 (#) at December 31, 1997 ($)
Shares Acquired Exercisable/ Exercisable/
Name(#)(1) on Exercise Value Realized($) Unexercisable Unexercisable (2)
- -------------------------------------------------------------------------------------------------
Martin M. Pollak -0- -0- 500,000/-0- -0-
Donald Hasfurther -0- -0- 100,000/-0- -0-
(1) None of the named executive officers exercised any stock options during
1997.
(2) Calculated based on the closing price of the Common Stock ($.08) as reported
by the OTC Bulletin Board on December 31, 1997. The exercise price of such
option is $.50.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 2, 1998,
with respect to shares of Common Stock which are beneficially owned by (a) each
person who owns more than 5% of the Company's Common Stock, (b) each director of
the Company, (c) each of the persons named in the Summary Compensation Table and
(d) all officers and directors of the Company as a group.
Beneficial Ownership
Number of Percentage
Name and Address Common Shares of Class (1)
---------------- ------------- ------------
GP Strategies Corporation (2) 6,971,750 53.5%
Martin M. Pollak (3)(6)(7)(8) 7,564,322 55.9
Jerome I. Feldman (4)(6)(7)(8) 7,566,386 57.0
Scott N. Greenberg (5)(6) 79,150 *
Donald J. Hasfurther (5)(6) 100,000 *
Edward Dunay (5)(9) 50,000 *
John D. Scanlan (5)(9) 50,000 *
Arthur T. Downey (5)(9) 33,330 *
Sergey Efuni, MD, Ph.D. 20,000 *
All directors and officers
as a group (8 persons) 1,519,688 10.8
* The number of shares owned is less than one percent of the outstanding shares
of Common Stock.
(1) Based upon 13,020,155 shares of Common Stock outstanding as well as options
outstanding as of March 2, 1998.
(2) GP Strategies has entered into a Voting Agreement which limits its ability,
to a certain degree, to control the affairs of the Company. See "Certain
Relationships and Related Transactions - GP Strategies' Capital Stock Interest."
(3) Includes (i) 6,971,750 shares of Common Stock beneficially owned by GP
Strategies, (ii) 85,204 shares of Common Stock held by Mr. Pollak, (iii) 5,751
shares of Common Stock held by Mr. Pollak's wife (iv) 1,617, shares of Common
Stock for a foundation of which Mr. Pollak is a trustee and (v) 500,000 shares
of Common Stock issuable upon exercise of currently exercisable stock options
held by Mr. Pollak. Mr. Pollak disclaims beneficial ownership of the shares
owned by GP Strategies and his wife.
(4) Includes (i) 6,971,750 shares of Common Stock beneficially owned by GP
Strategies, (ii) 93,463 shares of Common Stock held by Mr. Feldman (iii), 1,173
shares of Common Stock which are held by certain members of Mr. Feldman's family
and (iv) 500,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options held by Mr. Feldman. Mr. Feldman disclaims beneficial
ownership of the shares owned by GP Strategies and his family.
(5) Includes 4,150 shares of Common Stock held by Mr. Greenberg and 75,000,
100,000, 50,000, 50,000 and 33,330 shares each for Messrs. Greenberg,
Hasfurther, Dunay, Scanlan and Downey, respectively, issuable upon exercise of
currently exercisable stock options.
(6) Of the directors and executive officers of the Company, the following
beneficially own the number of shares of common stock of GP Strategies
indicated: Scott N. Greenberg (116,857, of which 60,875 shares are issuable upon
exercise of currently exercisable stock options and 49,950 shares which he has
the right to acquire through the conversion of shares of GP Strategies Class B
Capital Stock into shares of common stock) (1.1%) and Donald J. Hasfurther (500
shares, all of which are issuable upon exercise of currently exercisable stock
options). Martin M. Pollak and Jerome I. Feldman beneficially own 792,405 (7.0%)
and 789,967 (6.9%) shares of GP Strategies Common Stock, respectively, which
include (i) currently exercisable options to purchase 335,917 and 333,417 shares
of common stock, respectively; (ii) options held by each to purchase 356,150
shares of Class B Capital Stock which are convertible into shares of GP
Strategies Common Stock on a one-for-one basis; and (iii) 31,250 shares of Class
B Capital Stock beneficially held by each, which are convertible into shares of
GP Strategies Common Stock on a one-for-one basis. Also included are 1,618
shares for a foundation of which Mr. Pollak is a trustee. Mr. Pollak disclaims
beneficial ownership of 5,752 shares held by his wife which are also included.
Mr. Feldman disclaims beneficial ownership of the 1,173 shares held by his wife
and children which are also included. All directors and executive officers of
the Company (exclusive of Messrs. Pollak and Feldman) as a group beneficially
own 117,357 shares of common stock of GP Strategies, of which 111,325 shares are
issuable upon exercise of currently exercisable stock options.
All of such persons have sole voting and investment power as to all shares
except as indicated.
(7) Member of the Executive Committee.
(8) Member of the Compensation Committee.
(9) Member of the Audit Committee.
Item 13. Certain Relationships and Related Transactions
Management Services Agreement
As of January 1, 1994, the Company and GP Strategies entered into a
three-year Management Services Agreement pursuant to which certain direct and
indirect services will be provided to the Company by GP Strategies, which
agreement was automatically extended for an additional one year period. The
services to be provided by GP Strategies include management, legal, tax,
accounting, insurance and employee benefit administrative services. The Company
paid $10,000 per month to GP Strategies in 1997. The Company believes that the
terms of this agreement are comparable to those available from unaffiliated
third parties. The Agreement is automatically renewable for successive one-year
terms unless one of the parties notifies the other in writing that the Agreement
is terminated. In such event, the Company will be required to hire additional
employees to perform these services or to contract with third parties to do so.
Loans and Advances from GP Strategies
As of December 31, 1997, the Company's long-term indebtedness to GP
Strategies totaled $3,933,000. The indebtedness was comprised of (i) $2.5
million pursuant to a $2.5 million loan agreement with GP Strategies(see Note 12
to Consolidated Financial Statements), (ii) cash advances from GP Strategies
totaling $682,000, and (iii) accrued interest at the prime rate of $751,000.
These proceeds were used to fund the Company's working capital needs. At
December 31, 1997, the Company had no additional borrowing capacity available
under its GP Strategies Loan Agreement. Principal and accrued interest pursuant
to such agreement is due on August 5, 1999.
In July 1996, the Company issued a convertible note (the "Note") in the
principal amount of $1,000,000 in a private offering (the "Offering") (See Note
6 to Consolidated Financial Statements). The Company received net proceeds of
$950,000 from the Offering. The Note matures on June 30, 2001, bears interest at
the rate of 7% per annum, and is convertible into shares of common stock of the
Company at a conversion price of $.25 per share. In connection with the
Offering, GP Strategies issued warrants to purchase an aggregate of 82,306
shares of GP Strategies Common Stock, exercisable at a price of $12.15 per
share, provided that the warrants may only be exercised utilizing the Note. In
the event that the closing price of the common stock of the Company is at least
$1.00 per share for at least 20 consecutive trading days, the Notes shall be
subject to redemption at the election of the Company, at a redemption price of
100% of the principal amount called for redemption, together with accrued
interest.
The Company and GP Strategies have agreed that (i) if the Notes are
used to exercise the warrants prior to a default on the Notes, GP Strategies
will receive from the Company, in exchange for the Notes shares of the Company's
common stock at a price equal to 60% of its then current market value, and (ii)
if the Notes are used to exercise the warrants after a default on the Notes, GP
Strategies will receive from the Company, in exchange for the Notes shares of
the Company's Common Stock at a price equal to 25% of its then current market
value.
GP Strategies' Capital Stock Interest
Upon completion of the Distribution, GP Strategies held approximately
6,990,900 shares of Common Stock, representing approximately 54% of the Common
Stock issued and outstanding on August 5, 1994 (without taking into account
outstanding options and warrants). The Company's by-laws do not provide for
cumulative voting. GP Strategies has entered into a Voting Agreement pursuant to
which it has agreed that, for a period of three years from August 5, 1994 it
will vote its shares of Common Stock (i) such that not more than 50% of the
Company's directors will be officers or directors of GP Strategies; and (ii) on
all matters presented to a vote of stockholders, other than the election of
directors, in the same manner and in the same proportion as the remaining
stockholders of the Company vote. GP Strategies, nevertheless, will be able to
influence substantially the affairs of the Company. See "Principal
Stockholders." The Company has extended the Voting Agreement for another two
years through August 5, 1999.
Certain Employment Matters
Several officers and directors of the Company also render services to
GP Strategies. Mr. Martin M. Pollak, President, Chief Executive Officer and a
director of the Company, is Executive Vice President, Treasurer and a director
of GP Strategies. Mr. Jerome I. Feldman, Chairman of the Board of, and
consultant to the Company, serves as President, Chief Executive Officer and a
director of GP Strategies. Finally, Mr. Scott N. Greenberg, the Company's Chief
Financial Officer serves as Vice President and Chief Financial Officer and a
director of GP Strategies. See "Management."
Tax Allocation Agreement
In connection with the Distribution, GP Strategies and the Company have
entered into a tax allocation agreement, dated as of August 5, 1994, which,
among other things, provides for the allocation between GP Strategies and the
Company of (i) responsibility for the preparation and filing of tax returns and
the payment of tax liabilities and (ii) entitlement to tax refunds.
In general, the tax allocation agreement provides that GP Strategies
will indemnify and hold harmless the Company and its present and future
affiliates, including NPD Trading (collectively, the "ADC Group") against tax
liabilities of GP Strategies or any of its affiliates or subsidiaries that is
not a member of the ADC Group (the "GP Strategies Group") and (ii) all federal
income tax liabilities of the ADC Group, except deferred tax liabilities as
recorded under generally accepted accounting principals, until August 5, 1994.
The Company will indemnify and hold GP Strategies harmless against (i) all
federal income tax liabilities of the ADC Group for all periods after August 5,
1994 and (ii) all tax liabilities of the ADC Group other than federal income tax
liabilities.
From January 29, 1990 through August 5, 1994, the Company reported
approximately $2,100,000 in net operating losses in GP Strategies' consolidated
Federal Income Tax Return. As a result of the loss allocation rules contained in
the Federal income tax consolidated return regulations, approximately $263,000
of net operating loss carryforwards are allowable to the Company upon ceasing to
be a member of GP Strategies' consolidated return group. As agreed between GP
Strategies and the Company, GP Strategies will not compensate the Company for
any use by the GP Strategies Group of the net operating losses of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Pollak, the Company's President and Chief Executive Officer and Mr.
Feldman, the Company's Chairman of the Board and a consultant to the Company,
served on the Compensation Committee of the Company for the past year. Other
than the foregoing, no director or executive officer of the Company served as a
director or executive officer of any other corporation that has a director or
executive officer who is also a director or a board committee member of the
Company.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements are included in Part II, Item 8:
Page
Independent Auditors' Report........................................13
Financial Statements:
Consolidated Balance Sheets -
December 31, 1997 and 1996..........................................14
Consolidated Statements of
Operations - Years ended
December 31, 1997, 1996 and 1995....................................16
Consolidated Statements of Changes in
Stockholders' Equity (Deficiency)- Years
ended December 31, 1997, 1996 and 1995..............................17
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995........................18
Notes to Consolidated Financial Statements..........................19
(a)(2) Schedules have been omitted because they are not required
or are not applicable, or the required information has been
included in the financial statements or the notes thereto.
(a)(3) See accompanying Index to Exhibits
(b) There were no Reports on Form 8-K filed by the Registrant during the
last quarter of the period covered by this report.
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.
AMERICAN DRUG COMPANY
Martin M. Pollak, President
and Chief Executive Officer
Dated: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title
Martin M. Pollak President, Chief Executive Officer and Director
(Principal Executive and Operating Officer)
Jerome I. Feldman Chairman of the Board
Scott N. Greenberg Chief Financial Officer and
(Principal Financial and Accounting Officer)
Edward Dunay Director
iii
INDEX TO EXHIBITS
Exhibit No. Document Page
- ----------- ----
3 Amended Certificate of Incorporation of the Registrant.
Incorporated herein by reference to Exhibit 3 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
3.1 By-laws of the Registrant. Incorporated herein by reference to
Exhibit 3.2 of the Registrant's Registration Statement on Form
S-1 filed on July 22, 1994, Registration Statement No. 33-78252.
10. 1994 Stock Option Plan of the Registrant. Incorporated herein by
reference to Exhibit 10.1 of the Registrant's Registration
Statement on Form S-1 filed on July 22, 1994, Registration
Statement No. 33-78252.
10.1 Transfer and Distribution Agreement. Incorporated herein by
reference to Exhibit 2.1 of the Registrant's Registration
Statement on Form S-1 filed on July 22, 1994, Registration
Statement No. 33-78252.
10.2 Management Services Agreement, dated as of August 5, 1994,
between GP Strategies Corporation and the Registrant.
Incorporated herein by reference to Exhibit 10.3 of the
Registrant's Registration Statement on Form S-1 filed on July
22,1994, Registration Statement No. 33-78252.
10.3 Employment Agreement, dated as of January 1, 1994, between Martin
M. Pollak and the Registrant. Incorporated herein by reference to
Exhibit 10.4 of the Registrant's Registration Statement on Form
S-1 filed on July 22, 1994, Registration Statement No. 33-78252.
10.4 Consulting Agreement, dated as of January 1, 1994, between Jerome
I. Feldman and the Registrant. Incorporated herein by reference
to Exhibit 10.5 of the Registrant's Registration Statement on
Form S-1 filed on July 22, 1994, Registration Statement No.
33-78252.
10.5 Form of Generic Pharmaceutical Products Supply Agreement.
Incorporated herein by reference to Exhibit 10.7 of the
Registrant's Registration Statement on Form S-1 filed on July 22,
1994, Registration Statement No. 33-78252.
10.6 Form of Warrant Agreement, dated as of August 5, 1994, between
the Registrant, The Harris Trust Company of New York, as Warrant
Agent, and the holder of Warrants from time to time. Incorporated
herein by reference to Exhibit 10.8 of the Registrant's
Registration Statement on Form S-1 filed on July 22, 1994,
Registration Statement No. 33-78252.
10.7 Tax Allocation Agreement, dated as of August 5, 1994, between GP
Strategies Corporation and the Registrant. Incorporated herein by
reference to Exhibit 10.9 of the Registrant's Registration
Statement on Form S-1 filed on July 22, 1994, Registration
Statement No. 33-78252.
10.8 Voting Agreement, dated as of August 5, 1994, from GP Strategies
Corporation to the Registrant. Incorporated herein by reference
to Exhibit 10.10 of the Registrant's Registration Statement on
Form S-1 filed on July 22, 1994, Registration Statement No.
33-78252.
10.9 Stock Purchase and Loan Agreement, dated as of August 5, 1994
between GP Strategies Corporation and the Registrant.
Incorporated herein by reference to Exhibit 10.11 of the
Registrant's Registration Statement on Form S-1 filed on July 22,
1994, Registration Statement No. 33-78252.
10.10 Form of 7% Convertible Note due 2001 of the Registrant.
Incorporated herein by Reference to Exhibit 4.1 of the
Registrant's Form 10-Q for the second quarter ended June 30,
1996.
21. Subsidiaries.