PROSPECTUS
GLOBAL MED
TECHNOLOGIES,
INC.
1,337,000 Units, each consisting of
Two Shares of Common Stock and
One Class A Common Stock Purchase Warrant
This Prospectus relates to the offering (the "Offering") by Global Med
Technologies, Inc. (the "Company") of 1,337,000 units (the "Units"), each
consisting of two shares of Common Stock (the "Common Stock") and one Class A
Common Stock Purchase Warrant (the "Warrants"). The Common Stock and the
Warrants comprising the Units will not be separately tradeable or transferable
for a period of six months commencing on the date of this prospectus or earlier
at the discretion of RAF Financial Corporation (the "Representative").
Prior to the Offering, there has not been any public market for the
securities of the Company. The initial public offering price of the Units and
the initial exercise price and other terms of the Warrants have been arbitrarily
determined by negotiation between the Company and the Representative, as
representative of the participating underwriters (the "Underwriters"). The Units
have been approved for quotation and trading on the NASDAQ Small-Cap Market
under the trading symbol GLOBU. Only the Units will be listed for quotation on
NASDAQ until the Common Stock and Warrants become separately tradeable and
transferable. Thereafter, subject to the Company then meeting the NASDAQ
maintenance requirements, the Units will be delisted from quotation on NASDAQ
and only the Common Stock and Warrants will be listed for quotation on NASDAQ.
Each Warrant entitles the registered holder thereof to purchase one share
of Common Stock at an exercise price of $4.55 (130% of the initial public
offering price of the Common Stock) per share, subject to adjustment in certain
events, at any time commencing on the date the Warrants are separately tradeable
and transferable and ending on February 11, 2000. Commencing on the date the
Warrants are separately tradeable and transferable, the Warrants are subject to
redemption by the Company at $.55 per Warrant at any time until the end of the
second year after the date of this Prospectus and thereafter at $.75 per Warrant
at any time prior to their expiration, on not less than 30 days' prior written
notice to the holders of Warrants, provided that the daily trading price per
share (as defined on page 50) of Common Stock has been as least $5.46 (120% of
the Warrant exercise price) for a period of at least 20 consecutive trading days
ending within 10 days prior to the date upon which the notice of redemption is
given. Once exercisable, the Warrants will be exercisable until the close of the
business day preceding the date fixed for redemption, if any. See Description of
Securities - Warrants.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION TO INVESTORS. POTENTIAL PURCHASERS SHOULD NOT
INVEST IN THESE SECURITIES UNLESS THEY CAN AFFORD THE RISK OF LOSING THEIR
ENTIRE INVESTMENT. SEE RISK FACTORS COMMENCING ON PAGE 6 OF THIS PROSPECTUS AND
DILUTION COMMENCING ON PAGE 17 OF THIS PROSPECTUS.
After completion of this Offering, the Company will amend this Prospectus
to permit certain of its security holders to publicly offer and sell Common
Stock. See Shares Eligible for Future Sale.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to the
Public Discount (1) Company (2)
- --------------------------------------------------------------------------------
Per Unit ............. $ 7.00 $.70 $6.30
- --------------------------------------------------------------------------------
Total (3) ............ $9,359,000 $935,900 $8,423,100
================================================================================
Footnotes on following page.
It is expected that the delivery of the Units will be made at the offices
of the Representative on or about February 14, 1997.
RAF Cohig & Associates, Inc.
Financial Corporation
The date of this Prospectus is February 11, 1997.
<PAGE>
- -------------
(1) The Company has also agreed to pay the Representative a non-accountable
expense allowance equal to 3% of the total Price to Public for the Units
and to issue to the Representative and its designees for a nominal
consideration warrants to purchase 133,700 Units at a purchase price equal
to 165% of the Price to Public (the "Representative's Warrants"). Each Unit
issuable upon exercise of the Representative's Warrants will consist of two
shares of Common Stock and one Warrant exercisable at a price equal to 165%
of the exercise price of the Warrants. The Representative's Warrants and
the securities underlying the Representative's Warrants have been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), by means of the Registration Statement of which this Prospectus is a
part. Subject to certain limitations, upon exercises of the Warrants
occurring after one year from the date of this Prospectus, the Company has
also agreed to pay the Representative a solicitation fee equal to 10% of
the exercise price of the Warrants. The Representative has a three year
right of first refusal with respect to future public or private offerings
for cash by the Company or any of its subsidiaries. In addition, the
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. See
Underwriting.
(2) Before deducting expenses of the Offering payable by the Company estimated
at $240,000, which excludes the non-accountable expense allowance described
in Note (1) above, and assumes no exercise of the Underwriters'
over-allotment option. See Use of Proceeds.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 200,550 additional Units from the Company at the Price to Public, less
the Underwriting Discount, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $10,762,500,
$1,076,250, and $9,686,250, respectively. See Underwriting.
THE UNITS OFFERED IN THIS OFFERING BY THE UNDERWRITERS ARE SUBJECT TO PRIOR
SALE. THE UNDERWRITERS RESERVE THE RIGHT TO WITHDRAW, CANCEL OR MODIFY SUCH
OFFER (WHICH MAY BE DONE ONLY BY FILING AN AMENDMENT TO THE REGISTRATION
STATEMENT) AND TO REJECT ORDERS IN WHOLE OR IN PART FOR THE PURCHASE OF ANY OF
THE COMPANY'S UNITS AND TO CANCEL ANY SALE EVEN AFTER THE PURCHASE PRICE HAS
BEEN PAID IF SUCH SALE, IN THE OPINION OF THE UNDERWRITERS, WOULD VIOLATE
FEDERAL OR STATE SECURITIES LAWS OR A RULE OR POLICY OF THE NATIONAL ASSOCIATION
OF SECURITIES DEALERS, INC. ("NASD").
IN CONNECTION WITH THIS OFFERING, THE REPRESENTATIVE MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE UNITS
AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offer made by this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or any of the Underwriters. This Prospectus does not constitute an offer to sell
or solicitation of an offer to buy any of the securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so or to any person to whom it is unlawful to make such offer or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that the information contained herein
is correct as of any time subsequent to the date of this Prospectus.
Until March 9, 1997 all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
TABLE OF CONTENTS
Summary 1 Executive Compensation 40
The Offering 2 Security Ownership of Certain
Summary Financial Information 5 Beneficial Owners and Management 46
Risk Factors 6 Certain Relationships and
Use of Proceeds 14 Related Transactions 48
Capitalization 16 Description of Securities 49
Dilution 17 Underwriting 51
Dividend Policy 18 Legal Matters 53
Selected Financial Information 18 Experts 53
Management's Discussion and Shares Eligible for Future Sale 54
Analysis or Plan of Operations 19 Additional Information 55
The Company 23 Glossary 56
Legal Proceedings 36 Financial Statements F-1
Management 37
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[GRAPHICS ON LEFT SIDE OF INSIDE FRONT COVER OMITTED]
Description of Wyndgate Technologies TM
<PAGE>
[GRAPHICS ON RIGHT SIDE OF INSIDE FRONT COVER OMITTED]
Description of DataMed International TM
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus.
The Company
Global Med Technologies, Inc. (the "Company") provides information
management software products and services to the healthcare industry and
provides substance abuse (which includes drug and alcohol) testing program
services to companies, including certain Fortune 1000 companies. The Company
consists of two divisions, Wyndgate Technologies ("Wyndgate") and DataMed
International ("DataMed"), both of which operate under their respective trade
names. Wyndgate develops, markets, licenses and supports software for the
healthcare industry. DataMed manages and markets a variety of services that are
designed to assist companies with administering substance abuse testing
programs.
Founded in 1984, Wyndgate initially developed a Student Information System
("SIS") software product, an integrated software package for colleges and
universities to track student information. Wyndgate currently has six contracts
for the SIS software product still in effect. Pursuant to an agreement with
eight California blood centers, Wyndgate began development of a blood tracking
system to assist community blood centers, hospitals, and plasma centers in the
U.S. in complying with the quality and safety standards of the Food and Drug
Administration ("FDA") for the collection and management of blood and blood
products. After several years of development and $1,080,000 paid by eight
California blood centers, Wyndgate has completed development and commenced
marketing of the SAFETRACE(TM) software product, which is a blood bank
management information software system, and which the Company believes to be the
most comprehensive and flexible system of its type available today. In
accordance with FDA regulations, the Company submitted a 510(k) application to
the FDA in October, 1995 for review of its SAFETRACE(TM) software product, which
is still pending. The Company is able to continue marketing the SAFETRACE(TM)
software product during the review process. There are no assurances that the
Company will receive a 510(k) clearance letter from the FDA. If not, the Company
will be required to discontinue marketing and licensing the SAFETRACE(TM)
software product.
In 1989, Wyndgate developed EDEN-OA(R) to utilize new technologies in the
evolving open systems computer market. EDEN-OA(R) is a rapid applications
development tool that can be used by software developers to produce software
products that operate in accordance with industry standards based computer
environments. EDEN-OA(R) can operate on different types of computer hardware
from different manufacturers and on several different operating systems.
Since its acquisition of Wyndgate in 1995, the Company has been seeking a
strategic alliance with a multi-national health care corporation in order to
attempt to enhance its acceptance in health care markets and more efficiently
and rapidly market its current and possible future product lines. To accomplish
this goal, the Company's management held numerous discussions with several
different companies over the past year. On November 14, 1996, the Company and
Ortho Diagnostic Systems Inc. ("ODSI") entered into an Exclusivity and Software
Development Agreement (the "Exclusivity Agreement") in which the Company and
ODSI agreed to negotiate in good faith towards reaching a definitive agreement
relating to a transaction or transactions with respect to the Company's
activities and developments in information technology and intellectual property
relating to donor and transfusion medicine (the "Technology"). ODSI is a wholly
owned subsidiary of Johnson & Johnson. Any such transaction or transactions
could take any form or structure, including, without limitation, a sale or
exchange of assets of the Company, including the Technology. There can be no
assurance that the Company and ODSI will be able to reach a definitive agreement
on these or any other arrangements. If the Company and ODSI are unable to reach
a definitive agreement, then the Company will renew its search for a strategic
partner. The Company also agreed to perform certain software development
services in consideration of the payment from ODSI of $500,000 in November 1996,
and an additional $500,000 received in January 1997. If the Company and ODSI
enter into a definitive agreement relating to the Technology, the Company's
other assets or Common Stock, then ODSI may decline the software development
services and apply the payments to the Company towards any consideration payable
to the Company in connection with the definitive agreement. The
1
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Company also granted ODSI a right of first refusal during the period May 14,
1997 through November 14, 1997, in the event the Company proposes to transfer,
dispose of, sell, lease, license (except on a non-exclusive basis pursuant to
the ordinary course of its business), mortgage or otherwise encumber or subject
to any pledge, claim, lien or security interest of the Technology. See The
Company - Wyndgate Technologies Division - Agreement with Ortho Diagnostic
Systems Inc.
DataMed was founded in 1989 by Michael I. Ruxin, M.D., the Chairman and CEO
of the Company, to offer the services of a Medical Review Officer ("MRO") to the
regulated segment of the substance abuse testing market. Due to federal
regulations, companies involved in commercial transportation must comply with
requirements mandating substance abuse testing of employees in safety sensitive
positions and substance abuse awareness education for supervisors and employees.
Additionally, federal substance abuse testing requirements applicable to
commercial transportation mandate the use of an MRO to evaluate the quality and
accuracy of the testing laboratory and to determine legal or illegal use of
substances. Corporate outsourcing has been a positive factor for DataMed as some
large companies have contracted with DataMed to outsource the management of
their substance abuse testing programs.
DataMed provides customized program management services to companies in an
attempt to increase total program quality and decrease total program costs.
DataMed provides substance abuse testing management services which coordinate
and actively manage the specimen collection process, the laboratory testing
process, the MRO review process, the random testing process, the blind sample
quality control process, the substance abuse testing process, and the data
management process including compliance reporting and record keeping.
Key elements of the Company's strategy include (i) expanding its sales and
marketing efforts to attempt to increase its customer base nationally and
internationally, (ii) developing new healthcare management software products and
services utilizing the Company's existing technology and experience in blood
bank management software and substance abuse management services, (iii)
expanding international markets within the transportation and healthcare
industries, (iv) developing strategic relationships and selective acquisitions
to capitalize on opportunities in its industry, and (v) maintaining its
technology advantage in developing regulatory compliance tracking software and
quality assurance software products by continuing to focus on research and
development.
National MRO, Inc., founded in 1989, changed its name to Global Data
Technologies, Inc. in June 1995 in connection with the merger of National MRO,
Inc. and The Wyndgate Group, Ltd. in May 1995, and changed its name again in May
1996 to Global Med Technologies, Inc. The Company's executive offices are
located at 12600 West Colfax, Suite A-500, Lakewood, Colorado 80215, and its
telephone number is (303) 238-2000.
THE OFFERING
Securities Offered ................. 1,337,000 Units, each consisting of two
shares of Common Stock and one Warrant.
Each Warrant entitles the holder thereof
to purchase one share of Common Stock.
The Common Stock and the Warrants will
not be separately tradable or
transferrable for a period of six months
commencing on the date of this
Prospectus or earlier at the discretion
of the Representative. See Description
of Securities and Underwriting.
Offering Price ..................... $7.00 per Unit.
Common Stock Outstanding
before Offering ................. 4,966,626 shares
Common Stock to be Outstanding
after Offering (1) .............. 7,908,596 shares
Warrants Outstanding before Offering None
2
<PAGE>
Warrants to be Outstanding
after Offering ................. 1,337,000 Warrants
Exercise Price of Warrants ........ $4.55 (130% of the initial public
offering price of the shares included in
the Units) per share of Common Stock,
subject to adjustment in certain
circumstances. See Description of
Securities - Warrants.
Expiration Date of Warrants ....... February 11, 2000 (three years after the
date of this Prospectus.)
Redemption of Warrants ............ Commencing on the date the Warrants are
separately tradeable and transferable,
the Warrants are redeemable by the
Company at $.55 per Warrant at any time
until the end of the second year after
the date of this Prospectus and
thereafter at $.75 per Warrant at any
time until their expiration, on not less
than 30 days' prior written notice to
the holders of Warrants, provided that
the closing bid price per share of the
Common Stock on the NASDAQ SmallCap
Market, or the last sale price per share
if listed on the NASDAQ National Market
System or a national exchange, has been
at least $5.46 (120% of the Warrant
exercise price) for a period of 20
consecutive trading days ending on the
tenth day prior to the date on which the
Company gives notice of redemption. See
Description of Securities - Warrants.
Estimated net proceeds
to the Company (2) .............. $7,902,330
Use of Proceeds .................... The Company intends to use the net
proceeds of this Offering for sales and
marketing, to pay research and
development costs, to pay existing
accounts payable, accrued expenses and
existing debt, and for working capital
and general corporate purposes. See Use
of Proceeds and The Company.
Risk Factors ...................... An investment in the securities offered
by this Prospectus involves a high
degree of risk and immediate substantial
dilution. See Risk Factors and Dilution.
NASDAQ Symbol (3) ................. Units: GLOBU (4)
- --------------
(1) Includes: (i) 2,674,000 shares of Common Stock included in the Units to be
sold by the Company in this Offering, (ii) 137,646 shares of Common Stock
issuable upon the conversion of $516,200 of the principal amount of 10%
Notes (plus an estimated additional 10,324 shares issuable upon conversion
of accrued interest thereon) and (iii) 120,000 shares of Common Stock
issuable to certain shareholders of the Company pursuant to the terms of a
private placement which provided for a share adjustment in the event the
price per share in the Company's initial public offering is less than $4.90
per share. Does not include: (i) up to 401,100 shares of Common Stock
included in the Units subject to the over-allotment option; (ii) up to
1,337,000 shares of Common Stock issuable upon exercise of the Warrants
included in the Units to be sold by the Company in this Offering (1,537,550
shares if the over-allotment option is exercised); (iii) up to 401,100
shares of Common Stock issuable upon the exercise of the Representative's
Warrants and the Warrants included in the Units issuable upon exercise of
the Representative's Warrants; and (iv) 1,077,929 shares of Common Stock
issuable upon the exercise of outstanding options and warrants to purchase
shares of Common Stock, which includes 187,800 shares of Common Stock
underlying warrants issued in connection with the 10% Notes and 150,000
shares of Common Stock underlying warrants exercisable at 85% of the price
per share of the Common Stock included in the Units.
3
<PAGE>
(2) After deduction of the Underwriting Discount and expense allowance and
additional offering expenses estimated at $240,000. Does not include any
proceeds from the sale of the Units included in the over-allotment option.
(3) The continuation of quotations on NASDAQ is subject to certain conditions.
The failure to meet these conditions may prevent the Company's securities
from continuing to be quoted on NASDAQ. Failure to maintain continued
quotations on NASDAQ may have an adverse effect on the market for the
Company's securities. See Risk Factors.
(4) The Common Stock and the Warrants will not be separately tradeable or
transferable for a period of six months commencing on the date of this
Prospectus or earlier at the discretion of the Representative. Until such
time, it is unlikely that any trading market will develop for such
securities. Subject to the Company meeting the NASDAQ maintenance
requirements, the Company intends to delist the Units from NASDAQ and to
list the Common Stock and Warrants on NASDAQ on or about the date the
Common Stock and the Warrants are separately tradeable and transferable.
Other Securities Being Registered
As a result of agreements of the Company, the Registration Statement of
which this Prospectus is a part has registered for resale by certain persons an
additional 1,285,770 shares of Common Stock. Of these shares, 150,000 shares
will be eligible for sale at the earlier of the date the Common Stock and
Warrants may be traded separately or six months after the date of this
Prospectus. The remaining 1,135,770 shares will be eligible for sale commencing
six months after the date of this Prospectus. After the completion of this
Offering, the Company will amend its Registration Statement and this Prospectus
to permit such persons to publicly offer and sell such Common Stock after the
appropriate period. See Shares Eligible for Future Sale - Concurrent
Registration by Selling Shareholders.
4
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SUMMARY FINANCIAL INFORMATION
The following selected financial data should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this Prospectus. The consolidated statement of operations data for the years
ended December 31, 1995 and 1994, and the consolidated balance sheet data at
December 31, 1995 are derived from and should be read in conjunction with the
consolidated financial statements of the Company and notes thereto audited by
Ernst & Young LLP, independent auditors.
The selected financial data as of, and for the nine months ended September
30, 1996 and 1995, are derived from the unaudited financial statements of the
Company, which, in the opinion of the Company reflect all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results for the nine months ended September 30, 1996 and 1995, which are
not necessarily indicative of the results for a full year.
Statement of Operations Data:
<TABLE>
<CAPTION>
Years Ended December 31, Nine Months Ended September 30,
1995 1994 1996 1995
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 6,674,118 $4,976,255 $ 8,929,549 $ 4,841,514
Cost of sales (1) 3,217,595 2,429,789 5,016,101 2,308,078
Gross profit 3,456,523 2,546,466 3,913,448 2,533,436
Selling, general
and administrative (1) 5,980,130 2,427,383 5,792,048 4,658,018
Income (loss) from operations (2,523,607) 119,083 (1,878,600) (2,124,582)
Net income (loss) $(2,684,858) $ 172,247 $(2,074,117) $(2,041,348)
=========== ========== =========== ===========
Net income (loss) per
common share (2) $ (.64) $ .04 $ (.47) $ (.49)
=========== ========== =========== ===========
Common shares used in
computing net income
(loss) per common share (2): 4,211,317 4,010,497 4,377,164 4,178,015
</TABLE>
Balance Sheet Data:
December 31, 1995 September 30, 1996
----------------- ------------------
Cash and cash equivalents $ 421,743 $ 587,724
Working capital (deficit) $(2,171,397) $ (2,250,308)
Total assets $ 2,720,862 $ 6,509,592
Long-term liabilities $ 647,929 $ 804,517
Stockholders' equity (deficit) $(1,458,485) $ (1,092,094)
- ----------
(1) See Note 1 to the Consolidated Financial Statements for a description of
the reclassification of certain expenses.
(2) See Note 1 to the Consolidated Financial Statements for a description of
the computation of net income (loss) per common share.
5
<PAGE>
RISK FACTORS
The Units offered hereby are speculative in nature and involve a high
degree of risk. The Units should be purchased only by persons who can afford to
lose their entire investment. Therefore, prior to making any purchase, each
prospective investor should consider very carefully the following risk factors,
as well as all of the other information set forth elsewhere in this Prospectus,
including the information contained in the financial statements.
Significant Operating Losses; Negative Net Worth; Net Working Capital Deficit
For the fiscal year ended December 31, 1995, the Company incurred a loss in
the amount of $2,684,858, as compared to a profit of $172,247 for the fiscal
year ended December 31, 1994. The loss was primarily due to (i) employee
compensation which increased because of additional sales and operations staff
hired by the Company in 1995 in anticipation of future growth of the Company's
operations and (ii) expenses related to the merger with The Wyndgate Group, Ltd.
The Company incurred a loss for the nine months ended September 30, 1996 of
$2,074,117 as compared to a loss of $2,041,348 for the nine months ended
September 30, 1995. The increased loss was primarily due to increases in overall
staffing and related expenses necessary to handle recent and anticipated future
growth of the Company. As of September 30, 1996, the Company had a negative
working capital deficit of $2,250,308 and the Company had a negative net worth
of $1,092,094. The Company anticipates that it will incur a loss of
approximately $4,725,000 for the year ended December 31, 1996. While the Company
anticipates that its software revenue will continue to increase in future
periods, the Company expects to continue to incur losses until 1998, and
possibly thereafter, until its software products are better established in its
markets. There can be no assurance that the Company will be able to generate
sufficient revenues to operate profitably in the future or to pay the Company's
debts as they become due. See Management's Discussion and Analysis or Plan of
Operations and Financial Statements.
Revenue Fluctuations
The Company has experienced revenue fluctuations when software for the
SAFETRACE(TM) software product is delivered and towards year end, when clients
of the Company historically tend to increase their substance abuse testing
activity. The SAFETRACE(TM) software product license fees are recognized as
revenue upon delivery of the software if no significant vendor obligations exist
as of the delivery date, and therefore are subject to delays of the delivery
service and customer delayed delivery requests. Software sales and consulting
revenues have not followed seasonal patterns. The substance abuse testing
business has historically experienced higher volumes of testing in the last six
months of every year compared to the first six months of the same year. As a
result, the Company's operating results could fluctuate widely from quarter to
quarter and investors should put more emphasis on the Company's results for a
full year rather than on the Company's quarterly results.
Lack of Significant Operating History
The Company has been in existence since 1989. As such, the Company is
subject to many of the risks common to enterprises with a limited operating
history, including potential under-capitalization, limitations with respect to
personnel, financial and other resources and limited customers and revenues. As
of the date hereof, only two of the licensees of the SAFETRACE(TM) software
product, Wyndgate's blood tracking system, has the SAFETRACE(TM) software
product in operation. There is no assurance that the additional licensees of the
SAFETRACE(TM) software product to date will ever become operational with their
SAFETRACE(TM) software product, that the Company will be able to license the
SAFETRACE(TM) software product to additional persons, that the Company will be
able to develop and license new products or that the Company will be successful.
The likelihood of success of the Company must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with the development and marketing of new products.
See The Company.
Government Regulation
The Company's products and services are subject to regulations adopted by
governmental authorities, including the FDA, which governs blood center computer
software products regulated as medical devices, and the U.S. Department of
Transportation which issues regulations regarding procedures applicable to
6
<PAGE>
substance abuse testing programs required in six transportation industries.
Government regulations can be burdensome and may result in delays and expense to
the Company. In addition, modifications to regulations could adversely affect
the timing and cost of new products and services introduced by the Company.
Failure to comply with applicable regulatory requirements can result in, among
other things, operating restrictions and fines. For instance, if the Company is
unable to obtain a 510(k) clearance letter from the FDA for the Company to
market the SAFETRACE(TM) software product, or if in the future the FDA also
determines that the Company's SAFETRACETX(TM) product requires FDA clearance
prior to the marketing of such product, the time delay to market the
SAFETRACE(TM) and/or the SAFETRACETX(TM) software products could materially and
negatively impact the Company's business. The Company cannot predict the effect
of possible future legislation and regulation. See The Company - Wyndgate
Technologies Division Industry Overview and The Company - DataMed International
Division - Industry Overview.
Rapidly Changing Technology
The market for applications software is characterized by rapidly changing
technology and by changes from mainframe to client/server computer technology,
including frequent new product introductions and technological enhancements in
the applications software business. During the last five years the use of
computer technology in the information management industry has expanded
significantly to create intense competition. With rapidly expanding technology
there can be no assurance that the Company, with its limited resources, will be
able to acquire or maintain any technological advantage. The Company's success
will be in large part dependent on its ability to use the developing technology
to its maximum advantage and to remain competitive in price and product
performance. If the Company is unable to acquire or maintain a technological
advantage, or if the Company fails to stay current and evolve in the
applications software and information management fields, its efforts may not be
successful and shareholders may lose their entire investment. See The Company.
Royalty Agreements
Pursuant to certain royalty agreements, the Company is required to pay
certain of its sales proceeds directly to outside parties. Such payments may
adversely affect the Company's available cash to fund future operations and the
Company's future profitability. See The Company - Wyndgate Technologies Division
- - Development Agreements.
Possible Loss of Software Licenses Due to Failure to Meet Maintenance Schedules
The Wyndgate software license agreements have a license term that varies,
but are typically five year licenses which are automatically renewable. The
software license may be terminated by the customer if Wyndgate fails to deliver
the maintenance services consisting of product bug fixes, regulatory compliance
and updates. Wyndgate may terminate the license if the customer fails to meet
its contractual obligations, primarily the payment of usage fees. However, there
can be no assurance that the Company will be able to meet all of the maintenance
services and contractual commitments required to keep the license agreements in
force or that the customers will continue to make the usage fee payments.
Possible Loss of DataMed Substance Abuse Management Contracts Due to Material
Default
DataMed's substance abuse testing service agreements have contract terms
that vary from one to five years and, unless cancelled generally ninety days
prior to the end of the license term, most are automatically renewable.
Generally, either party may terminate the service agreement upon material
default or bankruptcy of the other party, if such default or bankruptcy is not
cured within thirty days. Some of the service agreements permit DataMed to
terminate the service agreement if the customer does not agree to permit price
increases due to changes in regulations or technology or due to the percentage
of positive results increasing beyond those negotiated in the agreement.
However, there can be no assurance that the Company will be able to meet all of
its contractual obligations, or that the customers will continue to use the
DataMed services required to keep the service agreements in force.
7
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Product and Reporting Liability
The Company has only recently completed the final testing stages for the
SAFETRACE(TM) software product and is in the beginning stages of marketing and
customer implementation. As of the date hereof, only two of the Company's
licensees have the SAFETRACE(TM) software product in operation. Currently, the
Company has product liability exposure for defects in its SAFETRACE(TM) software
product which may become apparent through widespread use of the SAFETRACE(TM)
software product. No claims have been filed against the Company involving the
SAFETRACE(TM) software product and the Company is not aware of any material
problems involving the SAFETRACE(TM) software product. While the Company will
continue to attempt to take appropriate precautions, there can be no assurance
that it will completely avoid product liability exposure. The Company maintains
product liability insurance on a claims made basis for the SAFETRACE(TM)
software product in the aggregate of at least $4 million. There can be no
assurance that such coverage will be available in the future, that it will be
available at reasonable prices, or that it will be available in amounts adequate
to cover any product liabilities that may be incurred by the Company.
Similarly, if DataMed were to release an erroneous substance abuse test
report to an employer stating that an employee's test had shown positive results
(a "false positive"), the Company could be held liable for the publication of
such information. Although the Company carries medical professional liability
insurance which insures against liability associated with such an occurrence,
there can be no assurance that a recovery or multiple recoveries may not exceed
the insurance limit, or that such coverage will continue to be available at
reasonable prices. See The Company.
Dependence on Major Customers
During the nine months ended September 30, 1996, two of the Company's
customers, Laidlaw Transit, Inc. and Gulf Coast Regional Blood Center, accounted
for approximately 13% and 13.5%, respectively, of the Company's revenues. During
1995, three of the Company's customers, Laidlaw Transit, Inc., Chevron
Corporation, and a group consisting of eight California blood centers (the
"Royalty Group"), accounted for approximately 18%, 12% and 10%, respectively, of
the Company's revenues. See The Company - Wyndgate Technologies Division
Development Agreements. During 1994, two of the Company's customers, Chevron
Corporation and the Royalty Group, accounted for approximately 19% and 18%,
respectively, of the Company's revenues. Laidlaw Transit, Inc. is associated
with the transportation industry. Chevron Corporation is associated with
extraction and distribution of oil and gas. The Royalty Group, through a 1992
development agreement with Wyndgate, assisted in financing the development of
Wyndgate's SAFETRACE(TM) software product. Gulf Coast Regional Blood Center is a
blood center located in Texas. Non-renewal or termination of the contractual
arrangements with these key customers could have a material adverse effect on
the Company. There can be no assurance that the Company will be able to retain
these key customers or, if such customers are not retained, that the Company
would be able to attract and retain new customers to replace the revenues
currently generated by these customers. See The Company - Customers.
Substantial Competition
There is substantial competition in all aspects of the blood bank and
hospital information management and substance abuse testing industries. Numerous
companies are developing technologies and marketing products and services in the
health care information management area and many companies are engaged in
substance abuse testing. Many of these competitors have been in business longer
than the Company and have substantially greater personnel and financial
resources available to them than the Company, and there can be no assurance that
the Company will be able to compete with these competitors successfully. See The
Company - Wyndgate Technologies Division - Competition and The Company - DataMed
International Division - Competition.
Dependence on Development of New Businesses
Through the merger with The Wyndgate Group, Ltd., the Company became
engaged in the information management section of the blood center market. To
effect its plan of operations, which includes the generation of increased
revenues, the Company must expand its operations significantly beyond the
historical operations of DataMed and Wyndgate to other markets which require
similar management information services. There is no assurance that the Company
will be able to expand its business operations. The current activities of
DataMed and Wyndgate in the substance abuse and blood center markets do not
assure future business expansion or profitability. See The Company.
8
<PAGE>
Proprietary Rights and Licenses
The Company's success depends in part on its ability to obtain and enforce
intellectual property rights for its technology and software, both in the United
States and in other countries. The Company's proprietary software is protected
by the use of copyrights, trademarks, confidentiality agreements and license
agreements that restrict the unauthorized distribution of the Company's
proprietary data and limit the Company's software products to the customer's
internal use only. While the Company has attempted to limit unauthorized use of
its software products or the dissemination of its proprietary information, there
can be no assurance that the Company will be able to retain its proprietary
software rights and prohibit the unauthorized use of proprietary information.
The Company may file additional applications for patents, copyrights, and
trademarks as management deems appropriate. There can be no assurance that any
patents, copyrights, or trademarks the Company may obtain will be sufficiently
broad to protect the Company's products, or that applicable law will provide
effective legal or injunctive remedies to stop infringement on the Company's
patents (if obtained), trademarks, or copyrights. In addition, there can be no
assurance that any patent, trademark, or copyright obtained by the Company will
not be challenged, invalidated, or circumvented, that intellectual property
rights obtained by the Company will provide competitive advantages, or that the
Company's competitors will not independently develop technologies or products
that are substantially equivalent or superior to those of the Company. In
addition, if the Company's software tools or products infringe upon the rights
of others, the Company may be subject to suit for damages or an injunction to
cease the use of such tools or products. The Company is not aware of any claims
or infringements of the Company's software tools or products upon the rights of
others. See The Company.
Future Capital Needs; Uncertainty of Additional Financing
The Company anticipates, based on its current proposed plans and
assumptions relating to its operations, that the proceeds of this Offering,
together with projected cash flow from operations, will be sufficient to satisfy
its contemplated cash requirements for the next 12 to 18 months, although the
Company anticipates that it will continue to incur operating losses and
significant capital expenses during that period. Thereafter, the Company will
likely require substantial funds in addition to the proceeds of this Offering in
order to continue to develop and market its products. See Management's
Discussion and Analysis or Plan of Operations, Use of Proceeds and The Company.
Dependence on Personnel
The Company is significantly dependent on a limited number of personnel,
including Michael I. Ruxin, M.D. (Chairman and Chief Executive Officer), Joseph
F. Dudziak (President and Chief Operating Officer), William J. Collard
(Secretary/Treasurer, Director and President of the Wyndgate division), and
Gerald F. Willman, Jr. (Director and Vice President of the Wyndgate division).
Although all of these individuals are subject to employment agreements, such
agreements are difficult to enforce against employees. If the Company fails to
retain the services of one or more of these employees, the Company's operations
may be adversely affected. The Company does not have key man insurance on any of
its officers or employees; however, the Company is the designated beneficiary of
a term life insurance policy for Dr. Ruxin in the face amount of $1,000,000. See
Management.
One Outside Director
Presently, only one of the Company's Directors, John D. Gleason, is an
"outside" director, i.e., not a member of management. Mr. Gleason is a member of
the Company's Audit/Systems Committee, but not a member of the Compensation
Committee. See Management.
9
<PAGE>
Potential Future Dilution
Currently, the Company has outstanding options and warrants to issue up to
1,077,929 shares of the Company's Common Stock that are exercisable from $1.00
to $3.75 per share. In addition, the Company has reserved for issuance 147,970
shares of Common Stock underlying the 10% Notes. The issuance of any shares
pursuant to exercise of the options and warrants or conversion of the 10% Notes
at less than the book value per share of the Company's Common Stock could dilute
the book value of the Common Stock. In addition, 120,000 shares of Common Stock
will be issuable by the Company to certain shareholders pursuant to the terms of
a private placement which provided for a share adjustment in the event the price
per share in the Company's initial public offering is less than $4.90 per share.
This adjustment will dilute a purchaser's investment herein. See Dilution.
No Dividends
The Company does not anticipate paying any cash dividends for the
foreseeable future. The Company expects that future earnings, if any, will be
used to finance growth. No person seeking dividend income from an investment
should invest in this Offering. See Description of Securities - Dividend Policy.
Authorized Stock Available for Issuance by the Company
After the sale of the Units being offered hereby, the Company will have
7,908,596 shares of Common Stock outstanding, out of a total of 40,000,000
shares of Common Stock and 10,000,000 shares of Preferred Stock authorized for
future issuance under the Company's Articles of Incorporation. This figure
includes (i) 137,646 shares of Common Stock issuable upon conversion of $516,200
of the principal amount of 10% Notes, (ii) approximately 10,324 shares issuable
upon conversion of accrued interest thereon and (iii) 120,000 shares of Common
Stock issuable to certain shareholders of the Company pursuant to the terms of a
private placement which provided for a share adjustment in the event the price
per share in the Company's initial public offering is less than $4.90 per share.
It does not, however, include 1,337,000 shares issuable upon exercise of the
Warrants or 1,077,929 shares issuable upon exercise of other outstanding options
and warrants. The remaining shares of Common Stock and Preferred Stock not
issued or reserved for specific purposes may be issued without any action or
approval of the Company's shareholders. Although there are no present plans,
agreements or undertakings involving the issuance of such shares except as
disclosed in this Prospectus, any such issuances could be used as a method of
discouraging, delaying or preventing a change in control of the Company or could
dilute the public ownership of the Company. There can be no assurance that the
Company will not undertake to issue such shares if it deems it appropriate to do
so. See Dilution and Description of Securities.
Substantial Dilution to Investors
The Company has previously issued 4,966,626 shares of Common Stock. Of
these shares, 3,307,405 shares, including 1,960,000 shares issued in conjunction
with the May 1995 Wyndgate merger, were issued to subscribers during the past
two years at prices ranging from $2.45 to $3.75 per share. Purchasers in this
offering will pay $3.50 per share. Accordingly, there is a significant disparity
between the price per share paid by present shareholders and the price to be
paid by the public purchasers in this offering. As a result of some of these
prior issuances of Common Stock by the Company, and the net losses the Company
has incurred, there will be immediate and substantial dilution to the investors
in this Offering in that the net tangible book value per share of the Common
Stock after the Offering will be substantially less than the public offering
price of the Units. The dilution to new investors, after giving effect to
conversion of the principal amount of the 10% Notes into shares of Common Stock,
and after giving effect to the sale of shares of Common Stock in this Offering
(ascribing no value to the Warrants), will be approximately $2.63 per share.
This represents a reduction of approximately 75% from the $3.50 offering price
per share. See Dilution.
10
<PAGE>
No Prior Joint Operations
Both of the Company's divisions have prior operating histories and
revenues. However, the principals of the Company have worked together for only
the past year, and have experience in the industries only in which their
respective divisions were engaged. Consequently, there can be no assurance that
the Company will be able to successfully operate either division or both
divisions. Furthermore, the Company may be considered as being in an early stage
of development due to the lack of operating history in its two business
segments. See The Company.
Limited Capitalization
The Company has only limited capitalization available to it and is
dependent on the proceeds of this Offering to effect its intended operations.
The Company may need additional capital to pursue its intended business plan;
however, the Company has received no commitment from any person for that
financing, and there can be no assurance that adequate financing will be
available on reasonable terms, if and when needed. See The Company.
Control by Present Shareholders
After giving effect to the sale of 1,337,000 Units to be issued in this
Offering and the conversion of $516,200 principal amount of the 10% Notes and
accrued interest thereon, the present shareholders will control approximately
63% of the outstanding shares of Common Stock of the Company, without giving
effect to the exercise of the Warrants, other outstanding options and warrants
or the Underwriters' over-allotment option. The Company's officers, directors,
holders of more than 5% of the Company's outstanding Common Stock prior to the
Offering, and their affiliates will own approximately 42% of the outstanding
Common Stock of the Company and will be able to substantially influence all
matters requiring approval by the shareholders of the Company, including the
election of directors. The Company does not provide for cumulative voting in the
election of directors; hence, purchasers of the securities offered hereby should
not expect to be able to elect any directors to the Company's Board of
Directors. See Security Ownership of Certain Beneficial Owners and Management.
Allocation of Proceeds in Discretion of Management
Approximately 4.3% of the estimated net proceeds from the Offering will be
used by management for working capital and general corporate purposes. In
addition, approximately 21.2% of the estimated net proceeds of the Offering has
been allocated to the repayment of debt other than accounts payable and accrued
liabilities. See Use of Proceeds.
Possible Anti-Takeover Effects of Proxies and Right of First Refusal
Granted to ODSI, Preferred Stock and Severance Payments
Certain of the Company's officers, directors and major shareholders
beneficially owning 3,033,034 shares of the Company's Common Stock have granted
an irrevocable proxy to ODSI until November 14, 1997, to vote their shares in
favor of a proposal to approve any definitive agreement between the Company and
ODSI relating to the Technology and on any other proposal relating to the sale
of any of the stock of the Company or all or substantially all of the assets of
the Company or any of the Technology. Each of the shareholders granting a proxy
to ODSI has also granted ODSI a right of first refusal in the event a
shareholder proposes to transfer, dispose of or otherwise sell such
shareholder's shares to a third party or grant an option to acquire the shares
to any third party. The grant of the proxies and rights of first refusal to ODSI
could have the effect of delaying, deferring or preventing a change in control
of the Company or a bid by a third person for the Company and/or the Technology.
See Security Ownership of Certain Beneficial Owners and Management.
The Board of Directors of the Company may issue shares of Preferred Stock
without stockholder approval on such terms as the Board may determine. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. In addition, as discussed under Management - Employment
Agreements, if the Company terminates the employment of Michael I. Ruxin,
William J. Collard, Gerald F. Willman, Jr. or Joseph F. Dudziak for any reason
other than cause or disability, the Company will be required to pay a lump sum
11
<PAGE>
per individual ranging from approximately $220,000 (representing approximately
two years salary) to $2.5 million. The effect of the severance payment
provisions is to increase the likelihood that a potential purchaser will seek to
negotiate directly with the Board of Directors and management in order to gain
control of the Company or its assets rather than directly approaching the
Company's shareholders as a group. All of the foregoing could have the effect of
delaying, deferring or preventing a change in control of the Company and could
limit the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. See Management - Employment Agreements and
Description of Securities - Preferred Stock.
Determination of Offering and Exercise Prices
The offering price of the Units and the exercise price of the Warrants were
determined arbitrarily by negotiation between the Company and the
Representative. In determining the prices, the Company and the Representative
considered (among other things) estimates of the business potential of the
Company, the management of the Company, the Company's plans for the expansion of
its business base, the general condition of the securities markets and the
amount of retained equity to the present shareholders. Prospective investors
should not consider the offering price of the Units or the exercise price of the
Warrants as necessarily indicative of the actual value of the Units or
underlying shares of Common Stock or Warrants. The offering price of the Units
and the exercise price of the Warrants do not bear any direct relationship to
the Company's assets, book value, net worth or business potential, or to any
other traditionally recognized criteria of value.
Restrictions on Exercise of Warrants; Possible Redemption of Warrants
Investors purchasing Units in this Offering will not be able to exercise
the Warrants included therein unless at the time of exercise this Registration
Statement is current, or a new registration statement registering the Common
Stock issuable upon exercise of the Warrants is effective and such shares have
been registered and/or qualified or deemed to be exempt from registration and/or
qualification under the securities laws of the state of residence of the holder
of the Warrants. The Company does not intend to advise holders of the Warrants
of their inability to exercise the Warrants other than in response to a specific
written inquiry to the Company. The value of the Warrants may be greatly reduced
if a current registration statement covering the shares of Common Stock
underlying the Warrants is not effective or if such Common Stock is not
registered or exempt from registration in the states in which the holders of the
Warrants reside. Commencing on the date the Warrants are separately tradeable
and transferable, the Warrants are subject to redemption by the Company on 30
days prior written notice provided that the daily trading price for the shares
is above $5.46 (120% of the Warrant exercise price) for at least 20 consecutive
trading days ending within ten days prior to the date of the notice of
redemption. If the Warrants are redeemed, Warrantholders will lose their right
to exercise the Warrants except during such 30 day redemption period. See
Description of Securities - Warrants.
Shares Eligible for Future Sale
All of the 4,966,626 shares of the Company's Common Stock presently issued
and outstanding are "restricted securities" as that term is defined under Rule
144 promulgated under the Securities Act of 1933, as amended. Of this amount,
1,659,221 shares have been held in excess of two years, and will be available
for sale 90 days after the date hereof pursuant to Rule 144. In addition,
1,285,770 shares, including 187,800 shares underlying warrants exercisable at
$3.75 per share and 150,000 shares underlying warrants exercisable at 85% of the
price per share of Common Stock included in the Units, have been registered for
sale under the Registration Statement of which this Prospectus is a part. Of
these shares, 150,000 shares will be eligible for sale at the earlier of the
date the Common Stock and Warrants may be traded separately or six months after
the date of the Prospectus. The remaining 1,135,770 shares will be eligible for
sale commencing six months after the date of this Prospectus. Before this
Offering, there has been no public market for the securities of the Company.
Sales of substantial amounts of shares by shareholders after such six month
period pursuant to this Prospectus or sales made pursuant to Rule 144 or
otherwise could adversely affect the market price of the Company's securities
and make it more difficult for the Company to sell equity securities in the
future at a time and price which it deems appropriate. The Company is unable to
predict the effect that sales made after such six month period or Rule 144 or
otherwise may have on the then prevailing market price of the Common Stock.
12
<PAGE>
Nonetheless, the possibility exists that the sale of these shares may have a
depressive effect on the prices of the Company's Common Stock and Warrants. See
Description of Securities.
No Prior Public Market and Possible Volatility of Price of Units, Shares of
Common Stock and Warrants
The prices of securities of publicly traded corporations tend to fluctuate
widely. It can be expected, therefore, that if and when trading commences in the
Company's Units, Common Stock and Warrants, there may be wide fluctuations in
price. There has been no prior public market for the Units, Common Stock or
Warrants and despite the initial listing of the Units on NASDAQ, there is no
assurance that a market will develop in the Units or be sustained. The lack of a
current market for the Units, Common Stock and Warrants, fluctuations in trading
interest and changes in the Company's operating results, financial condition and
prospects could have a significant impact on the market prices for the Units,
Common Stock and the Warrants. See Underwriting.
NASDAQ Maintenance Requirements and Effects of Possible Delisting; Risks Related
to Low-Priced Stocks
Although the Company's Units have been approved for initial listing on the
NASDAQ Small-Cap Market upon notice of issuance of such securities, the Company
must continue to meet certain maintenance requirements in order for such
securities to continue to be listed on NASDAQ. Further, the Company must meet
such maintenance requirements for the Company to be able to list the Company's
Common Stock and Warrants on NASDAQ at such time as they are separately
tradeable and transferable. NASDAQ recently announced that it intended to
propose new entry and maintenance requirements for companies traded on the
NASDAQ Small-Cap Market, including increased financial standards and requiring
the companies to have at least two independent directors and an audit committee,
a majority of which are independent directors. There can be no assurance that
the Company will be able to meet such new proposals if such new proposals are
adopted. If the Company's securities are delisted from NASDAQ, this could
restrict investors' interest in the Company's securities and could materially
and adversely affect any trading market and prices for such securities. In
addition, if the Company's securities are delisted from NASDAQ, and if the
Company's net tangible assets do not exceed $2 million, and if the Common Stock
is trading for less than $5.00 per share, then the Company's Units, Common Stock
and Warrants would each be considered a "penny stock" under federal securities
law. Additional regulatory requirements apply to trading by broker-dealers of
penny stocks which could result in the loss of effective trading markets, if
any, for the Company's Units, Common Stock and Warrants.
Warrants to Representative
Upon successful completion of this Offering, the Company will sell to the
Representative and its designees, for a nominal cost, warrants to purchase up to
133,700 Units (the "Representative's Warrants") at a purchase price equal to
165% of the Price to Public of the Units in this Offering. The Representative's
Warrants will be exercisable for a forty nine month period, commencing 11 months
from the date of their issuance. The Representative will be given the
opportunity to profit from a rise in the market price of the Company's Common
Stock with a resulting dilution of the interest of stockholders. Furthermore,
the Company will give certain registration rights with regard to the Units
underlying the Representative's Warrants and issuable upon exercise of the
Warrants included in such Units and such registration could result in
substantial expense to the Company. See Underwriting.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company, after deduction of the underwriting
discount (10%) and estimated expenses of the offering, including the
Representative's nonaccountable expense allowance, will be approximately
$7,902,330. The net proceeds are anticipated to be used as follows:
Sales and marketing (1) $2,000,000 25.3%
Research and development (2) 2,500,000 31.6%
Payment of accounts payable and accrued expenses 1,390,000 17.6%
Debt repayment (3) 1,420,000 18.0%
Repayment of the 10% Notes and
estimated accured interest (4) 253,000 3.2%
Working capital and general corporate purposes (5) 339,330 4.3%
---------- -----
$7,902,330 100.0%
========== =====
- ----------
(1) Sales and marketing includes expenses for increased advertising activity
including trade shows, product demonstrations and other advertising and
promotional efforts. Sales and marketing may also include expenses
associated with the development of strategic marketing affiliations within
the Company's industry.
(2) Included in research and development is the expenditure of approximately
$860,000 to convert the-EDEN-OA(R) tool to a graphical based program,
including conversion of the current SAFETRACE(TM) software product and all
enhancements in process of being made to the SAFETRACE(TM) software
product. Also included are expenditures of approximately $420,000 for the
development of the SAFETRACETx(TM) software product, and $515,000 for
continuing efforts to obtain the FDA 510(k) clearance letter, documentation
for the SAFETRACETx(TM) software product development and expansion of the
Customer Help Line. Additionally, $500,000 will be used for ongoing
research and development of information systems technology utilized in the
Company's DataMed division to enhance the automation of its customer
service. The remaining $205,000 will be used for development of products
ancillary to the SAFET RACE(TM) software product line. Approximately
$2,000,000 of these expenditures are anticipated to be made in 1997 and
$500,000 in 1998.
(3) The Company has a revolving line of credit with a bank which bears interest
at 2% plus prime compounded monthly per annum. As of September 30, 1996,
the Company's outstanding balance on the line of credit was $970,000. The
borrowed funds were used for working capital. In January, 1997, the Company
borrowed $450,000 from two individuals at 12% interest. The notes are due
the earlier of the closing of this Offering or March 23, 1997. The borrowed
funds were used for working capital. In connection with the loans, the
Company issued warrants to purchase 150,000 shares of Common Stock
exercisable at 85% of the price per share of the Common Stock included in
the Units.
(4) Includes $235,000 principal and estimated accrued interest of approximately
$18,000 on the 10% Notes, $85,000 principal amount of which are owned by
certain directors and officers of the Company and a principal shareholder
of the Company. See Certain Relationships and Related Transactions. Holders
of an additional $516,200 principal amount of 10% Notes have indicated
their intention to convert their 10% Notes for 137,646 shares of Common
Stock plus an estimated additional 10,324 shares for approximately $38,715
of accrued interest. The proceeds from the sale of the 10% Notes were used
for working capital.
(5) The Company may use a portion of the funds allocated for working capital to
acquire companies and/or technology in fields related to the Company's
business. The Company has no present plans, proposals, arrangements or
understandings with respect to acquisitions of other companies or
technology.
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<PAGE>
The allocation of the net proceeds from this Offering set forth above
represents the Company's best estimate based on its present plans and certain
assumptions regarding general economic and industry conditions and the Company's
anticipated future revenues and expenditures. If any of these factors change,
the Company may find it necessary or advisable to reallocate some of the
proceeds from working capital to other of the above-described categories. The
Company anticipates, based on its current proposed plans and assumptions
relating to its operations, that the proceeds of this Offering, together with
projected cash flow from operations will be sufficient to satisfy its
contemplated cash requirements for the next 12 to 18 months, although the
Company anticipates that it will continue to incur operating losses and
significant capital expenses during that period. The Company's cash requirements
beyond this period will depend on many factors, including (but not limited to)
the Company's cash flow from operations, the length of time it may take for the
Company to develop or acquire products or services for the market, the market
acceptance of these products or services, and the response of competitors who
may develop competing products or services at lower cost. To the extent that the
funds generated by this Offering are insufficient to fund the Company's
activities in the short or long term, the Company may need to raise additional
debt or equity through public or private financings. The Company has no
commitment for any such financing, and there can be no assurance that any
additional financing will be available to the Company, when needed, and on
reasonable terms. See Risk Factors.
If the over-allotment option is exercised (of which there can be no
assurance), the Company will receive additional net proceeds of approximately
$1,221,350. Any proceeds received from the exercise of the over-allotment option
will be added to working capital.
The amounts set forth above merely indicate the proposed use of proceeds,
and the actual expenditures may vary substantially from the estimates. None of
the items set forth in the foregoing table should be considered as a firm
commitment by the Company.
To the extent that the net proceeds are not used immediately, the Company
will invest such net proceeds in short-term government securities through a bank
or in a non-discretionary account of the Company with the Representative.
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<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of September 30, 1996, and as adjusted to reflect the sale of the 1,337,000
Units at an offering price of $7.00 per Unit and receipt of net proceeds of
approximately $7,902,330 therefrom.
September 30, 1996
Unaudited As Adjusted
--------- -----------
Notes payable $ 751,200 $ -0- (1)
Current portion of capital lease obligations 402,968 402,968
Line of credit 970,100 100
Capital lease obligations, less current portion 804,517 804,517
Stockholders' Equity (deficit):
Preferred Stock, $.01 par value; 10,000,000 shares
authorized, no shares issued and outstanding 0 0
Common Stock, $.01 par value; 40,000,000 shares
authorized, 4,966,626 shares
issued and outstanding; 7,898,272 issued and
outstanding, as adjusted 49,666 78,982(1)
Additional paid in capital $ 4,131,967 $12,521,181(1)
Accumulated deficit $(5,273,727) $(5,273,727)
Total Stockholders' Equity (deficit) $(1,092,094) $ 7,326,436(1)
- ----------
(1) Assumes holders of $516,200 principal amount of 10% Notes convert their 10%
Notes into 137,646 shares of Common Stock and the issuance of 120,000
shares of Common Stock to certain shareholders of the Company pursuant to
the terms of a private placement which provided for a share adjustment in
the event the price per share in the Company's initial public offering is
less than $4.90 per share. Does not include (i) approximately $38,715 of
accrued interest on the 10% Notes which will be converted into
approximately 10,324 shares of Common Stock or (ii) additional accrued
interest on the 10% Notes of approximately $18,000 to be paid in cash.
16
<PAGE>
DILUTION
The Company's net tangible book value (deficiency) as of September 30, 1996
was ($1,866,592) or ($.38) per share. The "net tangible book value per share"
represents the Company's total tangible assets less its total liabilities,
divided by the number of shares of Common Stock outstanding at September 30,
1996. After giving effect to (i) the conversion of $516,200 principal amount of
outstanding 10% Notes for a total of 137,646 shares of Common Stock (ii) the
issuance of 120,000 shares of Common Stock to certain shareholders of the
Company pursuant to the terms of a private placement which provided for a share
adjustment in the event the price per share in the Company's initial public
offering is less than $4.90 per share and (iii) the sale of the 1,337,000 Units
at an offering price of $7.00 per Unit and allocating no value to the Class A
Warrants included in the Units, and without giving effect to the possible
exercise of the over-allotment option, the Company's pro forma net tangible book
value at September 30, 1996, would have been approximately $6,901,938 or $.87
per share. This represents an immediate increase in net tangible book value
(deficiency) per share of $1.25 to existing shareholders, and an immediate
dilution of $2.63 per share of Common Stock (75%) to the investors purchasing
Units in this Offering. The following table illustrates dilution in net tangible
book value on a per share basis to new investors:
Price to investors .................................... $3.50
Net tangible book value before Offering ............... $ (.38)
Increase attributable to new investors ................ $ 1.25
Pro forma net tangible book value after Offering ...... $ .87
-----
Dilution to new investors (1) .......................... $2.63
=====
- ---------
(1) If the over-allotment option is exercised in full, dilution to new
investors would be $2.52.
The following table sets forth the number of shares of Common Stock
purchased from the Company, the effective cash contribution made and the price
per share paid by existing shareholders and by purchasers of the 1,337,000 Units
offered hereby, without deducting estimated expenses and fees of the
Representative.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Paid Average
----------------- ------------------------ Price Per
Number Percent Amount Percent Share
------ ------- ------ ------- ----------
<S> <C> <C> <C> <C> <C>
Officers, Directors and
Promoters (1) 2,237,372 28.3% $ 100,000 0.7% $ .04
Other Shareholders (2) 2,997,224 37.9 4,699,946 33.2 $ 1.57
New Investors 2,674,000 33.8 9,359,000 66.1 $ 3.50
--------- ---- --------- ---- ------
Total 7,908,596 100.0% $14,158,946 100.0%
========= ===== =========== =====
</TABLE>
- ----------
(1) Includes shares purchased by Michael I. Ruxin, William J. Collard and
Gerald F. Willman, Jr., and shares issuable to Joseph F. Dudziak upon
conversion of the 10% Notes and accrued interest thereon. Mr. Collard and
Mr. Willman's shares were issued in connection with The Wyndgate Group,
Ltd., merger. No value has been assigned to the shares issued to Mr.
Collard and Mr. Willman.
(2) Includes (i) shares (other than shares issued to Mr. Collard and Mr.
Willman) issued in connection with the merger with The Wyndgate Group,
Ltd., as to which no value has been assigned, (ii) 137,646 shares issuable
upon the conversion of the principal amount of the 10% Notes (plus an
estimated additional 10,324 shares issuable upon conversion of accrued
interest of approximately $38,715 thereon), other than the shares issuable
to Joseph F. Dudziak upon conversion of the 10% Notes and accrued interest
thereon and (iii) 120,000 shares of Common Stock issuable to certain
shareholders of the Company pursuant to the terms of a private placement
which provided for a share adjustment in the event the price per share in
the Company's initial public offering is less than $4.90 per share.
The computations in the tables set forth above assume no exercise of
outstanding warrants or stock options as of the date hereof, and assume no
exercise of the Underwriters' over-allotment option. On the date of this
17
<PAGE>
Prospectus, there were outstanding options and warrants to purchase 1,077,929
shares of Common Stock (including, but not limited to, 187,800 shares of Common
Stock underlying Warrants issued in connection with the sale of the 10% Notes
and 150,000 shares of Common Stock exercisable at 85% of the price per share of
the shares of Common Stock included in the Units) at a weighted average exercise
price of $2.80 per share.
DIVIDEND POLICY
The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements and financial condition. Since its inception, the Company has not
paid any dividends on its Common Stock and does not anticipate paying such
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance its operations.
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information regarding the
results of operations and financial position of the Company for the periods and
at the dates indicated. The financial statements of the Company as of December
31, 1995 and for the years ended December 31, 1995 and 1994 have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report included
elsewhere in this Prospectus. The selected financial information as of September
30, 1996 and for the nine months ended September 30, 1996 and 1995 are derived
from the unaudited interim consolidated financial statements of the Company set
forth elsewhere in this Prospectus and include, in the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary for
the fair presentation of its results of operations for such periods. The results
of operations for the nine months ended September 30, 1996, are not necessarily
indicative of the results to be expected for the full year. This data should be
read in conjunction with the Company's consolidated financial statements
(including the notes thereto) and the Company's unaudited interim consolidated
financial statements appearing elsewhere in this Prospectus and in conjunction
with Management's Discussion and Analysis or Plan of Operations.
Statement of Operations Data:
- -----------------------------
<TABLE>
<CAPTION>
Years Ended December 31, Nine Months Ended September 30,
1995 1994 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Drug testing and other $5,740,487 $3,836,136 $4,680,448 $3,957,936
Software sales and consulting 933,631 1,140,119 4,249,101 883,578
---------- ---------- ---------- -----------
Total revenue 6,674,118 4,976,255 8,929,549 4,841,514
Cost of sales and
product development (1) 3,217,595 2,429,789 5,016,101 2,308,078
---------- ---------- ---------- ----------
Gross profit $3,456,523 $2,546,466 $3,913,448 $2,533,436
Operating expenses
- ------------------
Payroll and other (1) 1,998,452 708,718 1,574,799 1,431,242
General and administrative (1) 1,478,666 605,459 1,418,894 1,240,230
Sales and marketing (1) 1,731,533 657,988 1,903,569 1,471,986
Research and development 654,500 403,714 547,387 442,342
Depreciation and amortization 116,979 51,504 347,399 72,218
---------- --------- ---------- ---------
Income (Loss) from operations $(2,523,607) $ 119,083 $(1,878,600) $(2,124,582)
18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, Nine Months Ended September 30,
1995 1994 1996 1995
---- ---- ---- ----
Other Income (Expense)
- ----------------------
<S> <C> <C> <C> <C>
Interest income (expense), net (61,112) 6,339 (179,464) (20,581)
Other (70,608) - (16,053) (4,943)
Income (loss) before provision for
(benefit from) income taxes (2,655,327) 125,422 (2,074,117) (2,150,106)
Provision for (benefit from)
income taxes 29,531 ( 46,825) - (108,758)
--------- -------- --------- ---------
Net Income (Loss) $(2,684,858) $172,247 $(2,074,117 $(2,041,348)
=========== ======== =========== ===========
</TABLE>
- ----------
(1) See Note 1 to the Consolidated Financial Statements for a description of
the reclassification of certain expenses.
Balance Sheet Data:
- -------------------
December 31, 1995 September 30, 1996
----------------- ------------------
Working capital (deficit $(2,171,397) $(2,250,308)
Total assets $ 2,720,862 $ 6,509,592
Accumulated deficit $(3,199,610) $(5,273,727)
Stockholder's equity (deficit) $(1,458,485) $(1,092,094)
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
General
The Company and its two divisions are in the business of providing
information management software products and services to the healthcare industry
and substance abuse testing program services to companies.
Wyndgate is primarily involved in providing software products, services and
maintenance to purchasers of licenses for its SAFETRACE(TM) software product.
Revenues from the sales of software licenses are recognized upon delivery of the
software product to the customer unless the Company has significant related
vendor obligations remaining. Revenue from post contract customer support is
recognized over the period the customer support services are provided, and
software services revenue is recognized as services are performed.
DataMed provides substance abuse testing management services. Revenues from
DataMed are recognized as services are provided. DataMed typically contracts
with its customers to provide for laboratory and collection site services (which
DataMed obtains from others), Medical Review Officer ("MRO") services, data
management, record storage and coordination of all substance abuse testing
program elements. DataMed serves international, national and regional clients in
a variety of industries.
In November 1996, DataMed elected to terminate its contracts with
approximately 560 customers, representing approximately $400,000 of revenue for
the nine months ended September 30, 1996. DataMed's election was made to improve
operating efficiencies with its remaining customer contracts. The terminated
contracts represented customers each contributing average annual revenues of
less than $1000. DataMed expects it will be able to improve its gross profit
margins by eliminating the inefficiencies associated with these smaller
accounts, thus improving its ability to serve its remaining customers.
19
<PAGE>
The above Statement of Operations Data reflect results of operations of the
Company through the nine month period ended September 30, 1996. While the
Company has not finalized results of operations after that date, the Company
expects that it will have a consolidated net loss for the three months ended
December 31, 1996 of approximately $2,650,000, which will result in a net loss
of approximately $4,725,000 for the year ended December 31, 1996.
Results of Operations
Nine Months Ended September 30, 1996 as Compared to Nine Months Ended September
30, 1995
Revenues. Revenues increased by $4.1 million, or 85%, to $8.9 million for
the nine months ended September 30, 1996 ("Interim 1996") compared to $4.8
million for the nine months ended September 30, 1995 ("Interim 1995"). The
increase was primarily the result of both the introduction of Wyndgate's
SAFETRACE(TM) software product which accounted for approximately $3.4 million
and the increase in substance abuse test volume which increased by approximately
27,000 tests, or 21%, to approximately 157,000 tests in Interim 1996 compared to
approximately 130,000 tests in Interim 1995.
Cost of sales and product development. Cost of sales and product
development as a percentage of revenues increased 8% to 56% in Interim 1996
compared to 48% in Interim 1995 primarily as a result of the following:
increased royalty fee expenses based on increased sales of Wyndgate's
SAFETRACE(TM) software product licenses; increased resales of vendor hardware
and software priced at lower profit margins than Company developed software
sales and increased amortization expense of the capitalized software development
costs related to the development of Wyndgate's SAFETRACE(TM) software product.
Gross profit. Gross profit as a percentage of revenues decreased 8% to 44%
in Interim 1996 compared to 52% in Interim 1995 as a result of the increased
costs discussed above and primarily as a result of increased sales of software
and hardware purchased from third party manufacturers.
Payroll and other. Payroll and other increased $143,557, or 10.0%, in
Interim 1996 compared to Interim 1995. The increase in payroll and other was
primarily due to the hiring of additional management personnel together with
increases in client service personnel necessary to manage the Company's new
customers. Management does not expect significant increases in payroll and other
costs for the foreseeable future.
General and administrative. General and administrative expenses increased
$178,664, or 14.4%, in Interim 1996 compared to Interim 1995. The increase in
general and administrative expenses was attributable primarily to increases in
outside contract services, product liability insurance, bad debt expense, leased
office space and other general administrative expenses which were related to the
increase in the number of employees. These expenses were offset by a significant
decline in merger and reorganization expenses.
Sales and marketing. Sales and marketing expenses increased $431,583 or 29%
in Interim 1996 compared to Interim 1995. The increase in sales and marketing
expenses was primarily due to increased activity in advertising media, trade
shows and direct sales including personnel and travel related expenditures for
both divisions of the Company. Management expects that there will be increases
in sales and marketing expenses if the Company is successful in introducing its
new transfusion management information system, the SAFETRACETx (TM) software
product.
Research and development. Research and development expenses were $547,387
in Interim 1996 compared to $442,342 in Interim 1995 representing an increase of
24%. The increase in research and development expenses was primarily due to an
increase in the number of employees assigned to software and systems development
at both divisions of the Company. Management expects research and development
expenses to increase as additional software development related to the Company's
blood management product line is planned within the next fiscal year.
Depreciation and amortization. Depreciation and amortization increased
$275,181, in Interim 1996 compared to Interim 1995. The increase in depreciation
and amortization is due to the increases in fixed assets.
20
<PAGE>
Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994
Revenues. Revenues increased by $1.7 million, or 34%, to $6.7 million for
the year ended December 31, 1995 ("1995") compared to $5 million for the year
ended December 31, 1994 ("1994"). The increase was primarily the result of the
increase in substance abuse test volume which increased by approximately 82,000
tests, or 64%, to approximately 210,000 tests in 1995 compared to approximately
128,000 tests in 1994. The increase in substance abuse test volume was offset by
a decrease in software sales and consulting revenue of $206,448. The decrease in
software sales and consulting revenue was primarily the result of a focused
effort to complete the development of the SAFETRACE(TM) software product during
1995.
Cost of Sales and Product Development. Cost of sales and product
development as a percentage of revenues decreased 1% to 48% in 1995 compared to
49% in 1994 primarily as a result of decreases in laboratory and collection site
expenses related to substance abuse testing. These expenses decreased because
the Company renegotiated certain laboratory and collection site agreements.
Gross profit. Gross profit as a percentage of revenues increased 1% to 52%
in 1995 compared to 51% in 1994 as a result of the decreased costs discussed
above.
Payroll and other. Payroll and other increased $1,289,734, or 182%, in 1995
compared to 1994. The increase in payroll and other was primarily due to an
increase in management personnel together with increases in staff handling
substance abuse testing.
General and administrative. General and administrative expenses increased
$873,207, or 144%, in 1995 compared to 1994. The increase in general and
administrative expenses can be primarily attributable to the following events:
$164,500 in expenses related to the 1995 merger with Wyndgate; a $244,000
provision for doubtful accounts; an expense of $350,000 for payments for certain
non-compete agreements with management personnel; and approximately $161,000 for
options granted to certain shareholders. These increases in general and
administrative expenses were offset by decreases in other general and
administrative expenses. The increases noted above are anticipated to reflect
events not expected to reoccur. See the discussion below in Credit Loss
Experience for a further discussion of bad debt expense.
Sales and marketing. Sales and marketing expenses increased $1,073,545, or
163%, in 1995 compared to 1994. The increase in sales and marketing expenses was
primarily due to increased activity in advertising media, trade shows and direct
sales including personnel and travel and related expenditures for both divisions
of the Company.
Research and development. Research and development expenses increased
$250,786 or 62% from 1994 to 1995. The increase in research and development is
primarily due to increased staff hired by Wyndgate to complete the development
of its SAFETRACE(TM) software product during the second half of 1995.
Depreciation and amortization. Depreciation and amortization increased
$65,475 in 1995 compared to 1994. The increase in depreciation and amortization
is due to the increases in fixed assets.
Credit Loss Experience. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk specific to customers,
historical trends and other information. The Company performs ongoing credit
evaluations of its customers' financial condition and maintains allowances for
potential credit losses. Actual losses, allowances and accounts receivable
turnover trends generally have been within management's expectations. The
Company's provision for doubtful accounts was $244,000 in 1995. A significant
portion of this reserve was as a result of management's decision to reserve
accounts receivable which had been properly billed according to its contract
with a specific and significant customer, but for which the customer's
expectation was to receive billings directly from certain subcontractors of the
Company rather than from the Company. The Company is continuing to work with
this customer to resolve billing issues and anticipates there may be an
additional increase in the provision for doubtful accounts in 1996 related to
accounts receivable with this customer.
21
<PAGE>
During the nine months ended September 30, 1996, the provision for doubtful
accounts was approximately $156,000, or approximately 2% of revenues. The
provision for doubtful accounts is included in general and administrative
expenses. Management is not aware of any other unusual credit risks or material
collection problems which have not been accounted for in the allowance for
doubtful accounts.
Liquidity and Capital Resources
The Company had a working capital deficit of approximately $2.3 million as
of September 30, 1996 compared with a working capital deficit at December 31,
1995 of approximately $2.2 million. The Company used cash in operating
activities of approximately $2.7 million for the nine months ended September 30,
1996 compared to approximately $432,000 for the comparable period in 1995. The
increase in cash used for the first nine months of 1996 is attributable
primarily to an increase of approximately $2.4 million in accounts receivable
and unbilled receivables and an increase in note receivable of $250,000, offset
by increases in accrued payroll and other accrued expenses. The Company used
cash in investing activities of approximately $184,000 for the nine months ended
September 30, 1996 compared with approximately $268,000 for the comparable
period in 1995. These operating and investing activities were financed primarily
from the proceeds of private placements of Common Stock, notes payable and short
term borrowing on a line of credit with a bank.
The Company generated approximately $751,000 from the issuance of notes
payable during the nine months ended September 30, 1996 and received net
short-term borrowings of $470,000 for the same period from its line of credit.
Additionally, the Company received proceeds of approximately $1,740,000 from the
private placement of its Common Stock after deducting commissions and expenses
of $260,000 during the same period. For the nine months ended September 30,
1996, the Company also used cash from the financing activities by making
approximately $254,000 in principal payments on capital leases and by payment of
$350,000 of issuance and distribution costs for the Offering.
Cash provided by financing activities for the nine months ended September
30, 1995 included proceeds from the issuance of common stock of approximately
$735,000. Net proceeds for this period from other sources were minimal.
During January, 1997, the Company borrowed $450,000 from two individuals at
12% interest. The loans are due the earlier of the closing of this Offering or
March 23, 1997. The proceeds of the loans were used for working capital. In
connection with the loans, the Company issued two warrants to purchase 150,000
shares of the Company's Common Stock, exercisable at 85% of the per share price
of the shares of Common Stock included in the Units.
The Company's cash flows have historically been used primarily in investing
in software development and working capital needs. The Company intends to use
proceeds from the Offering primarily to repay debt, to pay certain accounts
payable and accrued expenses, and for research and development, sales and
marketing programs, and working capital and general corporate purposes. See Use
of Proceeds.
The Company maintains a $1,000,000 line of credit with a bank secured by
substantially all of the Company's assets, except for those assets under lease
agreements, which bears interest at prime plus two percent and matures February
12, 1997. The amount drawn on this line of credit at September 30, 1996 was
$970,000. A principal stockholder of the Company has personally guaranteed the
repayment of any amounts under the line of credit.
The Company recognizes the significant impact of accounts receivable on its
working capital needs. The substantial increase in revenue from software sales
and consulting for the nine months ended September 30, 1996 have generated
corresponding increases in accounts receivable. While management does not
believe there are any unusual or material credit risks related to the Company's
software sales, the high number of software installations for the Company's
customers within a short period of time has created billing and collection
delays. Management intends to aggressively pursue more timely billing and
collection of accounts receivable to correct these delays.
22
<PAGE>
The Company anticipates that it will incur a loss of approximately
$4,725,000 for the year ended December 31, 1996. While the Company anticipates
that its software revenues will continue to increase in future periods, the
Company expects to continue to incur losses until 1998, and possibly thereafter,
until its software products are better established in its markets. The Company
expects that the net proceeds of this Offering will enable the Company to meet
its liquidity and capital requirements for approximately twelve to eighteen
months. There can be no assurance that the Company can generate sufficient
revenues, earnings and cash collections from software sales and substance abuse
testing sales to satisfy its working capital requirements after such time. The
Company's working capital requirements will depend on numerous factors,
including progress of the Company's research and development of the SAFETRACETx
(TM) software product, other new products, as well as new applications for its
present core products, which include both SAFETRACE(TM) and the SAFETRACETx (TM)
software products. Additionally, the Company's working capital requirements may
depend upon its success in obtaining a FDA 510(k) clearance letter within the
next twelve to eighteen months. Failure to receive such clearance letter may
require the Company to seek additional financing. The Company may seek financing
to meet its working capital requirements through strategic alliances within the
Company's industry and through collaborative arrangements with other suppliers
to the Company's customers. There can be no assurance, however, that additional
funds, if required, will be available from sources historically available to the
Company or other sources on favorable terms, if at all.
Effect of Inflation and Foreign Currency Exchange
The Company has not experienced unfavorable effects on its results of
operations due to currency exchange fluctuations with its foreign customers or
material effects upon its results of operations as a result of domestic
inflation.
THE COMPANY
Global Med Technologies, Inc. (the "Company") provides information
management software products and services to the healthcare industry and
provides substance abuse testing program services to companies, including
certain Fortune 1000 companies. National MRO, Inc., founded in 1989, changed its
name to Global Data Technologies, Inc. in June 1995 in connection with the
merger of National MRO, Inc. and The Wyndgate Group, Ltd. in May 1995, and
changed its name again in May 1996 to Global Med Technologies, Inc. The Company
now consists of two divisions, Wyndgate Technologies ("Wyndgate") and DataMed
International ("DataMed"), both of which operate under their respective trade
names. Wyndgate develops, markets, licenses and supports software for the
healthcare industry. DataMed manages and markets a variety of services that are
designed to assist companies with administering substance abuse testing
programs.
The Company has received several indications of interest regarding a
possible acquisition of the DataMed division. While the Company has no specific
plans for divestiture of this division, or any segment of the Company, any offer
which enhances return on invested capital and shareholder value and which
furthers the Company's strategic goals will be seriously evaluated to insure
that the best interests of the Company and its shareholders are served.
Founded in 1984, Wyndgate initially developed a Student Information System
("SIS"), an integrated software package for colleges and universities to track
student information. Wyndgate currently has six contracts for SIS still in
effect. Pursuant to an agreement with eight California blood centers (the
"Royalty Group"), Wyndgate began development of a blood tracking system to
assist community blood centers, hospitals, plasma centers and outpatient clinics
in the U.S. in complying with the quality and safety standards of the FDA for
the collection and management of blood and blood products. After several years
of development and $1,080,000 paid by the Royalty Group, Wyndgate has completed
development and commenced marketing of the SAFETRACE(TM) software product
(Wyndgate's blood bank management information system software), which it
believes to be the most comprehensive and flexible system of its type available
today. In accordance with FDA regulations, the Company submitted a 510(k)
application to the FDA in October, 1995 for review of its SAFETRACE(TM) software
product, which is still pending. The Company is able to continue marketing the
SAFETRACE(TM) software product during the review process. There are no
assurances that the Company will receive a FDA clearance letter for its 510(k)
application. If not, the Company will be required to discontinue marketing and
licensing the SAFETRACE(TM) software product. See The Company - Wyndgate
Technologies Division Industry Overview.
23
<PAGE>
In 1989 Wyndgate developed EDEN-OA(R) to utilize new technologies in the
evolving open systems computer market. EDEN-OA(R) is a rapid applications
development tool that can be used by software developers to produce software
products that operate in accordance with industry standards based computer
environments. EDEN-OA(R) interfaces with database management systems and
operates on multiple computer and operating system platforms. The Company plans
to continue to use EDEN-OA(R) to develop other medical software applications.
DataMed was founded in 1989 by Michael I. Ruxin, M.D. to offer the services
of a Medical Review Officer ("MRO") to the regulated segment of the substance
abuse testing market. Due to federal regulations, companies involved in
commercial transportation must comply with requirements mandating substance
abuse testing of employees in safety sensitive positions and substance abuse
awareness education for supervisors and employees. Additionally, federal
substance abuse testing requirements applicable to commercial transportation
mandate the use of an MRO to evaluate the quality and accuracy of the testing
laboratory and to determine legal or illegal use of substances. Corporate
outsourcing has been a positive factor for DataMed as some large companies have
contracted with DataMed to outsource the management of their substance abuse
testing programs.
DataMed provides customized program management services to companies in an
attempt to increase total program quality and decrease total program costs.
DataMed provides substance abuse testing management services which coordinate
and actively manage the specimen collection process, the laboratory testing
process, the MRO review process, the random testing process, the blind sample
quality control process, the substance abuse testing process, and the data
management process including compliance reporting and record keeping.
Strategy
The following are key elements of the Company's strategy; however, there
can be no assurance that the Company will be successful in its strategy.
Expand sales & marketing efforts. Upon completion of this Offering, the
Company intends to increase its sales and marketing efforts by hiring additional
field sales and other marketing personnel during the twelve months following
this Offering. The Company currently has six sales and marketing personnel. The
Company believes it can increase its penetration of the U.S. blood bank
information management market as well as the substance abuse testing program
management market through its planned sales and marketing staff.
Develop new healthcare management software products and services. The
Company believes that it can develop new products and services from its existing
technology base. The Company plans to build upon its technology base by using
EDEN-OA(R) to develop new applications. In the future, the Company intends to
introduce a transfusion management information system, to be known as the
SAFETRACETx(TM) software product.
Expand international markets. The Company is focused on expanding
international markets. The Company continues to pursue new international
customers within the transportation industries, including but not limited to,
international shipping. The Company also plans to pursue international growth as
it relates to blood banks, plasma centers and hospitals.
Develop strategic relationships. The Company intends to pursue strategic
relationships in order to further develop uses for its technology. Additionally,
the Company may work with other healthcare information providers to develop
applications based on EDEN-OA(R).
Maintain technology advantage. The Company believes that the foundation of
its SAFETRACE(TM) software product, EDEN-OA(R), is an important technological
advancement, and that the maintenance of this technological advancement is
essential in order for the Company to compete effectively. The Company will
continue to focus research and development on evolving this software development
tool. The funds generated by this Offering may not be sufficient to enable the
Company to accomplish its goal, and additional financing may be required.
24
<PAGE>
Sales and Marketing
The Company intends to continue to sell and market its medical information
management products and services through a direct sales force. Each sales
representative will have a geographic area and will market all products and
services. Additionally, the Company will continue to respond to requests for
proposals ("RFPs") issued by blood banks, plasma centers, hospitals and other
entities which are usually Fortune 1000 companies. The Company is pursuing
opportunities within the blood bank industry and will continue to focus on
Fortune 1000 companies to market DataMed's services.
Customers
The Company's current customer base includes Fortune 1000 companies that
are required by the U.S. Department of Transportation or their own company
policy to have a substance abuse testing program and small to large community
blood banks.
During the nine months ended September 30, 1996, two of the Company's
customers, Laidlaw Transit, Inc. and Gulf Coast Regional Blood Center, accounted
for approximately 13% and 13.5%, respectively, of the Company's revenues. During
1995, three of the Company's customers, Laidlaw Transit, Inc., Chevron
Corporation and the Royalty Group, accounted for approximately 18%, 12% and 10%,
respectively, of the Company's revenues. See Wyndgate Technologies Division
Development Agreements. During 1994, two of the Company's customers, Chevron
Corporation and the Royalty Group, accounted for approximately 19% and 18%,
respectively, of the Company's revenues. Laidlaw Transit, Inc. is associated
with the transportation industry. Chevron Corporation is associated with the oil
and gas industry. The Royalty Group, through a 1992 development agreement with
Wyndgate, assisted in the financing of the development of Wyndgate's
SAFETRACE(TM) software product. Gulf Coast Regional Blood Center is a blood bank
located in Texas. Non-renewal or termination of the contractual arrangements
with these key customers could have a material adverse effect on the Company.
There can be no assurance that the Company will be able to retain these key
customers or, if such customers were not retained, that the Company will be able
to attract and retain new customers to replace the revenues currently generated
by these customers. See The Company - Sales and Marketing.
The Company currently has 22 (including the Royalty Group) blood banks as
customers for its SAFETRACE(TM) software product and intends to continue to
target domestic and international blood banks, plasma centers and hospitals.
DataMed has a number of customers for its substance abuse testing services,
including certain Fortune 1000 and other transportation companies.
Research and Development
During the fiscal years ended December 31, 1995 and 1994, and during the
first nine months of 1996, the Company expended $654,500, $403,714 and $547,387,
respectively, for research and development.
Employees
As of September 30, 1996, the Company had 145 full-time employees,
consisting of 12 employees for the Company, 59 at Wyndgate and 74 at DataMed. Of
the 145 full-time employees, 49 employees were in research and development, nine
employees were in sales and marketing, 13 employees were in administration, and
74 employees were in program management and implementation. The Company has
employment agreements with certain personnel. See Management. The Company's
employees are not represented by a labor union or subject to collective
bargaining agreements. The Company has never experienced a work stoppage and
believes that its employee relations are satisfactory.
Properties
The Company currently occupies two primary locations. The Company occupies
approximately 17,000 square feet of office space in Lakewood, Colorado pursuant
to a lease that expires on December 31, 2000. The Company also leases
approximately 8,800 square feet of office space in Sacramento, California
pursuant to a lease that expires on August 31, 1998. The Company also has
employees located in Virginia, Illinois, Pennsylvania and Texas. No office lease
is required at those locations because the employees work out of their homes.
During the nine months ended September 30, 1996, office lease expenses per month
were approximately $25,000. Additional leased space will be required to
accommodate the planned personnel increases.
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Wyndgate Technologies Division
Wyndgate designs, develops, markets, licenses and supports software for the
healthcare industry. Pursuant to an agreement with eight California blood
centers, Wyndgate developed a blood tracking system called the SAFETRACE(TM)
software product to assist community blood centers, plasma centers, hospitals
and outpatient clinics in the U.S. in complying with the quality and safety
standards of the FDA for the collection and management of blood and blood
products. Wyndgate incorporates and integrates products and services for the
management of the blood supply and its derived products from donor recruitment
to shipment from the blood bank to the hospital, clinic, medical research
institution or other purchaser. The SAFETRACE(TM) software product was developed
using the Company's application development tool, EDEN-OA(R). The Company
intends to utilize its proprietary EDEN-OA(R) software development tool to
attempt to develop new products for the medical information market.
In addition, Wyndgate provides training and consulting services for
installation, implementation, special programming, system design, and
maintenance for the SAFETRACE(TM) software product. The majority of customers
for the SAFETRACE(TM) software product and the Student Information System
software product ("SIS") use all or a portion of these services. Historically,
maintenance and product upgrades from Wyndgate's SIS software product have
provided an on-going revenue stream and information concerning Wyndgate's
customers' requirements and satisfaction. Special programming services can
result in customer funded development, as was done with the SAFETRACE(TM)
software product.
Industry Overview
The management of the Company believes that market driven forces to
increase quality while containing rising healthcare costs have resulted in an
increasing demand for healthcare information systems that meet the changing
needs of the marketplace. This shift has resulted in systems that utilize new
technologies to provide higher-accuracy information.
With the spread of AIDS and Hepatitis-B, stringent FDA guidelines have been
imposed on blood banks in order to ensure a safe blood supply. Some community
blood centers ("CBCs") have been cited by the FDA for noncompliance and some
have even been closed. The American Red Cross and Blood Systems, Inc. blood
centers are currently under consent decrees requiring them to comply with FDA
guidelines. The blood banking industry has developed various in-house systems to
track blood collection, testing, processing, distribution and transfusion
activities. The Company believes that most blood center in-house developed
systems are not fully integrated and do not offer the capabilities required by
the FDA in view of the fact that the Company's current customers are switching
from their in-house systems to the Company's SAFETRACE(TM) software product.
While laboratory equipment vendors have developed automated testing and
reporting procedures directed at a segment of the community blood center
process, these systems address only the laboratory function and are not fully
integrated. The Company believes that blood centers and the laboratory equipment
products vendors are looking for a way to meet the FDA guidelines and minimize
their risk and cost.
The FDA required all blood tracking application software vendors to submit
a 510(k) application for review by March 31, 1996. The application process for
FDA review and compliance with the new guidelines relates to computer software
products regulated as medical devices. The FDA considers software products
intended for the following to be medical devices: (i) use in the manufacture of
blood and blood components; or (ii) maintenance of data used to evaluate the
suitability of donors and the release of blood or blood components for
transfusion or further manufacturing. As medical device manufacturers, the
Company and its competitors are required to register with the Center for
Biologics Evaluation and Research ("CBER"), list their medical devices, and
submit a pre-market notification or application for pre-market review. There is
no deadline to receive a clearance letter from the FDA and the FDA has allowed
those vendors that have submitted a 510(k) by March 31, 1996, to market and
license their product. A competitor recently received a 510(k) clearance letter
from the FDA for certain modules of its blood bank management information system
software product. The Company does not believe this will impact Wyndgate's
marketing of its SAFETRACE(TM) software product because the Company does not
believe that this competitor offers the spectrum of software modules offered by
the Company.
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Wyndgate Strategy
The key elements of Wyndgate's strategy to address the market include:
Expand sales and marketing efforts to increase its customer base nationally
and internationally. In the near-term, the Company will aggressively pursue
opportunities in the U.S. and abroad in blood tracking and management with its
SAFETRACE(TM) software product. The Company has no reason to believe that it
will not receive an FDA 510(k) clearance letter in the future. The Company plans
to continue to respond to any and all requests by the FDA for additional
information up to and including resubmission of the 510(k) application. However,
there can be no assurance that the Company will receive an FDA 510(k) clearance
letter.
Develop new healthcare management software products and services. By using
its background in healthcare information systems, the Company will continue to
attempt to develop new applications based upon its EDEN-OA(R) architecture. In
the future, the Company intends to introduce a transfusion management
information system (the SAFETRACETx(TM) software product). However, there can be
no assurance that such introduction to the market will occur.
Strategic relationships and selective acquisitions. Wyndgate intends to
continue to pursue strategic relationships to further develop uses for its
technology.
Software Products
The SAFETRACE(TM) software product is a set of integrated software modules
that are used to manage and control multiple aspects of blood and plasma
operations, from recruiting of donors and collecting donated blood or plasma, to
testing and manufacturing of blood products, distribution and billing. The
Company currently markets its SAFETRACE(TM) software product to blood banks and
plasma centers and eventually will market it to hospitals and transfusion
centers. A customer can license one or more modules as needed to automate its
operations.
SAFETRACE(TM) Modules Function
- ------------------ --------
Donor Recruitment Used by the marketing department of a
blood or plasma center to systematically solicit,
recruit and schedule donors. Facilitates the
recruiting process by producing call lists on
demand or scheduling calls by batch processing.
Donor Management Provides a means for registering donors
and recording necessary medical and personal donor
data. All real-time donor deferral and eligibility
information is used to determine current
eligibility status of the donor to be registered.
Laboratory Management Performs a number of data recording and
evaluation functions. Permits the posting of tests
either by interfacing directly with testing
equipment or manually. Also performs inventory
label validation, which helps to ensure that all
blood components are suitable for distribution and
have been properly tested, validated and labeled.
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SAFETRACE(TM) Modules Function
- ------------------ --------
Blood Inventory and
Distribution Maintains current inventories of all available
blood products which have been tested and labeled.
Records the movement of blood products from the
blood or plasma center to the customer and between
customers. Also maintains records for imported
blood related products.
Special Procedures Registers patients and tracks blood requirements
for surgeries. Also provides the capabilities to
define and manage special requests for autologous,
designated and therapeutic donations.
Billing Implements the pricing and billing practices
associated with each blood product for customers.
Also provides financial information for management
control.
The SAFETRACE(TM) software product relies on its donor identification,
laboratory component, labeling and release site-based logic technology to assist
blood banks in complying with FDA regulations. The SAFETRACE(TM) software
product has an 85% table driven structure which permits it to easily adapt to
each customer's individual and unique operations. The SAFETRACE(TM) software
product has been developed using industry standards, common operating systems
and database managers to ensure portability. Because of the independence of the
SAFETRACE(TM) software product's database, operating systems and hardware,
customers have freedom and flexibility in selecting computer hardware and
software components. The SAFETRACE(TM) software product permits customers to
preserve their application software and training investment as customer systems
needs and technology change. Currently, management estimates the SAFETRACE(TM)
software product consists of more than 1.5 million lines of code, 390 data
tables, 59 labeling occurrences of component and release logic, 3,000 discrete
programs and over 1,000 screens and windows.
Services
Wyndgate believes that the high quality of the services component of the
business is the key to retaining current customers, enhancing Wyndgate's
reputation for quality and improving market penetration. Wyndgate's services
begin with initial customer contact and continue throughout the relationship.
Services include complete installation and implementation, training, consulting
and maintenance. The license agreements currently being used by Wyndgate
typically commit a customer to five years of maintenance service. The fees
associated with the maintenance service are typically invoiced monthly,
quarterly or annually in advance. The Company believes that service fees,
excluding maintenance, range from 10% to 50% of the initial software license
fee. Under the Company's current license agreements, only the software license
fee and the maintenance fee are required to be paid and the other fees are
optional. However, many customers that have licensed the SAFETRACE(TM) software
product to date have contracted for additional services.
Installation and Implementation Services. Installation and implementation
services assist the customers with the selection of hardware and software
systems and, if necessary, the initial installation of the software on the
customer's system. Implementation services include assisting customers in
analyzing work flow and standard operating procedures ("SOPs"), developing
tables, screen layouts, reports, and installation specific requirements.
Management estimates that it takes from six to twelve months to implement the
SAFETRACE(TM) software product and a portion of Wyndgate's resources are used
during that time. Installation and implementation services are not considered
part of the SAFETRACE(TM) software product license fee or usage fee, and are
typically billed separately.
Training Services. Training services are provided to customers either at
the customer site or at Wyndgate's offices. Training includes hands-on access to
the applications software and usually includes building initial tables and
screens. All customers to date have purchased initial training services which
range from five to fifteen days depending on the customer size and number of
people to be trained. Wyndgate also offers follow-up training services to assist
customers in training new staff on new product functions.
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Maintenance Services. Fees for maintenance services are required to be paid
under certain of the relevant SAFETRACE(TM) software product license agreements
for the term of the license. Maintenance services are optional under the other
license agreements. Maintenance services include "bug" fixing, enhancements and
product upgrades. Wyndgate provides an 800-Help Line number for customer service
calls that permits access to Wyndgate's technical resources directly during the
working day and on a paged call-back basis at all other times.
Consulting Services. Consulting services are provided to customers who want
special features, assistance with system configurations, database consulting,
systems management, networking or additional capabilities beyond those included
in the applications software. Wyndgate also performs special applications
development projects under certain development agreements. The Company has been
contracted to provide consulting services by some of its SAFETRACE(TM) software
product customers.
Product Development
SAFETRACETx(TM) - Transfusion Management Information System. Wyndgate has
begun the development of the SAFETRACETx(TM) software product, a transfusion
management information system that can be utilized by hospitals to help them
ensure the safety of the blood transfused into patients. If completely
developed, it will provide electronic cross-matching capabilities to help ensure
blood compatibility with the recipients and will track, inventory, bill and
document all activities with the blood product from the time it is received in
inventory to the time the blood product is used or sent back to the blood
center. The SAFETRACETx(TM) software product will complement the SAFETRACE(TM)
software product as it will integrate hospitals with blood centers that supply
blood products. The Company anticipates that the SAFETRACETx(TM) software
product will be released in 1997; however, there can be no assurance that the
software will be released as scheduled, if at all.
EDEN-OA(R) Development Tool. EDEN-OA(R) is a software tool set and
methodology that the management of the Company believes enables programmers to
easily build and maintain information management systems. It runs on different
hardware, operating system and database management system products. The
EDEN-OA(R) tool set allows the programmer to focus on the business logic and
rules (how data relates and the formulas for calculations) and on the
presentation (viewing and printing) of the information to the user. Management
believes that EDEN-OA(R) (i) reduces application product development time and
cost; (ii) reduces application software project risk; (iii) focuses the software
developer on the user's concerns, not on the hardware, operating system or
database management system; and (iv) reduces the time and cost for modifying and
maintaining a software application. EDEN-OA(R) is the basis for the
SAFETRACE(TM) software product, and it is planned that EDEN-OA(R) will be the
basis for future products from Wyndgate.
The Company believes that a major advantage of EDEN-OA(R) is that it allows
local user modifications to the application. Additionally, it coordinates and
tracks user modifications with upgrades, "bug" fixes or enhancements made by
Wyndgate, a feature that assisted Wyndgate in documenting the SAFE TRACE(TM)
software product for FDA 510(k) review. The entire maintenance process is
integrated into the application, thereby eliminating the common problem of user
changes not integrating with vendor supplied code, which often prevents
upgrading applications because of the high cost and risk. This maintenance
feature permits the customers to make changes dictated by business requirements
as opposed to the ability of the application to accommodate such changes. For
example, adding a data element such as a suffix for a zip code, adding a new
table to track service information or adding new FDA mandated blood tests would
be a very difficult and time consuming task with most applications.
EDEN-OA(R) includes an On-Line User-System Repository Manager which
consists of the following: an Active Data Dictionary; a Database Maintenance
Manager for automatic generation of database structure and I/O procedures; a
Panel (Screen) System Manager providing a Screen Definition Language and GUI;
use of a Procedural Language; and Interactive Utility Programs and Procedures
including a software maintenance system manager and a systems development
procedures manager. This combination of capabilities makes EDEN-OA(R) portable
and easy to tailor and maintain.
EDEN-OA(R) facilitates application maintenance through the integrated
Active Data Dictionary, common applications functions and development and
maintenance tools. Each client organization has specific needs for tailoring
functions, screens, reports and processes. By making changes to the Active Data
Dictionary, the user invokes the Applications Manager tools which generate the
code. A single Active Data Dictionary entry modifies all application modules,
screens and reports impacted by that change. Since the Active Data Dictionary
separates the application from front-end (screen generators) and the back-end
(database manager and hardware systems), development and on-going maintenance
costs are often reduced. Traditionally, on-going maintenance has been the most
costly part of any applications development and implementation. EDEN-OA(R) is
modular and can be used to replace or extend existing application systems and
provides end-user flexibility.
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EDEN-OA(R) will continue to be developed and refined. It is currently
planned that EDEN-OA(R) will be the foundation to any new medical applications
developed by Wyndgate in the future.
Development Agreements
Pursuant to the development agreement between Wyndgate and the Royalty
Group, pursuant to which Wyndgate developed the SAFETRACE(TM) software product,
Wyndgate must make royalty payments to the Royalty Group based on a percentage
of Wyndgate's SAFETRACE(TM) software product license sales, measured by invoice
amounts to purchasers of the software, net of certain fees and charges. The time
period under the royalty schedule is based upon the first date of customer
invoicing, which was September 14, 1995. The Wyndgate royalty payment schedule
is as follows:
Date Royalty Percentage
---- ------------------
September 1995 to September 1997 12%
September 1997 to September 1998 9%
September 1998 to September 1999 6%
After September 1999 3%
Pursuant to a Development Agreement ("Agreement") between the Company and
The Institute for Transfusion Medicine ("ITxM"), the Company has agreed to
develop Commercial Centralized Transfusion System Software ("Commercial CTS
Software"), which it is planned will become Wyndgate's SAFETRACETx(TM) software
product. This Agreement requires that the Commercial CTS Software be completed
by December 16, 1997. If not timely completed, the Company would be subject to
monetary penalties. The Agreement provides for a royalty payment to ITxM for
revenues received from the sale of the Commercial CTS Software, net of certain
fees and charges. The royalty period starts with the first commercial transfer
for value of the Commercial CTS Software. The royalty that would be paid is as
follows:
Percentage of Percentage of
License Fee if License Fee if
ITxM Initiates Sale Company Initiates Sale
------------------- ----------------------
1 Year 10% 5%
2 Year 10% 5%
3 Year 6% 3%
4 Year 6% 3%
5 Year 4% 2%
6 Year 4% 2%
7 Year 4% 2%
8 Year 4% 2%
9 Year 4% 2%
Thereafter 2% 1%
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Customers
Wyndgate currently has SAFETRACE(TM) software product contracts with the
following blood centers:
Belle Bonfils Memorial Blood Center, Denver, CO
Blood Bank of Alameda-Contra Costa Medical Association, Oakland, CA
Blood Bank of San Bernardino and Riverside Counties, San Bernardino, CA
Blood Bank of the Redwoods, Santa Rosa, CA
Coffee Memorial Blood Center, Albuquerque, NM
Community Blood Bank of Erie County, Erie, PA
Community Blood Bank of Lancaster County Medical Society, Lincoln, NE
Community Blood Center of Appleton, Appleton, WI
Gulf Coast Regional Blood Center, Houston, TX
Institute For Transfusion Medicine, Pittsburgh, PA
Irwin Memorial Blood Center, San Francisco, CA
Peninsula Blood Bank, Inc., Burlingame, CA
Sacramento Medical Foundation Blood Center, Sacramento, CA
Samuel W. Miller Memorial Blood Center, Bethlehem, PA
San Diego Blood Bank, San Diego, CA
Siouxland Community Blood Bank, Sioux City, IA
Stanford Medical School Blood Center, Palo Alto, CA
The Blood Center of Central Iowa, Des Moines, IA
The Blood Center for Southeast Louisiana, New Orleans, LA
Tri-Counties Blood Bank, Santa Barbara, CA
The Memorial Blood Centers of Minnesota, Inc., Minneapolis, MN
Oklahoma Blood Institute, Oklahoma City, OK
See Services, above, for a description of a typical license agreement.
Management of the Company estimates that SAFETRACE(TM) software product
implementations take approximately six to twelve months depending on the blood
center's size and complexity of the blood center's standard operations
procedures ("SOPs"). All of the above blood centers are in various stages of
implementation, with the exception of Tri-Counties Blood Bank and Sacramento
Medical Foundation Blood Center in which the SAFETRACE(TM) software product is
fully operational.
The Company has entered into a letter of intent with a New York Stock
Exchange listed company pursuant to which the Company and the other party
expressed their desire to negotiate a license agreement for the Company's
SAFETRACE (TM) software product for a term of ten years. The letter of intent
contemplates that the Company would grant the other party the right to use the
SAFETRACE(TM) software product in up to 15 locations in return for the other
party paying the Company a software license payment over the life of the
agreement in an amount commensurate with what the Company believes would be an
appropriate fee for multiple location licenses and a maintenance fee
substantially similar to the maintenance fee charged to other customers of the
Company. There is no assurance that the parties will be able to negotiate a
final agreement relating to the proposed licensing arrangement.
The potential customers for Wyndgate's products include community blood
centers ("CBC"), hospitals, out-patient centers and stand alone transfusion
sites. CBCs are able to utilize the SAFETRACE(TM) software product to manage
their business and comply with FDA regulations to help ensure the safety of the
blood supply. The SAFETRACE(TM) software product allows the CBCs to enter the
FDA guidelines, consistent with the CBC's SOPs, into SAFETRACE(TM) software
product tables which then provide system control over the manufacture and
processing of blood and blood products. In the future, the Company plans to
introduce a transfusion management information system (which it is planned will
be the SAFETRACETx(TM) software product). All acute care hospitals and alternate
transfusion sites will be potential customers for the SAFETRACETx(TM) software
product.
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In the transfusion market the potential customer base is easily identified
but presents a challenge in reaching the volume of clients for product
demonstrations. Customers will require a product demonstration before making a
commitment to purchase. In addition, the transfusion product being developed
will face severe competition from established vendors in this market. Wyndgate
believes that by penetrating blood centers with the SAFETRACE(TM) software
product, hospitals that receive blood from these centers may want to link their
existing transfusion product to the blood center. There can be no assurance that
hospitals will desire to establish this link using Wyndgate's SAFETRACETx(TM)
software product.
Agreements with Ortho Diagnostic Systems Inc.
On November 14, 1996, the Company entered into an Exclusivity and Software
Development Agreement (the "Exclusivity Agreement") with Ortho Diagnostic
Systems Inc. ("ODSI"), a wholly-owned subsidiary of Johnson & Johnson. The
Exclusivity Agreement provides that until May 14, 1997 (the " Exclusivity
Period"), ODSI has the exclusive right to negotiate with the Company with
respect to the Company's activities and developments in information technology
and intellectual property relating to donor and transfusion medicine (the
"Technology") and that, during the Exclusivity Period, the Company will not,
directly or through any intermediary, accept, encourage, solicit, entertain or
otherwise discuss any acquisition of any of the Company's Common Stock (other
than in this Offering), business, property or know-how, including the
Technology, with any person or entity other than ODSI or an affiliate thereof
and will not otherwise encumber the ability of ODSI or an affiliate thereof to
enter into any arrangement with the Company concerning the Technology. The
Exclusivity Period is subject to extension at the Company's option for up to 60
days in the event approval of the transaction by the Company's shareholders is
required to be obtained.
The Company also agreed to perform certain software development services in
consideration of the payment by ODSI of $500,000 on November 14, 1996, and
$500,000 received in January, 1997. If the Company and ODSI enter into a
definitive agreement relating to the Technology, the Company's other assets or
Common Stock, then ODSI may elect to decline the software development services
and apply the payment to the Company towards any consideration payable to the
Company in connection with the definitive agreement. If the parties are unable
to come to terms with respect to a definitive agreement, then the Company will
provide the software development services selected by ODSI and the parties will
negotiate a definitive software development agreement. If ODSI has not elected
to decline the Company's services and the Company fails to provide the software
development services, unless ODSI has breached its obligations under the
definitive agreement and is then in breach, the Company shall have been deemed
to have granted ODSI a non-exclusive license (with the right to sub-license) to
the Technology with a royalty rate not to exceed 4% of net sales, and the
parties agreed they would negotiate a definitive license agreement.
Pursuant to the Exclusivity Agreement, the Company has granted ODSI a right
of first refusal for a period of six months after the expiration of the
Exclusivity Period in the event the Company proposes to transfer, dispose of,
sell, lease, license (except on a non-exclusive basis in the ordinary course of
its business), mortgage or otherwise encumber or subject to any pledge, claim,
lien, charge, encumbrance or security interest (except for the security interest
with the Company's current lender) of any kind or nature any of the Technology
(the "Sale"). Prior to consummating any Sale of any of the Technology, the
Company has agreed to present ODSI with a copy of the written offer by or
agreement with any third party (the "Third Party Offer"). ODSI shall have a
period of 30 days from receipt of a copy of the Third Party Offer to notify the
Company of its intention to enter into a similar transaction with the Company
upon substantially the same terms and conditions specified therein. If the
purchase price specified in the Third Party Offer is payable in property other
than cash, ODSI has the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If ODSI chooses not to exercise
its right of first refusal, the Company has 60 days thereafter in which to sell
or otherwise dispose of the Technology upon terms and conditions (including the
purchase price) no less favorable to the Company than those specified in the
Third Party Offer. In the event the Company does not sell or otherwise dispose
of the Technology during such 60-day period, ODSI has a right of first refusal
with respect to any subsequent sale of the Technology by the Company during the
six-month period of the right of first refusal.
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The Company has agreed in the Exclusivity Agreement that in the event (a)
the Company breaches any covenant, agreement, representation or warranty
contained in the Exclusivity Agreement and the Company shall have had contracts
or entered into negotiations relating to a Business Combination (as hereafter
defined) at any time during the Exclusivity Period, as such may be extended, and
with respect to any person, entity or group with whom such contacts or
negotiations have occurred, a Business Combination shall have occurred or the
Company shall have entered into a definitive agreement providing for a Business
Combination; or (b) any definitive agreement entered into between the Company
and ODSI fails to receive the requisite affirmative vote of the shareholders of
the Company at a shareholders' meeting called for the purpose of voting on such
agreement and at the time of such meeting there exists a Competing Transaction
(as hereafter defined); or (c) (i) the Board of Directors of the Company shall
withdraw, modify or change its recommendation of the Exclusivity Agreement or
any subsequent agreement in a manner adverse to ODSI, or shall have resolved to
do any of the foregoing; (ii) if the Board of Directors of the Company shall
have recommended to the shareholders of the Company a Competing Transaction;
(iii) a tender offer or exchange offer for 20% or more of the outstanding shares
of Common Stock of the Company is commenced and the Company's Board of Directors
recommends that the shareholders of the Company tender their shares in such
tender or exchange offer; or (iv) any person shall have acquired beneficial
ownership or the right to acquire beneficial ownership of or any "group" (as
such term is defined under Section 13(d) of the Securities Exchange Act of 1934,
and the rules and regulations promulgated thereunder) shall have been formed
which beneficially owns, or has the right to acquire "beneficial ownership" of
more than 20% of the then outstanding shares of the Company's Common Stock, then
the Company shall pay ODSI an amount equal to $2,000,000 plus ODSI's expenses.
For purposes of the Exclusivity Agreement, the term "Business Combination" means
(i) a merger, consolidation, share exchange, business combination or similar
transaction involving the Company; (ii) a sale, lease, exchange, transfer or
disposition of 20% or more of the assets of the Company and its subsidiaries, if
any, taken as a whole, in a single transaction or series of transactions,
including, without limitation, any sale that would trigger ODSI's right of first
refusal described in the immediately preceding paragraph; or (iii) the
acquisition by a person or entity, or any "group" (as such term is defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder) of
"beneficial ownership" of 20% or more of the Company's Common Stock whether by
tender offer or exchange offer or otherwise. A "Competing Transaction" means any
of the following involving the Company or any or its subsidiaries (either
existing or hereafter created): (i) any merger, consolidation, share exchange,
business combination, or other similar transaction; (ii) any sale, lease,
exchange, mortgage, pledge, transfer, license (except for a non-exclusive
license in the ordinary course of the Company's business) or other disposition
of 20% or more of the assets, taken as a whole, in a single transaction or
series of transactions, or any of the Technology; (iii) any tender offer or
exchange offer for 20% or more of the outstanding shares of Common Stock of the
Company or the filing of a registration statement under the Securities Act of
1933 in connection therewith; (iv) any person having acquired beneficial
ownership or the right to acquire beneficial ownership of, or any "group" (as
such term is defined under Section 13(d) of the Securities Exchange Act of 1934
and the rules and regulations promulgated thereunder) having been formed which
beneficially owns or has the right to acquire beneficial ownership of, 20% or
more of the then outstanding shares of the Common Stock of the Company; or (v)
any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing.
Concurrently with executing the Exclusivity Agreement, ODSI and Michael I.
Ruxin, William J. Collard, Gerald F. Willman, Jr., Lori J. Willman, Timothy J.
Pellegrini and Gordon Segal (collectively, the "Shareholders") entered into a
Proxy and Right of First Refusal Agreement (the "Shareholders Agreement"), dated
November 14, 1996, pursuant to which each of the Shareholders has granted an
irrevocable proxy to ODSI to vote their shares of the Company's Common Stock (i)
in favor of a proposal to approve any definitive agreement between the Company
and ODSI relating to the Technology, or (ii) on any other proposal relating to
the sale of any of the stock of the Company or all or substantially all of the
assets of the Company or any of the Technology, unless prior to the date of the
shareholders' meeting, the definitive agreement has been terminated for any
reason other than the occurrence of any event that would trigger the payment of
the termination fees pursuant to the Exclusivity Agreement or any similar
provision in the definitive agreement, or ODSI has materially breached any of
its material obligations under the definitive agreement, in any of which events
the proxy would terminate upon the termination of the definitive agreement.
Unless earlier terminated, the proxy granted by each of the Shareholders expires
November 14, 1997. Each of the Shareholders also agreed that until November 14,
1997, such Shareholder will not transfer, dispose of, or otherwise sell to any
third party or grant to any third party an option or other right to buy any
shares of the Company's Common Stock held by the Shareholder without having
first offered ODSI the right to enter into a similar transaction with the
33
<PAGE>
Shareholder on the same terms as proposed; provided, that each Shareholder has
the right to donate up to 6% of such Shareholder's stock ownership to a
non-profit institution without invoking ODSI's right of first refusal. ODSI has
30 days to exercise its right of first refusal after being notified of the
proposed third party transaction. In the event ODSI declines to enter into such
transaction, then the Shareholder has 90 days after the end of the 30 day
acceptance period to consummate the proposed transaction on the terms and
conditions as proposed. In the event the transaction is not consummated within
90 days, then ODSI has the right of first refusal with respect to any future
proposed transactions by Shareholders to a third party. ODSI's right of first
refusal is not assignable except to an affiliate of ODSI.
Competition
Currently, Wyndgate is aware of five primary competitors in the blood bank
industry segment including MAK from France, Blood Trac Systems, Inc. from
Canada, Information Data Management ("IDM"), Blood Bank Computer Systems and
Systec from the United States. Some of these competitors are larger and have
greater resources than the Company. The Company believes it is able to compete
on the basis of the capabilities of the technology in its SAFETRACE(TM) software
product; however, the Company can provide no assurances in this regard.
DataMed International Division
Founded in 1989, DataMed manages and markets a variety of services that are
designed to assist companies with administering substance abuse testing
programs. Due to federal regulations, employers involved in commercial
transportation must comply with requirements mandating substance abuse testing
of employees in safety sensitive positions and substance abuse awareness
education for supervisors and employees. Additionally, federal substance abuse
testing requirements mandate the use of a Medical Review Officer ("MRO") to
evaluate the quality and accuracy of a testing laboratory and determine legal
versus illegal use of controlled substances. DataMed provides customized
substance abuse testing management services to companies. DataMed coordinates
and actively manages the specimen collection process, the laboratory testing
process, the MRO review process, the process of random testing, the blind sample
quality control process, the substance abuse testing process and the data
management process, including compliance reporting and record storage. DataMed
arranges for specimens to be tested by a qualified laboratory and appropriately
monitors the performance of: testing laboratory(ies); urine collection
providers; the MRO; and the overall quality of information that is received,
stored and reported. DataMed currently provides substance abuse testing
management services to a number of clients worldwide.
Industry Overview
In the Company's experience, most substance abuse testing programs for
Fortune 1000 companies are internally managed. Companies contract with
laboratory and collection sites and utilize internal resources to manage the
process. However, the Company believes that some companies appear to be shifting
to outsourced substance abuse program management in an attempt to reduce overall
costs as well as to increase overall quality.
The current market for the substance abuse testing industry consists of the
regulated markets and the unregulated markets. The regulated markets include all
employees that fall under federal regulations for commercial transportation,
with the largest concentration in the motor carrier industry. Additionally,
regulated employees are subject to random substance abuse testing, post-accident
testing and "reasonable suspicion" testing. The unregulated market primarily
consists of companies testing new employees.
Currently, the urine specimen substance abuse testing industry has several
large nationally known laboratories, such as Corning Clinical Laboratories, Lab
Corp. and SmithKline-Beecham, offering drug testing lab analysis.
The U.S. Department of Transportation ("DOT") has ruled that activities
involving the management of MRO services or activities that give the appearance
of any type of financial arrangement between an MRO and a laboratory are
prohibited from being conducted by the laboratory. The net effect of this ruling
is to limit the laboratory's ability to provide drug testing management
services. Therefore, with respect to testing performed under DOT regulations
(which is the standard by which all substance abuse testing programs are
measured), the laboratory cannot provide full service substance abuse testing
program management and meet DOT requirements.
34
<PAGE>
Companies that manage their own substance abuse testing programs are
required to remain abreast of changing DOT regulations and their implications as
well as maintain significant amounts of data that must be processed, audited and
stored. A significant amount of work is required in administering substance
abuse testing programs, and these programs are complex to manage. The Company
believes that these factors have created a market opportunity for third-party
administrators or program management companies since it appears some companies
are moving to outsource substance abuse testing program management.
Strategy
The key elements of DataMed's strategy to address the market opportunity
include:
Expand sales and marketing efforts to increase its customer base nationally
and internationally. The Company will continue to market complete program
management services principally to Fortune 1000 companies. The Company's
complete program management services (ProScreen Plus(TM)) typically provide
higher profit margins for the Company. For the year ended December 31, 1995, the
Company's complete program management services accounted for 48% of DataMed's
revenues. For the nine months ended September 30, 1996, DataMed's complete
program management services accounted for approximately 70% of DataMed's
revenues.
Expand international markets within the transportation and healthcare
industries. The Company has customers in international markets outside the U.S.
Many international customers have some local requirements for substance abuse
testing, primarily in the shipping industry. The Company has dedicated personnel
to continue to pursue these opportunities.
Develop new healthcare management software products and services. With
federal regulations mandating substance abuse testing, the Company will continue
to provide additional products and services for complete substance abuse testing
management.
Maintain its technological advantage in developing regulatory compliance
tracking software and quality assurance software products. Since the substance
abuse testing management process is labor intensive due to the amount of data
that must be processed and audited, DataMed intends to use Wyndgate's technology
to attempt to develop an advanced system to reduce the costs and increase the
quality of its services. There can be no assurance that the Company will be
successful in developing an automated test tracking system or that it will
operate effectively.
Services
DataMed's service allows a company that no longer wants to micro-manage its
substance abuse program to outsource the administration of its entire substance
abuse program. DataMed's goal is to help a company increase total program
quality and decrease total program costs. DataMed can coordinate or actively
manage the specimen collection process, the laboratory testing process, the
medical review process, random testing process, the blind sample quality control
process, the substance abuse testing process and the data management process,
including compliance reporting and record storage. DataMed's services can be
purchased independently or as a management package. DataMed has two basic levels
of management services: ProScreen(TM) and ProScreen Plus(TM).
ProScreen(TM) is DataMed's program coordination service and is designed to
attract the medium to large customer operating in either a regulated or
unregulated environment. ProScreen(TM) is a solution for clients that realize
their programs are large enough to have become a burden, but small enough not to
warrant a full time employee. DataMed, through its ProScreen(TM) service, offers
companies a limited range of "pro-active" management services designed to ease
the burden of an internally managed program. ProScreen(TM) can also be an entry
point for a client that wants to eventually move to a ProScreen Plus(TM) level
of service.
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<PAGE>
ProScreen Plus(TM) is a customized service designed to attract Fortune 1000
clients who have decided to outsource the management of their entire program.
Through its ProScreen Plus(TM) product, DataMed focuses its efforts on helping
the large organization concentrate on its core business, increase program
quality and reduce total program costs. ProScreen Plus(TM), in its truest form,
allows DataMed to function as a company's substance abuse department.
Customers
A customer may have programs that are federally regulated, unregulated or
both. Fortune 1000 customers tend to have both regulated and unregulated
programs. The Federal Highway Administration oversees the largest percentage of
regulated testing. Companies regulated by the Federal Aviation, Transit and
Railroad Administrations (and other federal organizations) are also subject to
federally mandated programs. Unregulated testing accounts for the largest market
segment and is driven by company policy, state and local laws.
International companies are also potential customers. DataMed currently
provides substance abuse testing management services to approximately 40
companies internationally. However, the management of the Company believes that
the international market is expected to grow at a slower rate due to lack of
governmental regulations. Department of Transportation regulations adopted after
the passage of The North American Free Trade Agreement require Mexican and
Canadian transportation companies using U.S. road systems in cross-border trade
to comply with U.S. Department of Transportation regulations, including
substance abuse testing.
DataMed believes it is ahead of its competition when it comes to offering
international substance abuse testing management services because the Company
has taken many years to develop an overseas collection site network and has
developed procedures to timely usher specimens through customs for analysis.
Competition
When examining competitors it is important to distinguish between program
coordination and program management. There are hundreds of companies capable of
providing program coordination services. Some of these direct competitors are:
Substance Abuse Management, Inc. ("SAMI"); Concord, Inc.; National Safety
Alliance ("NSA"); Drug Intervention Services of America ("DISA"); First Lab; and
University Services. If any of these companies change their marketing and
operational approach, they could quickly become more of a presence in the
program management marketplace.
The Company believes that DataMed's primary competitive advantage is
quality and name recognition. DataMed has established policies and procedures in
an attempt to achieve total quality management and continuous quality
improvement goals.
The Company believes that corporate outsourcing trends and regulatory
burdens (e.g., substance abuse testing) will continue to increase and DataMed
will attempt to capitalize on these trends. Program management companies are
increasing in number. The Company believes that SAMI, DISA, NSA, University
Services, FirstLab and Concord, Inc. are the largest competitors present in the
marketplace.
LEGAL PROCEEDINGS
The Company currently is not involved in any legal proceedings.
36
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MANAGEMENT
The following table sets forth the names and positions of the director,
executive officers and key employees of the Company:
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
Michael I. Ruxin, M.D. 51 Chairman of the Board and CEO 1989
Joseph F. Dudziak 59 President and COO 1995
William J. Collard 55 Secretary/Treasurer, 1995
Director and Wyndgate President
Gerald F. Willman, Jr. 39 Director and Wyndgate Vice-President 1995
Gregory R. Huls 45 Chief Financial Officer 1996
and General Counsel
John D. Gleason 37 Director 1994
</TABLE>
The directors of the Company are elected to hold office until the next
annual meeting of shareholders and until their respective successors have been
elected and qualified. Officers of the Company are elected annually by the Board
of Directors and hold office until their successors are elected and qualified.
The following sets forth biographical information concerning the Company's
directors and executive officers for at least the past five years. All of the
following persons who are executive officers of the Company are full time
employees of the Company.
Michael I. Ruxin, M.D., the founder of the Company, has been an officer and
director of the Company since its incorporation in 1989 and is currently the
Chairman and Chief Executive Officer of the Company. From 1982 to 1994, Dr.
Ruxin was a director of GeriMed of America, Inc., a private company
administering senior health care centers. From 1985 to 1993, Dr. Ruxin was an
officer and director of CBL Medical, Inc. ("CBL"), a public company which
managed multiple medical groups, including Medcomp Medical Group which was a
group of small clinics owned by Dr. Ruxin. CBL focused on providing second
opinions on workers compensation claims. Dr. Ruxin left CBL management in 1988
to found the Company although he remained on the board of CBL due to his
continued ownership of clinics until 1993. Five years after Dr. Ruxin left CBL
management, in 1993, CBL filed a Petition under Chapter 7 of the Federal
Bankruptcy Code to liquidate due to a change in the workers compensation
regulations in the State of California. Dr. Ruxin received a B.A. degree from
the University of Pittsburgh and an M.D. degree from the University of Southern
California. Dr. Ruxin is a licensed physician in California and Colorado. He is
a member of the American Association of Medical Review Officers.
Joseph F. Dudziak has been President and Chief Operating Officer of the
Company since June 1995. From January 1993 to June 1995, he was employed as a
"site executive" with Analysts International Corporation, a contract consulting
firm engaged primarily in development and support of software. From August 1991
to December 1992, he was a self-employed executive consultant, during which time
he provided consulting services primarily to The Wyndgate Group, Ltd. in the
areas of product development and marketing and the development of a business
plan. For the 30 years prior to August 1991, Mr. Dudziak was employed in various
capacities (most recently as a group Vice President) by Control Data Corporation
("CDC"), which was involved in the computer systems, software and information
management businesses.
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William J. Collard has been a director and the Secretary/Treasurer of the
Company and the President of the Wyndgate division since May 1995. From 1984 to
May 1995 he was president and a director of The Wyndgate Group, Ltd., and
responsible for directing the sales, operations and research and development
efforts of The Wyndgate Group, Ltd. From 1976 to 1984, Mr. Collard was the
executive director of Sigma Systems, Inc., a company that provides colleges and
other institutions with administrative computer applications. Mr. Collard
received a B.S. degree in Business Administration (Finance) and an M.S. degree
in Business Administration (Quantitative Methods) from California State
University.
Gerald F. Willman, Jr. has been a director of the Company and the Vice
President of the Wyndgate division since May 1995. Mr. Willman was director and
then a Vice President of The Wyndgate Group, Ltd., from 1984 to 1995 and was
responsible for the overall design and development of the products developed by
The Wyndgate Group, Ltd., including research of new technologies. Prior to his
employment at The Wyndgate Group, Ltd., he was employed as a development team
leader at Systems Research, Inc. Mr. Willman received a B.S. degree from Hampden
Sydney College and M.B.A. degree from National University.
Gregory R. Huls has been the Chief Financial Officer and General Counsel of
the Company since October, 1996. From May, 1996 through October, 1996, Mr. Huls
was engaged in the private practice of law. From 1993 through 1995, Mr. Huls was
a full time student at the University of Denver, College of Law. From 1992 to
1993, Mr. Huls was Senior Vice President and Chief Financial Officer for
Comprecare Holdings, Inc., and from 1987 to 1992, Vice President of Finance and
Chief Financial Officer for AMISUB (Comprecare), Inc. where he directed the
financial, provider contracting and information system functions of that health
maintenance organization (HMO). Mr. Huls received a B.S. degree in Business
(Accounting) from Indiana University and a J.D. degree from the University of
Denver, College of Law. He is also a certified public accountant. He is a member
of the American Institute of Certified Public Accountants, the Colorado Society
of Certified Public Accountants, and the Colorado and American Bar Associations.
John D. Gleason has been a director of the Company since 1994. Since
November, 1990 he has been employed with MDS Inc., formerly MDS Health Group
Limited ("MDS"), a publicly held Canadian company that is engaged in the
business of medical laboratory testing, currently as Vice President of Corporate
Strategic Initiatives and previously as Chief Financial Officer and Vice
President of Finance. Mr. Gleason received an Honors degree (the Canadian
equivalent of a bachelors degree) from Queens University in Ontario, Canada and
a masters degree from the University of Toronto. Mr. Gleason is a chartered
accountant.
The Company's Audit/Systems Committee acts as the liaison between the
Company and its independent public accountants. Its members consist of Dr. Ruxin
and Mr. Gleason who were recently appointed in such capacity and have not yet
met as a committee. The Audit/Systems Committee is responsible for reviewing and
approving the scope of the annual audit undertaken by the Company's independent
accountants and will meet with the accountants to review the progress and
results of their work, as well as any recommendations the accountants may offer.
The Audit/Systems Committee will also review the fees of the independent
accountants and make recommendations to the Board of Directors as to the
appointment of the accountants. In connection with the Company's internal
accounting controls, the Audit/Systems Committee will review the internal audit
procedures and reporting systems in place at the Company and review their
accuracy and adequacy with management and with the Company's independent
accountants.
The Company's Compensation Committee, which will recommend compensation
levels to the Board of Directors, consists of Dr. Ruxin and Mr. Collard who were
recently appointed in such capacity and have not yet met as a committee. The
Compensation Committee will review salaries, bonuses, and other forms of
compensation for officers and key employees of the Company and its subsidiaries,
and will establish salaries, benefits, and other forms of compensation for new
employees. Included in the Compensation Committee's responsibility is the
issuance of stock bonuses and stock options under the Company's two stock
option/bonus plans. In addition, the Compensation Committee will review other
matters concerning compensation and personnel as the Board of Directors may
request. The Compensation Committee will design the Company's compensation to
enable the Company to attract, retain, and reward highly qualified executives,
while maintaining a strong and direct link between executive pay, the Company's
financial performance, and total stockholder return. The Compensation Committee
believes that officers and certain other key employees should have a significant
stake in the Company's stock price performance under programs which link
executive compensation to stockholder return.
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<PAGE>
Scientific Advisory Committee
The Board of Directors has established a Scientific Advisory Committee to
advise and consult with the Board of Directors as may be requested by the Board
from time-to-time. Currently, the Scientific Advisory Committee consists of
William C. Dickey, M.D., Cathy Bryan and Ronald O. Gilcher, M.D. It is not
presently contemplated that the Scientific Advisory Committee will have formal
meetings as a group. The members of the Scientific Advisory Committee will not
receive any cash compensation from the Company for serving in that capacity, but
each will be reimbursed for any expenditures incurred on behalf of the Company.
In connection with their appointment to the Scientific Advisory Committee, in
January, 1996, Dr. Dickey, Ms. Bryan and Dr. Gilcher were issued options to
purchase 2,500, 1,000 and 1,000 shares, respectively, of the Company's Common
Stock, exercisable at $3.75 per share, which options vest over a five year
period and are exercisable until January, 2006.
William C. Dickey, M.D., Chairman of the Scientific Advisory Committee, has
been the Medical Director, Chief Executive Officer and President of the Belle
Bonfils Memorial Blood Center, Denver, Colorado since July 1990. From 1972 to
1974, he was the Director of the Blood Bank for Irwin Army Hospital, located in
Texas, and from 1974 to 1991, he was the Director of the Blood Bank for St.
Anthony Hospital, Denver, Colorado. He graduated from the University of Denver
with a B.S. degree and received his M.D. degree from the University of Colorado
School of Medicine. He was certified by the American Board of Pathology for
Anatomic and Clinical Pathology in 1972, and is licensed to practice medicine in
Colorado and Kansas.
Cathy Bryan has been the Chief Executive Officer, Administrator and FDA
Responsible Head for the Blood Bank of the Redwoods, Santa Rosa, California,
since July 1987. She received a B.A. degree in social sciences from San Jose
State University. She was one of the founders of the Blood Centers of
California, of which she served as a Director (1987) and President (1994), and
is a member of the California Blood Bank Society, of which she served as
Chairman of the Administrator Program from 1992 - 1994, and the American
Association of Blood Banks.
Ronald O. Gilcher, M.D. has been the President and Chief Executive Officer
of the Sylvan N. Goldman Center, Oklahoma Blood Institute, Oklahoma City,
Oklahoma, since 1990 and was the director thereof from 1979 to 1990. He served
in the U.S. Army Medical Corps at Walter Reed Army Institute of Research,
Washington, D.C. from 1968 - 1971, and from 1971 to the present, has been an
assistant or associate professor at the University of Pittsburgh School of
Medicine (1971-1979) and an adjunct professor and clinical associate professor
at the University of Oklahoma School of Medicine (1979 to present). Dr. Gilcher
graduated from the University of Pittsburgh with a B.S. degree in chemistry, and
received his M.D. degree from Jefferson Medical College. He was certified by the
American Board of Internal Medicine for Internal Medicine (1969 and 1977) and by
the American Board of Internal Medicine for Hematology (1972), and is licensed
to practice medicine in the states of Pennsylvania, Oklahoma and California.
Significant Employees
The following employees make a significant contribution to the business of
the Company:
Bart K. Valdez, age 33, has been the Director of Operations for DataMed
since October, 1996. He was Director of Finance and Operations and also acted as
the Principal Financial Officer for the Company from June 1995 through
mid-October 1996. Mr. Valdez functions under the direct supervision of the
President and is accountable for the effective operations of the account
management team, medical review, data management, vendor management and
information systems departments. From 1989 to joining the Company in 1995, he
was employed by Baxter International, Inc., a medical supply and manufacturing
company, most recently as Regional Director of Operations for the Mountain
Region. Mr. Valdez received a B.S. degree in Management from Colorado State
University and a M.B.A. degree from the University of Colorado.
L.E. "Gene" Mundt, age 57, has been the Senior Vice President for Wyndgate
since February, 1996, where he is responsible for medical applications. Prior to
joining Wyndgate, from 1967 to 1996, Mr. Mundt was employed by Control Data
Systems, Inc., a computer hardware and software manufacturer, most recently as
the Director, Integration and Consulting Services, Central Region, North and
South America Operations. Mr. Mundt received a Bachelors degree in Math from the
University of Iowa.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The following table sets forth information regarding compensation paid to
the Company's CEO and the other executive officers of the Company who received
in excess of $100,000 of salary and bonus from the Company during the year ended
December 31, 1996:
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation ($$) Awards
------------------------ -------------------------
Restricted Options Other
Name and Position Year Salary Bonus Stock Awards & SARs Compensation
- ----------------- ---- ------ ----- ------------ ------ ------------
($$) ($$) ($$) (##) ($$)
<S> <C> <C> <C> <C> <C> <C> <C>
Michael I. Ruxin, 1996 $195,000 -0- -0- -0- $ 16,520 (1)
Chairman and CEO 1995 $190,000 -0- -0- -0- $ 16,520 (1)
1994 $180,000 -0- -0- -0- $ 8,216 (2)
Joseph F. Dudziak, 1996 $110,000 -0- -0- 25,000 (3) $ 4,800 (4)
President and COO 1995 $105,000 -0- -0- 100,000 (3) $ 4,800 (4)
1994 -0- -0- -0- -0- $ -0-
William J. Collard, 1996 $100,000 -0- -0- -0- $ 180,400 (5)
Secretary/Treasurer 1995 $100,000 -0- -0- -0- $ 30,400 (5)
and Director, 1994 $ 75,000 $100(6) -0- -0- $ -0-
Wyndgate President
</TABLE>
- ----------
(1) Dr. Ruxin receives $5,000 per annum in life insurance premiums and a $960
per month car allowance.
(2) Dr. Ruxin received a car allowance of $368 per month, and $3,800 in life
insurance premiums.
(3) In June 1995, Mr. Dudziak received options to purchase 100,000 shares
exercisable at $2.45 per share. In September 1996, Mr. Dudziak received
options to purchase 25,000 shares exercisable at $2.50 per share. These
options vest at the rate of 20% per year. No value has been attributed to
these options since the exercise price was the estimated fair value of the
Company's shares at the time of grant.
(4) Mr. Dudziak receives $400 per month car allowance.
(5) Mr. Collard receives a $450 per month car allowance. In 1995, Mr. Collard
received $25,000 under his non-compete agreement. In 1996, Mr. Collard
received $175,000 under his non-compete agreement.
(6) In 1994, Mr. Collard received a performance bonus of $100.
Employment Agreements
The Company has entered into an employment agreement with Dr. Ruxin for a
period of five years commencing May 24, 1995. The initial term of this agreement
can be extended at the close of the second year for an additional two years
beyond the initial term (creating a term of seven years from May 24, 1995).
Under the agreement, Dr. Ruxin receives a salary of $190,000 per year and
certain other fringe benefits. Dr. Ruxin's employment agreement includes a
cost-of-living increase at the rate of 2 1/2% per annum, plus any other increase
which may be determined from time to time at the discretion of the Company's
Board of Directors. Pursuant to the employment agreement, Dr. Ruxin is provided
with a car on such lease terms to be determined by the Company, provided that
the monthly operating costs (including lease payments) to be paid by the Company
will not exceed $960. The agreement also includes a covenant not to compete for
which Dr. Ruxin was to be paid a lump sum of $115,000 on January 1, 1996. No
payments have been made in connection with the covenant not to compete. The
covenant not to compete will terminate the later of five years from the date of
the agreement or the term of the agreement; hence, the Company will not receive
any benefit from the covenant not to compete unless the agreement is terminated
prior to May 24, 2000. Dr. Ruxin has now agreed that such payment will have to
be made only if and when the Company has sufficient cash flow, as determined by
the Board of Directors. Proceeds from this offering will not be used to make any
payments in connection with the covenant not to compete. Dr. Ruxin's employment
40
<PAGE>
under the employment agreement may be terminated by Dr. Ruxin upon the sale by
the Company of substantially all of its assets, the sale, exchange or other
disposition of at least 40% of the outstanding voting shares of the Company, a
decision by the Company to terminate its business and liquidate its assets, the
merger or consolidation of the Company with another entity or an agreement to
such a merger or consolidation or any other type of reorganization, or if the
Company makes a general assignment for the benefit of creditors, files for
voluntary bankruptcy or if a petition for the involuntary bankruptcy of the
Company is filed in which an order for relief is entered and remains in effect
for a period of thirty days or more, or if the Company seeks, consents to, or
acquiesces in the appointment of a trustee, receiver or liquidator of the
Company or any material part of its assets. Dr. Ruxin's employment under the
employment agreement also may be terminated by reason of Dr. Ruxin's death or
disability or for cause as set forth in the employment agreement. If the
agreement is terminated by the Company for any reason other than cause or
permanent disability, the Company must pay Dr. Ruxin a lump sum severance
payment of $2.5 million.
On May 24, 1995, the Company also entered into a five year employment
agreement with William J. Collard which contains the same extension provision
and reasons for termination as does Dr. Ruxin's agreement, and provides for an
annual salary of $100,000. Mr. Collard's employment agreement includes a
cost-of-living increase at the rate of 2 1/2% per annum, plus any other increase
which may be determined from time to time at the discretion of the Company's
Board of Directors. Mr. Collard's agreement also contains a covenant not to
compete, with payments of $100,000 for the covenant to have been made on January
1, 1996 and May 24, 1996, respectively. Aggregate payments of $200,000 were made
as follows: $25,000 in December, 1995; $75,000 in January, 1996; and $100,000 in
May, 1996. The covenant not to compete will terminate the later of five years
from the date of the agreement or the term of the agreement; hence, the Company
will not receive any benefit from the covenant not to compete unless the
agreement is terminated prior to May 24, 2000. If Mr. Collard's agreement is
terminated by the Company for any reason other than cause or permanent
disability, the Company must pay him a lump sum severance payment of $2.5
million. Mr. Collard also receives a car allowance of $450 per month.
The Company also has an employment agreement with Gerald F. Willman, Jr.
which contains an extension provision for the term of the agreement and reasons
for termination similar to those of Dr. Ruxin and Mr. Collard with an annual
salary of $95,000, except the initial term is for three years commencing May 24,
1995 and the extension is for an additional two years. Mr. Willman's employment
agreement includes a cost-of-living increase at the rate of 2 1/2% per annum,
plus any other increase which may be determined from time to time in the
discretion of the Company's Board of Directors. The employment agreement
requires that if he is terminated by the Company for any reason other than cause
or permanent disability, the Company must pay Mr. Willman a lump sum severance
payment of $1.0 million.
On June 28, 1995, the Company entered into an employment agreement with
Joseph F. Dudziak for a two year term pursuant to which Mr. Dudziak earns a
salary of $105,000 per year. Mr. Dudziak's employment agreement contains the
same reasons for termination as the other employment agreements described above,
but does not include the same extension provision or an annual cost-of-living
increase. However, if increased, his salary may not be decreased thereafter
during the term of the agreement without Mr. Dudziak's consent. If Mr. Dudziak's
employment is terminated by the Company for any reason other than for cause or
permanent disability, the Company is required to pay Mr. Dudziak his salary and
benefits for the full two years. Mr. Dudziak is entitled to certain incentive
compensation based on the Company's pre-tax profits for 1996. The agreement also
grants Mr. Dudziak options to purchase an aggregate of 100,000 shares of the
Company's common stock. Subject to early vesting in certain circumstances, the
options vest over a five year period at the rate of 20% per year and are
exercisable at $2.45 per share, which was the estimated fair value of the shares
at the time of grant. Mr. Dudziak receives a car allowance of $400 per month.
The Company has agreed to pay Mr. Dudziak approximately $25,000 for moving
expenses which have not been paid as of the date of this Prospectus.
41
<PAGE>
On February 8, 1996, the Company entered into an employment agreement with
L. E. "Gene" Mundt for a three year term pursuant to which Mr. Mundt earns a
salary of $95,000 per year. Mr. Mundt's employment agreement contains the same
reasons for termination as the other employment agreements described above, but
does not include an extension provision or an annual cost-of-living increase. If
Mr. Mundt's salary is increased, it may not be decreased thereafter during the
term of the agreement without Mr. Mundt's consent. If Mr. Mundt's employment is
terminated for any reasons other than for cause or permanent disability, the
Company is required to pay Mr. Mundt his salary and benefits for the full three
year period. Mr. Mundt is entitled to certain incentive compensation based on
the Company's pre-tax profits for 1996. The agreement also grants Mr. Mundt
options to purchase an aggregate of 75,000 shares of the Company's Common Stock
at an exercise price of $3.75 per share which was the estimated fair value of
the shares at the time of grant. Under the terms of the agreement, Mr. Mundt
receives non-qualified stock options to purchase 25,000 shares of Common Stock
which are exercisable for ten years from the date of the agreement and incentive
stock options to purchase 50,000 shares of common stock which, subject to early
vesting in certain circumstances, vest over a five year period at the rate of
20% per year. Mr. Mundt receives a car allowance of $400 per month. During 1996,
the Company paid Mr. Mundt approximately $42,000 for moving expenses.
The Company also has an employment agreement with Bradley V. Maberto which
contains an extension provision for the term of the agreement and reasons for
termination similar to those of Mr. Willman. The agreement provides for an
annual salary of $55,000. The initial term for the agreement is three years
commencing on May 24, 1995 and the extension is for an additional two years. Mr.
Maberto's employment agreement includes a cost-of-living increase at the rate of
2 1/2% per annum, plus any other increase which may be determined from time to
time in the discretion of the Company's Board of Directors. The agreement
requires that if Mr. Maberto is terminated by the Company for any reason other
than cause or permanent disability, the Company must pay Mr. Maberto a lump sum
severance payment of $1.0 million.
On October 14, 1996, the Company hired Gregory R. Huls as Chief Financial
Officer and General Counsel for the Company. According to the terms of his
employment arrangement, which has not yet been reduced to a written employment
agreement, Mr. Huls is to receive an annual salary of $95,000 and an annual
automobile allowance of $4,800. In addition, Mr. Huls was granted incentive
stock options to purchase 75,000 shares, which vest over a five year period at
20% per year and are exercisable at $2.50 per share, and the Company agreed to
pay the premium on a $15,000 life insurance policy for Mr. Huls.
Compensation of Directors
Members of the Company's Board of Directors are not compensated in their
capacities as Board Members. However, the Company reimburses all of its
officers, directors and employees for accountable expenses incurred on behalf of
the Company.
Stock Option Plan
The Company has adopted its Amended and Restated Stock Option Plan (the
"Plan") which provides for the issuance of options or stock bonuses to purchase
up to 1,234,279 shares of Common Stock to employees, officers, directors and
consultants of the Company. The purposes of the Plan are to encourage stock
ownership by employees, officers, directors and consultants of the Company so
that they may acquire or increase their proprietary interest in the Company, to
(i) reward employees, officers, directors and consultants for past services to
the Company and (ii) encourage such persons to become employed by or remain in
the employ of or otherwise continue their association with the Company and to
put forth maximum efforts for the success of the business of the Company.
The Plan is administered by a Committee consisting of the Board of
Directors or Compensation Committee, if appointed. At its discretion, the
Committee may determine the persons to whom Options may be granted and the terms
thereof. As noted above, the Committee may issue options to the Board.
42
<PAGE>
The terms of any Options granted under the Plan are not required to be
identical as long as they are not inconsistent with the express provisions of
the Plan. In addition, the Committee may interpret the Plan and may adopt, amend
and rescind rules and regulations for the administration of the Plan.
Options may be granted as incentive stock options ("Incentive Options")
intended to qualify for special treatment under the Internal Revenue Code of
1986, as amended (the "Code"), or as non-qualified stock options ("Non-Qualified
Options") which are not intended to so qualify. Only employees of the Company
are eligible to receive Incentive Options. The period during which Options may
be exercised may not exceed ten years. The exercise price for Incentive Options
may not be less than 100% of the fair market value of the Common Stock on the
date of grant; except that the exercise price for Incentive Options granted to
persons owning more than 10% of the total combined voting power of the Common
Stock may not be less than 110% of the fair market value of the Common Stock on
the date of grant and may not be exercisable for more than five years. The
exercise price for Non-Qualified Options may not be less than 85% of the fair
market value of the Common Stock on the date of grant. The Plan defines "fair
market value" as the last sale price of the Company's Common Stock as reported
on a national securities exchange or on the NASDAQ NMS or, if the quotation for
the last sale reported is not available for the Company's Common Stock, the
average of the closing bid and asked prices of the Company's Common Stock as
reported by NASDAQ or on the electronic bulletin board or, if none, the National
Quotation Bureau, Inc.'s "Pink Sheets" or, if such quotations are unavailable,
the value determined by the Committee in accordance with its discretion in
making a bona fide, good faith determination of fair market value.
The Plan contains provisions for proportionate adjustment of the number of
shares issuable upon the exercise of outstanding Options and the exercise price
per share in the event of stock dividends, recapitalizations resulting in stock
splits or combinations or exchanges of shares.
In the event of the proposed dissolution or liquidation of the Company, or
any corporate separation or division, including, but not limited to, split-up,
split-off or spin-off, merger or consolidation of the Company with another
company in which the Company is not the survivor, or any sale or transfer by the
Company of all or substantially all its assets or any tender offer or exchange
offer for or the acquisition, directly or indirectly, by any person or group for
more than 50% of the then outstanding voting securities of the Company, the
Committee may provide that the holder of each Option then exercisable will have
the right to exercise such Option (at its then current Option Price) solely for
the kind and amount of shares of stock and other securities, property, cash or
any combination thereof receivable upon such dissolution, liquidation, corporate
separation or division, merger or consolidation, sale or transfer of assets or
tender offer or exchange offer, by a holder of the number of shares of Common
Stock for which such Option might have been exercised immediately prior to such
dissolution, liquidation, or corporate separation or division, merger or
consolidation, sale or transfer of assets or tender offer or exchange offer; or
in the alternative the Committee may provide that each Option granted under the
Plan will terminate as of a date fixed by the Committee; provided, however, that
not less than 30 days written notice of the date so fixed will be given to each
recipient, who will have the right, during the period of 30 days preceding such
termination, to exercise the Option to the extent then exercisable. To the
extent that Section 422(d) of the Code would not permit this provision to apply
to any outstanding Incentive Options, such Incentive Options will immediately
upon the occurrence of the dissolution or liquidation, etc., be treated for all
purposes of the Plan as Non-Qualified Options and shall be immediately
exercisable as such.
Except as otherwise provided under the Plan, an Option may not be exercised
unless the recipient then is an employee, officer or director of or consultant
to the Company or a subsidiary of or parent to the Company, and unless the
recipient has remained continuously as an employee, officer or director of or
consultant to the Company since the date of grant of the Option.
If the recipient ceases to be an employee, officer or director of, or
consultant to, the Company or a subsidiary or parent to the Company (other than
by reason of death, disability or retirement), other than for cause, all Options
theretofore granted to such recipient but not theretofore exercised will
terminate three months after the date the recipient ceased to be an employee,
officer or director of, or consultant to, the Company.
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<PAGE>
If the recipient ceases to be an employee, officer or director of, or
consultant to, the Company or a subsidiary or parent to the Company by reason of
termination for cause, all Options theretofore granted to such recipient but not
theretofore exercised will terminate thirty days after the date the recipient
ceases to be an employee, officer or director of, or consultant to, the Company.
If a recipient dies while an employee, officer or director of or a
consultant to the Company, or if the recipient's employment, officer or director
status or consulting relationship, shall terminate by reason of disability or
retirement, all Options theretofore granted to such recipient, whether or not
otherwise exercisable, unless earlier terminated in accordance with their terms,
may be exercised by the recipient or by the recipient's estate or by a person
who acquired the right to exercise such Options by bequest or inheritance or
otherwise by reason of the death or disability of the recipient, at any time
within one year after the date of death, disability or retirement of the
recipient; provided, however, that in the case of Incentive Options such
one-year period will be limited to three months in the case of retirement.
Options granted under the Plan are not transferable other than by will or
by the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act of 1974, or the rules thereunder. Options may be exercised,
during the lifetime of the recipient, only by the recipient and thereafter only
by his legal representative.
The Committee may suspend, terminate, modify or amend the Plan, but without
shareholder approval the Board may not materially increase the number of shares
as to which Options may be granted, change the eligibility requirements for
persons entitled to participate in the Plan or materially increase the benefits
to be received by any participant under the Plan. The Board may not adversely
affect any Option previously granted without the consent of the participant.
Unless sooner terminated, the Plan will expire on May 31, 2000.
Option Grants
The following table sets forth certain information regarding options to
purchase shares of Common Stock issued to Executive Officers of the Company
during the fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
Option Grants in 1996
Number
of % of Total
Securities Options Granted
Underlying to
Options Employees Exercise Expiration
Name Granted in 1996 Price Date
---- ------- ------- ----- ----
<S> <C> <C> <C> <C>
Joseph F. Dudziak 25,000 (1) 10.8% $2.50 09/30/06
</TABLE>
- ----------
(1) Options to purchase 5,000 shares vest each year Mr. Dudziak remains in the
employ of the Company, beginning September 30, 1997 and continuing each
September 30 thereafter. Once vested, the options are exercisable for a ten
year period.
There were no options exercised during the last fiscal year by the
Company's executive officers, and no value has been ascribed to their
unexercised options at December 31, 1996 as there was and is no public market
for the Company's Common Stock.
Limitations on Directors' and Officers' Liability
The Company's Articles of Incorporation limit the liability of directors to
shareholders for monetary damages for breach of a fiduciary duty except in the
case of liability: (i) for any breach of their duty of loyalty to the Company or
its shareholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) for unlawful
distributions as provided in Section 7-108-403 of the Colorado Business
Corporation Act; or (iv) for any transaction from which the director derived an
improper personal benefit.
44
<PAGE>
The Company's Articles of Incorporation and Bylaws provide for the
indemnification of directors and officers of the Company to the maximum extent
permitted by law, including Section 7-109-102 of the Colorado Business
Corporation Act, against all liability and expense (including attorneys' fees)
incurred by reason of the fact that the officer or director served in such
capacity for the Company, or in a certain capacity for another entity at the
request of the Company. Section 7-109-102 of the Colorado Business Corporation
Act provides generally for indemnification of directors against liability
incurred as a result of actions, suits or proceedings if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the Company. The Company has entered into employment
agreements with certain of its employees which provide for indemnification in
addition to the indemnification provided for above. These agreements, among
other things, indemnify and hold harmless the employees against all claims,
actions, costs, expenses, damages and liabilities arising out of or in
connection with activities of the Company or its employees or other agents
within the scope of the employment agreements or as a result of being an officer
or director of the Company. Excluded is indemnification for matters resulting
from gross negligence or willful misconduct of the employee. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified persons as directors and officers. Insofar as indemnification
for liabilities arising under the Securities Act of 1933, as amended (the "Act")
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being or
may be sought, and the Company is not aware of any other pending or threatened
litigation that may result in claims for indemnification by any director,
officer, employee or other agent.
45
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date hereof, the ownership of the
Company's Common Stock by (i) each director and executive officer of the
Company, (ii) all executive officers and directors of the Company as a group,
and (iii) all persons known by the Company to beneficially own more than 5% of
the Company's Common Stock prior to the Offering. The effect of conversion of
$516,200 of principal plus accrued interest of 10% Notes into 147,970 shares of
Common Stock has been included in the percentages shown below.
<TABLE>
<CAPTION>
Name and Amount and Nature
Address of of Beneficial Percent of Class
Shareholder Ownership (1) Before Offering After Offering
----------- ------------- --------------- --------------
<S> <C> <C> <C>
Michael I. Ruxin, M.D.(1) (12) 913,417 (2) 18.3% 11.5%
12600 W. Colfax
Suite A-500
Lakewood, CO 80215
Joseph F. Dudziak (1) 46,833 (3) 0.9% 0.6%
12600 W. Colfax Ave.
Suite A-500
Lakewood, CO 80215
William J. Collard (1) (12) 630,206 (4)(5) 12.6% 7.9%
11121 Sun Center Drive
Suite C
Rancho Cordova, CA 95670
Gerald F. Willman, Jr.(1) (12) 882,514 (6) 17.8% 11.2%
11121 Sun Center Drive
Suite C
Rancho Cordova, CA 95670
Gregory R. Huls (1) -0- (7) -0-% -0-%
12600 W. Colfax Ave.
Suite A-500
Lakewood, CO 80215
Lori J. Willman (1) (12) 882,514 (8) 17.8% 11.2%
11121 Sun Center Drive
Suite C
Rancho Cordova, CA 95670
Timothy J. Pellegrini (1)(9)(12) 343,480 (9) 6.9% 4.3%
11121 Sun Center Drive
Suite C
Rancho Cordova, CA 95670
MDS (US) Inc. (1)(11) 325,000 6.5% 4.1%
100 International Blvd.
Etobicoke, Ontario
Canada M9W 6J6
46
<PAGE>
Name and Amount and Nature
Address of of Beneficial Percent of Class
Shareholder Ownership (1) Before Offering After Offering
----------- ------------- --------------- --------------
Gordon Segal (10)(12) 263,417 (10) 5.3% 3.3%
550 5th Ave.
New York, NY 10019
John D. Gleason -0- -0-% -0-%
100 International Blvd.
Etobicoke, Ontario
Canada M9W 6J6
All Directors and Executive
Officers as a group (6 persons) 2,472,970 48.7% 30.9%
</TABLE>
- ----------
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by such person,
but are not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed.
(2) Includes 6,667 shares underlying 10% Notes purchased by Michael I. Ruxin,
M.D. in the principal amount of $25,000, an estimated 500 shares from
accrued interest on the 10% Notes and 6,250 shares underlying warrants
issued in connection with the purchase of the 10% Notes. Dr. Ruxin has
advised the Company he does not intend to convert his 10% Notes into shares
and therefore the principal and accrued interest will be paid from the
proceeds of this offering. See Use of Proceeds.
(3) Includes options exercisable from June 28, 1996 until June 27, 2006 to
purchase 20,000 shares at $2.45 per share, 13,333 shares underlying 10%
Notes purchased by Joseph F. Dudziak in the principal amount of $50,000, an
estimated 1,000 shares from accrued interest on the 10% Notes and 12,500
shares underlying warrants issued in connection with the purchase of the
10% Notes. Does not include 105,000 shares underlying the unvested portion
of Mr. Dudziak's options.
(4) Includes 16,000 shares underlying 10% Notes purchased by William J. Collard
in the principal amount of $60,000, an estimated 1,200 shares from accrued
interest on the 10% Notes and 15,000 shares underlying warrants issued in
connection with the purchase of the 10% Notes. Mr. Collard has advised the
Company that he does not intend to convert his 10% Notes into shares and
therefore the principal and accrued interest will be paid from the proceeds
of this offering. See Use of Proceeds.
(5) William J. Collard has granted individual options to an employee of
Wyndgate to purchase all or any part of 1,633 of his shares of the Company,
exercisable until September 21, 2005.
(6) Includes 346,481 shares owned by Lori J. Willman, the spouse of Gerald F.
Willman, Jr. Gerald F. Willman, Jr. has granted individual options to
certain employees of Wyndgate to purchase all or any part of 109,434 of his
shares of the Company, exercisable until September 21, 2005.
(7) Does not include 75,000 shares underlying the unvested portion of Mr. Huls'
option.
(8) Includes 536,033 shares owned by Gerald F. Willman, Jr., the spouse of Lori
J. Willman.
(9) Includes 5,000 shares underlying an option owned by Catherine Pellegrini,
the spouse of Mr. Pellegrini.
(10) Includes 6,667 shares underlying 10% Notes purchased by Gordon Segal in the
principal amount of $25,000, an estimated 500 shares from accrued interest
on the 10% Notes and 6,250 shares underlying warrants issued in connection
with the purchase of the 10% Notes.
(11) MDS (US) Inc., formerly known as MDS Inc., is a wholly owned subsidiary of
MDS Health Group Limited. The directors of MDS (US) Inc. are Wilfred G.
Lewitt, John A. Rogers and Douglas M. Phillips, and the officers are
Wilfred G. Lewitt, John A. Rogers, Douglas M. Phillips, E.K. Rygiel, R.H.
Yamada and Peter E. Brent.
47
<PAGE>
(12) On November 14, 1996, Michael I. Ruxin, William J. Collard, Gerald F.
Willman, Jr., Lori J. Willman, Timothy J. Pellegrini and Gordon Segal
(collectively, the "Shareholders") entered into a Proxy and Right of First
Refusal Agreement (the "Shareholders Agreement") with ODSI pursuant to
which each of the Shareholders granted an irrevocable proxy to ODSI to vote
their shares of the Company's Common Stock (i) in favor of a proposal to
approve any definitive agreement between the Company and ODSI relating to
the Technology, or (ii) on any other proposal relating to the sale of any
of the stock of the Company or all or substantially all of the assets of
the Company or any of the Technology, unless prior to the date of the
shareholders' meeting, the definitive agreement has been terminated under
certain conditions. Unless earlier terminated, the proxy granted by each of
the Shareholders expires November 14, 1997. Each of the Shareholders also
granted ODSI a right of first refusal to purchase the Shareholder's shares
until November 14, 1997, in the event such Shareholder proposes to
transfer, dispose of, or otherwise sell such Shareholder's shares to any
third party or grant to any third party an option or other right to buy any
shares of the Company's Common Stock held by such Shareholder. See The
Company -Wyndgate Technologies Division - Agreements with Ortho Diagnostic
Systems Inc.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 5, 1995, the shareholders of the Company approved a loan in the
amount of $161,500, with interest at 8% per annum, made by the Company to Sonya
M. Levine, the wife of Michael I. Ruxin, in 1994, which had not previously been
approved by the shareholders in accordance with Colorado corporate law.
Effective June 30, 1995, the Company forgave Ms. Levine's note in consideration
of the forgiveness of a note payable by the Company to Dr. Ruxin in the same
amount and at the same interest rate as Ms. Levine's note.
In May 1996, Gordon Segal, a beneficial owner of over 5% of the outstanding
Common Stock of the Company, and Michael I. Ruxin, William J. Collard, Joseph F.
Dudziak and Bart K. Valdez, officers and directors of the Company, purchased 10%
Notes in the principal amounts of $25,000, $25,000, $60,000, $50,000 and
$11,200, respectively, in the 10% Note offering by the Company. The notes are
convertible into 6,667, 6,667, 16,000, 13,333 and 2,986 shares of the Company's
Common Stock, respectively, ($3.75 of principal amount per share). Drs. Segal
and Ruxin and Messrs. Collard, Dudziak and Valdez were also issued warrants to
purchase 6,250, 6,250, 15,000, 12,500 and 2,800 shares of the Company's Common
Stock, respectively, at $3.75 per share in connection with their purchase of the
10% Notes. The purchases of the 10% Notes were on the same terms and conditions
as purchases by non-affiliates.
The Board of Directors of the Company has adopted resolutions that no
business transaction, loan or advance will be made by the Company to any
officer, director or holder of more than 5% of the Company's Common Stock, or
any affiliate thereof, unless it has been established that a bona fide business
purpose exists, that all future transactions between the Company and its
officers, directors, or principal shareholders, or any affiliate of any of such
person, must be approved or ratified by a majority of the disinterested
directors of the Company, and the terms of such transaction must be no less
favorable to the Company than could have been realized by the Company in an
arms-length transaction with an unaffiliated person. The Company believes that
all ongoing transactions with the Company's affiliates are on terms no less
favorable than could be obtained from unaffiliated third parties.
The Board of Directors of the Company has also adopted a resolution that
provides that the areas of business in which the Company shall be interested for
the purpose of the doctrine of corporate opportunities shall be the business of
information management software products and services. Any business opportunity
which falls within such areas of interest must be brought to the attention of
the Company for acceptance or rejection prior to any officer or director of the
Company taking advantage of such opportunity. John D. Gleason has been excluded
from such requirement. Any business opportunity outside such areas of interest
may be entered into by any officer or director of the Company without the
officer or director first offering the business opportunity to the Company.
Dr. Ruxin has personally guaranteed the Company's $1 million line of credit
and various leases totaling approximately $1.2 million.
48
<PAGE>
In June 1995, the Company agreed to pay approximately $20,000 in tax
liability incurred by the shareholders of The Wyndgate Group, Ltd. (an "S"
corporation) in connection with the merger between The Wyndgate Group, Ltd. and
the Company.
DESCRIPTION OF SECURITIES
Units
Each Unit consists of two shares of Common Stock and one Warrant. The
Common Stock and Warrants must be purchased together. The Common Stock and the
Warrants will not be separately tradeable or transferrable for a period of six
months from the date of this Prospectus or earlier at the discretion of the
Representative.
Common Stock
The Company is authorized to issue up to 40,000,000 shares of Common Stock,
$.01 par value. There are 4,966,626 shares presently outstanding. All shares of
Common Stock have equal voting rights and, when validly issued and outstanding,
have one vote per share in all matters to be voted upon by shareholders. There
are approximately 119 holders of record of the Company's Common Stock. The
shares of Common Stock have no preemptive, subscription, conversion or
redemption rights and may be issued only as fully paid and non-assessable
shares. Cumulative voting in the election of directors is not allowed, which
means that the holders of a majority of the outstanding shares represented at
any meeting at which a quorum is present will be able to elect all of the
directors if they choose to do so and, in such event, the holders of the
remaining shares will not be able to elect any directors. On liquidation of the
Company, each common shareholder is entitled to receive a pro rata share of the
Company's assets available for distribution to common stockholders.
The Company has outstanding options and warrants to purchase an aggregate
of 1,077,929 shares of Common Stock, including (i) 187,800 warrants outstanding
issued in conjunction with the 10% Notes, at exercise prices ranging from $1.00
to $3.75 per share and expiration dates ranging from October 15, 1997 to
September 30, 2006 and (ii) 150,000 warrants issued in January, 1997 in
connection with borrowing $450,000, which warrants are exercisable at a price
equal to 85% of the price per share of the shares of Common Stock included in
the Units. In addition to customary anti-dilution provisions, the exercise price
of the warrants may be adjusted if the Company issues Common Stock or Common
Stock purchase rights at a price less than the then exercise price.
Additionally, there are 137,646 shares (plus approximately 10,324 shares
issuable upon conversion of accrued interest) issuable upon conversion of the
10% Notes. The Company has no stock option plan or similar plan which may result
in the issuance of stock options, stock purchase warrants or stock bonuses other
than: (i) the Amended and Restated Stock Option Plan adopted by the Company
pursuant to which an aggregate of 1,234,279 shares of Common Stock have been
reserved for issuance pursuant to options or warrants; and (ii) the right of
shareholders of the Company who purchased shares in the Company's May 1995
private placement to receive a "share adjustment" to the extent the public
offering price per share of Common Stock is less than $4.90. Based upon an
offering price per share of $3.50, an additional 120,000 shares of Common Stock
are issuable to such shareholders.
Preferred Stock
The Company is authorized to issue up to a total of 10,000,000 shares of
preferred stock, $.01 par value, with the shares to be issued in series by the
Board of Directors. The Company's Board of Directors has designated 100,000
shares of preferred stock as Series A Preferred Stock, of which 66,667 were
issued and subsequently converted into an equal number of shares of the
Company's Common Stock. The remaining shares of preferred stock may be issued in
one or more series from time to time with such designations, rights, preferences
and limitations as the Company's board of directors may determine without
approval of its shareholders. Series A Preferred Stock has the same voting
rights of Common Stock, except that the holders of Series A Preferred Stock are
entitled to elect as a class one director to the Company's Board of Directors.
The holders of the Series A Preferred Stock shall be entitled to dividends when,
as and if declared on the same basis as the holders of the Company's Common
Stock. The rights, preferences and limitations of separate series of serial
49
<PAGE>
preferred stock may differ with respect to such matters as may be determined by
the Company's Board of Directors, including without limitation, the rate of
dividends, method or nature or prepayment of dividends, terms of redemption,
amounts payable on liquidation, sinking fund provisions, conversion rights and
voting rights. The ability of the Board to issue preferred stock could also be
used by it as a means for resisting a change of control of the Company and can
therefore be considered an "anti-takeover" device. The Company currently has no
plans to issue any shares of Preferred Stock.
10% Notes
The $751,200 principal amount of outstanding 10% Notes accrue interest at
the rate of 10% per annum until maturity, which is 20 days after the date of the
closing of this Offering. See Use of Proceeds. The dates of the Notes vary from
May 2, 1996 to June 25, 1996, depending upon the date funds were received from
subscribers. The 10% Notes may be prepaid in whole or in part from time to time
without penalty. The 10% Notes are convertible to Common Stock at the rate of
one share per $3.75 of interest and principal due and payable. Holders of
$516,200 in principal amount of 10% Notes have advised the Company they wish to
convert the principal and interest on their 10% Notes into an aggregate of
137,646 shares and approximately 10,324 shares, respectively, of Common Stock
upon the date hereof. In addition, 187,800 shares of Common Stock are issuable
upon exercise of warrants issued in conjunction with the 10% Note offering.
Warrants
Each Warrant entitles the holder hereof to purchase one share of Common
Stock at an exercise price of $4.55 (130% of the initial public offering price
of the Common Stock) per share, subject to adjustment in certain events, at any
time prior to February 11, 2000.
Commencing on the date the Warrants are separately tradeable and
transferable, the Warrants are subject to redemption by the Company at $.55 per
Warrant at any time until the end of the second year after the date of this
Prospectus and thereafter at $.75 per Warrant at any time until their
expiration, on 30 days' prior written notice to the holders of Warrants,
provided that the daily trading price per share of Common Stock has been as
least $5.46 (120% of the Warrant exercise price) for a period of at least 20
consecutive trading days ending within 10 days prior to the date upon which the
notice of redemption is given. For purposes of determining the daily trading
price of the Company's Common Stock, if the Common Stock is listed on a national
securities exchange, is admitted to unlisted trading privileges on a national
securities exchange, or is listed for trading on a trading system of the NASD
such as the NASDAQ Small Cap Market or the NASDAQ/NMS, then the last reported
sale price of the Common Stock on such exchange or system each day shall be used
or if the Common Stock is not so listed on such exchange or system or admitted
to unlisted trading privileges then the average of the last reported high bid
prices reported by the National Quotation Bureau, Inc. each day shall be used to
determine such daily trading price. The Warrants will be exercisable until the
close of the business day preceding the date fixed for redemption, if any.
The Warrants will be issued in registered form pursuant to the terms of a
Warrant Agreement dated as of February 11, 1997, (the "Warrant Agreement")
between the Company and American Securities Transfer & Trust Inc., as Warrant
Agent. Reference is made to said Warrant Agreement (which has been filed as an
Exhibit to the Registration Statement of which this Prospectus is a part) for a
complete description of the terms and conditions thereof. The description herein
is qualified in its entirety by reference to the Warrant Agreement.
The exercise prices and number of shares of Common Stock or other
securities issuable on exercise of the Warrants are subject to adjustment in
certain circumstances, including in the event of a stock dividend, stock split,
recapitalization, reorganization, merger or consolidation of the Company.
Fractional shares will not be issued and such shares will have no value.
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
50
<PAGE>
cashier's or certified check payable to the Company) to the Warrant Agent for
the number of warrants being exercised. The Warrant holders do not have the
rights or privileges of holders of Common Stock.
Dividend Policy
Dividends are payable on Common Stock when, as, and if declared by the
Board of Directors out of funds legally available to pay dividends, subject to
any preferences which may be given to holders of preferred stock. The Company
has paid no cash dividends to date and it does not anticipate payment of cash
dividends in the foreseeable future.
Stock Transfer Agent
The Company has designated American Securities Transfer & Trust, Inc. as
its transfer agent for the Common Stock and as its Warrant Agent.
UNDERWRITING
The Underwriters named below, acting through the Representative, have
jointly and severally agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company and the Company has agreed
to sell to the Underwriters, the respective number of Units set forth opposite
their names below at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus:
Underwriters Number of Units
------------ ---------------
R A F Financial Corporation 912,000
Cohig & Associates, Inc. 350,000
Neidiger/Tucker/Bruner, Inc. 50,000
Paulson Investment Company, Inc. 25,000
---------
Total 1,337,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the securities offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to purchase 1,337,000 Units, if
any are purchased.
The Underwriters propose to offer part of the Units offered hereby directly
to the public at the offering price and part of such Units to certain dealers at
a price that represents a concession within the discretion of the
Representative. The Underwriters do not intend to confirm sales to accounts over
which they exercise discretionary authority. The Underwriters may allow, and
such dealers may re-allow, a concession within the discretion of the
Representative. After the initial offering, the offering price and the selling
terms may be changed by the Underwriters.
The Units offered by the Underwriters are subject to prior sale. The
Underwriters reserve the right to withdraw, cancel or modify such offer (which
may be done only by filing an amendment to the Registration Statement) and to
reject orders in whole or in part for the purchase of the Units and to cancel
any sale even after the purchase price has been paid if such sale, in the
opinion of the Underwriters, would violate federal or state securities laws or a
rule or policy of the NASD.
The Company and the Underwriters have agreed to indemnity each other and
related persons against certain liabilities, including liabilities under the
Securities Act, and, if such indemnifications are unavailable or are
insufficient, the Company and the Underwriters have agreed to damage
contribution arrangements between them based upon the relative benefits received
from the Offering and the relative fault resulting in such damages. Such
relative benefits and relative fault would be determined in legal actions among
the parties. Under such contribution arrangements, the maximum amount payable by
any Underwriter would be the public offering price of the Units underwritten and
distributed by such Underwriter.
51
<PAGE>
Except for the outstanding securities described herein and except upon the
exercise of the options and warrants described herein, the Company has agreed
not to sell any additional securities for six months after the date of this
Prospectus without the Representative's prior written consent. The officers and
directors of the Company, holders of more than 5% of the Company's outstanding
Common Stock prior to the Offering, and their affiliates have entered into
agreements which provide that such persons, who own an aggregate of 3,333,933
shares of Common Stock, may not sell any of such shares during a 13 month period
commencing on the closing date of the Offering. This restriction does not apply
to nine persons who have received options to purchase 111,067 shares of the
Company's Common Stock from William J. Collard and Gerald F. Willman, Jr. The
agreements also provide that any sales of Common Stock by such persons pursuant
to Rule 144 will be executed through the Representative. See Shares Eligible for
Future Sale.
The Company has granted to the Underwriters an option exercisable for 30
days from the date of this Prospectus to purchase up to 200,550 additional Units
from the Company at the respective Prices to Public less the Underwriting
Discounts solely to cover over-allotments, if any. In addition, the Company has
agreed to pay to the Representative at the closing of the Offering, a
non-accountable expense allowance of 3% of the aggregate initial public offering
price of the Units to cover expenses incurred by the Representative in
connection with the Offering, reduced by $40,000 previously advanced by the
Company.
The Company has agreed to issue for $100.00, warrants to the Representative
and its designees to purchase 133,700 Units (the "Representative's Warrants).
The Warrants are exercisable at any time during the four year period commencing
11 months after the date of their issuance, at $11.55 per Unit (165% of the
initial public offering price). The Representative's Warrants are not
transferable except (i) to an Underwriter or a partner or officer of an
Underwriter or (ii) by will or operation of law. Any profit realized on the sale
of the Representative's Warrants or the underlying securities may be deemed
additional underwriting compensation. Commencing one year and ending five years
from the date hereof, holders of the Representative's Warrants and the
securities underlying the Representative's Warrants will have a one time right
to demand registration of the securities underlying the Representative's
Warrants at the Company's expense. The Representative's Warrants, the Units
issuable upon exercise of the Representative's Warrants and the shares of Common
Stock underlying the Warrants included in such Units have been registered under
the Securities Act by means of the Registration Statement of which this
Prospectus is a part.
Each of the Units issuable upon exercise of the Representative's Warrants
consists of two shares of Common Stock and one Warrant. Each of such Warrants
contains the same terms and conditions as the Warrants except that (i) the
exercise price of the Warrants included in the Units issuable upon exercise of
the Underwriter's Warrants will be 165% of the exercise price of the Warrants,
and (ii) these Warrants will not be transferable except (i) to an Underwriter or
a partner or officer of an Underwriter, or (ii) by will or operation of law.
If any of the Representative's Warrants are exercised during the first year
after the date of this Prospectus, the Units and any underlying securities
acquired as a result of any such exercise may not be transferred or assigned
except to an Underwriter or a partner or an officer of an Underwriter, or by
will or operation of law until after the expiration of such one year period.
For a period of three years from the date hereof, the Representative has a
preferential right to purchase for its account or to sell for the account of the
Company, or any parent or subsidiaries of the Company, any securities with
respect to which any of them may seek to sell, publicly or privately, for cash.
The Price to Public of the Units has been determined by negotiations
between the Company and the Representative, with consideration being given to
the current status of the Company's business, its financial condition, its
present and prospective operations, the general status of the securities market,
and the market conditions for new offerings of securities. The price bears no
relationship to the assets, net worth, book value, sales price of securities
issued to shareholders of the Company, or any other criteria of value.
52
<PAGE>
The Company has agreed to give the Representative notice of meetings of its
Board of Directors and to grant access to such meetings to a representative of
the Representative. Any such representative will have no official status or
voting rights at any such meeting.
For a period of five years after the date of this Prospectus, the Company
has agreed to pay the Representative a consulting fee in connection with any
merger, consolidation, stock exchange or acquisition or sale of all or a
material part of the assets or business of any entity, if such transaction
involves the Company, its parent company, or any of its subsidiaries, if such
transaction was initiated by the Representative. The total fee will be from 1%
to 5% of the value of the transaction. In connection with any such transaction,
the Representative has agreed to provide consulting services which are customary
in the industry.
If the Representative, at its election, at any time one year after the date
of this Prospectus, solicits the exercise of the Warrants, the Company will be
obligated, subject to certain conditions, to pay the Representative a
solicitation fee equal to 10% of the aggregate proceeds received by the Company
as a result of the solicitation. No solicitation fee will be paid within one
year after the date of this Prospectus, no solicitation fee will be paid if the
market price of the Common Stock is lower than the then exercise price of the
Warrants, no solicitation fee will be paid if the Warrants being exercised are
held in a discretionary account at the time of exercise, except where prior
specific approval for exercise is received from the customer exercising the
Warrants, and no solicitation fee will be paid unless the customer exercising
the Warrants states in writing that the exercise was solicited and designates in
writing the Representative or other broker-dealer to receive compensation in
connection with the exercise. The Representative may reallow a portion of the
fee to soliciting broker-dealers.
LEGAL MATTERS
Legal matters in connection with the shares of Common Stock and Warrants
being offered hereby have been passed on for the Company by the law firm of
Brenman Bromberg & Tenenbaum, P.C., Denver, Colorado. Members of the firm of
Brenman Bromberg & Tenenbaum, P.C. own 50,000 shares of the Company's Common
Stock. The law firm of Smith, McCullough & Ferguson, P.C., Denver, Colorado has
acted as legal counsel to the Representative in connection with certain legal
matters relating to the Offering.
EXPERTS
The consolidated financial statements of Global Med Technologies, Inc. as
of December 31, 1995 and 1994 and for the years then ended included in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports appearing elsewhere herein,
and are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
7,908,596 shares of Common Stock, which includes 137,646 shares (plus an
estimated additional 10,324 shares issuable upon conversion of accrued interest)
which are to be issued upon conversion of $516,200 principal amount of 10% Notes
and 120,000 shares of Common Stock issuable to certain shareholders of the
Company pursuant to the terms of a private placement which provided for a share
adjustment in the event the price per share in the Company's initial public
offering is less than $4.90 per share. The shares of Common Stock offered hereby
(other than those which may be acquired by affiliates of the Company) will be
freely tradeable, without restrictions, under the Securities Act of 1933, as
amended (the "Act"). Approximately 1,659,221 shares are "restricted securities"
within the meaning of Rule 144 under the Act, have been held in excess of two
years, and, as a result, will be able to be publicly sold 90 days after the date
hereof in the event a public market for the Company's Common Stock develops.
Holders of 4,133,933 shares have entered into a lock up agreements with the
Representative. See Underwriting.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
restricted securities have been fully paid for and held for at least two years
from the later of the date of payment therefor to the Company or acquisition
thereof from an affiliate, may sell such securities in brokers' transactions or
directly to market makers, provided that the number of shares sold in any three
month period may not exceed the greater of 1% of the then outstanding Common
Stock or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain notice requirements and the availability of current public information
about the Company. After three years have elapsed from the later of the issuance
of restricted securities by the Company or their acquisition from an affiliate,
such securities may be sold without limitation by persons who are not affiliates
under Rule 144.
Sales of substantial amounts of Common Stock by shareholders of the Company
under Rule 144 or otherwise, or even the potential for such sales, are likely to
have a depressive effect on the market price of the Units, Common Stock and
Warrants and could impair the Company's ability to raise capital through the
sale of its equity securities.
Concurrent Registration by Selling Shareholders
The Company has registered under the Registration Statement of which this
Prospectus is a part, 1,285,770 shares of Common Stock which includes (i)
800,000 shares which the Company has agreed to register on behalf of purchasers
in the Company's Private Placement completed in September, 1996, (ii) 137,646
shares to be issued to holders of the 10% Notes who have elected to convert
their 10% Notes to shares of Common Stock, plus approximately 10,324 shares to
be issued in exchange for interest on such 10% Notes, (iii) 187,800 shares of
Common Stock underlying warrants issued in connection with the sale of the 10%
Notes and (iv) 150,000 shares of Common Stock underlying warrants exercisable at
85% of the price per share of Common Stock included in the Units. The shares of
Common Stock and warrants are held by 87 persons. Included in the persons who
hold securities to be sold under the Registration Statement are Joseph F.
Dudziak, President of the Company, Bart K. Valdez, Director of Operations of
DataMed and LMU & Company, a consultant to the Company. After the completion of
this offering, the Company will amend its Registration Statement and this
Prospectus to permit such persons to publicly offer and sell all such shares of
Common Stock.
54
<PAGE>
ADDITIONAL INFORMATION
The Company has filed a Registration Statement under the Securities Act of
1933, as amended with respect to the securities offered hereby with the United
States Securities and Exchange Commission ("SEC"), 450 Fifth Street, N.W.,
Washington, D.C. 20549. This Prospectus, which is a part of the Registration
Statement, does not contain all of the information contained in the Registration
Statement and the exhibits and schedules thereto, certain items of which are
omitted in accordance with the rules and regulations of the SEC. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement, including all exhibits and
schedules therein, which may be examined at the SEC's Washington, D.C. office,
450 Fifth Street, N.W., Washington, D.C. 20549 without charge, or copies of
which may be obtained from the SEC upon request and payment of the prescribed
fee. Statements made in this Prospectus as to the contents of any contract,
agreement or document are not necessarily complete, and in each instance
reference is made to the copy of such contract, agreement or other document
filed as an exhibit to the Registration Statement, and each such statement is
qualified in its entirety by such reference. As of the date of this Prospectus,
the Company became a reporting company under the Securities Exchange Act of
1934, as amended, and in accordance therewith in the future will file reports
and other information with the SEC. All of such reports and other information
may be inspected and copied at the public reference facilities maintained by the
SEC at the address set forth above in Washington, D.C. and at regional offices
of the SEC located at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. In
addition, the Company intends to provide its shareholders with annual reports,
including audited financial statements, unaudited semi-annual reports and such
other reports as the Company may determine. The SEC maintains a Web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC at http://www.secgov.
55
<PAGE>
GLOSSARY
Community Blood Centers - Community Blood Centers or CBCs are the not for
profit blood centers usually affiliated with the local city or community. These
are different from the American Red Cross Blood Centers that maintain national
affiliation.
Donor Identification and Laboratory Component Labeling and Release
Site-Based Logic - Multiple-occurring program logic that is designed to help
control and help manage those areas of a blood center's operation in which the
hazard potential of the purity, potency and safety of the blood and blood
products effects a recognized level of concern.
EDEN-OA(R) - EDEN-OA(R) (OA is for Open Architecture) is the proprietary
Wyndgate application development product and environment used as a basis for the
SAFETRACE(TM) software product. It provides basic functions common to
applications plus maintenance management features and processes.
FDA 510(k) - FDA 510(k) refers to the Federal Drug Administration process
number 510(k) which governs a clearance letter distributed by the FDA. Software
such as the SAFETRACE(TM) software product is classified as a medical device.
The 510(k) process is a stringent set of testing, verification and review of
products like the SAFETRACE(TM) software product.
GUI - GUI refers to the Graphical User Interface, most commonly seen as the
icon driven windows on PC's. Special tools are needed to develop GUI windows.
Help Line - Help Line refers to the service line number provided by
Wyndgate for use of its customers to receive assistance regarding Wyndgate
products. Wyndgate provides a 1-800 number for its customers who have a
maintenance contract.
Module - Refers to pieces of applications computer code used to perform a
certain set of tasks or functions. Generally, modules have a name commensurate
with the major function of that set of computer code, e.g., Billing Module
refers to handling the processing of invoices.
MRO - Medical Review Officer
SAFETRACE(TM) Software Product - The SAFETRACE(TM) software product is the
blood bank information management system developed by Wyndgate using EDEN-OA(R)
in conjunction with eight California blood centers. The SAFETRACE(TM) software
product contains the following application modules: Donor Recruitment; Donor
Management; Laboratory Management; Special Procedures; Inventory-Distribution;
and Billing.
SAFETRACETx (TM) Software Product - The SAFETRACETx(TM) software product is
the transfusion management software system under development. This transfusion
system, if fully developed, will service hospitals and those blood centers that
not only supply blood or blood components to a hospital but also manage the
transfusion process.
Substance Abuse - Substance abuse refers to the use of chemical products
which may have an adverse effect on humans. Classified under substance abuse are
drugs such as cocaine and heroin and chemicals such as alcohol.
56
<PAGE>
Consolidated Financial Statements
Global Med Technologies, Inc.
(formerly Global Data Technologies, Inc.)
Nine months ended September 30, 1996 and 1995
(unaudited) and years ended December 31, 1995
and 1994 with Report of Independent Auditors
<PAGE>
Global Med Technologies, Inc.
Consolidated Financial Statements
Nine months ended September 30, 1996 and 1995 (unaudited)
and years ended December 31, 1995 and 1994
Contents
Report of Independent Auditors ................................... F-1
Consolidated Financial Statements
Consolidated Balance Sheets ...................................... F-2
Consolidated Statements of Operations ............................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) ........ F-5
Consolidated Statements of Cash Flows ............................ F-6
Notes to Consolidated Financial Statements ....................... F-8
<PAGE>
Report of Independent Auditors
Board of Directors
Global Med Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Global Med
Technologies, Inc. (formerly Global Data Technologies, Inc.) and divisions as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated May 15, 1996, the
Company, as discussed in Note 1, has experienced losses and working capital
deficiencies that adversely affect the Company's current results of operations
and liquidity. Note 1 describes management's plan to address these issues.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Global Med
Technologies, Inc. and divisions at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
May 15, 1996,
except for Note 1, as
to which the date is
November 13, 1996
F-1
<PAGE>
<TABLE>
<CAPTION>
Global Med Technologies, Inc.
Consolidated Balance Sheets
December 31 September 30
1995 1994 1996
-------------------------------------------------
<S> <C> <C> <C>
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 421,743 $ 309,851 $ 587,724
Accounts receivable-trade, net of allowance for
uncollectible accounts of $200,000, $56,000
and $200,000 at December 31, 1995 and 1994
and September 30, 1996, respectively 607,987 671,218 2,420,327
Unbilled receivables, net 306,975 257,677 1,084,490
Prepaid expenses and other assets 23,316 47,020 104,320
Deferred offering costs - - 350,000
Deferred income taxes - 36,229 -
-------------------------------------------------
Total current assets 1,360,021 1,321,995 4,546,861
Note receivable - - 250,000
Equipment and fixtures, at cost:
Furniture and fixtures 206,471 70,000 193,117
Machinery and equipment 432,162 259,435 384,349
Computer and software 723,536 133,042 1,139,627
-------------------------------------------------
1,362,169 462,477 1,717,093
Less accumulated depreciation and amortization (404,556) (311,105) (428,860)
-------------------------------------------------
957,613 151,372 1,288,233
Capitalized software development costs, less
accumulated amortization of $65,852, $15,502 and
$114,582 at December 31, 1995 and 1994 and
September 30, 1996, respectively 403,228 294,627 424,498
-------------------------------------------------
Total assets $ 2,720,862 $1,767,994 $6,509,592
=================================================
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Global Med Technologies, Inc.
Consolidated Balance Sheets
December 31 September 30
1995 1994 1996
-------------------------------------------------
Liabilities and stockholders' equity (deficit) (Unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 1,457,263 $ 586,215 $1,779,905
Accrued expenses 296,293 151,445 1,244,860
Accrued payroll and other 187,661 53,050 408,978
Accrued vacation 261,100 90,342 420,000
Noncompete accrual 325,000 - 150,000
Unearned revenue 271,188 304,408 669,158
Short-term debt 500,100 250,100 970,100
Notes payable - - 751,200
Current portion of capital lease obligations 232,813 24,151 402,968
------------------------------------------------
Total current liabilities 3,531,418 1,459,711 6,797,169
Capital lease obligations, less current portion 647,929 23,059 804,517
Deferred income taxes - 7,498 -
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value:
Authorized shares 40,000,000
Issued and outstanding shares 3,949,629,
3,619,221 and 4,966,626 at December 31,
1995 and 1994 and September 30, 1996,
respectively 39,496 36,192 49,666
Preferred stock, $.01 par value:
Authorized shares - 10,000,000
None issued or outstanding - - -
Additional paid-in capital 1,701,629 719,386 4,131,967
Accumulated deficit (3,199,610) (477,852) (5,273,727)
-------------------------------------------------
Total stockholders' equity (deficit) (1,458,485) 277,726 (1,092,094)
-------------------------------------------------
Total liabilities and
stockholders' equity (deficit) $ 2,720,862 $1,767,994 $6,509,592
=================================================
See accompanying notes.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Global Med Technologies, Inc.
Consolidated Statements of Operations
Nine months ended
September 30
Year ended December 31 (Unaudited)
1995 1994 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Drug testing and other $ 5,740,487 $3,836,136 $ 4,680,448 $ 3,957,936
Software sales and consulting 933,631 1,140,119 4,249,101 883,578
-------------------------------------------------------------------
6,674,118 4,976,255 8,929,549 4,841,514
Cost of sales and product development 3,217,595 2,429,789 5,016,101 2,308,078
-------------------------------------------------------------------
Gross profit 3,456,523 2,546,466 3,913,448 2,533,436
Operating expenses:
Payroll and other 1,998,452 708,718 1,574,799 1,431,242
General and administrative 1,478,666 605,459 1,418,894 1,240,230
Sales and marketing 1,731,533 657,988 1,903,569 1,471,986
Research and development 654,500 403,714 547,387 442,342
Depreciation and amortization 116,979 51,504 347,399 72,218
------------------------------------------------------------------
Income (loss) from operations (2,523,607) 119,083 (1,878,600) (2,124,582)
Other income (expense):
Interest income (expense), net (61,112) 6,339 (179,464) (20,581)
Other (70,608) - (16,053) (4,943)
------------------------------------------------------------------
Income (loss) before provision for
(benefit from) income taxes (2,655,327) 125,422 (2,074,117) (2,150,106)
Provision for (benefit from) income taxes 29,531 (46,825) - (108,758)
------------------------------------------------------------------
Net income (loss) $(2,684,858) $ 172,247 $(2,074,117) $(2,041,348)
==================================================================
Net income (loss) per common share $(.64) $.04 $(.47) $(.49)
Common shares used in computing net
income (loss) per common share 4,211,317 4,010,497 4,377,164 4,178,015
See accompanying notes.
F-4
</TABLE>
<PAGE>
Global Med Technologies, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 3,619,221 $36,192 $ 719,386 $(650,099) $ 105,479
Net income - - - 172,247 172,247
------------------------------------------------------------------------------------------
Balance December 31, 1994 3,619,221 36,192 719,386 (477,852) 277,726
Issuance of common stock 300,000 3,000 732,000 - 735,000
Issuance of common stock -
finder's fee 30,408 304 74,196 - 74,500
Issuance of common stock
warrants - - 15,000 - 15,000
Compensation related to
issuance of common stock
options by principal
stockholders - - 161,047 - 161,047
Distribution to stockholders
(Wyndgate) - - - (36,900) (36,900)
Net loss - - - (2,684,858) (2,684,858)
--------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,949,629 39,496 1,701,629 (3,199,610) (1,458,485)
Issuance of common stock -
exercise of common stock
warrants (unaudited) 150,000 1,500 448,500 - 450,000
Issuance of preferred stock
converted to common stock
(unaudited) 66,667 667 249,333 - 250,000
Issuance of common stock
under employee's stock
option plan (unaudited) 330 3 505 - 508
Issuance of common stock
(unaudited) 800,000 8,000 1,732,000 - 1,740,000
Net loss (unaudited) - - - (2,074,117) (2,074,117)
---------------------------------------------------------------------------------------------
Balance, September 30, 1996
(unaudited) 4,966,626 $ 49,666 $4,131,967 $(5,273,727) $(1,092,094)
=============================================================================================
See accompanying notes.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Global Med Technologies, Inc.
Consolidated Statements of Cash Flows
Nine months ended
September 30
Year ended December 31 (Unaudited)
1995 1994 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) $(2,684,858) $ 172,247 $(2,074,117) $(2,041,348)
Adjustments to reconcile net
income (loss) to
net cash provided by (used in)
operating activities:
Depreciation and amortization 167,329 51,504 396,129 107,893
Loss on disposal of assets 49,857 - 16,053 4,943
Issuance of common stock options by
principal stockholders 161,047 - - 161,047
Issuance of common stock-finder's fee 74,500 - - 74,500
Changes in operating assets and liabilities:
Accounts receivable-trade, net 63,231 (29,479) (1,812,340) (120,603)
Unbilled receivables, net (49,298) (14,744) (777,515) 77,932
Note receivable - - (250,000) -
Short-term investments - 98,450 - -
Prepaid expenses and other assets 23,704 (18,572) (81,004) 14,541
Deferred income taxes 28,731 (47,625) - 121,376
Accounts payable 871,048 191,099 322,642 414,495
Accrued payroll and other 134,611 17,294 221,317 90,413
Accrued expenses 144,848 49,369 948,567 107,387
Accrued vacation 170,758 29,451 158,900 170,758
Noncompete accrual 325,000 - (175,000) 350,000
Unearned revenue (33,220) (160,236) 397,970 34,239
------------------------------------------------------------------
Net cash provided by (used in)
operating activities (552,712) 338,758 (2,708,398) (432,427)
Investing activities
Purchases of equipment and fixtures (31,653) (26,990) (113,754) (109,012)
Increase in software development costs (158,951) (271,058) (70,000) (158,951)
------------------------------------------------------------------
Net cash used in investing activities (190,604) (298,048) (183,754) (267,963)
Financing activities
Borrowings on short-term debt 1,354,50 820,000 575,000 1,204,500
Principal payments on short-term debt (1,104,500) (731,150) (105,000) (1,104,500)
Principal payments under
capital lease obligations (107,892) (30,391) (253,575) (44,166)
Issuance of notes payable - - 751,200 -
Issuance of common stock 735,000 - 2,440,508 735,000
Deferred offering costs - - (350,000) -
Issuance of common stock warrants 15,000 - - 15,000
Distribution to stockholders (Wyndgate) (36,900) - - (36,900)
------------------------------------------------------------------
Net cash provided by financing activities 855,208 58,459 3,058,133 768,934
------------------------------------------------------------------
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Global Med Technologies, Inc.
Consolidated Statements of Cash Flows (continued)
Nine months ended
September 30
Year ended December 31 (Unaudited)
1995 1994 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net increase in cash and cash equivalents $ 111,892 $ 99,169 $ 165,981 $ 68,544
Cash and cash equivalents at
beginning of period 309,851 210,682 421,743 309,851
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 421,743 $309,851 $ 587,724 $378,395
===================================================================
</TABLE>
Supplemental disclosures:
The Company entered into capital lease obligations of $941,424 and $51,653
in 1995 and 1994, respectively, and entered into capital lease obligations of
$580,318 and $335,944 during the nine months ended September 30, 1996 and 1995,
respectively. The Company paid income taxes of $800 in both 1995 and 1994.
Interest expense approximates interest paid. During 1996, the Company completed
a private placement whereby it issued 66,667 shares of Series A convertible
preferred stock at $3.75 per share which were converted into 66,667 shares of
common stock (See Note 11). During 1994, the Company paid $161,500 to a related
party in exchange for a note receivable which accrued interest at 8% per year.
During 1995, the Company forgave the note receivable in consideration of the
forgiveness of a note payable from the Company to a principal stockholder which
also was for $161,500 and which also accrued interest at 8% per year.
See accompanying notes.
F-7
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements
(Information subsequent to December 31, 1995 is unaudited)
1. Summary of Significant Accounting Policies
Organization
On May 23, 1995, The Wyndgate Group, Limited (Wyndgate) merged with National
MRO, Inc. (National MRO) in accordance with the terms and provisions of an
Agreement of Merger and National MRO changed its name to Global Data
Technologies, Inc., which subsequently changed its name to Global Med
Technologies, Inc. (the Company). Also, the National MRO and Wyndgate divisions
are now referred to as DataMed International (DataMed) and Wyndgate
Technologies, respectively. All shares of Wyndgate common stock were exchanged
for a total of 1,960,000 shares of common stock of the Company. This merger
transaction was accounted for as a pooling of interests; therefore, the
Company's financial statements include the results of operations as if the
merger had been consummated at the beginning of all periods presented.
Subsequent to the merger, the businesses of both Wyndgate and DataMed have been
operated as divisions of the Company. The Company incurred expenses related to
the merger of $164,500, which included a $130,000 finder's fee, which consisted
of $74,500 in common stock of the Company and $55,500 in cash, and $34,500
related to legal and other fees. The related merger costs are included in
general and administrative expenses in the accompanying consolidated statement
of operations.
Separate results of operations for the periods up to the date of the merger are
as follows (operating results for the period ended May 23, 1995 approximate the
results for the period ended June 30, 1995, as shown):
January 1, 1995 January 1, 1994
to to
June 30, 1995 December 31, 1994
--------------------------------------
Net sales:
National MRO $2,380,790 $3,836,136
Wyndgate 883,578 1,140,119
--------------------------------------
Combined $3,264,368 $4,976,255
======================================
Net income (loss):
National MRO $ (93,344) $ (140,141)
Wyndgate 76,266 312,388
--------------------------------------
Combined $ (17,078) $ 172,247
======================================
Liquidity and Management's Plans
The Company is involved in the development of certain software products for the
blood bank industry as well as in the operation of substance abuse testing and
medical surveillance management services, including medical review functions,
data management, record storage and coordination of all substance abuse testing
program elements.
The development of the businesses has resulted in losses, which aggregated
$3,199,610 and $5,273,727 at December 31, 1995 and September 30, 1996,
respectively. In addition, the Company had working capital deficits of
$2,171,397 and $2,250,308 at December 31, 1995 and September 30, 1996,
respectively. Management intends to fund these deficiencies from the proceeds of
an initial public offering.
Description of Business
The Company and its two divisions are in the business of providing information
management software products and substance abuse testing and medical
surveillance management services, including medical review functions, data
management, record storage and coordination of all substance abuse testing
program elements. The Company serves international, national and regional
clients in a variety of industries.
F-8
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
1. Summary of Significant Accounting Policies (continued)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its divisions. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition
Revenue from substance abuse testing services is recognized as services are
provided.
Revenue from sales of software licenses is recognized upon delivery of the
software product to the customer, unless the Company has significant related
vendor obligations remaining. When significant obligations remain after the
software product has been delivered, revenue is not recognized until such
obligations have been completed or are no longer significant. The costs of any
insignificant obligations are accrued when the related revenue is recognized.
Revenue from postcontract customer support is recognized over the period the
customer support services are provided, and software services revenue is
recognized as services are performed.
Revenue from software development contracts is recognized on a
percentage-of-completion method with progress to completion measured based upon
labor costs incurred or achievement of contract milestones.
Revenue from the sale of hardware and software, obtained from vendors, is
recognized at the time the hardware and software are delivered to the customer.
Unbilled Receivables, Net
Unbilled amounts at December 31, 1995 and 1994 and September 30, 1996 have been
reduced by an allowance for doubtful accounts of $100,000, $0 and $100,000,
respectively, and are generally billable and collectible within one year.
Unearned Revenue
Included in unearned revenue at December 31, 1995 and September 30, 1996 is
approximately $200,000 and $70,000, respectively, of unperformed professional
services related to an agreement between the Royalty Group and Wyndgate (see
Note 9).
Significant Customers
During 1995, three of the Company's customers-Laidlaw Transit, Inc., Chevron
Corporation, and the Royalty Group (see Note 9)-accounted for approximately 18%,
12% and 10% respectively, of the Company's revenues. During 1994, two of the
Company's customers-Chevron Corporation and the Royalty Group-accounted for
approximately 19% and 18% respectively, of the Company's revenues.
During the nine months ended September 30, 1996, two of the Company's
customers-Laidlaw Transit, Inc. and Gulf Coast Regional Blood Center--each
accounted for approximately 13% and 13.5% respectively, of the Company's
revenues.
F-9
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
1. Summary of Significant Accounting Policies (continued)
Accounts receivable from principal customers were approximately, $516,000,
$119,000 and $855,000 at December 31, 1995, December 31, 1994, and September 30,
1996, respectively. Unbilled receivables from principal customers were
approximately $198,000, $68,000 and $314,000, at December 31, 1995, December 31,
1994 and September 30, 1996, respectively. In order to reduce credit risk, the
Company requires substantial down payments and progress payments during the
course of an installation of Wyndgate's software products. See further
discussion of credit and market risks below.
Credit and Market Risk
Accounts receivable from the sale of substance abuse testing program services
are due from customers primarily located throughout the United States in
transportation and other various industries. Accounts receivable from the sale
of software licenses and other postcontract support are derived entirely from
sales to blood banks and universities. The Company performs ongoing credit
evaluations of its customers' financial conditions and maintains allowances for
potential credit losses. The Company generally does not require collateral or
other security to support customer receivables. The Company establishes
allowances for doubtful accounts based upon factors surrounding the credit risk
specific to customers, historical trends and other information. Actual losses,
allowances and accounts receivable turnover trends generally have been within
management's expectations. The provision for doubtful accounts included in
general and administrative expenses was $244,000 in the year ended December 31,
1995 and $156,000 during the nine months ended September 30, 1996.
Foreign Currency and Inflation Risk
The Company believes sales to customers in foreign countries and operations
located in foreign countries have not been material. Additionally, the Company
believes foreign currency translation gains (losses) and domestic inflation have
not had a material effect on the Company's financial position or results of
operations.
Equipment and Fixtures
Equipment and fixtures are stated at cost. Depreciation and amortization, which
includes amortization of assets under capital leases (see Note 4), is based on
the straight-line method over the following estimated useful lives:
Furniture and fixtures 3 - 5 years
Machinery and equipment 3 - 5 years
Computer and software 3 - 5 years
Financial Instruments
The carrying amounts of the Company's financial instruments approximate fair
value due to the short maturity of these items.
Long-Lived Assets
In March 1995, the FASB issued Statement of Financial Accounting Standard
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS No. 121), which requires impairment losses to be
recorded on long-lived assets used in operations when indications of impairment
are present. The Company is required to adopt SFAS No. 121 in the year ended
December 31, 1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
F-10
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
1. Summary of Significant Accounting Policies (continued)
Software Development Costs
Certain software development costs incurred after the technological feasibility
of the related software development product has been established are capitalized
and amortized on a straight-line basis over the life of the related software
product. Costs incurred prior to the establishment of the technological
feasibility of the related software product are expensed as incurred as research
and development. Costs of maintenance and customer support are expensed as
incurred. Amortization of capitalized costs commences when the product is
available for general release to the public or when software development revenue
has begun to be recognized. Amortization of capitalized software development
costs was $50,350 and $15,282 for the years ended December 31, 1995 and 1994,
respectively, and is included in cost of sales in the accompanying consolidated
statements of operations.
Malpractice Insurance
The Company maintains its malpractice insurance coverage on a claims made basis
through a commercial insurance carrier. Should the current claims made policy
not be renewed or replaced with equivalent insurance at a future date, claims
based on occurrences during its term but subsequently reported will be
uninsured. Based upon historical experience, the Company's management believes
the Company has adequately provided for the ultimate liability, if any, from the
settlement of such potential claims.
Stock-Based Compensation
In October 1995, the FASB issued Statement of Financial Accounting Standard No.
123, Accounting and Disclosure of Stock-Based Compensation (SFAS No. 123). SFAS
No. 123 is applicable for fiscal years beginning after December 15, 1995 and
gives the option to follow either fair value accounting or Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
related Interpretations.
The Company has elected to continue to follow APB No. 25 and related
Interpretations in accounting for outstanding stock options. Under APB No. 25,
because the exercise price of the Company's stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation is
recognized. However, the Company will be required to provide fair value
disclosures relating to stock options effective with the year ended December 31,
1996.
Statements of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less when
purchased to be cash equivalents.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS No.
109), which requires that the Company account for income taxes using the
liability method. Under SFAS No. 109, deferred income taxes are provided for
temporary differences in recognizing certain income and expense items for
financial reporting and tax reporting purposes. Upon completion of the merger in
May 1995, Wyndgate terminated its S corporation status and began providing for
current and deferred income taxes as a C corporation as part of the Company.
Accordingly, Wyndgate adopted SFAS No. 109 in May 1995, and the statement of
operations for the year ended December 31, 1995 includes a one-time charge
(included in the provision for income taxes) of approximately $150,000 to record
the related deferred tax liability. The following supplemental net income (loss)
eliminates the one-time charge and reflects income tax expense in all periods
presented. Supplemental net income (loss) is ($2,834,771) and $46,979 for the
years ended December 31, 1995 and 1994, respectively.
F-11
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
1. Summary of Significant Accounting Policies (continued)
Net Income (Loss) Per Common Share
Earnings per common share is based upon the weighted average of common and
common equivalent shares outstanding during the period. Primary and fully
diluted earnings per share are the same. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletins and Staff Policy, common and common
equivalent shares issued during the 12-month period prior to an initial public
offering at prices below the public offering price are presumed to have been
issued in contemplation of the public offering, even if antidilutive, and have
been included in the calculation as if these common and common equivalent shares
were outstanding for all periods presented (using the treasury stock method, and
the estimated initial public offering price for the Company's common stock).
The Company has filed a Registration Statement under Form SB-2 covering the
proposed sale of 1,337,000 Units, each consisting of two shares of common stock
and one Class A common stock purchase warrant in an initial public offering (the
Offering). Management intends to use a portion of the proceeds from the Offering
to repay borrowings under the Company's revolving line of credit and notes
payable. If the Offering had occurred on January 1, 1995, the loss per common
share would have been ($.56) and ($.42) for the year ended December 31, 1995 and
the nine months ended September 30, 1996, respectively.
Accounting Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Beginning in 1996, certain expenses which were previously classified as general
and administrative expenses and as payroll and other expenses have been
reclassified to cost of sales and product development and to sales and marketing
expenses to more accurately reflect the Company's cost structure. All prior year
amounts have been reclassified to conform with the current period's
presentation.
Certain other prior year amounts have been reclassified to conform with the
current period's presentation.
2. Noncompete Agreements
During 1995, the Company entered into noncompete agreements with certain key
employees for $350,000. The terms of the agreements are for the greater of five
years or the term of the related employee's employment contract. Of the
$350,000, $25,000 was paid in 1995, $175,000 was paid in 1996, with the
remaining $150,000 payable in 1996 or whenever cash is available. The entire
amount of $350,000 was expensed in the second half of 1995 and is included in
general and administrative expenses in the accompanying consolidated statement
of operations.
F-12
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
3. Income Taxes
The components of income tax expense for the years ended December 31, 1995 and
1994 are as follows:
1995 1994
------------------------------------
Provision for (benefit from) income taxes:
Current:
State $ 800 $ 800
Deferred:
FederaL 25,048 (42,612)
State 3,683 (5,013)
------------------------------------
Total deferred 28,731 (47,625)
------------------------------------
Provision for (benefit from) income taxes $29,531 $(46,825)
====================================
The Company has net operating loss carryforwards of approximately $1,253,000
which expire in the years 2006 to 2010. Such net operating loss carryforwards
may be subject to separate return limitation laws.
The components of the deferred tax provision (benefit), which arise from timing
differences between financial and tax reporting, are presented below:
1995 1994
---------------------------------------
Cash to accrual adjustment $ (250,208) $(48,534)
Allowance for uncollectible
accounts receivable (96,380) (1,900)
Accelerated depreciation 12,141 3,800
Noncompete accrual (128,375) -
Accrued vacation (67,450) (991)
Net operating loss carryforward (449,872) (27,101)
Valuation allowance 1,008,875 27,101
---------------------------------------
Total deferred provision (benefit) $ 28,731 $(47,625)
=======================================
Variations from the federal statutory rate are as follows:
1995 1994
---------------------------------------
Expected provision for (benefit from)
federal income taxes at statutory
rate of 34% $(902,811) $ 42,643
Termination of S corporation election
by Wyndgate 149,913 -
Wyndgate income nontaxable due to
S corporation status (77,199) $(119,011)
Valuation allowance 1,008,875 27,101
State tax expense (benefit), net of
federal expense (benefit) (146,043) 6,898
Other (3,204) (4,456)
---------------------------------------
$ 29,531 $ (46,825)
=======================================
F-13
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
3. Income Taxes (continued)
Income (loss) before provision for
(benefit from) income taxes $(2,655,327) $ 125,422
========================================
Effective rate (1.1)% (37)%
========================================
The components of the net accumulated deferred income tax asset as of December
31, 1995 and 1994 are as follows:
1995 1994
-----------------------------------------
Deferred tax assets:
Cash to accrual adjustmen $ 873,899 $ 254,542
Excess of capital losses
over capital gains 79,000 79,000
Net operating loss carryforward 495,031 45,159
Allowance for uncollectible
accounts receivable 118,500 22,120
Noncompete accrual 128,375 -
Accrued vacation 103,135 35,685
Valuation allowance (1,130,034) (121,159)
-----------------------------------------
667,906 315,347
Deferred tax liabilities:
Cash to accrual adjustment 648,395 279,246
Accelerated depreciation 19,511 7,370
-----------------------------------------
667,906 286,616
-----------------------------------------
Deferred tax asset, net $ - $ 28,731
-----------------------------------------
4. Leases
The Company primarily leases equipment and office space. An operating lease
expiring in 2000 is personally guaranteed by a principal stockholder. Rental
expense under operating leases, included in general and administrative expenses,
for the years ended December 31, 1995 and 1994 was $216,795 and $139,000,
respectively. Certain leases for furniture and fixtures and machinery and
equipment are classified as capital leases. A principal stockholder of the
Company has personally guaranteed repayment of substantially all capital lease
obligations. Included in equipment and fixtures in the accompanying consolidated
balance sheets are the following assets held under capital leases:
December 31
1995 1994
---------------------------------------
Furniture and fixtures $143,658 $10,433
Machinery and equipment 294,530 28,323
Computer and software 549,891 54,201
---------------------------------------
Assets under capital lease 988,079 92,957
Less accumulated amortization (92,926) (26,873)
---------------------------------------
Assets under capital lease, net $895,153 $66,084
=======================================
F-14
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
4. Leases (continued)
The following represents the minimum lease payments remaining under capital
leases and the future minimum lease payments for all noncancelable operating
leases at December 31, 1995:
Capital Operating
Leases Leases
--------------------------------------------
1996 $ 345,690 $ 275,725
1997 329,662 275,725
1998 318,577 247,353
1999 69,592 203,117
2000 67,903 203,117
--------------------------------------------
Total minimum lease payments 1,131,424 $1,205,037
================
Less amount representing interest (250,682)
-----------------
Present value of minimum
lease payments 880,742
Less current portion of
obligations under
capital lease (232,813)
-----------------
Obligations under capital lease,
less current portion $ 647,929
=================
5. Short-Term Debt
The Company maintains an unsecured revolving credit line of $25,000 which bears
interest at prime (8.5% at December 31, 1995) plus one percent and matures on
January 1, 1997. Amounts outstanding under this revolving line of credit were
$100 at December 31, 1995 and 1994.
In addition, the Company maintains a $1,000,000 line of credit with a bank
secured by substantially all of the Company's assets except for those assets
under lease agreements (see Note 4), which bears interest at prime (8.5% at
December 31, 1995) plus two percent and which matured on November 14, 1996.
Amounts outstanding under this line of credit were $970,000, $500,000 and
$250,000 at September 30, 1996 and December 31, 1995 and 1994, respectively. A
principal stockholder of the Company has personally guaranteed the repayment of
any amounts outstanding under the line of credit. At December 31, 1995, the
Company was in violation of a certain bank covenant, which requires the Company
to maintain positive net worth of at least $1,000,000. Under the terms of the
agreement, upon violation of this covenant, amounts outstanding may become due
and payable in full at the bank's request.
During the nine month period ended September 30, 1996, the Company obtained
covenant relief through an amendment to the original borrowing agreement. The
covenant, which requires the Company to maintain a positive net worth of at
least $1,000,000, has been waived effective June 1, 1996 through November 30,
1996. The Company is in the process of extending both the maturity date and the
covenant waiver through January 31, 1997. The bank has notified the Company in
writing that the bank does not consider the line of credit to be in default.
(See also Note 11 for updated terms on the line of credit).
The Company incurred interest expense on outstanding borrowings of approximately
$43,000 and $13,400 for the years ended December 31, 1995 and 1994,
respectively.
F-15
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
6. Stock Option Plans
During 1990, the Company adopted an incentive stock option plan and a
nonqualified stock option plan, and in 1995 consolidated these plans by adopting
the Company's Amended and Restated Stock Option Plan (the Plan). The Plan
provides for the issuance of options to purchase up to 1,234,279 shares of
common stock to employees, officers, directors and consultants of the Company.
The terms of any options granted under the Plan are not required to be identical
as long as they are not inconsistent with the express provisions of the Plan.
Options may be granted as incentive options or as nonqualified options; however,
only employees of the Company are eligible to receive incentive options. The
period during which options vest may not exceed ten years; however, the majority
of the options granted under the Plan vest over five years at the rate of twenty
percent per year. The exercise price for incentive options may not be less than
100% of the fair market value of the common stock on the grant date, except that
the exercise price for incentive options granted to persons owning more than ten
percent of the total combined voting power of the common stock may not be less
than 110% of the fair market value of the common stock on the grant date and may
not be exercisable for more than five years. The exercise price for nonqualified
options may not be less than 85% of the fair market value of the common stock on
the grant date.
Activity and price information regarding the Plan are as follows:
<TABLE>
<CAPTION>
Incentive Stock Option Plan Nonqualified Stock Option Plan
------------------------------------------------------------------------
Number Stock
Number of Option
of Stock Stock Option Stock Price
Options Price Range Options Range
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1993 81,300 $1.00 - $1.54 38,029 $1.54
Granted 15,400 1.54 - -
------------------------------------------------------------------------
Outstanding, December 31, 1994 96,700 1.00 - 1.54 38,029 1.54
Granted 206,050 1.54 - 3.75 - -
Forfeited - - (6,000) 1.54
------------------------------------------------------------------------
Outstanding, December 31, 1995 302,750 1.00 - 3.75 32,029 1.54
Granted 206,750 2.50 - 3.75 31,500 3.75
Exercised (330) 1.54
Forfeited (2,570)
------------------------------------------------------------------------
Outstanding, September 30, 1996 506,600 $1.00 - $3.75 63,529 $1.54 - $3.75
========================================================================
</TABLE>
During 1995, certain of the Company's principal stockholders granted personal
stock options to certain employees for the right to buy shares from the
principal stockholders at an exercise price of $1.00 per share. This transaction
has been accounted for as if the options were issued to the employees directly
from the Company. The Company recorded compensation expense related to this
transaction of $161,047, as such options were issued for prior service and are
fully vested. The related compensation expense is included in general and
administrative expenses in the accompanying consolidated statement of
operations.
F-16
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
6. Stock Option Plans (continued)
During the second quarter of 1996, the Company entered into an agreement with a
business advisory enterprise. As part of the agreement, the Company granted
160,000 stock options at an exercise price of $2.50 per share. To date, no
options have been exercised as a result of this agreement.
Certain members of the Company's Scientific Advisory Committee serve as officers
and directors of certain of the Company's significant customers. In addition,
these members also are beneficial owners of the Company through grants of stock
options and through the Company's ten percent note offering (see Note 11).
7. Common Stock Warrants
In May 1995, the Company completed a private placement of 150,000 units at $5
per unit. Each unit consisted of two shares of common stock ($2.45 each) and one
common stock warrant ($.10 each), exercisable at $3.00 per share for a period of
three years from the closing date of the offering. The Company has the right to
call the common stock warrants at $.12 per warrant at any time during the period
commencing six months from the date of issuance and terminating on the
expiration date of such warrants. In addition, the Company has outstanding an
additional 12,000 warrants to a nonrelated investor which are convertible into
common stock at an exercise price of $1.54 per share. Of these warrants, 2,000
expired in July 1996 with the remaining 10,000 warrants expiring in October
1997.
During the first quarter of 1996, 150,000 common stock warrants issued in
conjunction with the May 1995 private placement were exercised for $450,000.
8. Contributions to Retirement Plan
During April 1992, the Company established a 401(k) retirement plan which covers
eligible employees, as defined, of the Company. Employees may defer up to
sixteen percent of their annual compensation up to the maximum amount as
determined by the Internal Revenue Service. Under the retirement plan agreement,
the Company, at its discretion, may make contributions to the plan. No
contributions were made to the plan in 1995 or 1994. Retirement plan
administrative expense was approximately $8,000 and $3,000 for the years ended
December 31, 1995 and 1994, respectively.
9. Commitments and Contingencies
The Company has entered into nine employment agreements with certain management
employees; the initial terms are generally for three to five years. Certain of
the agreements may be extended for two additional years. Such agreements, which
can be revised from time to time, provide for minimum salary levels as adjusted
for cost-of-living changes, as well as for incentive bonuses which are payable
when specified management goals are attained. At December 31, 1995, the
aggregate commitment for future salaries payable through May 2000, excluding
bonuses, is approximately $2,600,000. If all agreements are extended, the
additional commitment for future salaries will be approximately $1,400,000.
The Company maintains product liability insurance for Wyndgate's
software-related products. To date, no claims have been filed against the
Company related to its Wyndgate software products. In addition, the Company
applied for certain regulatory approval of its blood bank software. The Company
has not received regulatory approval to date.
F-17
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
9. Commitments and Contingencies (continued)
In January 1993, Wyndgate entered into an agreement with the EDEN-OA Blood Bank
Users Group (the Royalty Group) to develop Blood Bank Management Information
System Software (BBMIS). As part of the consideration for funding the
development of the BBMIS, Wyndgate agreed to pay to the Royalty Group certain
royalty payments on future software license fees. All payments are due 30 days
after each quarter and are based on software license fees collected. The Company
did not incur any royalty expenses related to this agreement in 1995. Royalty
expense related to this agreement, included in cost of sales in the nine months
ended September 30, 1996 was approximately $320,000. The time period under the
royalty schedule is based upon the first date of customer invoicing, which was
September 14, 1995. The royalty payment schedule is as follows:
From September:
1995 - 1997 12 percent
1997 - 1998 9 percent
1998 - 1999 6 percent
1999 - thereafter 3 percent
In July 1996, the Company (through its Wyndgate division) entered into a
Development Agreement (Agreement) with The Institute for Transfusion Medicine
(ITxM), to develop Commercial Centralized Transfusion System Software
(Commercial CTS Software). This Agreement requires that the Commercial CTS
Software be completed by December 16, 1997. If not timely completed, the Company
would be subject to certain monetary penalties. The Agreement provides for a
royalty payment to ITxM from the Company for revenues received from the eventual
sale of the Commercial CTS Software, net of certain fees and charges. The
royalty period starts with the first commercial transfer for value of the
Commercial CTS Software by the Company. The royalty amounts for each year are
higher if the sales of the Commercial CTS Software are initiated by ITxM. The
royalty payments range from 10% or 5% in year one to 2% or 1% in year 10 and
thereafter. To date, the Company has not incurred any royalty expenses related
to this agreement.
As of September 30, 1996, the Company had 1,074,775 shares of common stock
reserved for future issuance as a result of the following: 506,600 and 63,529
shares issuable from the Company's incentive and nonqualified stock option
plans, respectively (see Note 6); 187,800 shares issuable upon the exercise of
certain warrants outstanding as a result of the 1996 10% note offering (see Note
11); 146,846 shares issuable upon conversion of certain of the 10% notes,
including principal and accrued interest, related to certain noteholders who
have given the Company notice of their intent to convert their 10% notes to
shares of common stock (see Note 11); 10,000 shares issuable upon the exercise
of certain warrants granted to a nonrelated investor (see Note 7), and 160,000
shares underlying certain stock options granted to a business advisory
enterprise during the second quarter of 1996 (see Note 6).
10. Segment Information
The Company's major operations are in information management software products
for the blood bank industry (Wyndgate), and substance abuse testing program
management services for transportation and other various industries (DataMed).
Revenue, income (loss) from operations, identifiable assets, depreciation and
amortization, and capital expenditures pertaining to the segments are presented
below. Revenues by segment include sales to unaffiliated customers. In addition,
there were no intersegment sales for any period presented.
F-18
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
10. Segment Information (continued)
<TABLE>
<CAPTION>
Year ended December 31, 1995
-------------------------------------------------------------
Wyndgate DataMed Consolidated
-------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 933,631 $5,740,487 $6,674,118
Income (loss) from operations (1,706,751) (816,856) (2,523,607)
Identifiable assets 1,015,623 1,705,239 2,720,862
Depreciation and amortization 85,184 82,145 167,329
Year ended December 31, 1994
-------------------------------------------------------------
Wyndgate DataMed Consolidated
-------------------------------------------------------------
Revenues $1,140,119 $3,836,136 $4,976,255
Income (loss) from operations 299,491 (180,408) 119,083
Identifiable assets 606,391 1,161,603 1,767,994
Depreciation and amortization 19,542 31,962 51,504
Nine months ended September 30, 1996
-------------------------------------------------------------
Wyndgate DataMed Consolidated
-------------------------------------------------------------
Revenues $4,249,101 $4,680,448 $8,929,549
Income (loss) from operations (630,935) (1,247,665) (1,878,600)
Identifiable assets 4,225,729 2,283,863 6,509,592
Depreciation and amortization 164,788 231,341 396,129
Nine months ended September 30, 1995
-------------------------------------------------------------
Wyndgate DataMed Consolidated
-------------------------------------------------------------
Revenues $ 883,578 $3,957,936 $4,841,514
Income (loss) from operations (1,456,761) (667,821) (2,124,582)
Identifiable assets 860,435 1,495,97 2,356,410
Depreciation and amortization 55,628 52,265 107,893
</TABLE>
11. Unaudited Interim Financial Information
The Company, in its opinion, has included all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of its financial
position at September 30, 1996 and the results of its operations for the nine
months then ended. The results of operations for the nine months ended September
30, 1996 are not necessarily indicative of the results for a full year.
During the first quarter of 1996, the Company completed a private placement
whereby it issued 66,667 shares of Series A convertible preferred stock at $3.75
per share. During 1996, the preferred shares were converted into 66,667 shares
of common stock.
During the first quarter of 1996, the Company advanced $250,000 to a development
company in California (the Development Company), in exchange for a convertible
promissory note (the Note), due February 26, 1997. During the fourth quarter of
1996, the maturity date of the Note was extended to December 31, 1997 and can,
upon certain conditions, be further extended until June 30, 1998. The Note
accrues interest at the prime rate plus two percent and is primarily
collateralized by the Development Company's technology.
F-19
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
(Information subsequent to December 31, 1995 is unaudited)
11. Unaudited Interim Financial Information (continued)
During the second quarter of 1996, the Company conducted an offering consisting
of convertible notes with detachable common stock warrants. The notes accrue
interest at ten percent per annum, mature in three years from the date of
issuance and are convertible into common stock of the Company at $3.75 per
share. In addition, each investor received one common stock warrant for the
right to purchase one share of common stock at $3.75 per share for each $4
invested. The warrants are exercisable over a period of three years. Total
proceeds from the note offering amounted to $751,200. Common stock issuable upon
conversion of the notes, including principal and accrued interest, amounts to
146,846 shares. Common stock issuable related to the warrants provided in
conjunction with the note offering amounts to 187,800 shares.
During the third quarter of 1996, the Company completed a private placement
whereby it issued 800,000 shares of common stock at $2.50 per share. Net
proceeds from the private placement were approximately $1,740,000.
During the third quarter of 1996, two former employees of the Company exercised
certain stock options through the Company's employee stock option plan for 330
shares of common stock at $1.54 per share.
During November 1996, the Company (through its Wyndgate division) entered into
an Exclusivity and Software Development Agreement (Agreement) with Ortho
Diagnostic Systems, Inc. (ODSI), a subsidiary of Johnson & Johnson. This
Agreement requires the Company to perform certain software development services
in consideration of the payment by ODSI of $500,000, received by the Company in
November 1996, and an additional payment of $500,000 received by the Company in
January 1997.
During January 1997, the Company extended the maturity date on its $1,000,000
line of credit through February 12, 1997. In addition, the positive net worth
covenant was eliminated by the bank.
During the first quarter of 1997, the Company borrowed $250,000 from one
individual and an additional $200,000 from another individual at 12% interest.
The two notes are due either on, or before five days after, the closing of the
Company's proposed initial public offering. If there is not a closing on the
offering, the $250,000 note is due March 23, 1997 and the $200,000 note is due
March 24, 1997. In connection with the notes, the Company issued warrants to
purchase 150,000 shares of common stock exercisable at 85% of the initial public
offering price per share of the common stock of the Company, or in the event of
no public offering, at $3.00 per share. The Company has reserved for the future
issuance of 150,000 shares of common stock related to the abovementioned notes.
(See Note 9 for description of additional shares of common stock reserved for
future issuance).
F-20
<PAGE>
[GRAPHIC OF KEYBOARD ON INSIDE BACK COVER OMITTED]
<PAGE>
GLOBAL MED
TECHNOLOGIES,
INC
1,337,000 Units
-------------------------
PROSPECTUS
-------------------------
RAF
Financial Corporation
Cohig & Associates, Inc.
