UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Fiscal Year Ended December 31, 2002
Commission File No. 0-109659
CITA BIOMEDICAL, INC.
DELAWARE 93-0962072
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
20 East Main Street Suite 46 Los Gatos, California 95030
(Address of principal executive offices)
Issuer's telephone number: (408) 354-0506
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
$.0l Par Value Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes __X___ No_____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part M of this Form 10-KSB or any
amendment to this Form 10-KSB: [X]
Issuer's revenues for the most recent fiscal year: $303,140.
The aggregate market value of the voting stock held by non-affiliates of the
issuer was approximately $1,878,876. The aggregate market value was based upon
the closing price for the shares of common stock as reported by NASDAQ as of
December 31, 2002, the last trading day of the year.
Number of shares outstanding of each of the issuer's classes of common equity,
as of December 31, 2001: 75,155,057 shares of common stock and 0 shares of
preferred stock.
DOCUMENTS INCORPORATED BY REFERENCE: See Exhibits.
Transitional Small Business Disclosure Format: Yes ____ No _X_
PART I
ITEM 1. DESCRIPTION OF BUSINESS
A. Background
CITA Biomedical, Inc. (the "Company" or "CITA(R)"), was incorporated in Colorado
on June 9, 1981, under the name "Blue Grass Breeders, Inc." The Company was
originally formed for the purpose of engaging in the business of acquiring,
breeding, racing and selling thoroughbred horses. The Company completed an
initial public offering of its $.0l par value common shares in February 1983,
receiving net proceeds of approximately $2,134,000. From March 1987 to May 1989,
the Company engaged in the business of breeding and selling horses. The Company
was dormant from May 1989 through 1997.
On December 15, 1997 a special meeting of shareholders of the Company was held
at which Joseph Dunn and Michael Hinton were elected to serve as Directors of
the Company. On August 12, 1998 the Company purchased 100% of the outstanding
capital stock of CITA Americas, Inc. (a Nevada corporation) from Aviation
Industries, Inc. for 1,000 Shares of the Company's Series A Convertible
Preferred Stock, par value $0.01 per share.
A dispute arose between the Company and Aviation Industries, Inc. concerning the
conversion formula as well as other matters relating to the original Stock
Purchase Agreement relating to the acquisition of CITA Americas, Inc. from
Aviation Industries, Inc. In reporting its fully diluted Common Stock, the
Company has previously reported 2.2 million shares issuable upon the conversion
of the Preferred Stock. However, the Company reached an agreement with Aviation
Industries, Inc. as of May 1, 2001 whereby the all outstanding shares of the
Preferred Stock were converted to 400,000 shares of Common Stock.
CITA Americas, Inc. operates as a wholly owned subsidiary of CITA Biomedical,
Inc. and is in the business of providing the technology, information, and
administrative services necessary to the treatment and rapid detoxification of
persons addicted to opiate based drugs whether natural or synthetic (i.e.,
Methadone, Heroin, Codeine, Demerol, and Percocet).
The Company currently has an agreement with Centinela Hospital in Los Angeles,
California whereby Centinela Hospital is licensed to treat patients using
proprietary UROD(R) (Ultra Rapid Opiate Detoxification) technology. The Company
is currently negotiating with other hospitals and medical facilities to
establish additional treatment centers both for UROD treatments and a new set of
treatments for cocaine and alcohol dependency, as described below, although it
has not yet received full Federal regulatory approval of those treatment
programs.
In November, 2001, the Company entered an agreement with CITA S.L., a Spanish
company operated by Dr. Juan Jose Legarda, the developer of CITA's UROD opiate
addiction treatment program, whereby CITA acquired from CITA S.L. a license to
certain technology, known as Detoxification and NeuroAdaptation
("DNA"),developed for the purpose of detoxifying persons habituated to alcohol
and cocaine, as well as a neuron adaptation process designed to "reset" the
nervous system of a habituated alcohol or cocaine user to its pre-habituation
state. The Company believes that, provided it can obtain capital to permit it to
implement the new technology, this license represents a major step in the
Company's efforts to become a leading provider of products and services for the
treatment of a wide variety of chemical addictions.
B. The Business of the Company
Products
The Company's current product offering consists primarily of UROD(R), which
stands for Ultra Rapid Opiate Detoxification. This revolutionary procedure
offers successful detoxification from heroin, methadone and other opiate
based drugs, including pharmaceuticals, to addicted individuals without the
typical elongated painful withdrawal discomfort. The UROD procedure has been
approved as an accepted treatment method by the American Society of Addictive
Medicine. Through year end 2001, over six thousand addicted persons have been
successfully treated with the UROD procedure. Patients are successfully
detoxified in 4 - 6 hours with a typical hospital stay of 24 hours. Patients are
put under anesthesia and are given FDA approved opiate antagonist drugs, which
displace the opiates at the receptor level. The UROD(R) procedure helps to reset
the natural state of the body's receptors.
In November 2001 the Company announced a new family of treatments based on the
DNA process, a new technology that provides revolutionary treatment for people
who are substance dependent. The DNA process establishes a new treatment
regiment in the fight against the disease of substance dependency. Historically
the disease of addiction has been treated only through behavioral intervention,
but the DNA process provides a solution for treating the physiological and
psychological components of this devastating condition. By providing successful
detoxification solutions that reduce the time, severity, pain and cost
associated with withdrawal, DNA process allows the patient to concentrate on
returning to a productive level of functioning in just hours.
Substance abuse impedes normal neural functioning of the brain and body systems
as a whole, not only resulting in cravings but potentially serious or even
life-threatening withdrawal symptoms. The DNA process reduces or eliminates
cravings while regulating the neural functioning. PET scans taken within days of
the DNA process demonstrate metabolic normalization of frontal, parietal and
temporal lobes of the brain. Completion rates for the DNA process far exceed
standard detoxification solutions; approaching a 100% completion rate. In its
first nine months of use the DNA for Addictions treatments have had a relapse
rate that averages less than half of the relapse rates for people treated for
substance dependence by other means.
The following treatments from the DNA for Addictions family have been announced
and are described below: DNA for Alcohol, DNA for Cocaine, DNA for Crack
Cocaine, and DNA for Alcohol and Cocaine.
DNA for Alcohol: Currently, over 735,000 patients in the United States seek
medical assistance for alcohol abuse every year. the Company has developed a
Detoxification and NeuroAdaptation for Alcohol (DNA for Alcohol) process that
cleanses the body in a 2 day period, during which time alcohol is purged from
the patient's body under rigorous and intensive medical supervision. Withdrawal
symptoms are treated and suppressed during the detoxification procedure and
immediately after it, ensuring the most comfortable transition for the patient
possible. In its first nine months of use DNA for Alcohol has a relapse rate of
less than 25%, this is in contrast with the close to 75% relapse rate for people
treated for alcoholism by other means. $8,000 per treatment. Patents pending.
DNA for Cocaine and Crack Cocaine: There are over 237,000 patients in the United
States who seek medical assistance for cocaine abuse every year. the Company has
developed a Detoxification and NeuroAdaptation for Cocaine (DNA for Cocaine)
offering that cleanses the body in a 2 day period, during which time cocaine is
purged from the patient's body under rigorous and intensive medical supervision.
Withdrawal symptoms are treated and suppressed during the detoxification
procedure and immediately after it, ensuring the most comfortable transition for
the patient possible. In its first nine months of use DNA for Cocaine and Crack
Cocaine has a relapse rate of less than 25%. This is in contrast to the close to
70% relapse rate for people treated for cocaine and crack cocaine addiction by
other means. Crack cocaine use makes up about one third of all cocaine use yet
it constitutes over 67% of all cocaine users who seek treatment for substance
abuse. $10,000 per treatment. Patents pending.
DNA for Poly-drug: Over half of all people who seek treatment for substance
dependency are poly-drug users. DNA for Alcohol and Cocaine is the first
poly-drug treatment to be released in our new family of treatments, DNA for
Addictions. In the past successful treatment of poly-drug use has been difficult
and most treatment programs have not been designed to address poly-drug use.
With DNA for Poly-drug the patient treated derives all the benefits of the
single drug user in the same treatment time. A significant percent of patients
treated for substance dependency are dependent on multiple substances. For
instance 43% of patients treated for alcohol dependency have a secondary drug
dependency. This procedure is an inherent part of any DNA procedure and it can
also be administered during a UROD procedure. In the past many patients using
other substances, like cocaine were ineligible for UROD. This procedure
eliminates the opiates only requirement and therefore increases the UROD market.
Patents pending.
Flexible Intensity Treatment (FIT): Following the DNA and UROD procedures, the
patient is initiated into continuing care, a long-term program consisting of
flexible intensity treatment based on The American Society of Addiction
Medicines Patient Placement Criteria and the patient's ongoing needs in the
areas of his/her physical, mental, and spiritual life. By providing the patient
with a relapse-prevention medication (UROD patients only) and an aftercare
program built on the solid foundation of an abstinence-based "twelve-step" model
of recovery, the patient is offered the best possible chance at ongoing,
continued persistent recovery.
The Company is in discussions with several hospitals regarding the provision of
DNA treatments for alcohol and cocaine dependency. The latter program offers
dual benefits insofar as it may be used as a standalone procedure, or in
conjunction with UROD to treat patients dependent both on cocaine and opiate
drugs. The Company's licensed facilities are currently unable to treat opiate
addicts who test positive for cocaine as well.
The market for an effective alcohol treatment program is far larger than that
for either opiates or cocaine. The principal advantage of the Company's alcohol
treatment program over existing programs is that it can "reset" the brain's
neurological function in order to prevent or ease the cravings experienced by
many recovering alcoholics.
Staff
The Company currently has a total of eleven staff members. These include two
Certified Addiction Counselors, and one person with a Masters Degree in
Psychology and significant work completed for her Doctorate.
The Market
Opiates occur naturally as alkaloids in the opium poppy, or they can be imitated
synthetically. Collectively, all of these highly addictive drugs are known as
opioids. Of the twenty alkaloids contained in opium, only morphine and codeine
remain in clinical use. Heroin (diacetylmorphine), the other major natural
opiate-derived drug, was first introduced 1898, and it was widely prescribed as
a cure for morphine addiction. Since the 1960's, synthetic methadone has been
heralded as a cure or palliative (depending upon point of view) for heroin
addiction. Most recently, a two-drug substitute for methadone has evolved using
Orlaam and buprenorphine in combination. Both of these are longer acting, and
unlike the required daily intake of methadone (Dolophine), this combination
needs to be taken only three times per week.
Shown here are various other synthetic opioids that have been developed for
various medical applications, most notably as analgesic or cough suppressants,
wherein both generic and registered trade names (which are capitalized) are
given:
o hydrocodone: Lorcet, Lortab, Vicodin
o hydromorphone: Diluadid
o levorphanol: Levo-Dromoran
o meperidine
o oxycodone: OxyContin, Percocet, Percodan
o oxymorphone: Numorphan.
These drugs can be prescribed by physicians, dentists, veterinarians, etc.
"Medical addiction" occurs when a patient becomes addicted under medical
supervision using legally prescribed drugs. Black markets also exist for these
drugs.
In 1999, National Institute on Drug Abuse (NIDA) studies identified hydrocodone,
hydromorphone, and oxycodone as emerging narcotic drugs of abuse, noting that
hospital admissions for hydrocodone, primarily Vicodin, increased from 6,115 in
1993 to 14,639 in 1999, an increase greater than 139%.
Consequently, the opiate detoxification market is growing. Opiate addiction
affects 0.7% of adult Americans sometime during their lifetime1. In 1998, total
spending for all detoxification services amounted to approximately $10.5 billion
in the U.S. alone. This represented a 6% growth over the prior two years2.
Heroin and other opiate addiction is currently at an epidemic state both
nationally as well as internationally. Between 1988 and 1995, according to NIDA,
American users spent between $9 billion and $18 billion yearly on the purchase
of opiate drugs. Recent studies estimate that there are almost two million
heroin users in the U.S.3, and indications show the number is rising. Worldwide
estimates are significantly greater. More importantly, and likely greater, is
the population of prescription opiate abusers, which has yet to be quantified by
researchers. It is estimated, for example, that as many as 4 million people in
the U.S. may be abusing prescription drugs obtained, in most cases, for
legitimate medical purposes. Of this number, roughly 2.5 million people misused
opioid and other narcotic pain relievers.4 This number does not take into
account abuse of prescription drugs obtained from black market sources.
Additionally, there are over 180,000 registered methadone addicts in the U.S.5
There are an estimated 1.5 million opiate addicts in the U.S. with only 600,000
treatment slots currently available. In New York state alone, almost 30,000
opiate detoxification procedures are performed each year6 and an additional
40,000 methadone patients are addicted. The State spends almost $140 million a
year on maintaining methadone addicts and $130 million for opiate
detoxifications.7
Recent U.S. government data on nationwide hospital admissions for substance
abuse issues has been obtained through the Office of Applied Studies, Substance
Abuse and Mental Health Services Administration from its published 1998
Treatment Episode Data Set. There were 1,560,915 such admissions in that year of
which opioid addiction accounted for approximately 234,000, or approximately 14%
of the total. Of this approximately 234,000, about 216,000, roughly 92%, were
due to heroin alone.
1 Robbins LN, Regier DA (eds): Psychiatric Disorders in America, New York,
Free Press, 1991.
2 National Institute on Drug Abuse: National Household Survey on Drug Abuse,
Washington DC, US Government Printing Office, 1998.
3 American Psychiatric Association: Practice Guidelines for Treatment of
Patients With Substance Abuse Disorders: Alcohol, Cocaine,
Opioids, Washington DC American Psychiatric Association, 1995.
4 "Prescription Drug Abuse Said to be on the Rise," Reuters/Yahoo! News,
April 12, 2001.
5 National Institute on Drug Abuse: Washington DC.
6 New York State Department of Social Services, DHLTC FFY 1995, Longitudinal
Inpatient (E) 807D Report.
7 Rettig RA, Yarmolinski J (eds): Federal Regulations of Methadone Treatment,
Washington D.C., National Academy Press; New York State
Department of Services, Longitudinal Inpatient (E) 807D Report.
Other statistics published by NIDA confirm that addiction risk is rising in
youthful populations. Specifically,
o A 1998 Monitoring the Future (MFT) study showed that heroin use among high
school seniors nationwide had doubled since 1991.
o A 1997 MFT study found that 2.1% of 12th graders had used heroin at least once
and that 1.2% had used it once within the last thirty days.
o A Community Epidemiology Work Group study concluded that emergency room
admissions for heroin within the 18 to 25-age category increased 51.4% from 1997
to 1999.
Competition
The Company's primary competition for rapid opiate detoxification comes from two
distinct forms of treatment: (i) traditional in-patient methods of
detoxification; and (ii) methadone maintenance or methadone taper
detoxification.
A. Traditional In-Patient Methods of Detoxification
Traditional forms of detoxification are generally conducted in an in-patient
setting, in a hospital facility. Examples of such treatment centers include the
following:
1. Hazelden Foundation: A 28 day program, which costs more than $20,000.
2. The Betty Ford Center: A 28 day program, which costs more than $20,000.
3. Cornerstone in New York: A 7-day detoxification treatment at an estimated
cost of $4,000, with no outpatient follow up. (This is the most typical
form of conventional detoxification treatment). Aftercare is billed
separately, totaling approximately $7,000.
4. National Recovery Institute: A 14 to 28 day program costing approximately
$250 per day (average total cost $5,000). This program uses group therapy
and medication, including methadone. No follow up care after detoxification
is complete is included in the cost of the program.
5. Methadone Maintenance: $4000-$8000 per year with patient remaining addicted.
Most centers for treatment of opiate addiction refer the patients out to a local
hospital to do the detoxification portion of the treatment, then bring the
patient into an outpatient rehabilitation program. These hospital
detoxifications generally cost between $4,500 and $13,000, depending on daily
hospital rates, length of stay, any additional substances, etc. The main
advantage these programs have over CITA is that they are generally covered by
third party payors, such as insurance companies and managed care entities.
However, this may change in the future if the CITA program authorized for
reimbursement by private insurance companies, and managed care groups. The
Company is currently working with two organization to provide first third-party
reimbursement arrangement for CITA procedures, Creative Care Management in
Chicago, Illinois, and The Promises Foundation, in Malibu, California.
In terms of quality and strength, CITA has several distinct advantages over the
conventional methods of the competition, including the following:
O Success rates - traditional forms of detoxification currently have a
documented 7-17% average success rate; CITA consistently enjoys a documented 60%
average success rate8. O The usual 6-28 days for detoxification is reduced to
just 24 to 36 hours.
O UROD is a guaranteed and 100% effective detoxification: all traces of opiates
are removed.
O Trained and board-certified UROD anesthesiologists oversee and monitor the
entire detoxification process, offering an even more controlled and safer
environment than conventional centers. O No painful withdrawal symptoms are
experienced while under anesthesia. O Hospital stay is reduced to 23 to 36
hours: UROD frees hospital space for more efficient use of the facilities.
O No traumatic transition experienced between detoxification and rehabilitative
treatment, thereby increasing the chances the patient will continue to go on to
further therapy and rehabilitation. O UROD allows for an earlier return to work
and home. O No addictive medications are used as opiate substitutions.
O UROD accelerates repair of the body's cells and increases regeneration of the
natural opiates.
O The CITA program reduces insurance requests for re-treatment. O The CITA
program is the only viable treatment for methadone addicts.
B. Methadone
Developed in Germany around World War II, methadone was brought into use in the
United States in the mid 1960's as a method of treating those addicted to heroin
and other illegal substances. It was endorsed by the government as a daily
maintenance dose of synthetic opiates to produce a pharmacological
cross-tolerance, or "blockade," so that patients would not feel any narcotic or
euphoric effects if they were to self-administer a normal dose of a short acting
narcotic (e.g., heroin).
Methadone's intended use was four fold: (1) to counter the problem of addicts'
highs and lows (severe sickness and mood swings), allowing this population to go
back to work and normal daily functions; (2) to control issues surrounding
disease transmission through needle use; (3) to reduce criminal activity related
to obtaining the substance; and (4) to contribute to the reduction of illegal
drug trafficking.
Methadone's intended goal was to safely taper addicts off of opiates, such as
heroin, in a controlled environment, while offering counseling and support on
the psychological end. The problem with methadone has become apparent in the
increasing number of methadone patients, the increasing amounts per dosage that
the patients are receiving, and the increasing number of methadone facilities.
Many patients report that their guidance counselors at the clinics have no
intention of weaning the patients off methadone, and rarely offer counseling or
help to get them detoxified.
Methadone clinics have become a place patients visit each and every morning,
stand in line, pay their fees, take their doses, and go on with their day. There
is little attempt at helping the patients overcome the addiction or work on
other areas of their lives, and the clinics have no economic incentive to begin
reducing memberships. It has become a prison for many, as they are told that
there is no other solution. These clinics perpetuate the very problem they were
set up to solve.
8 Rabinowitz J, Cohen H, Kotler M: One Year Outcomes of Ultra Rapid Opiate
Detoxification Combined with Naltrexone Maintenence, Journal of Drug Abuse,
1996.
The CITA Method of detoxification is a superior solution, and CITA believes that
it is the only method in existence today that can effect a rapid release of
methadone addicts from their addiction. CITA's research shows that approximately
70% of the addicts receiving methadone maintenance are treatable and are capable
of leading normal and functional lifestyles, with detoxification and aftercare.
C. Other Rapid Detoxification Programs
Although there are a few other small and little known clinics, small hospitals
and sole practitioners performing one form or another of one-day opiate
detoxification, their impact is not deemed significant for several reasons
outlined below. The individual hospitals (CITA has identified three) that
provide this treatment do so in the $6,000 - $10,000 price range, and have done
such a small number of patients that CITA does not believe they will be able to
continue operations indefinitely. These hospitals have no opportunity for
regional or national reach, and have no capabilities of absorbing any of CITA's
prospective patients or market share due to CITA's own name branding. In
addition, none appear to combine the detoxification treatment with the long-term
counseling necessary to relieve the patient from psychological addiction.
The small clinics and individual doctors that compete in the one-day opiate
detoxification market charge competitive prices in the upper $4000 to lower
$6000 price range, but are based in free-standing, and often times dangerous,
clinic settings, with no regional or national reach.
CITA has several distinct advantages over the other rapid detoxification
centers, including the following:
O CITA's patented technology and proprietary program combines rapid
detoxification with long-term aftercare for relapse prevention.
O CITA has the only method of rapid detox that is affiliated with major
hospitals.
O CITA's method of rapid detox is the only method that is clinically proven to
be safe and effective - based on over a decade of research.
O CITA's Ultra Rapid Opiate Detoxification has been successful on over 6,000
patients worldwide, and is the only such method with no mortality, morbidity or
insurance claims.
Conventional Detoxification
One of the serious limitations of conventional detoxification is that many
patients do not complete it. In single center studies, dropout rates have been
as high as 80% for outpatient detoxification9 and between 15% to 30% for
inpatient detoxification10.
9 Stark M: Dropping Out of Substance Abuse Treatment: A Clinically Oriented
Review, Clin Psychol Rev 1992; 12:93-116. 10 Gossop M, Green L, Phillips G,
Bradley B: Lapse, Relapse, and Survival Among Opiate Addicts After Treatment:
A perspective follow-up study. Br J Psychiatry 1989; 154:348-353.
Multi-center studies report inpatient dropout rates without distinguishing
between opiates and other substances11. In the CATOR (Comprehensive Assessment
and Treatment Outcome Research) study, based on 6,000 patients from 19 treatment
centers in 13 states, the dropout rates for all inpatient substance abuse
programs was 16%12. In perhaps the only national study reporting dropout rates
from detoxification and treatment, which was conducted in Israel, almost half of
the patients abandoned inpatient detoxification during the first week of the
standard 30-day stay13. In New York State, 26% of Medicaid clients drop out of
inpatient detoxification14. This amounts to an expenditure of almost $30 million
per year for dropouts in New York State alone. Under the CITA program, patients
cannot drop out during detoxification.
Another limitation of conventional detoxification is that many patients are
averse to detoxification. Stark, for example, found that 34% of methadone
maintenance patients do not detoxify due to detoxification phobia.15 Thus,
another possible advantage of anesthesia aided detoxification is that it may
facilitate the detoxification of addicted persons who are afraid to approach
conventional detoxification.
CITA Aftercare
It is well recognized that while detoxification is an important first step,
relapse prevention requires an aftercare program. The Drug Abuse Reporting
Program (DARP), a national treatment outcome study conducted in the United
States on several thousand patients from 52 different substance abuse programs,
found that 75% to 85% of patients treated in detoxification-only programs
relapsed within one year. As noted previously, completing detoxification is a
barrier to treatment for many patients. Of those patients who completed
conventional detoxification without dropping out and who subsequently entered an
aftercare program, 50% to 80% of them returned to routine use of opiates within
the first year. For example, in the DARP study, relapse rates for patients in
aftercare programs ranged from 60% to 75% during the first year. Another major
national study of treatment outcomes, TOPS (Treatment Outcome Prospective
Study), found that of 2,280 select clients who had successfully completed
detoxification and then enrolled and started after care treatment, 57.2% had
relapsed during the first year.
CITA requires that all prospective UROD treatment patients commit to a
comprehensive aftercare program. CITA's aftercare program consists of six months
of an opiate antagonist such as Naltrexone, up to six months of group and
individual counseling and the support of a spouse or significant other during
and immediately following UROD treatment. Persons who are unable to commit to
all of these steps are ineligible to receive UROD detoxification.
11 Stark M: Dropping Out of Substance Abuse Treatment: A Clinically Oriented
Review. Clin. Psychol. Rev 1992; 12:93-116.
12 Harrison PA, Hoffman NG, Steed SG. Drug and Alcohol Addiction Treatment
Outcome, Miller NS, ed. Comprehensive Handbook on Drug and
Alcohol Addiction, New York, 1991, Maecel Dekker Inc. 1163 - 1197.
13 Levinson D: Comparisons of Outcomes Among Graduates of Various Detoxification
Programs, Jerusalem IL, State of Israel Ministry of Health, 1993. 14 In 1995,
Medicaid paid for 28,921 detoxifications in New York State. In 7,474 cases,
patients left against medical advice after an average of 4.4 days. Since
detoxification takes 7 days and these patients left against medical advice,
they apparently dropped-out prior to completing detoxification.
15 Stark M: Droping Out of Substance Abuse Treatment: A Clinically Oriented
Review. Clin. Psychol. Rev 1992.
16 Hubbard RL, Rachel JV, Craddock SG, Cavanaugh ER, Treatment Outcome
Prospective Study (TOPS), NIDA Res. Monogr., 1984;51:42-68.
Methadone Treatment
According to Federal guidelines, while the eventual goal of methadone programs
is abstinence, it is recognized that some patients may need long-term methadone
treatment. In practice, most programs encourage long-term methadone maintenance
and do not encourage detoxification17. Not surprisingly, it is rare to find
patients who have successfully detoxified from methadone without relapsing to
opiate use18. In the TOPS study discussed above, which included almost 2,700
methadone maintenance patients, by 13 weeks, 32% of patients had dropped out of
treatment, and by 26 weeks 48% had dropped out. Only 34% of patients remained in
methadone program for over one year. Similar results were obtained in the DARPS
study 19.
Thus, as compared to conventional detoxification, methadone appears to have a
higher dropout rate. After taking into account the higher drop out rate, and the
dollars spent, it is evident that the CITA treatment is far more effective and
cost efficient than methadone treatment of persons addicted to opiates.
The CITA Treatment Program Success Rates
After adjusting for dropout rates during detoxification or methadone treatment,
the literature reviewed above suggests that, of all patients who enter opiate
detoxification or methadone treatment, fewer than 30% are opiate free a year
later. In contrast to the relapse rates of patients treated with conventional
methods, a study of patients who completed the CITA treatment program found that
after 1.5 years following UROD Procedure, 57% of 113 randomly selected patients
remained drug-free20. Despite the fact that the UROD study allowed more time for
relapse (1.5 years vs. 1 year), the results are considerably better than most
other studies. Considering that 15% to 50% of conventional inpatient
detoxification patients drop out before completing the detoxification process,
the success rate of the CITA treatment program in this study appears to be four
times that of conventional detoxification programs.
Advertising and Promotion
CITA recognizes that the key to continued success and growth at this time is
extensive promotion. This must be done aggressively and on a nationwide scale.
Responses and success rates based on patients treated indicate that the CITA
program for detoxification and rehabilitation has earned an excellent reputation
among both the addicted population and substance abuse professionals. CITA
intends to use this earned reputation as an important part of its advertising
and promotion program. Relationships with third party payers, hospitals and
community leaders are as important as traditional forms of advertising in
reaching CITA's goals.
CITA's strategy is to enhance, promote and support the quality of its products
and services, as it continues to increase its share of the market for the
treatment of opiate addiction, and to enter the market for the treatment of
dependency on cocaine, alcohol, nicotine and other substances. Upon licensing
medical institutions, CITA participates in the development of a comprehensive
promotion plan designed to educate the public about CITA, create demand for its
product, and add value to the medical institution's name and image.
18 Kleber HD: Detoxification From Methadone Maintenance; The State of the Art,
International Journal of Addiction 1977; 12:807-820.
19 Hubbard RL, Mardsen ME, Rachel JV, Harwood HJ, Cavenaugh ER, Ginzburg HM:
Drug Abuse Treatment: A National Study of Effectiveness, Chapel Hill, NC, The
University of North Carolina Press, 1989.
20 Rabinowitz J, Cohen H, Kotler M: One Year Outcomes of Ultra Rapid Opiate
Detoxification Combined with Naltrexone Maintenance, Journal of Drug
Abuse, 1996.
17 Hubbard RL, Mardsen ME, Rachel JV, Harwood HJ, Cavenaugh ER, Ginzburg HM:
Drug Abuse Treatment: A National Study of Effectiveness, Chapel Hill, NC,
The University of North Carolina Press, 1989.
During the years 2001 and 2002, CITA was hampered in its efforts to promote the
UROD program due to insufficient working capital. Until sufficient additional
capital is available to it, CITA will be constrained and unable to engage in
intensive promotion of its products.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases office suite consisting of approximately 700 square feet at
20 East Main Street, Suite 46, Los Gatos, CA 95030. However, certain Company
personnel occupy space in licensed facilities where UROD and DNA procedures are
performed, have small office spaces in their region, or telecommute.
ITEM 3. LEGAL PROCEEDINGS
An action against the Company and its President was brought in the Superior
Court of Justice for Ontario, Canada claiming breach of contract. No one in the
Company was served with process. On November 27, 2000 a default judgment against
the Company and Mr. Dunn was entered in the amount of $255,000 U.S. plus $3,000
Canadian. The plaintiff has filed an action in the Los Angeles County Superior
Court to enter the Canadian judgment as a California judgment. The Company has
retained Canadian counsel to set aside the default on the grounds that service
of process was not made on the defendants. Once the default is set aside, the
Company intends to contest this matter and expects to prevail. The California
litigation on the Canadian judgment is stayed by agreement of the parties
pending resolution of the matter in Canada.
An action was filed in the Circuit Court of Oregon on or about December 10,
2001. The claim regarded unpaid wages by a former contractor at a CITA-licensed
facility in Portland, Oregon. A default judgment in the amount of $12,466.41 was
entered on February 5, 2002. CITA may be required to qualify as a foreign
corporation prior to moving to set aside the default.
An action was filed based on a breach of contract claim in Superior Court of
California on or about December 20, 2001. Plaintiff seeks a recovery of $30,237
plus fees, costs and interest. Following termination of the contract, the
plaintiff withheld certain equipment owned by CITA and stored with the
plaintiff. The Company is exploring its options with respect to this action.
A default judgment was obtained against CITA on January 28, 2000 in regard to an
action initially filed in the Superior Court of California. Plaintiff attached
approximately $8,000 of CITA funds pending the outcome of the action. The court
has seized or attached the $8,000 in CITA funds and has transferred said funds
to plaintiff. CITA continues to owe plaintiff approximately $9,500.
The Company is involved in various claims and lawsuits arising from its
inability to pay for contracts entered into and/or services rendered. Management
believes that any financial responsibility that could be incurred in the
settlement of such claims and lawsuits would be more adverse to the Company's
current financial position. (Refer to Financial Condition above)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no meetings of the shareholders in the fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been listed for quotation in the Electronic
Bulletin Board owned and maintained by NASDAQ, trading under the symbol "DTOX".
The number of record holders of Common Stock as of December 31, 2002 was
approximately 2,740 including nominees of beneficial owners.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Company's Board of Directors. No dividends on the Common Stock
have been paid by the Company to date nor does the Company anticipate that
dividends will be paid in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
From May 1989 through 1997, the Company was inactive. At a meeting of the
shareholders in December 1997, Mr. Joseph Dunn and Mr. Michael Hinton were
elected to the Board of Directors with instructions to reorganize the Company,
complete necessary filings required by applicable law, and to seek one or more
potential businesses to acquire. Mr. Dunn was designated Chairman and CEO of the
Company, and Mr. Hinton was designated as Secretary of the Company.
Acquisition
In August 1998, the Company acquired all of the outstanding shares of CITA
Americas, Inc. from Aviation Industries, Inc. in exchange for the issuance of
the Company's non-voting convertible preferred stock having a liquidation value
of $2,200,000. A dispute arose between the Company and Aviation Industries, Inc.
concerning the conversion formula as well as other matters relating to the
original Stock Purchase Agreement relating to the acquisition of CITA Americas,
Inc. from Aviation Industries, Inc. In reporting its fully diluted Common Stock,
the Company has previously reported 2.2 million shares issuable upon the
conversion of the Preferred Stock. However, the Company reached an agreement
with Aviation Industries, Inc. as of May 1, 2001 whereby the all outstanding
shares of the Preferred Stock were converted to 400,000 shares of Common Stock.
In November 1998, the Company changed its name from Southwestern Environmental
Corp. to CITA Biomedical, Inc.
Business
CITA is in the business of providing innovative treatment of addictions. The
Company holds a patent for the Ultra Rapid Opiate Detoxification ("UROD")
process, a non-invasive medical procedure administered under local anesthesia to
detoxify patients addicted to opiates such as heroin, methadone, morphine,
percodan, percocet, darvon and other narcotics. The procedure is performed over
a four to seven hour period following which the patient has only residual
opiates in his or her system. The patient then is required to undergo an intense
psychotherapy recovery program. The Company generally charges a fee of $8,000
per UROD treatment.
License of Alcohol and Cocaine Detoxification Technology
In November, 2001, the Company entered an agreement with CITA S.L., a Spanish
company operated by Dr. Juan Jose Legarda, the developer of CITA's UROD opiate
addiction treatment program, whereby CITA acquired from CITA S.L. a license to
certain technology developed for the purpose of detoxifying persons habituated
to alcohol and cocaine, as well as a neuron adaptation process designed to
"reset" the nervous system of a habituated alcohol or cocaine user to its
pre-habituation state (together, the "New Technologies"). The Company believes
that, provided it can obtain capital to permit it to implement the New
Technologies, this license represents a major step in the Company's efforts to
become a leading provider of products and services for the treatment of a wide
variety of chemical addictions.
The agreement, which has an initial term of five years, requires the payment of
monthly royalties to CITA S.L. in consideration of the exclusive right to
utilize the New Technologies within the United States, Canada and Mexico, as
well as the right to develop additional technologies or procedures based on the
New Technologies.
The Company believes that the ability to treat cocaine addiction will be of
particular benefit to the Company in the near term. Currently, the Company is
unable to provide its UROD treatment to persons addicted to opiates where
pre-treatment testing indicates use of cocaine as well. Following acquisition of
the license to the New Technologies, the Company will be able to treat
individuals simultaneously for both opiate and cocaine addiction.
In the longer term, the Company believes that the alcohol treatment portion of
the New Technologies will dramatically increase the market for the Company's
products and services. The rate of alcohol dependency in the U.S. far exceeds
the rates of opiate and cocaine addictions, and the Company's ability to treat
individuals dependent on alcohol represents a major new source of potential
revenues.
The Company will require significant additional outside capital in order to
implement treatment programs incorporating the New Technologies. The Company
believes that the acquisition of the New Technologies license will enhance its
ability to raise such capital by virtue of the additional market opportunities
presented by the New Technologies. Although the Company is in discussions with
potential funding sources, there can be no assurance that the Company will
obtain funds in an amount sufficient to commence treatment procedures utilizing
the New Technologies. In the event that the Company is unable to raise such
funds, it may be to make timely payments of royalties, and CITA S.L. could act
to terminate the license and revoke the Company's ability to administer
procedures using the New Technologies.
Revenues
The Company's revenues for 2002 were $303,140 compared to revenues of $545,521
in 2001. Essentially all of this revenue was derived from UROD treatments.
Cost of Revenues
The Company's cost of revenues in 2002 was $148,704 resulting in a gross profit
of $154,435 or a gross profit margin of 50%. This compares to $287,460 cost of
revenues in 2001, resulting in a gross profit of $258,061, or a gross profit
margin of 47.0%.
Other Expenses
General and administrative expenses in 2002 were $2,361,139. This compares to
$1,858,180 for general and administrative costs in 2001. The Company incurred
$19,088 in depreciation and amortization expenses in 2002 compared to $398,335
in 2001. The resulting total operating expenses of $2,380,227 in 2002 produced
an operating loss of $2,225,182 compared with $3,827,861in total operating
expenses in 2001 and an operating loss of $3,282,340.
Capital Resources
The Company raised $877,472 in sales of its common stock. The proceeds were used
for marketing and operational expenses.
The Company finances its ongoing operations from net cash flow from operations
and third party financing transactions. The Company continues to explore all
options available to it with respect to such potential financing.
Effect of Inflation
Inflation did not have a significant effect on the operations of the Company in
2002, nor is it expected to have any significant effect on operations in the
foreseeable future.
ITEM 7. FINANCIAL STATEMENTS
See index beginning on page
F-l.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING DISCLOSURE
There were no disagreements with the Company's accountants on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure for the 2002 fiscal year.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
Name AGE Position
------ --- -------
Joseph Dunn 51 Chairman, CEO, President, CFO
Michael C. Hinton 55 Secretary, Director
Gary Zinn 43 Director
Joseph Dunn has served as an officer and director of the Company since December
15, 1998. Since 1994 he has been CEO of AVT, a firm engaged in the business of
electronic operator and long distance services and Executive Vice President of
Kane Gray, Inc. a firm engaged in the business of providing traffic management
services to major corporations. Prior thereto and from 1980 he was Chief
Executive Officer of Azonic Technology, Inc. that was engaged in the design,
manufacture, sale and distribution of devices used in the etching and cleaning
of silicon wafers. Mr. Dunn has also served as interim president and director of
various technology firms that needed to undergo restructuring and market
turnaround. Mr. Dunn graduated from Falls College in Atlanta, Georgia in 1970
with a degree in data processing and has taken courses in business at the
University of California in Hayward, California and the UCLA Graduate School of
Management in Los Angeles, California.
Michael C. Hinton has been an officer and director of the Company since December
15, 1997. Since 1990, he has been engaged in managing his own investments and is
the sole owner of Multimarket Americas Export Corp. which is engaged in
exporting telephone and construction equipment and the import of food products.
Mr. Hinton received a bachelor's degree in economics from Colorado State
University.
Gary Zinn was appointed by the Board of Directors in April, 2002 to fill a
vacancy on the Board of Directors. Mr. Zinn went to work for American Home
Products in 1982 and became the top representative for the region in the first 9
months. After 3 years in the food business Mr. Zinn went to work or Pac Tel
Mobile Access (the first cellular phone company in Los Angeles).
After numerous Sales and Achievement Awards including Top Representative in the
city, he started his own cellular phone company - Gary Zinn and Associates. In
1989 Mr. Zinn became a registered representative of the National Association of
Securities Dealers for various Stock Brokerage firms and was a registered
representative for 6 years. In 1995 Mr. Zinn went to work for a Fortune 100 firm
in which he was responsible for the Legal Market of Ikon Office Solutions. In
1998 Mr. Zinn moved overseas and was C.E.O. for a major Venture Capital firm for
which he was responsible for 12 different ventures. He was responsible for
raising millions of dollars including, but not solely, CITA Biomedical, ProGolf
of America, Pinnacle Resources, Sonicport Inc. and many other ventures. Mr. Zinn
received a bachelor's degree from Cabrillo College in Aptos, California.
ITEM 10. EXECUTIVE COMPENSATION
The Company did not pay any cash compensation in 2002. The Board of Directors
has determined Mr. Dunn's cash compensation rate to be $180,000 per year, with
an understanding that payment at this rate will commence when the Company has
received adequate funding.
The Board further acknowledged that Mr. Dunn is due $860,000 in deferred wages.
The Company anticipates that Mr. Dunn will accept stock in the Company in
exchange for a significant portion of the amounts owed to him for deferred
wages.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
--------------------- ----------------------
Name and All Other n
Principal Compen-satio
Position Year ($)
--------------- -------- --------------------------------------- ---------------------------------------- ------------
Awards Payouts
--------------- -------- --------------------------------------- ----------------------------- ---------- ------------
Other
Annual Restricted
Compen-sationStock Securities LTIP
Salary ($) ($) Award(s) ($) Underlying Payouts
Bonus ($) Options/ ($)
SARs (#)
--------------- -------- ------------ ------------- ------------ -------------- -------------- ---------- ------------
Joseph Dunn, 1999 0 0 0 0 0 0 0
President CEO
--------------- -------- ------------ ------------- ------------ ------------- --------------- ---------- ------------
2000 $12,000 0 0 0 500,000 0 0
--------------- -------- ------------ ------------- ------------ ------------- --------------- ---------- ------------
2001 $6,000 0 0 0 0 0 0
--------------- -------- ------------ ------------- ------------ ------------- --------------- ---------- ------------
2002 $ 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------
Michael 1999 0 0 0 0 0 0 0
Hinton,
Secretary
--------------- -------- ------------ ------------- ------------ ------------- --------------- ---------- ------------
2000 0 0 0 0 200,000 0 0
--------------- -------- ------------ ------------- ------------ ------------- --------------- ---------- ------------
2001 0 0 0 0 0 0 0
--------------- -------- ------------ ------------- ------------ ------------- --------------- ---------- ------------
2002 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------
Employment Contracts
The Company entered into an employment agreement with its Vice President of
Research and Development, John Bancroft, ("VP of R&D") in December 2001. The
agreement requires the Company to pay the VP of R&D a minimum annual base salary
of $150,000, bonuses aggregating up to two times the base salary, (at the
discretion of the board of directors), health, dental and life insurance through
November 2006. Under the terms of this employment agreement the Company retains
the right to terminate the agreement at any time but, must first determine
cause.
The Company entered into an employment agreement with its Vice President of
Marketing, Paula Pineda, ("VP of MKT") in September 2000. The agreement requires
the Company to pay the VP of MKT.a minimum annual base salary of $120,000,
bonuses aggregating at least $20,000 annually (additional bonuses are determined
at the Company's discretion), health, dental and life insurance through August
2004. The agreement also requires the Company to issue 200,000 incentive stock
options at a price determined by the Company's board of directors to vest over a
48 month period beginning in September 2000. Under the terms of this employment
agreement the Company retains the right to terminate the agreement at any time
with or without cause. However, if the Company terminates the agreement without
cause the VP of MKT shall be paid a severance amount equal to 6 month's salary.
No officer is entitled to receive any additional compensation for his services
to the Company as a director.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At December 31, 2002, the Company had outstanding 75,155,057 shares of common
stock and 0 shares of preferred stock. Each share of Common Stock entitles the
holder to one vote in any matter submitted to shareholders for approval.
The following tabulates holdings of Common Stock of the Company by each person
who holds of record, or is known by management of the Company to own
beneficially, more than 5 % of the voting securities outstanding as of December
31, 2001, and by all directors and officers of the Company individually and as a
group. To the knowledge of management, the shareholders listed below have sole
voting and investment power, except as otherwise noted.
Number
of Shares Percent
Name and Address Securities of Voting
- ---------------- ---------- ---------
Scott Sabins 14,050,000(1) 18.70%
Joseph Dunn 4,067,013(2) 5.40%
Michael Hinton 400,000(3) 0.50%
Gary Zinn 0 0.00%
All Directors, Officers and 18,517,013 24.64%
Shareholders of greater than
5% as a group (three persons)
(1) These shares are held by Mr. Sabins and related parties to Mr. Sabins.
(2) Includes 2,000,000 shares which Mr. Dunn has the right to acquire upon
exercise of a fully-vested option.
(3) Includes 200,000 shares which Mr. Hinton has the right to acquire upon
exercise of a fully-vested option.
The Company knows of no arrangement, including the pledge by any person of
securities of the Company, which may at a subsequent date result in a change of
control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
None
The following exhibits are filed with or incorporated by reference into this
report:
Exhibit Description
2.3 Closing Agreement between Equine Enterprises, Inc., and the Company,
dated March 10, 1987.
3.1 Amended and Restated Articles of Incorporation filed January 14,
1982 with the Secretary of State of the State of Colorado.
3.2 Amended and Second Restated Articles of Incorporation filed
January 3,1983 with the Secretary of State of the State of Colorado.
3.3 Amended and Second Restated Articles of Incorporation filed July
28, 1993, with the Secretary of State of the State of Colorado.
3.4 Bylaws adopted by the Company effective June 9, 1981.
4.1 Specimen certificate for Common Shares, par value $.01 per share.
10.1 Agreement between Company and Mr. Gary E. Keogh.
10.2 1993 Stock Option Plan.
10.3 Security Agreement
10.4 Promissory Note
10.5 Guaranty
Incorporated by reference to the Company Form 8-K dated March 20, 1987.
Incorporated by reference to the Company's Registration Statement No. 2-81022D
on Form S-18 dated December 21, 1992.
Incorporated by reference to the like-numbered exhibits filed with the Company's
Form 8-K dated July 7, 1993.
Incorporated by reference to the like-numbered exhibits filed with the Company's
Form 8-K dated August 6, 1993.
Incorporated by reference to the like-numbered exhibits filed with the Company's
report on Form 10-KSB for the fiscal year ended September 30, 1993.
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.
CITA BIOMEDICAL, INC.
By: /s/ Joseph Dunn
-----------------
Joseph Dunn
Chairman of the Board
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 in
the capacities and on the dates indicated.
DATE SIGNATURE TITLE
April 15, 2003 /s/ Joseph Dunn Chairman of the Board,
--------------------- Chief Executive Officer,
Joseph Dunn President and Chief
Financial Officer
(Principal Financial Officer)
April 15, 2003 /s/ Michael C. Hinton Director
----------------------
Michael C. Hinton
April 15, 2003 /s/ Gary Zinn Director
----------------------
Gary Zinn