As filed with the Securities and Exchange Commission on May 15, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM SB-2
REGISTRATION STATEMENT
under the
SECURITIES ACT OF 1933
GLOBAL MED TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Colorado 8741; 8071; 7372 84-1116894
-------- ---------------- ----------
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification
or organization) Code Number) Number)
Global Med Technologies, Inc.
12600 West Colfax
Suite A-500
Lakewood, Colorado 80215
(303) 238-2000
(Address and telephone number of principal executive offices
and principal place of business)
____________________
Michael I. Ruxin, M.D.
Global Med Technologies, Inc.
12600 West Colfax
Suite A-500
Lakewood, Colorado 80215
(303) 238-2000
(Name, address and telephone number of agent for service)
COPIES OF ALL COMMUNICATIONS TO:
Albert Brenman, Esq.
Brenman Bromberg & Tenenbaum, P.C.
Mellon Financial Center
1775 Sherman Street, Suite 1001
Denver, Colorado 80203
(303) 894-0234
(303) 839-1633 FAX
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that
this registration statement shall thereafter become effective in accordance
with section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said section 8(a), may determine.
<PAGE>
Calculation of Registration Fee
===============================================================================
Proposed
Title of each Proposed maximum Amount
class of Amount maximum aggregate of
securities to to be offering offering registration
be registered registered price(1) price(1) fee
- -------------------------------------------------------------------------------
Common Stock Underlying
Common Stock Purchase
Warrants 12,000,000(2) $ 1.50 $18,000,000 $6,102
===============================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rules 457(a) and (g).
(2) Represents shares of Common Stock underlying warrants held or to be
held by the Selling Security Holders.
____________________
<PAGE>
Cross Reference Sheet
FORM SB-2
ITEM NO. SECTIONS IN PROSPECTUS
- --------- ----------------------
1 Front of Registration Statement and
Outside Front Cover of Prospectus . . . . . Cover Page
2 Inside Front and Outside Back Cover
Pages of Prospectus . . . . . . . . . . . . Inside Front Cover
Pages (i)(ii); Table of
Contents
3 Summary Information and Risk
Factors . . . . . . . . . . . . . . . . . . Prospectus Summary;
Risk Factors
4 Use of Proceeds . . . . . . . . . . . . . . Prospectus Summary; Use
of Proceeds
5 Determination of Offering Price . . . . . . Cover Page; Plan of
Distribution
6 Selling Security Holders. . . . . . . . . . Selling Security
Holders
7 Plan of Distribution. . . . . . . . . . . . Prospectus Summary;
Plan of Distribution
8 Legal Proceedings . . . . . . . . . . . . . Legal Proceedings
9 Directors, Executive Officers,
Promoters and Control Persons . . . . . . . Management - Directors
and Executive Officers
10 Security Ownership of Certain
Beneficial Owners and Management. . . . . . Security Ownership of
Certain Beneficial
Owners and Management
11 Description of Securities . . . . . . . . . Description of Securities
12 Interest of Named Experts and
Counsel . . . . . . . . . . . . . . . . . . Experts
13 Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities . . . . . . . . . . . . . . Statement as to
Indemnification
14 Organization within Last Five Years . . . . The Company; Interests
of Management and
Others in Certain
Transactions
15 Description of Business . . . . . . . . . . Prospectus Summary;
Risk Factors; The
Company
16 Management's Discussion and
Analysis or Plan of Operation . . . . . . . Management's Discussion
and Analysis or Plan of
Operation
17 Description of Property . . . . . . . . . . The Company
<PAGE>
18 Certain Relationships and Related
Transactions. . . . . . . . . . . . . . . . Interests of Management
and Others in Certain
Transactions
19 Market for Common Equity and
Related Stockholder Matters . . . . . . . . Risk Factors; Market
for Common Equity,
Dividend Policy and
Related Shareholder
Matters
20 Executive Compensation. . . . . . . . . . . Management - Executive
Compensation
21 Financial Statements. . . . . . . . . . . . Index to Financial
Statements
22 Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . Experts
23 Indemnification of Directors and
Officers. . . . . . . . . . . . . . . . . . Indemnification of
Directors and Officers
24 Other Expenses of Issuance and
Distribution. . . . . . . . . . . . . . . . Other Expenses of
Issuance and
Distribution
25 Recent Sales of Unregistered
Securities. . . . . . . . . . . . . . . . . Recent Sales of
Unregistered Securities
26 Exhibits. . . . . . . . . . . . . . . . . . Exhibits
27 Undertakings. . . . . . . . . . . . . . . . Undertakings
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION
GLOBAL MED TECHNOLOGIES, INC.
12,000,000 Shares
This Prospectus relates to the resale by the holders (the "Selling
Security Holders") named herein, for their own accounts, of up to
12,000,000 shares of Common Stock which underly warrants (the "Warrants")
exercisable at $.25 per share (hereinafter sometimes referred to as the
"Shares"). The Company's Common Stock and Class A Common Stock Purchase
Warrants (the "Class A Warrants") are currently traded on the Bulletin
Board under the trading symbols GLOB and GLOBW, respectively. See MARKET
FOR COMMON EQUITY, DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS and
DESCRIPTION OF SECURITIES.
The shares of Common Stock being offered hereby are not being
underwritten in this offering, and the Company will not receive any
proceeds from their sale, although the Company will receive up to
approximately $3,000,000 if the Selling Security Holders exercise their
warrants at $.25 per share, of which there is no assurance. However, these
Selling Security Holders will have to exercise their warrants in order to
sell the underlying shares of Common Stock. See SELLING SECURITY HOLDERS.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK TO
INVESTORS. PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE DISCUSSION
UNDER RISK FACTORS COMMENCING ON PAGE 7 OF THIS PROSPECTUS.
Brokers and dealers who propose to effect transactions in the Shares
should assure themselves of the existence of appropriate exemptions from
the securities registration requirements of the securities laws of the
applicable jurisdictions or effectuate such registrations in connection
with any offers or sales of the Shares.
__________
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.
____________________
THE DATE OF THIS PROSPECTUS IS MAY __, 1998.
<PAGE>
The following language appears in red on the left side of the cover page.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN A STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
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. 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.
TABLE OF CONTENTS
Summary. . . . . . . . . . . . . . . 3 Security Ownership of Certain
Risk Factors . . . . . . . . . . . . 7 Beneficial Owners and Management. . .60
Use of Proceeds. . . . . . . . . . .18 Certain Relationships and
Market For Common Equity, Related Transaction . . . . . . . . .62
Dividend Policy and Related Description of Securities. . . . . . .63
Shareholder Matters . . . . . . . .19 Selling Security Holders . . . . . . .66
Selected Financial Data. . . . . . .20 Plan of Distribution . . . . . . . . .66
Management's Discussion and Legal Matters. . . . . . . . . . . . .67
Analysis or Plan of Operations. . .22 Experts. . . . . . . . . . . . . . . .67
The Company. . . . . . . . . . . . .31 Shares Eligible for Future Sale. . . .68
Legal Proceedings. . . . . . . . . .45 Additional Information . . . . . . . .68
Management . . . . . . . . . . . . .46 Glossary . . . . . . . . . . . . . . .70
Executive Compensation . . . . . . .50 Financial Statements . . . . . . . . F-1
ii
<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") was organized under the
laws of the State of Colorado in December 1989. The Company completed its
initial public offering of securities in the first quarter of 1997, from
which it received net proceeds of approximately $8.2 million from the sale
of 1,456,988 Units, each of which consisted of two shares of Common Stock
and one Class A Common Stock Purchase Warrant (the "Class A Warrants").
On April 14, 1998, the Company entered into two debt financing
agreements which, as amended on April 16, 1998 and April 20, 1998 provided
the Company up to $3 million in borrowings in exchange for up to 12 million
warrants (the "Warrants") convertible into Common Stock at $0.25 per
share. Should the Company not repay the financing proceeds and accrued
interest thereon on or before April 15, 1999, the convertible financing
proceeds, including interest thereon, are convertible into approximately 70
million shares of Common Stock at $0.05 per share. See THE COMPANY -
FINANCING AGREEMENTS below for a further discussion of these agreements.
The shares of Common Stock included in this registration statement are the
Shares underlying the Warrants.
Formerly known as National MRO, Inc., which was founded in 1989, the
Company changed its name to Global Data Technologies, Inc., in 1995 in
connection with the merger of National MRO, Inc., and The Wyndgate Group,
Ltd., in May 1995. The Company changed its name again in May 1996 to
Global Med Technologies, Inc.
The Company, through its one operating division Wyndgate Technologies
("Wyndgate"), designs, develops, markets and supports information
management software products for blood banks, hospitals, centralized
transfusion centers and other healthcare related facilities. Pursuant to
an agreement with eight California blood centers, Wyndgate developed a
blood tracking system ("SAFETRACE(R)") 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, through its SAFETRACE(R)
software, incorporates and integrates products and services for the
management of the blood supply and blood products from donor recruitment to
shipment from blood centers to hospitals, clinics, medical research
institutions and other healthcare related facilities.
3
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THE OFFERING
Common Stock Offered for
Selling Security Holders. . . 12,000,000 shares of Common Stock
Use of Proceeds . . . . . . . The Company will not receive any
proceeds from the sale of the Shares.
However, the Company will receive
$3,000,000 from the exercise of
warrants to purchase the Shares. 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 should be
considered only by persons who can
afford the loss of their entire
investment. Prospective purchasers
should review carefully the entire
Prospectus and should consider, among
other things the matters set forth
under Risk Factors.
Trading Symbols(1). . . . . . Common Stock: GLOB
Warrants: GLOBW
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SUMMARY FINANCIAL INFORMATION
Set forth below is summary financial information with respect to the
Company. Financial information for the years ended December 31, 1997 and
December 31, 1996 is derived from the consolidated financial statements
included elsewhere in the Prospectus and is qualified by reference to such
financial statements and the notes related thereto which have been audited
by Ernst & Young LLP, independent public accountants.
SUMMARY CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
(In Thousands, except per common Years Ended December 31,
share amounts) ------------------------
1997 1996
---- ----
Revenues $ 2,506 $ 4,576
Cost of revenues 1,597 1,883
---------- ----------
Gross profit 909 2,693
Selling, general and administrative
and other 8,325 5,504
---------- ----------
Loss from continuing operations (7,416) (2,811)
Loss from discontinued operations(2) (880) (1,681)
Gain on sale of discontinued
operations(2) 1,013 -----
---------- ----------
Net loss $ (7,283) $ (4,492)
========== ==========
Net loss from continuing operations
per common share(1) $ (0.96) $ (0.63)
========== ==========
Weighted average of common shares
outstanding(1) 7,728 4,499
========== ==========
SUMMARY CONSOLIDATED BALANCE SHEET
DATA: December 31
(In Thousands) -----------
1997 1996
---- ----
Cash and cash equivalents $ 2,370 $ 489
Working capital deficit $ (2,582) $ (3,995)
Total assets $ 4,266 $ 3,239
5
<PAGE>
Net liabilities of discontinued
operations(2) $ 631 $ 1,132
Long-term liabilities $ 198 $ 232
Stockholders' deficit $ (1,473) $ (3,360)
_____________________
(1) See Note 1 to the consolidated financial statements for a description
of the computation of net loss from continuing operations per common
share.
(2) See Note 2 to the consolidated financial statements for a description
of the December 15, 1997 sale of the Company's DataMed International
division ("DataMed"). The consolidated financial statements and notes
thereto also reflect DataMed as discontinued operations.
6
<PAGE>
RISK FACTORS
The Shares offered hereby are speculative in nature and involve a high
degree of risk. The Shares 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; NET WORKING CAPITAL DEFICIT; CUMULATIVE NET
LOSSES
For the fiscal years ended December 31, 1997 and 1996, the Company
incurred a net loss of approximately $7.3 million and $4.5 million,
respectively. For the fiscal years ended December 31, 1997 and 1996, the
Company incurred a net loss from continuing operations of approximately
$7.4 million and $2.8 million, respectively. The net loss from continuing
operations in 1996 of approximately $2.8 million was primarily due to
increases in overall staffing and related expenses necessary to operate
Wyndgate's research and development programs and the anticipated future
growth of the Company. The increased net loss from continuing operations
in 1997 was primarily due to a substantial decrease in SAFETRACE(R) license
sales, relative increases in revenues derived from lower margin
SAFETRACE(R) related implementation and customer support services,
increases in sales and marketing expenses for Wyndgate's current and future
software products and services, and a substantial increase in research and
development expenses incurred for the software development of SAFETRACE
TX(TM), which entered beta testing on April 6, 1998. At December 31, 1997,
the Company had a net working capital deficit of approximately $2.6 million
and cumulative net losses of approximately $15 million. There can be no
assurance that the Company will be able to generate sufficient revenues to
operate profitably in the future or to pay its debts and liabilities as
they become due. See MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS.
ANTICIPATED NEGATIVE CASH FLOW
Management anticipates that the Company will continue to generate
negative cash flows from operations and from investing activities until
1999 and possibly thereafter. Accordingly, the Company may be required to
substantially reduce its software development programs and/or substantially
reduce its other operating expenses to enable it to continue its planned
operations with available cash resources. No assurances can be given that
the Company will achieve profitability or positive cash flow. If the
Company is unable to substantially reduce its negative cash flows from
continuing operations during 1998 and generate positive cash flows
beginning in 1999 and beyond, management will be required to substantially
reduce the Company's software development programs and other operating
expenses.
7
<PAGE>
REVENUE FLUCTUATIONS
The Company has experienced revenue fluctuations when SAFETRACE(R) has
been delivered. SAFETRACE(R) license fees have historically been
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.
Revenue fluctuations could also be affected by the decision on whether or
not to recognize revenues based upon the length of time the licensees take
to implement SAFETRACE(R). The implementation cycle of Wyndgate's
SAFETRACE(R) software product is taking longer than originally anticipated.
Based on recent experience, management currently anticipates that the
average implementation cycle will typically take approximately 16 months.
The implementation cycles are dependent on various items, including the
blood center's size and the complexity of the blood center's standard
operating procedures. Further, special development projects required by
customers concurrent with the licensing of the Company's software products
and other significant obligations could result in revenue recognition
delays. As a result, the Company's operating results could fluctuate
significantly.
In October 1997, the AICPA issued Statement of Position 97-2 ("SOP 97-
2"), which changes the requirements for revenue recognition effective for
transactions that the Company will enter into beginning January 1, 1998.
Prior years are not required to be restated. Management's current plans to
address the revenue recognition requirements of SOP 97-2 include
substantial revisions to Wyndgate's current standard terms and conditions
included as part of Wyndgate's SAFETRACE(R) software license agreements and
establishing relationships with other businesses for the provision of
SAFETRACE(R) implementation and other support services. There can be no
assurance that management's plans to address the revenue recognition
requirements of SOP 97-2 will be successfully and timely implemented, that
substantial revisions to Wyndgate's existing standard terms and conditions
currently included as part of Wyndgate's SAFETRACE(R) software license
agreements will be accepted by potential SAFETRACE(R) licensees or that
changes to Wyndgate's provision of implementation and customer support
services will be accepted by potential SAFETRACE(R) licensees. Failure to
effectively address the revenue recognition requirements of SOP 97-2 and
future revenue recognition guidance regarding the software industry will
have a material adverse affect on the timing of revenue recognition, gross
margins and operating results. As a result, future capital raising efforts
may also be adversely affected.
LACK OF SIGNIFICANT OPERATING HISTORY AND DIFFICULTIES IN ANTICIPATING
REVENUES, EXPENSES AND NET CASH FLOWS
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. Currently, twelve of the twenty-four SAFETRACE(R) licensees have
SAFETRACE(R) in operation. There is no assurance that the additional
twelve SAFETRACE(R) licensees will ever become operational using
SAFETRACE(R), that the Company will be able to license SAFETRACE(R) to
additional customers, that the Company will be able to develop and license
new
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<PAGE>
products or that the Company will be successful. Additionally, the
development and marketing of new software products may cause difficulties
in accurately anticipating implementation and development schedules, future
revenues, expenses, financial condition and net cash flows. 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 software products and
related services.
POSSIBLE COMPLETE CHANGE IN MANAGEMENT AND CONTROL
In April 1998, the Company entered into financing arrangements with two
non-affiliated companies pursuant to which, among other things, the
Company's Officers, Directors and certain employees executed resignations,
which are being held in escrow by the lenders. Under the loan commitment
documents, the lenders have the right to cancel all management and employee
contracts, and if the Company defaults on the terms of the commitments, the
resignations of the Directors, Officers and employees will immediately be
effective. The lenders also have the right to appoint five members to the
Company's Board of Directors, which will then consist of a maximum of nine
members. There can be no assurance that the lenders will not invoke their
right to terminate such contracts, thus effecting an immediate change in
the management and control of the Company.
POSSIBLE SUBSTANTIAL DILUTION TO CURRENT SHAREHOLDERS
As consideration for the $1.5 million loan and $1.65 million line of credit,
extended to the Company by two related parties, which were previously not
affiliated with the Company, in April 1998, the Company has agreed to issue
warrants to purchase 7,000,000 shares of Common Stock, exercisable over a
ten year period at $.25 per share. An additional 5,000,000 warrants,
exercisable on the same terms, will be issuable in the event the Company
draws down any amounts on the line of credit. If the lenders exercise their
warrants, the Company could issue an additional 7,000,000 to 12,000,000
shares of Common Stock. In addition, in the event the Company were to
default under the terms of the loan or line of credit, the outstanding
principal and any unpaid interest may be converted, at the option of the
lenders, into approximately 70 million shares of the Company's Common Stock
on the basis of one share of Common Stock for each $.05 of debt. If the
lenders were to exercise their warrants, or convert any of the outstanding
debt into Common Stock upon default, the ownership of the present
shareholders of the Company would be significantly diluted.
INCREASED NET LOSS RELATED TO ISSUANCE OF DISCOUNTED WARRANTS
In connection with the April 14, 1998 loan and line of credit commitments,
the Company has agreed to issue warrants to purchase a minimum of 7,000,000
shares at $.25 per share, which is substantially below the market price for
the Company's Common Stock on that date. Additionally, if the Company draws
on the $1.65 million line of credit, the lenders will receive an additional
5,000,000 warrants exercisable under the same terms as the $1.5 million loan.
The issuance of these discounted warrants will result in a significant noncash
charge to the Company's 1998 statement of operations which, based on a
preliminary management assessment using the Black-Scholes pricing model,
could range as high as $7.42 million and $5.3 million for the 7,000,000 and
5,000,000 warrants, respectively.
9
<PAGE>
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. Compliance with
government regulations can be burdensome and may result in delays and
substantial costs incurred by the Company. In addition, modifications to
such regulations could materially and 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, since SAFETRACE TX(TM)
requires FDA clearance prior to the marketing of such product, the time
delay to market SAFETRACE TX(TM) could materially and adversely affect the
Company's business, financial condition and results of operations. The
Company cannot predict the effect of possible future legislation and
regulation. The Company will also be required to follow applicable Good
Manufacturing Practices ("GMP") regulations of the FDA, which include
testing, control and documentation requirements, as well as similar
requirements in other countries, including International Standards
Organization ("ISO") 9001 standards. Failure to meet these requirements
would preclude the Company from marketing its products on a commercial
basis, and therefore would materially and adversely affect the Company's
business, financial condition and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
Results of operations are expected to fluctuate substantially depending
upon numerous factors, including demand for the Company's products; the
timing of new software license agreements with Wyndgate customers; the
ability of the Company to develop, introduce and market new and enhanced
versions of the Company's products on a timely basis; personnel changes;
changes in Company strategy, and the level of international sales.
Operating results could also be affected by the timing of the receipt of
individual customer orders and other revenue fluctuation factors discussed
above.
LIMITED SALES, MARKETING AND DISTRIBUTION SYSTEMS
The Company's Wyndgate division has made limited sales of SAFETRACE(R)
to date. The Company currently markets SAFETRACE(R) through a small direct
sales force, both in the U.S. and internationally. Establishment of a
complete sales force capable of effectively commercializing SAFETRACE(R)
and SAFETRACE TX(TM) which entered beta testing on April 6, 1998, will
require substantial efforts and require substantial management and
financial resources. The Company also continues to evaluate various
strategic business alliances, which may assist in the development of a
national and international sales, marketing and distribution system. Any
alliance which is developed by the Company could require substantial
capital and financial resources. There can be
10
<PAGE>
no assurance that the Company will be able to establish such a sales
capability on a timely basis, if at all. Moreover, there can be no
assurance that any business alliance entered into by the Company would be
successful in such commercialization efforts.
POTENTIAL DIFFICULTIES IN MANAGING BUSINESS UNDERGOING RAPID GROWTH
The Company's future success will depend to a significant extent on the
ability of its current and future management personnel to operate
effectively, both independently and as a group. Most of the Company's
management team have no prior experience as senior executives of a public
corporation. There can be no assurance that the management team will
operate together effectively. To compete successfully against current and
future competitors, to timely complete research and development projects
and to develop future products, the Company believes that it must continue
to expand its operations, particularly in the areas of research and
development, sales and marketing and training. If the Company were to
experience significant growth in the future, such growth would likely place
significant strain upon the Company's management, operating and financial
systems and other resources. To accommodate such growth and compete
effectively, the Company must continue to implement and improve its
information systems, procedures and controls, and to expand, train,
motivate and manage its work force. There can be no assurance that the
Company's personnel, systems, procedures and controls will be adequate to
support the Company's future operations. Any failure to implement and
improve the Company's operational, financial and management systems or to
expand, train, motivate or manage its work force could materially and
adversely affect the Company's business, financial condition and results of
operations.
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 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.
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 and materially affect the Company's available cash to fund
future operations and the Company's future profitability.
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POSSIBLE LOSS OF SOFTWARE LICENSES DUE TO FAILURE TO MEET MAINTENANCE
SERVICE REQUIREMENTS
The Wyndgate software license agreements have license terms that vary,
but are typically multi-year licenses which are automatically renewable.
The software licenses may be terminated by customers if Wyndgate fails to
deliver various maintenance services consisting of product bug fixes,
continued regulatory compliance and product updates. Generally, Wyndgate
may terminate its software license agreements if customers fail to meet
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 customers will continue to make usage
fee payments.
POSSIBLE SHRINKAGE OF MARKET DUE TO MULTIPLE SITE CONTRACTS AND DUE TO
FURTHER CONSOLIDATION WITHIN THE BLOOD BANK INDUSTRY
Presently, the Company has one specific contract which covers multiple
blood banks. The potential number of available SAFETRACE(R) licensees could
be reduced if the Company were to enter into additional multiple site
contracts. While the Company believes the license fee charged for such
multi-site arrangements is comparable to the license fee which would be
earned on an equivalent number of single site licenses, there can be no
assurance that the Company's revenues will be equivalent to what it would
have earned under single site licenses. To date, approximately five of
Wyndgate's SAFETRACE(R) licensees have or are expected to merge to form two
SAFETRACE(R) licensees. There can be no assurance that further
consolidation throughout the domestic blood bank industry will not have a
material adverse affect on the Company's ability to successfully and timely
market its software products. Further, there can be no assurance that the
existing and future consolidation throughout the blood bank industry, will
not cause substantial implementation cycle delays and delays in obtaining
new customer orders for Wyndgate's software products. Such delays due to
consolidation within the blood bank industry may cause additional and
unanticipated use of the Company's financial resources and may also have a
material and adverse affect on the Company's business, financial condition
and results of operations.
PENALTIES AND POTENTIAL LIMITATIONS OF MARKET SHARE DUE TO ITXM DEVELOPMENT
AGREEMENT
The Company has a software development agreement with ITxM which provides
for penalties to be paid by the Company to ITxM in the event that beta
testing of SAFETRACE TX(TM) is not completed by July 17, 1998. The
Agreement also contains certain potential limitations on the Company's
right to market its products, including, SAFETRACE TX(TM), within the blood
transfusion industry and grants ITxM the ability to use SAFETRACE TX(TM)
pursuant to a non-exclusive, perpetual license. The Company and ITxM have
recently commenced negotiations relating to these provisions, which the
Company believes will have a material and adverse affect on its business if
not satisfactorily resolved. There can be no assurance that the
negotiations will result in the penalty payments being eliminated and/or
the resolution of the Company's and ITxM's respective rights to market and
use SAFETRACE TX(TM).
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PRODUCT AND REPORTING LIABILITY
As of the date hereof, twelve of the twenty-four SAFETRACE(R) licensees
have SAFETRACE(R) in operation. Currently, the Company has product
liability exposure for defects in SAFETRACE(R) which may become apparent
through widespread use of SAFETRACE(R). To date, no claims have been filed
against the Company involving SAFETRACE(R) and the Company is not aware of
any material problems involving SAFETRACE(R). 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
SAFETRACE(R) 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.
DEPENDENCE ON MAJOR CUSTOMERS
During the year ended December 31, 1997, two Wyndgate customers, Belle
Bonfils Memorial Blood Center, Denver, Colorado and Haemonetics
Corporation, Braintree, Massachusetts each accounted for approximately 10%
and 33% of the Company's total revenues from continuing operations. During
the year ended December 31, 1996, one Wyndgate customer, Gulf Coast
Regional Blood Center, Houston, Texas, accounted for approximately 29% of
the Company's total revenues from continuing operations. Accounts
receivable from the above customers as of December 31, 1997 and 1996 was
approximately $60,000 and $205,000, respectively. Unbilled revenues from
the above customers was approximately $160,000 as of December 31, 1997. In
order to attempt to reduce its credit risks, the Company generally requires
substantial down payments and progress payments during SAFETRACE(R)
implementations. Non-renewal or termination of the contractual arrangements
with these key and other Wyndgate customers could have a material adverse
effect on the Company. There can be no assurance that the Company will be
able to retain these or other customers or, if Wyndgate's 24 existing
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.
With the sale of DataMed, the Company has lost all of the revenues,
accounts receivable and unbilled revenue from that division's customers,
and its audited consolidated financial statements for the fiscal years
ended December 31, 1997 and 1996 and related footnotes reflect DataMed as
discontinued operations.
SUBSTANTIAL COMPETITION
There is substantial competition in all aspects of the blood bank and
hospital information management industry. Numerous companies are
developing technologies and marketing products and services in the
healthcare information management area. Many of these competitors have
been in business longer than the Company and have substantially greater
personnel and financial resources available to them than does the Company,
and there can be no assurance that the Company will be
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able to compete with these competitors successfully.
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 bank industry.
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 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 Wyndgate in the blood bank industry does not assure future
business expansion, profitability or long-term and sustainable success.
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 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 products. The Company is currently not aware of any
claims or infringements of the Company's software products upon the rights
of others.
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.
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AUTHORIZED STOCK AVAILABLE FOR ISSUANCE BY THE COMPANY
The Company presently has 8,148,255 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. The amount of Common Stock outstanding,
however, does not include 1,456,988 shares issuable upon exercise of
publicly held Class A Common Stock Purchase Warrants, 1,759,118 shares
issuable upon exercise of other outstanding options and warrants, 1,457,802
shares issuable but not outstanding in connection with the Company's stock
option and stock compensation plans or warrants to purchase from 7,000,000
to 12,000,000 shares of Common Stock issued or issuable to the Selling
Security Holders. 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. As part of the Company's
current capital raising efforts, the Company will likely be required, if
financing is obtained, to issue or reserve additional shares of its Common
Stock and/or Preferred Stock. Although there are no existing agreements
involving the issuance of such shares, 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.
LIMITED CAPITALIZATION
The Company has only limited capitalization available to it. The Company
anticipates it 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.
CONTROL BY OFFICERS AND DIRECTORS
The Company's officers and directors, own approximately 33% 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's Articles do
not provide for cumulative voting in the election of directors; hence,
shareholders should not expect to be able to elect any directors to the
Company's Board of Directors.
POSSIBLE ANTI-TAKEOVER EFFECTS OF PREFERRED STOCK, SEVERANCE PAYMENTS AND
BELOW-MARKET WARRANTS
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, certain of the Officers of
the Company have employment agreements with the Company which provide for
lump-sum payments to them of up to $2.5 million if the Company terminates
their employment for any reason other than cause or
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disability. Each of these Officers have executed a release of their
employment contract in favor of the Company; however, until the releases
are accepted by the lenders, the employment contracts are still in effect.
In addition, certain lenders have a minimum of 7,000,000 warrants to
purchase Common Stock, exercisable at $.25 per share until April 14, 2008.
The existence of the severance payment provisions and the large number of
outstanding low-priced warrants increases the likelihood that a potential
purchaser would seek to negotiate directly with the holders of the warrants
and/or the Board of Directors in order to gain control of the Company or
its assets rather than 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.
POSSIBLE VOLATILITY OF PRICE OF SHARES OF COMMON STOCK AND CLASS A WARRANTS
The shares of Common Stock and the Class A Warrants are currently traded
on the OTC Electronic Bulletin Board. The prices of securities of publicly
traded corporations tend to fluctuate significantly. The trading price of
the Common Stock and Class A Warrants could be subject to wide fluctuations
in response to quarterly variations in operating results, announcements of
technological developments, the Company's financial condition, as well as
other events or factors. Although a trading market for the Company's
Common Stock and Warrants currently exists, there can be no assurance that
a market will be sustained.
RISKS RELATED TO LOW-PRICED STOCKS
The Company's Common Stock and Class A Warrants are presently listed on
the OTC Bulletin Board. Since the Company's net tangible assets do not
exceed $2 million, and its Common Stock is trading for less than $5.00 per
share, then the Company's Common Stock and Class A Warrants are each
considered a "penny stock" under federal securities law. Additional
regulatory requirements applying to trading by broker-dealers of penny stocks
which, oftentimes, deter broker-dealers from trading "penny stocks."
WARRANTS TO REPRESENTATIVE
At the closing of the Company's February 1997 initial public offering,
the Company sold to RAF Financial Corporation (the "Representative") and
its designees, for $100, warrants to purchase up to 133,700 Units (the
"Representative's Warrants"), exercisable at $11.55 per Unit. The
Representative's Warrants are exercisable for a forty nine month period,
which commenced January 14, 1998. 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 granted certain registration rights with regard to
the shares of Common Stock underlying the Representative's Warrants and
issuable upon exercise of the Warrants included in the Representative's
Warrants, and such registration could result in substantial expense to the
Company.
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POTENTIAL LITIGATION DUE TO THE SALE OF DATAMED
DataMed's substance abuse testing service agreements have contract terms
that vary from one to five years and, unless canceled generally ninety days
prior to the end of the license term, most are automatically renewable.
Generally, such contracts are not assignable. The Asset Purchase Agreement
for the sale of DataMed provides that the Company will assign all of
DataMed's customer contracts to the purchaser, and if DataMed customers do
not consent to the assignment, the purchaser can require the Company to
terminate any non-consenting customers' contracts. The Company will not be
in the substance abuse testing business in the future. While the Company
does not consider it likely, it is possible, non-consenting customers could
commence litigation against the Company for failure to provide substance
abuse testing pursuant to such customers' contracts with DataMed.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and the
Company intends that such forward-looking statements be subject to the safe
harbors for such statements under such sections. The Company's
forward-looking statements include the plans and objectives of management
for future operations, including plans and objectives relating to the
Company's future marketing efforts and future economic performance of the
Company. The forward-looking statements and associated risks set forth in
this Prospectus include or relate to: (i) the ability of the Company to
obtain a meaningful degree of consumer acceptance for its software products
and proposed software products; (ii) the ability of the Company to market
its software products and proposed software products on a national and
international basis at competitive prices; (iii) the ability of the
Company's software products and proposed software products to meet
government regulations and standards; (iv) the ability of the Company to
develop and maintain an effective national and international sales network;
(v) success of the Company in forecasting demand for its software products
and proposed software products; (vi) the ability of the Company to maintain
pricing and thereby maintain adequate profit margins; (vii) the ability of
the Company to achieve adequate intellectual property protection for the
Company's software products and proposed software products; and, (viii) the
ability of the Company and its customers to successfully and timely
implement the Company's software products.
The forward-looking statements herein are based on current expectations
that involve a number of risk and uncertainties. Such forward-looking
statements are based on assumptions that the Company will market and
provide software products on a timely basis, that there will be no material
adverse competitive or technological change in condition of the Company's
business, that demand for the Company's software products will
significantly increase, that the Company's Chief Executive Officer will
remain employed as such by the Company, that the Company's forecasts
accurately anticipate market demand and that there will be no material
adverse change in the Company's operations, business or governmental
regulation affecting the Company or its suppliers. The foregoing
assumptions are based on judgments with respect to, among other things,
future
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economic, competitive and market conditions, and future business decisions,
all of which are difficult or impossible to predict accurately and many of
which are beyond the Company's control. Accordingly, although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any such assumption could prove to be inaccurate and therefore
there can be no assurance that the results contemplated in forward-looking
statements will be realized. In addition, as disclosed elsewhere in the
"Risk Factors" section of this Prospectus, there are a number of other
risks inherent in the Company's business and operations which could cause
the Company's operating results to vary markedly and adversely from prior
results or the results contemplated by the forward-looking statements.
Growth in absolute and relative amounts of cost of sales, research and
development, sales and marketing and other operating expenses or the
occurrence of other events could cause actual results to vary materially
from the results contemplated by the forward-looking statements.
Management decisions, including budgeting, are subjective in many respects
and periodic revisions must be made to reflect actual conditions and
business developments, the impact of which may cause the Company to alter
its marketing, capital investment and other expenditures, may also
materially and adversely affect the Company's liquidity, financial position
and results of operations. In light of significant uncertainties inherent
in the forward-looking information included in this Prospectus, the
inclusion of such information should not be regarded as a representation
by the Company or any other person that the Company's objectives or plans
will be achieved.
USE OF PROCEEDS
None of the proceeds from the sale of the shares of Common Stock by the
Selling Security Holders will be received by the Company. See SELLING
SECURITY HOLDERS and PLAN OF DISTRIBUTION.
If the Selling Security Holders exercised their warrants at $.25 per
share, of which there can be no assurance, the Company would receive
approximately $3,000,000 from such exercises. The Selling Security Holders
are required to exercise their warrants prior to the sale of the shares of
Common Stock offered hereby.
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MARKET FOR COMMON EQUITY, DIVIDEND POLICY AND
RELATED SHAREHOLDER MATTERS
MARKET INFORMATION. The following table sets forth the high and low bid
prices for the Company's Common Stock since the Common Stock commenced
trading on March 13, 1997. The quotations reflect inter-dealer prices,
with retail mark-up, mark-down or commissions, and may not represent actual
transactions. The information presented has been derived from the National
Quotation Bureau, Inc. Library.
1997 Fiscal Year High Bid Low Bid
---------------- -------- -------
First Quarter (from March 13). . . . . . . . . $ 3.875 $ 3.00
Second Quarter . . . . . . . . . . . . . . . . $ 3.00 $ 2.75
Third Quarter. . . . . . . . . . . . . . . . . $ 2.9375 $ 1.8125
Fourth Quarter . . . . . . . . . . . . . . . . $ 3.0625 $ 2.125
1998 Fiscal Year
----------------
First Quarter. . . . . . . . . . . . . . . . . $ 2.00 $ 0.78125
Second Quarter (through May 12 ) . . . . . . . $ 1.78125 $ 1.00
On May 12, 1998, the last reported bid and asked prices for the Common
Stock were $1.3125 and $1.4375, respectively, and the last reported bid and
asked prices for the Class A Common Stock Purchase Warrants were $.15625
and $.25, respectively.
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.
SHAREHOLDER INFORMATION. As of April 14, 1998, the Company had
approximately 134 holders of record of the Company's Common Stock.
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SELECTED FINANCIAL DATA
Set forth below is selected financial data with respect to the
Company. Financial data for the years ended December 31, 1997 and December
31, 1996 is derived from the consolidated financial statements included
elsewhere in the Prospectus and is qualified by reference to such financial
statements and the notes related thereto which have been audited by Ernst
& Young LLP, independent public accountants. Additionally, the following
selected financial data should be read in conjunction with MANAGEMENT'S
DISCUSSION AND ANALYSIS or PLAN OF OPERATIONS appearing elsewhere in this
Prospectus.
STATEMENT OF OPERATIONS DATA:
(In Thousands)
Years Ended December 31,
------------------------
1997 1996
---- ----
REVENUES:
Software sales and consulting $ 2,209 $ 3,648
Hardware and software, obtained
from vendors 297 928
---------- ----------
Total revenues 2,506 4,576
COST OF REVENUES:
Software sales and consulting 1,373 937
Hardware and software, obtained
from vendors 224 946
---------- ----------
Total cost of revenues 1,597 1,883
---------- ----------
Gross profit 909 2,693
OPERATING EXPENSES:
Payroll and other 1,487 1,524
General and administrative 1,115 879
Sales and marketing 1,458 948
Research and development 3,757 1,538
Provision for doubtful accounts 100 19
Depreciation and amortization 409 162
---------- ----------
Loss from continuing operations
before other income (expense) $ (7,417) $ (2,377)
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STATEMENT OF OPERATIONS DATA, CONTINUED
- ----------------------------
(In Thousands)
Years Ended December 31,
------------------------
1997 1996
---- ----
Interest income $ 168 $ 25
Interest expense (86) (209)
Other (81) (250)
---------- ----------
Loss from continuing operations (7,416) (2,811)
Loss from discontinued operations(1) (880) (1,681)
Gain on sale of discontinued operations(1) 1,013 --
---------- ----------
Net loss $ (7,283) $ (4,492)
========== ==========
BALANCE SHEET DATA:
(In Thousands)
December 31,
1997 1996
---- ----
Cash and cash equivalents $ 2,370 $ 489
Working capital deficit $ (2,582) $ (3,995)
Total assets $ 4,266 $ 3,239
Net liabilities of discontinued
operations(1) $ 631 $ 1,132
Accumulated deficit $ (14,975) $ (7,692)
Stockholders' deficit $ (1,473) $ (3,360)
_________________
(1) See Note 2 to the consolidated financial statements for a description
of the December 15, 1997 sale of the Company's DataMed International
division ("DataMed"). The consolidated financial statements and notes
thereto also reflect DataMed as discontinued operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
THIS PROSPECTUS, INCLUDING THE DISCLOSURES BELOW, CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. WHEN USED HEREIN, THE TERMS "ANTICIPATES," "EXPECTS,"
"ESTIMATES," "BELIEVES" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE
COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS MAY
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH MATERIAL
DIFFERENCES INCLUDE THE FACTORS DISCLOSED IN THE "RISK FACTORS" SECTION OF
THIS PROSPECTUS, WHICH PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY SHOULD CONSIDER CAREFULLY.
GENERAL
Global Med Technologies, Inc. (the "Company"), through its one
operating division Wyndgate Technologies ("Wyndgate"), designs, develops,
markets and supports information management software products for blood
banks, hospitals, centralized transfusion centers and other healthcare
related facilities. Revenues for Wyndgate are derived from the licensing
of software, the provision of consulting and other value-added support
services and the re-sale of hardware and software obtained from vendors. On
December 15, 1997, the Company sold its DataMed International division
("DataMed") which is in the business of substance abuse testing management
services. The audited financial statements and related footnotes herein
reflect DataMed as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30 ("APB 30").
On April 14, 1998, the Company entered into two debt financing
agreements which provided the Company up to $3 million in borrowings in
exchange for up to 12 million warrants convertible into Common Stock at
$0.25 per share. Should the Company not repay the financing proceeds and
accrued interest thereon on or before April 15, 1999, the financing proceeds,
including interest thereon, are convertible into approximately 70 million
shares of Common Stock at $0.05 per share. The issuance of these warrants
will result in material, non-cash charges to the Company's statement of
operations. Management has not completed its assessment of the amounts to
be charged to expense; however, based on current valuations using the
Black-Scholes option pricing model, the amounts to be charged to expense
related to the seven million and five million Warrants range as high as
approximately $7.42 million and $5.3 million, respectively. See THE
COMPANY - FINANCING AGREEMENTS above for a further discussion of these
agreements.
The Company completed its initial public offering of securities in the
first quarter of 1997, from which it received net proceeds of approximately
$8.2 million from the sale of 1,456,988 Units, each of which consisted of
two shares of Common Stock and one Class A Common Stock Purchase Warrant
(the "February 1997 public offering"). Through December 31, 1997, the
Company has used approximately $7.69 million of the net proceeds from the
February 1997 public offering. The use of proceeds to date have been
principally expended to repay short-term debt, notes payable, accounts
payable and other accrued expenses; to fund Wyndgate's research and
development of a transfusion management information software product
("SAFETRACE TX(TM)"); to fund Wyndgate's sales and marketing efforts, as
well as for general working capital purposes. Due to delays in
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software license fee revenues and delays in the implementation cycles
discussed below as part of Liquidity and Capital Resources, the Company's
use of the net proceeds from the February 1997 public offering for research
and development and for general working capital purposes has been, and is
expected to continue to be, greater than originally anticipated.
From inception to December 31, 1997, the Company incurred cumulative
net losses of approximately $15 million. The Company expects to continue
to incur losses until 1999, and possibly thereafter, until its existing
SAFETRACE(R) software product is fully implemented and fully operational
within the Company's customers information system environments and until
SAFETRACE TX(TM) is established in its markets. The timing and amounts of
the Company's expenditures will depend upon on a number of factors,
including the progress of the Company's research and development processes,
the status and timing of regulatory approval, the timing of market
acceptance of the Company's products, the level of support needed by the
Company's customers to implement the software products they license from
Wyndgate, and the efforts required to develop the Company's sales and
marketing organization.
The results of operations and cash flows for the year ended December
31, 1997 are not necessarily indicative of the results of operations and
cash flows that may be expected during 1998 or for any other year.
The following discussion of the Company's results of operations and of
its liquidity and capital resources are derived from and should be read in
conjunction with the consolidated financial statements and the related
notes thereto that have been audited by Ernst & Young, LLP, independent
accountants, appearing elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, 1997 ("FISCAL 1997) AS COMPARED TO YEAR ENDED
DECEMBER 31, 1996 ("FISCAL 1996")
RESULTS OF OPERATIONS
REVENUES. Revenues are comprised of software sales and consulting
revenues, and the re-sale of hardware and software obtained from vendors.
Revenues from software sales and consulting decreased by $1.4 million,
or 39%, to $2.2 million for Fiscal 1997 compared to $3.6 million for Fiscal
1996. This decrease in software sales and consulting revenue is primarily
the result of substantially reduced sales and related deliveries of
Wyndgate's SAFETRACE(R) software product, which were partially due to the
delays in software license fee revenue previously expected from certain
large internationally based hospitals and blood centers (See LIQUIDITY AND
CAPITAL RESOURCES and RISK FACTORS - REVENUE FLUCTUATIONS for a further
discussion of these delays).
Revenues from the re-sale of hardware and software, obtained from
vendors decreased by $631,000, or 68%, to $297,000 for Fiscal 1997 compared
to $928,000 for Fiscal 1996. This decrease was primarily due to decreases
in the average price per order and in the number of Wyndgate customers
which ordered third party hardware and software through Wyndgate.
The Company's sales and marketing efforts and its software development
programs will
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continue to be focused on current and future Wyndgate software products and
services. If future sales of Wyndgate's SAFETRACE(R) licenses are less than
management anticipates; if future sales of Wyndgate's SAFETRACE(R) licenses
require Wyndgate to complete significant customization upon delivery; if
there are further delays in the currently anticipated implementation
schedules for Wyndgate's existing SAFETRACE(R) customers; if there are
delays in the currently anticipated beta testing schedule, regulatory
clearance timing and market acceptance for SAFETRACE TX(TM) which is
currently in beta testing, the Company's revenues, gross margins, and
liquidity may be materially and adversely affected.
COST OF REVENUE. Cost of revenue as a percentage of total revenues
was 64% and 41% for Fiscal 1997 and Fiscal 1996, respectively.
Cost of software sales and consulting as a percentage of the related
revenue was 62% and 26% for Fiscal 1997 and Fiscal 1996, respectively. This
increase was primarily a result of decreased sales of Wyndgate's
SAFETRACE(R) software product licenses which are typically priced at higher
profit margins than revenues from consulting and implementation related
services. Additionally, relative increases in personnel and related
benefit and travel expenses incurred during Fiscal 1997 for the high number
of SAFETRACE(R) implementations, customer training and customer support
services also contributed to the increase in the cost of software sales and
consulting.
Cost of hardware and software, obtained from vendors as a percentage
of the related revenue was 75% and 102% for Fiscal 1997 and Fiscal 1996,
respectively. Typically, revenues from the re-sale of hardware and
software, obtained from vendors are priced at lower profit margins than
revenues from software sales and consulting.
GROSS PROFIT. Gross profit as a percentage of total revenue was 36%
and 59% for Fiscal 1997 and Fiscal 1996, respectively. This decrease in
gross profit was primarily a result of the decreased sales of the higher
margin SAFETRACE(R) software products discussed above. Additionally,
relative increases in revenues derived from the provision of lower margin
consulting, implementation and customer support services also contributed
to the decrease in gross profit experienced by the Company during Fiscal
1997.
PAYROLL AND OTHER. Payroll and other decreased $37,000, or 2%, to
$1.487 million for Fiscal 1997 compared to $1.524 million for Fiscal 1996.
The decrease in payroll and other was primarily due to decreased
administrative and other management personnel expenses as a result of less
administrative and management personnel deemed necessary by management for
the Company's remaining Wyndgate operations. During 1998, management does
not anticipate substantial increases in the number of administrative and
management personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $236,000, or 27%, to $1.115 million for Fiscal 1997 compared to
$879,000 for Fiscal 1996. The increase in general and administrative
expenses was attributable primarily to expenses of approximately $136,000
related to grants of certain stock options and increases in expenses for
outside contract services, various insurance related items, leased office
space and other general and administrative activities which were related to
the increase in the number of Wyndgate employees. During 1998,
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management does not anticipate substantial increases in the Company's
general and administrative expenses.
SALES AND MARKETING. Sales and marketing expenses were $1.458
million and $948,000 for Fiscal 1997 and Fiscal 1996, respectively, an
increase of $510,000, or 54%, compared to Fiscal 1996. The increase in sales
and marketing expenses was primarily due to expenses of approximately
$301,000 related to grants of certain stock options to a business advisory
enterprise and to others involved in corporate marketing efforts for the
Company. Management anticipates there will be additional increases in
sales and marketing efforts if the Company is successful in timely
completing SAFETRACE TX(TM) beta testing and timely submitting for and
receiving FDA 510(k) clearance for SAFETRACE TX(TM) during the next
eighteen months.
RESEARCH AND DEVELOPMENT. Research and development expenses
increased $2.2 million, or 144%, from Fiscal 1996 to Fiscal 1997. The
increase in research and development expenses was primarily due to an
increase in the number of employees and contracted developers assigned to
the development of Wyndgate's SAFETRACE TX(TM) transfusion management
information system software product. Additionally, the Company incurred
$485,000 in research development expenses in Fiscal 1997 in connection with
a January 1998 agreement between the Company and The Institute for
Transfusion Medicine ("ITxM") regarding the Company's payment avoidance of
certain monetary penalties as a result of anticipated SAFETRACE TX(TM)
development delays. Management anticipates research and development
expenses to continue to be a substantial portion of the Company's operating
expenses. Management's plans for Wyndgate's future software products and
services require continual research and development expenditures in order
to continue to capitalize on Wyndgate's existing technological base and its
existing software development talent.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
increased $81,000, or 426%, from Fiscal 1996 to Fiscal 1997. Management
believes it prudent to reserve for the potential uncollectability of
certain accounts receivable due from Wyndgate's SAFETRACE(R) customers.
Management does not anticipate significant increases in the provision for
doubtful accounts during 1998 as management believes that its accounts
receivable collection efforts and SAFETRACE(R) implementation efforts will
improve the collectability of accounts receivable and unbilled revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased $247,000, or 152%, from Fiscal 1996 to Fiscal 1997. The increase
in depreciation and amortization expense is due to the increases in
purchased fixed assets and due to the increases in fixed assets underlying
new capital lease financing obtained during Fiscal 1997.
INTEREST INCOME. Interest income increased $143,000 from Fiscal 1996
to Fiscal 1997. This increase was primarily due to interest income derived
from the net proceeds of the February 1997 public offering.
INTEREST EXPENSE. Interest expense decreased $123,000 from Fiscal
1996 to Fiscal 1997. This decrease was primarily due to the repayment of
approximately $1.9 million in short term debt and notes payable from the
net proceeds of the February 1997 public offering, which was partially
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offset by an increase in interest expense on capital lease obligations.
OTHER. Other expenses decreased $169,000 from Fiscal 1996 to Fiscal
1997. This decrease was primarily due to Fiscal 1996 expenses of $250,000
incurred in connection with the Company's allowance for a $250,000 note
receivable, which was partially offset by $79,000 of expenses incurred
during the first quarter of 1997 in conjunction with the issuance and
registration of warrants to two unrelated investors who provided the
Company with approximately $450,000 through the January 1997 issuance of
certain 12% notes. The 12% notes plus accrued interest thereon were repaid
in full from a portion of the net proceeds from the February 1997 public
offering.
LOSS FROM CONTINUING OPERATIONS. The Company's loss from continuing
operations during Fiscal 1997 as compared to Fiscal 1996 increased $4.6
million. The increased loss experienced during Fiscal 1997 was primarily
attributable to a substantial decrease in sales and related deliveries
SAFETRACE(R), relative increases in revenue derived from the provision of
lower margin services, increased research and development expenses incurred
for SAFETRACE TX(TM) development, and increased sales and marketing
expenses. During the first quarter of 1998, management began the
implementation of a cost reduction program which, it is anticipated, will
assist in management's efforts to reduce the Company's operating expenses.
However, there can be no assurance that management's cost reduction program
will be successful.
LOSS FROM DISCONTINUED OPERATIONS AND GAIN ON SALE OF DISCONTINUED OPERATIONS
The Company's loss from discontinued operations during Fiscal 1997 as
compared to Fiscal 1996 decreased $801,000. The decreased loss from
discontinued operations experienced during Fiscal 1997 was primarily
attributable to a interim management agreement which was entered into
between the Company and National Medical Review Offices, Inc., ("NMRO").
This interim management agreement transferred direction and control of the
business and operations of DataMed to NMRO effective July 1, 1997 and was
terminated upon the December 15, 1997 sale of DataMed. In connection with
the sale of DataMed, the Company reported an approximate $1 million gain as
a result of this transaction.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $2.37 million at December
31, 1997, none of which is restricted. During Fiscal 1997, management
became aware of delays in future software license fee revenues previously
expected from certain large internationally based blood centers and
hospital organizations. During Fiscal 1997, management became aware of
certain SAFETRACE(R) implementation delays. Currently and based on
Wyndgate's implementation schedules for SAFETRACE(R) customers which are
not yet operational using SAFETRACE(R), management expects the average
implementation cycle to take approximately 16 months from date of delivery
of SAFETRACE(R) to customers. During fourth quarter of 1997, management
became aware of SAFETRACE TX(TM) development delays. Through December 31,
1997, these delays caused a greater use of liquidity and capital resources
than originally anticipated. Based on this information and in light of the
Company's current cash and projected cash flow, management believes the
Company has the financial resources to maintain its planned level of
operations until April 1999, although the
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Company anticipates that it will continue to incur operating losses,
negative cash flows and capital expenditures during that period.
To the extent that the net proceeds generated by the April 14, 1998
financing agreements are insufficient to fund the Company's liquidity and
capital requirements in the short or long term, the Company may need to
raise additional capital through debt financings or through public or
private equity financings. The Company has no commitment for any such
financings, and there can be no assurance that any additional financing
will be available when needed, on reasonable terms, or at all. Management
anticipates that the net proceeds from the April 14, 1998 financing
agreements will be used to fund the Company's anticipated research and
development costs, sales and marketing efforts, negative cash flows during
the remainder of 1998 and for general working capital purposes.
The Company has historically financed its negative cash flows through
various forms of short-term debt financings, a number of equity private
placements and through the February 1997 public offering.
The Company had net working capital deficits of $2.6 million and $4
million at December 31, 1997 and 1996, respectively. Excluding the net
liabilities of the discontinued operations, the Company had net working
capital deficits of $1.95 million and $2.9 million at December 31, 1997 and
1996, respectively. The decrease in the Company's net working capital
deficit during Fiscal 1997 was primarily due to the completion of the
February 1997 public offering which generated approximately $8.2 million in
net proceeds, consummation of the sale of DataMed which yielded gross
proceeds of $1.2 million and which yielded net proceeds of approximately
$775,000 through April 15, 1998, offset by the Company's negative cash
flows and net losses incurred during the period. To date, the net proceeds
from the February 1997 public offering have principally been expended to
repay short term debt, notes payable, accounts payable and other accrued
expenses, to fund Wyndgate's research and development and sales and
marketing efforts and for general working capital purposes.
The Company used $5.3 million in net cash for operating activities
during Fiscal 1997, compared to $2.7 million of net cash used for operating
activities during Fiscal 1996. These amounts include $1.3 million of net
cash used by discontinued operations during Fiscal 1997 and $1 million of
net cash used by discontinued operations during Fiscal 1996. The cash used
in continuing operations of $4 million during Fiscal 1997 consisted
primarily of the net loss from continuing operations of $7.4 million; the
non-cash gain on the sale of DataMed of $1 million; net changes in other
assets and various current liabilities; offset by depreciation and
amortization and other non-cash expenses related to the issuance of common
stock, options and warrants; net decreases in accounts receivable and
unbilled revenue and a $1.4 million increase in deferred revenue.
Management expects that the Company will continue to experience negative
cash flows from operating activities until 1999 when, it is anticipated,
Wyndgate's SAFETRACE(R) software will become operational at an increasing
number of current and future SAFETRACE(R) customer locations and Wyndgate's
SAFETRACE TX(TM) software product will be established in its markets. As
a result, the Company may be required to obtain additional capital.
Net cash provided by investing activities was $161,000 during Fiscal
1997. Net cash used
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by investing activities was $242,000 during Fiscal 1996. Net cash provided
by investing activities during Fiscal 1997 consisted of $1 million in net
proceeds through December 31, 1997 related to the sale of DataMed, off-set
by capital expenditures of $781,000 for continued operations and $58,000 of
capital expenditures for discontinued operations.
Net cash provided by financing activities was $7 million and $2.96
million during Fiscal 1997 and Fiscal 1996, respectively. These amounts
include capital lease principal payments for discontinued operations of
$107,000 and $223,000 during Fiscal 1997 and Fiscal 1996, respectively.
During Fiscal 1997, the Company completed its February 1997 public offering
and received approximately $8.2 million in net proceeds and also received
other proceeds from certain exercises of stock options. The Company used
a portion of these net proceeds to repay approximately $1.9 million in
short term debt and notes payable, and also to pay certain offering and
distribution costs related to the February 1997 public offering. In
addition, the Company paid $207,000 in principal payments on capital lease
obligations for continuing operations during Fiscal 1997.
The implementation cycle of Wyndgate's SAFETRACE(R) software is
running longer than originally anticipated. Based on recent experience,
management now anticipates that the average implementation cycle will
typically take an average of approximately 16 months. The implementation
cycles are dependent on various items including the clients' size and the
complexity of the clients' standard operating procedures. Twelve of the
current twenty-four SAFETRACE(R) clients are implemented and operational
using SAFETRACE(R). The results of the implementation cycle delays have
and are expected to continue to delay future SAFETRACE(R) maintenance
revenues previously expected from the provision of customer support
services, future progress payments from clients as defined in the
SAFETRACE(R) license agreements, the previously anticipated increase in
future software license fee revenue from further sales of SAFETRACE(R), and
cause a greater use of liquidity and capital resources than originally
anticipated. Correspondingly, the implementation delays have created
billing and collection delays. Management recognizes the significant
impact accounts receivable, accounts receivable turnover trends and
unbilled revenues have on the Company's liquidity and working capital and
is continuing to attempt to reduce the implementation cycles for Wyndgate's
SAFETRACE(R) software.
The Company incurred a net loss of approximately $7.3 million during
Fiscal 1997. The Company expects to continue to incur net losses until
1999, and possibly thereafter, until its software products are better
established in their respective markets. There can be no assurance that
the Company can generate sufficient revenues, earnings and cash collections
from software sales to satisfy its working capital requirements. The
Company's working capital requirements will depend on numerous factors,
including progress of the beta testing of SAFETRACE TX(TM), the development
of other new software products, as well as new applications for its present
core products, which include both SAFETRACE(R) and SAFETRACE TX(TM).
Additionally, the Company's working capital requirements may depend upon
its success in timely obtaining a FDA 510(k) clearance letter for its
SAFETRACE TX(TM) software product. Failure to receive such clearance
letter may require the Company to seek additional financing beyond the
financing commitments it obtained on April 14, 1998. The Company may seek
financing to meet its working capital requirements through strategic
alliances within the Company's industry, through collaborative arrangements
with other suppliers to the Company's customers and/or through raising
additional capital through private placements
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of its Common or Preferred Stock. There can be no assurance, however, that
additional funds, if required, will be available from sources historically
available to the Company or from other sources on favorable terms, if at
all. If the Company is unable to obtain adequate financing when and if
such financing is required, management will be required to substantially
reduce the Company's software development programs and other operating
expenses. If the Company is successful in raising additional funds through
the sale of additional equity securities, such a change in capitalization
could also further increase the number of shares of Common Stock
outstanding, thus diluting ownership of the then current shareholders in
the Company.
EFFECT OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
The Company has not experienced material unfavorable effects on its
results of operations, cash flows or financial position due to foreign
currency exchange fluctuations or due to domestic inflation. As the
Company plans to market Wyndgate's products and services internationally,
the effect of inflation and foreign currency exchange fluctuations could
have a material adverse affect on the Company's future liquidity, cash
flows, financial position and results of operations.
USE OF PROCEEDS
In February 1997, the Company completed an initial public offering of
securities, from which it received net proceeds of approximately $8.2
million from the sale of 1,456,988 Units (the "February 1997 Public
Offering"). Each Unit consisted of two shares of Common Stock and one
Class A Common Stock Purchase Warrant. On March 13, 1997, the Common Stock
and the Warrants began trading separately.
Through December 31, 1997, the Company used a total of approximately
$7.69 million of the net proceeds from the February 1997 public offering.
The net proceeds to the Company from the February 1997 public offering of
approximately $8.2 million have been applied as follows: approximately $2.7
million for research and development costs, including approximately
$481,000 in capital expenditures, incurred primarily for the development of
Wyndgate's SAFETRACE TX(TM) software, which is currently in beta testing;
$860,000 for sales and marketing expenses incurred for sales and marketing
for Wyndgate's software products and services; approximately $300,000 of
other capital expenditures for general operating purposes related to the
increased number of employees assigned to customer support, customer
implementations, customer training and general operating purposes for
Wyndgate; approximately $ 1.874 million for the principal repayment of
certain short-term debt, approximately $181,000 of which was paid, under
the same terms and conditions as nonaffilates, to certain significant
owners, directors, officers and other related parties of the Company, who
held 10% notes; approximately $536,000 for general working capital
requirements for the Company's continuing operations; and approximately
$1.42 million for the Company's DataMed International division, which is
reflected as discontinued operations in the consolidated audited financial
statements herein. The remaining net proceeds of approximately $510,000
have been invested in short-term investment grade money market instruments.
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YEAR 2000 COMPLIANCE
Based upon information currently available, management does not
anticipate that the Company will incur substantial costs to update its
computer software programs and applications to be "Year 2000" compliant.
The "Year 2000" problem which is common to most corporations concerns the
inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information as the year 2000
approaches. Management has completed a Year 2000 compliance review of
SAFETRACE(R); SAFETRACE TX(TM), which is currently in beta testing; other
Wyndgate developed software and the Company's internal systems. As a
result, management has developed a plan to address the Company's Year 2000
compliance issues and is in the process of modifying and identifying
actions to address affected systems in time to minimize any detrimental
effects on sales of Wyndgate's software products and on the Company's
operations. Management anticipates that the costs to insure its software
products developed for sale and that the Company's internal systems are
Year 2000 compliant will not be material to the Company's results of
operations, liquidity, or financial position.
In addition, the Company relies on third party providers for some of
its internal systems support. To the extent that the Company will be
relying on outside software vendors, Year 2000 compliance matters will not
be entirely within the Company's direct control. In addition, the Company
has relationships with vendors, customers and other third parties that rely
on computer software that may not be Year 2000 compliant. There can be no
assurance that Year 2000 compliance failures by such third parties will not
have a material adverse effect on the Company or that the Company will be
successful in its own Year 2000 Compliance efforts.
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THE COMPANY
The Company, through its one operating division Wyndgate Technologies
("Wyndgate"), designs, develops, markets and supports information
management software products for blood banks, hospitals, centralized
transfusion centers and other healthcare related facilities. Pursuant to
an agreement with eight California blood centers, Wyndgate developed a
blood tracking system ("SAFETRACE(R)") 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, through its SAFETRACE(R)
software, incorporates and integrates products and services for the
management of the blood supply and blood products from donor recruitment to
shipment from blood centers to hospitals, clinics, medical research
institutions and other healthcare related facilities.
Wyndgate provides training and consulting services for installation,
implementation, special programming, system design, and maintenance for
licensees of SAFETRACE(R). The majority of SAFETRACE(R) licensees use all
or a portion of these services. Management believes that SAFETRACE(R)
maintenance and upgrades will provide the Company an on-going revenue
stream and valuable information concerning the blood bank industry.
Special programming services can result in customer funded development, as
was done with SAFETRACE(R).
Effective December 15, 1997, the Company sold its DataMed
International ("DataMed") division for gross proceeds of $1.2 million and
the assumption of certain liabilities and capital leases (the "DataMed
Sale"). Net proceeds from the DataMed Sale were approximately $775,000
through April 15, 1998. 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"), an integrated software package for colleges and
universities to track student information. 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 approximately $1.1 million paid by the Royalty Group, Wyndgate
completed development and
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commenced marketing of SAFETRACE(R), 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 SAFETRACE(R). In April 1997, the
Company's Wyndgate division received notification from the FDA of their
finding of "substantial equivalence" of SAFETRACE(R). This determination
permits the Company to continue to market SAFETRACE(R).
The Company continues to concentrate its development efforts on its
enhancements to SAFETRACE(R) and on SAFETRACE TX(TM) Wyndgate's transfusion
management information system software product. On April 6, 1998,
SAFETRACE TX(TM) entered beta testing. Wyndgate's development of SAFETRACE
TX(TM) began in 1996.
The Company's internally developed software development tool
EDEN-OA(R), was used in the development of Wyndgate's existing
character-based version of SAFETRACE(R). Based on management's now
anticipated development requirements of Wyndgate's graphical user interface
version of SAFETRACE(R) and continued enhancements to SAFETRACE TX(TM) as
a result of beta testing and future SAFETRACE TX(TM) version upgrades,
management has ceased development efforts for new versions of EDEN-OA(R).
Management intends to continue EDEN-OA(R) support for the existing
character-based version of SAFETRACE(R). As a result, management no longer
expects EDEN-OA(R) to be essential to the Company's strategic goals or to
be critical to the Company's competitive advantages.
STRATEGY
The following are key elements of the Company's strategy for its
Wyndgate Technologies division; however, there can be no assurance that the
Company will be successful in its strategy. Additional financing may be
required to enable the Company to accomplish its goals.
EXPAND SALES AND MARKETING EFFORTS. The Company's Wyndgate division
currently has five sales and marketing personnel. The Company believes it
can continue to increase its presence in the world-wide blood bank
industry market through future increases in Wyndgate's sales and marketing
staff and through the development of strategic relationships.
DEVELOP NEW BLOOD BANK MANAGEMENT SOFTWARE PRODUCTS AND SERVICES. The
Company believes that it can develop new products and services by using
its existing technology base and its existing software development talent.
During the next eighteen months, management anticipates completion of the
SAFETRACE TX(TM) beta testing, submission of a 510(k) application to the
FDA for review of SAFETRACE TX(TM) and receipt of notification from the FDA
of their finding of "substantial equivalence" of SAFETRACE TX(TM). Upon
market availability of SAFETRACE TX(TM) and in concert with Wyndgate's
existing SAFETRACE(R) software, management believes Wyndgate will be able
to provide a complete "vein to vein" system. However, there can be no
assurance as to the length of time required for completion of SAFETRACE
TX(TM) beta testing or as to the length of time required for the FDA to
review a 510(k) submission made by the Company or that the Company would
ultimately receive a clearance letter relating to SAFETRACE TX(TM).
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OBTAIN SUBSTANTIAL INTERNATIONAL MARKET SHARE. The Company is focused
on the world-wide potential for its blood bank and transfusion industry
products and services. The Company plans to pursue international growth by
marketing its current and future software products and services through its
internal sales and marketing organization and through strategic
relationships.
DEVELOP STRATEGIC RELATIONSHIPS. The Company intends to continue to
pursue strategic relationships in order to provide effective and efficient
sales and distribution channels for its software products and services.
Additionally, the Company may work with other healthcare information
providers to develop new software applications and to develop further uses
for Wyndgate's technology.
MAINTAIN TECHNOLOGICAL ADVANTAGE. The Company plans to continue to
focus research and development expenditures on new technology and
continued enhancements of software development tools and software
development methodologies. Management believes that evolving Wyndgate's
current technology base and its software development talent are both
critical elements to the long-term competitive advantages of Wyndgate's
software products and services.
CUSTOMERS
The Company, through its Wyndgate division, currently has 24
(including the Royalty Group) customers and intends to continue to target
domestic and international blood centers, plasma centers and hospitals.
During the year ended December 31, 1997, two Wyndgate customers, Belle
Bonfils Memorial Blood Center, Denver, Colorado and Haemonetics
Corporation, Braintree, Massachusetts each accounted for approximately 10%
and 33% of the Company's total revenues from continuing operations.
During the year ended December 31, 1996, one Wyndgate customer, Gulf Coast
Regional Blood Center, Houston, Texas, accounted for approximately 29% of
the Company's total revenues from continuing operations. Accounts
receivable from the above customers as of December 31, 1997 and 1996 was
approximately $60,000 and $205,000, respectively. Unbilled revenues from
the above customers was approximately $160,000 as of December 31, 1997. In
order to attempt to reduce its credit risks, the Company generally requires
substantial down payments and progress payments during SAFETRACE(R)
implementations. Non-renewal or termination of the contractual
arrangements with these key and other Wyndgate customers could have a
material adverse effect on the Company. There can be no assurance that the
Company will be able to retain these or other customers or, if Wyndgate's
24 existing 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.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1997 and 1996, the Company
incurred approximately $3.76 million and $1.5 million, respectively, for
research and development of Wyndgate's software products. Management
believes leveraging Wyndgate's research and development methodologies,
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experience and talent are keys to the long-term success and evolution of
Wyndgate's software products. Research and development expenses are
anticipated to continue to be a substantial portion of the Company's
operating expenses during 1998.
EMPLOYEES
As of April 24, 1998, the Company had 52 full-time employees,
consisting of 9 employees in the corporate offices in Denver, Colorado and
43 at Wyndgate's offices in Sacramento, California. 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. In March 1998, management began the
implementation of a cost reduction program which initially resulted in a
substantial decrease to its previous employee base. The Company has never
experienced a work stoppage and believes that its employee relations are
satisfactory.
FINANCING AGREEMENTS
On April 14, 1998, the Company entered into two financing agreements,
which, as amended on April 16, 1998 and April 20, 1998, provide for a $1.5
million loan and a $1.65 million line of credit to the Company. The first
loan in the amount of $1.5 million from Heng Fung Finance Company Limited
("Heng Fung") (the "Heng Fung Loan") bears interest at 12% per annum, which
is payable monthly, and matures on April 15, 1999, and is senior to any
other agreements, contracts or joint ventures to which the Company is, or
may be, a party. In consideration for the Heng Fung Loan, the Company agreed
to grant Heng Fung warrants to purchase 6,000,000 shares of Common Stock
(the "Heng Fung Warrants"), exercisable until April 14, 2008 at $.25 per
share, on the basis of one Heng Fung Warrant for one share of Common Stock,
and agreed to register the Common Stock underlying the Heng Fung Warrants no
later than July 14, 1998. Heng Fung also has the right to convert any part
of the loan into the Heng Fung Warrants at the rate of one share of Common
Stock for each $.25 of debt converted. The Company borrowed $250,000 of the
Heng Fung Loan on May 8, 1998.
The Heng Fung Loan also grants Heng Fung the right to appoint five
members to the Company's Board of Directors, which will now consist of a
maximum of nine members, who will be entitled to receive warrants
consistent with the duties required. The current members of the Company's
Board of Directors and management were required to execute resignation
letters, which have been delivered to Heng Fung, which will hold such
letters in escrow pending any default under the terms of the Heng Fung
Loan. Included in the Officers, Directors and employees who have submitted
resignations to Heng Fung are Michael I. Ruxin, William J. Collard, Gerald
F. Willman, Gordon E. Segal, Thomas F. Marcinek, Hollis Gailey, the wife of
William J. Collard, Lori Willman, the wife of Gerald F. Willman, Timothy
Pellegrini and Bradley V. Maberto. Heng Fung has the right to veto any
future contracts not in the ordinary course of business, and any contract
for employment, loans, leases or with a value in excess of $250,000.
The Company will be in default under the terms of the Heng Fung Loan
if the principal and interest payments are not paid on or before April 15,
1999, or within a seven day grace period, or if any other terms of the Heng
Fung Loan are not complied with. If a default occurs, the resignations of
all of the Company's existing Directors and management will be effective,
Heng Fung has the
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right to re-employ any of such persons in its discretion, and Heng Fung can
convert the outstanding amount of the loan, including interest, into
shares of the Company's Common Stock on the basis of one share for each
$.05 of debt.
Once the Company has drawn the full amount of the Heng Fung Loan
proceeds, the Company has the right to draw on the $1.65 million line of
credit from Fronteer Capital, Inc. ("Fronteer")(the "Fronteer Line of
Credit") in the amount of $1.65 million. The Fronteer Line of Credit also
bears interest at the rate of 12% per annum, payable monthly, and matures
on April 15, 1999. In consideration of extending the Line of Credit, the
Company agreed to grant Fronteer warrants to purchase 1,000,000 shares of
the Company's Common Stock, exercisable until April 14, 2008 at $.25 per
share. If the line of credit is drawn on, Fronteer will earn warrants to
purchase an additional 5,000,000 shares of Common Stock, exercisable at
$.25 per share until April 14, 2008 (all the warrants issuable to Fronteer
are hereinafter referred to as the "Fronteer Warrants"). If Heng Fung does
not exercise its right to appoint Directors, then Fronteer has the right to
appoint five members to the Company's Board of Directors. Fronteer also
has the right to cancel all management and employee contracts. Dr. Ruxin
has personally guaranteed repayment of $1.5 million of the Fronteer Line
of Credit from certain of his personal assets.
Fronteer has the same rights as does Heng Fung with respect to
registration of the shares underlying the Fronteer Warrants, rights on
default and right to veto contracts.
The Company agreed to pay a cash finder's fee of 9% of the Fronteer
Line of Credit to RAF Financial Corporation, payable as the Fronteer Line
of Credit is drawn.
In the event the Heng Fung Loan and the Fronteer Line of Credit
warrants, or a portion thereof, are exercised at $.25 per share and/or in
the event the Heng Fung Loan and the Fronteer Line of Credit proceeds,
including unpaid interest, or a portion thereof, are converted at $.05 per
share upon default, ownership of existing shareholders will be
proportionally diluted.
The issuance of these discounted warrants will result in a significant
noncash charge to the Company's 1998 statement of operations which, based on
a preliminary management assessment using the Black-Scholes pricing model,
could range as high as $7.42 million and $5.3 million for the 7,000,000 and
5,000,000 warrants, respectively.
Management anticipates that the net proceeds from the Heng Fung Loan
and from the Fronteer Line of Credit will be sufficient to satisfy the
Company's contemplated cash requirements until April 1999, although the
Company anticipates that it will continue to incur operating losses,
negative cash flows from operations and capital expenditures during that
period. Correspondingly, there can be no assurance as to the length of
time such proceeds will satisfy such cash requirements. The Company's
cash requirements beyond this period will depend upon many factors,
including, but not limited to, the Company's net cash flows from
operations; the length of time it may take for the Company to develop,
acquire, or receive regulatory approval to market its products or services;
the market acceptance of these products or services and the response of
competitors who may develop competing products or services at lower costs.
To the extent that the net proceeds generated
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by these two financing agreements are insufficient to fund the Company's
activities in the short or long term, the Company may need to raise
additional capital through debt financing or through public or private
equity financing. The Company has no commitment for any such financing,
and there can be no assurance that any additional financing will be
available when needed, on reasonable terms, or at all. See RISK FACTORS
and MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - LIQUIDITY
AND CAPITAL RESOURCES.
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BLOOD BANK AND TRANSFUSION INDUSTRY OVERVIEW
With the spread of AIDS and Hepatitis-B, stringent FDA guidelines have
been imposed on domestic blood centers in order to attempt to improve the
quality of the U.S. blood supply. Several domestic blood centers have been
cited by the FDA for noncompliance and certain blood centers have been
closed as a result of non-compliance with FDA requirements. Management
believes numerous blood centers throughout the worldwide blood bank
industry have internally developed their own software applications and
systems to track blood collection, testing, processing, distribution and
transfusion activities. These internally developed systems which have been
developed for domestic blood center use are also designed to comply with
FDA requirements. The Company believes that most blood center developed
systems are not fully integrated and do not offer the capabilities required
by the FDA in view of the fact that many of the Company's current
SAFETRACE(R) customers have or intend to replace their internally developed
blood tracking systems with SAFETRACE(R). While laboratory information
system providers have developed automated testing and reporting procedures
designed for a portion of the blood tracking process, these systems address
only the laboratory management function and are not fully integrated with
other blood tracking functions required for effective FDA compliant blood
tracking systems. The Company believes that blood centers and laboratory
information system providers are looking for a way to meet the FDA
guidelines while minimizing their risks and costs.
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 FDA 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. In April 1997, the Company's Wyndgate
division received notification from the FDA of its finding of "substantial
equivalence" of SAFETRACE(R). This determination provides a 510(k)
clearance and permits the Company to continue to market SAFETRACE(R). Two
competitors have received 510(k) clearance letters from the FDA for their
blood bank management information system software products. Management
does not believe this will have a material adverse impact on Wyndgate's
marketing of SAFETRACE(R) because management does not believe that these
competitors provide the spectrum of fully integrated modules currently
available in SAFETRACE(R).
SOFTWARE PRODUCTS
SAFETRACE(R) is a set of integrated 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 SAFETRACE(R) to blood banks and plasma centers worldwide.
Currently, most of Wyndgate's SAFETRACE(R) licensees have licensed the use
of all of the following six SAFETRACE(R) modules. However, a potential
licensee can license one or more modules as needed to automate its
operations.
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SAFETRACE(R) MODULES AND FUNCTION
DONOR RECRUITMENT Used by marketing departments of blood or plasma
centers to systematically solicit, recruit and
schedule donors. Facilitates recruiting
processes by producing call lists on demand or by
scheduling calls by batch processing.
DONOR MANAGEMENT Provides a system for registering donors and
recordings necessary medical and personal donor
information. All real-time donor deferral and
eligibility information is used to determine
current eligibility status of registered donors.
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 insure that all
blood components are suitable for distribution,
have been properly tested, validated and labeled.
BLOOD INVENTORY Maintains current inventories of all available
AND DISTRIBUTION blood products which have been tested and
labeled. Records the movement of blood products
from blood or plasma centers to customers and
between customers. Also maintains records for
imported blood related products.
SPECIAL PROCEDURES Registers patients and tracks blood requirements
for surgeries. Also provides capabilities to
define and manage special requests for
autologous, designated and therapeutic donations.
BILLING Implements pricing and invoicing practices
associated with each blood product for customers.
Also provides financial information for
management review.
SAFETRACE(R) relies on its donor identification, laboratory
management, labeling and release site-based logic technology to assist
blood centers in complying with FDA regulations. SAFETRACE(R) has an 85%
table driven structure which permits it to easily adapt to each customer's
unique operations. SAFETRACE(R) has been developed using industry
standards, common operating systems and database managers which is designed
to help insure portability. Since SAFETRACE(R) is database, operating
system and hardware independent, management believes blood centers choosing
SAFETRACE(R) are permitted flexibility in selecting their computer hardware
and software configurations. SAFETRACE(R) provides the opportunity for
blood centers to preserve their application software and training
investments as their system and technology requirements evolve. Currently,
management estimates that SAFETRACE(R) consists of more than 1.5 million
lines of code, 481 data tables, 6,054 data elements, 59 labeling
occurrences of component and release logic, 3,000 discrete programs and
over 1,000 screens and windows.
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SERVICES
Management believes continuing to provide Wyndgate customers high
quality services is critical to retaining its current customer base.
Additionally, management believes that providing high quality service to
Wyndgate's customers will continue to enhance Wyndgate's reputation for
quality and will help to increase Wyndgate's market presence. Wyndgate's
services begin with initial customer contact and continue throughout the
licensing relationship. Services include installation, implementation,
training, consulting and customer support. Historically, Wyndgate's
SAFETRACE(R) license agreements typically provide for five years of
customer support services. The fees associated with customer support
services are either invoiced monthly, quarterly or annually. Installation,
implementation and other related service fees, excluding customer support,
typically range from 10% to 50% of the SAFETRACE(R) license fees. Under
the Company's current license agreements, only software license fees and
customer support fees are required to be contracted for and the other
installation and implementation related fees are optional. However, many
customers that have licensed SAFETRACE(R) to date have contracted for these
and other additional services.
INSTALLATION AND IMPLEMENTATION SERVICES. Installation and
implementation services assist customers with the selection of hardware
and software systems and, if necessary, the initial SAFETRACE(R)
installation. Implementation services include assisting customers in
analyzing work flow and standard operating procedures, developing tables,
screen layouts, reports and implementation specific requirements.
Management estimates that it takes approximately sixteen months from the
date of delivery of the software to the customer to implement SAFETRACE(R)
and a portion of Wyndgate's resources are used during that time.
TRAINING SERVICES. Training services are provided to customers
either at customer sites or at Wyndgate's offices. Training includes
hands-on access to SAFETRACE(R) and usually includes building initial
tables and screens. Wyndgate also offers follow-up training services to
train customers on new SAFETRACE(R) functions.
CUSTOMER SUPPORT SERVICES. Fees for customer services are required
to be paid under certain SAFETRACE(R) license agreements for the term of
the license. Maintenance services include "bug" fixing, enhancements and
SAFETRACE(R) 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
request special features, assistance with system configurations, data base
consulting, systems management, networking or additional capabilities
beyond those readily available in SAFETRACE(R). 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(R) customers.
PRODUCT DEVELOPMENT
SAFETRACE TX(TM) - TRANSFUSION MANAGEMENT INFORMATION SYSTEM. Wyndgate
has completed the initial development of SAFETRACE TX(TM), a transfusion
management information system that is designed to be used by hospitals and
centralized transfusion centers to help insure
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the quality of blood transfused into patient-recipients. SAFETRACE TX(TM)
is expected to provide electronic cross-matching capabilities to help
insure blood compatibility with patient-recipients and will track,
inventory, bill and document all activities with blood products from the
time blood products are received in inventory to the time the blood
products are used or returned to blood centers. Management expects
SAFETRACE TX(TM) will complement SAFETRACE(R) as the combined SAFETRACE
TX(TM) and SAFETRACE(R) software system will be able to integrate hospitals
with blood centers. SAFETRACE TX(TM) entered beta testing on April 6,
1998. Upon completion of beta testing, a 510(k) submission of SAFETRACE
TX(TM) will be made to the FDA. Therefore, SAFETRACE TX(TM) may not be
able to be marketed by the Company in the United States until FDA 510(k)
clearance is received; however, during the FDA's review of SAFETRACE
TX(TM), management believes SAFETRACE TX(TM) could be marketed
internationally. There can be no assurance as to the length of time
required for the FDA to review a 510(k) submission made by the Company for
SAFETRACE TX(TM), or that the Company will ultimately receive a clearance
letter relating to SAFETRACE TX(TM).
DEVELOPMENT AGREEMENTS
Pursuant to a development agreement between Wyndgate and the Royalty
Group, Wyndgate developed SAFETRACE(R) and must make royalty payments to
the Royalty Group based on a percentage of Wyndgate's SAFETRACE(R) license
sales, measured by cash received from SAFETRACE(R) licensees, net of
certain fees and charges. The time period under the royalty schedule is
based upon the first date of SAFETRACE(R) license invoicing, which was
September 14, 1995. The 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 ("Development Agreement") dated
July 1996, between the Company and The Institute for Transfusion
Medicine("ITxM"), the Company agreed to develop and has completed the
initial development of Commercial Centralized Transfusion System Software
("Commercial CTS Software"), which is Wyndgate's SAFETRACE TX(TM) software
product. The Development Agreement required that the Commercial CTS
Software be completed by December 16, 1997. If not timely completed, the
Company would be subject to monetary penalties. The Development Agreement
provided 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:
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Percentage of Percentage of
License Fee License Fee
if ITxM Initiates Sale if 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%
The Development Agreement further granted ITxM a non-exclusive,
perpetual and fully-paid license to operate SAFETRACE TX(TM) for internal
use, which includes companies which ITxM controls as defined in the
Development Agreement and companies which ITxM has the ability to cause the
direction of management, whether through ownership of voting securities, by
contract or otherwise.
In January 1998, the Company and ITxM agreed (the "January 1998
Agreement") that the Company would not be required to pay monetary
penalties in the approximate amount of $485,000 to ITxM, which were
incurred as a result of delays in development of SAFETRACE TX(TM), in
consideration of the Company providing to ITxM additional maintenance
services and product upgrades and substitute liquidated damage provisions
for delays. The first of such revised dates and liquidated damage
provisions was April 3, 1998, by which the Company was to initiate beta
testing of SAFETRACE TX(TM) or pay $500 per day. SAFETRACE TX(TM) was
delivered to ITxM for beta testing on April 6, 1998, which was within the
grace period provided for in the January 1998 Agreement. Pursuant to the
January 1998 Agreement, beta testing of SAFETRACE TX(TM) is to be completed
by July 17, 1998, or the Company will face liquidated damages of $1,000 per
day. While management believes that beta testing can be completed as
currently scheduled, there can be no assurance that beta testing will be
completed by July 17, 1998, as required by the January 1998 Agreement.
The Company and ITxM have recently commenced negotiations relating to
eliminating the liquidated damage provisions. In addition, the Company is
seeking to renegotiate certain provisions of the Development Agreement
relating to potential limitations on the Company's ability to distribute
the Company's products, including SAFETRACE TX(TM), within the blood
transfusion industry and ITxM's ability to use the SAFETRACE TX(TM)
software product pursuant to the non-exclusive, perpetual license granted
to ITxM in the Development Agreement. There can be no assurance that the
parties will reach agreement as to any modifications of the Development
Agreement.
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CUSTOMERS
Wyndgate currently has SAFETRACE(R) contracts with the following blood
centers, which are in various stages of implementation:
* Belle Bonfils Memorial Blood Center, Denver, CO(1)
* Blood Bank of San Bernardino and Riverside Counties, San Bernardino,
CA(1)
* Blood Bank of the Redwoods, Santa Rosa, CA(1)
* Coffee Memorial Blood Center, Albuquerque, NM
* Community Blood Bank of Erie County, Erie, PA(1)
* Community Blood Bank of Lancaster County Medical Society, Lincoln, NE
* Community Blood Center of Appleton, Appleton, WI
* Gulf Coast Regional Blood Center, Houston, TX(1)
* Institute For Transfusion Medicine, Pittsburgh, PA
* Irwin Memorial Blood Center, San Francisco, CA(2)
* Lifeblood/Mid-South Regional Blood Center, Memphis, TN
* Peninsula Blood Bank, Inc., Burlingame, CA(2)
* Rhode Island Blood Center, Providence, Rhode Island
* Sacramento Medical Foundation Blood Center, Sacramento, CA(1)
* Samuel W. Miller Memorial Blood Center, Bethlehem, PA(1)
* San Diego Blood Bank, San Diego, CA
* Siouxland Community Blood Bank, Sioux City, IA(1)
* Stanford Medical School Blood Center, Palo Alto, CA(1)
* The Blood Center of Central Iowa, Des Moines, IA
* The Blood Center for Southeast Louisiana, New Orleans, LA(1)
* Tri-Counties Blood Bank, Santa Barbara, CA(1) (3)
* The Memorial Blood Centers of Minnesota, Inc., Minneapolis, MN(1)
* Oklahoma Blood Institute, Oklahoma City, OK(3)
* South Texas Blood and Tissue Center, San Antonio, TX
* Stewart Regional Blood Center, Tyler, TX
* University of Cincinnati, Cincinnati, OH
________________
(1) Implemented and operational.
(2) Merged to form Blood Centers of the Pacific, San Francisco, CA.
(3) Managed and/or owned by Haemonetics Corporation. See below.
See SERVICES, above, for a description of a typical license agreement.
Based upon its installation experience, management now estimates that
SAFETRACE(R) implementations will take approximately 16 months from the
date of delivery of the software to the customer depending on the blood
center's size and complexity of the blood center's standard operations
procedures.
On February 13, 1997, Wyndgate entered into a multi-million dollar,
10-year contract with Haemonetics Corporation ("Haemonetics"), a New York
Stock Exchange listed company located in Braintree, Massachusetts.
Licensing and other fees are payable by Haemonetics over the life of
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the contract. Under the contract, Wyndgate will provide the use of
SAFETRACE(R) to Haemonetics for its entry into the service side of blood
banking in multiple locations, including two of the blood centers listed
above which were previously contracted by Wyndgate. Haemonetics has
traditionally provided blood separation products to blood banks and
hospitals domestically and internationally.
The potential customers for Wyndgate's SAFETRACE(R) and SAFETRACE
TX(TM) software products include blood centers, hospitals, out-patient
centers, centralized transfusion services, blood bank industry data centers
and stand alone transfusion sites. Blood centers are able to use
SAFETRACE(R) to assist in the management of their business and comply with
FDA regulations to help insure the safety of the blood supply.
SAFETRACE(R) allows blood centers to enter FDA guidelines, consistent with
their standard operating procedures into tables which then provide system
control over the manufacturing and processing of blood and blood products.
In the future, the Company plans to begin marketing SAFETRACE TX(TM).
The potential market for Wyndgate's SAFETRACE TX(TM) software product
includes all acute care hospitals, centralized transfusion services,
alternate transfusion sites and other entities doing business in the
worldwide transfusion industry. Potential SAFETRACE TX(TM) licensees and
potential re-sellers and distributors of SAFETRACE TX(TM) will most likely
require extensive product demonstrations before agreeing to license
SAFETRACE TX(TM). In addition, SAFETRACE TX(TM) will face severe
competition from established vendors in this market. Wyndgate believes
hospitals that receive blood and blood related products from blood centers
using SAFETRACE(R) may find it useful to use SAFETRACE TX(TM) as their
transfusion software in order to be readily compatible with blood centers
using SAFETRACE(R). There can be no assurance that hospitals will desire
to establish this link using Wyndgate's SAFETRACE TX(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 had 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 would not, directly or through any intermediary,
accept, encourage, solicit, entertain or otherwise discuss any acquisition
of any of the Company's Common Stock, business, property or know-how,
including the Technology, with any person or entity other than ODSI or an
affiliate thereof and would not otherwise encumber the ability of ODSI or
an affiliate thereof to enter into any arrangement with the Company
concerning the Technology.
In May 1997, the Company received communication from ODSI that it had
not yet completed an internal evaluation of the Company's Technology and
would not be prepared at the conclusion of the Exclusivity Period to
discuss a transaction between the Company and ODSI. ODSI requested, and
the Company agreed, that ODSI be permitted to continue its evaluation of
the Company's Technology, on a non-exclusive basis, with the intent of
responding to the Company by July 14, 1997 regarding whether or not ODSI
would propose some form of transaction with the Company. The Company and
ODSI have agreed to further extensions of this non-exclusive
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agreement through June 30, 1998.
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 payments to the Company towards any
consideration payable to the Company in connection with a 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. On September 17, 1997, the parties agreed to extend the
time for ODSI's election with respect to the software development services
until June 30, 1998. In connection with the extension to June 30, 1998,
the parties agreed that ODSI has until December 31, 1998 to elect to
require the Company to provide the software development services as defined
in the Exclusivity Agreement.
Pursuant to the Exclusivity Agreement, the Company 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 proposed to effect certain
transactions with respect to the Technology. In connection with the
extension of the Exclusivity Agreement to September 30, 1997, ODSI
relinquished its right of first refusal.
COMPETITION
Currently, Wyndgate is aware of four primary competitors to its
SAFETRACE(R) software product, including MAK from France, 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 currently available in SAFETRACE(R);
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.
On August 18, 1997, the Company and National Medical Review Offices,
Inc. ("NMRO") entered into an Asset Purchase Agreement (the "Asset Purchase
Agreement") which provided for the sale of DataMed to NMRO. NMRO advised
the Company that it had agreed to sell DataMed to Substance Abuse
Technologies, Inc. ("SAT"), a publicly held company. The sale of DataMed
was approved by the Company's shareholders on December 2, 1997 and the
Asset Purchase Agreement was closed with NMRO and SAT on December 15, 1997.
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NMRO paid the Company $1.2 million at the closing and purchased
certain assets and assumed certain liabilities associated with DataMed at
June 30, 1997. The assets include accounts receivable, accrued accounts
receivable (unbilled revenue), pre-paid expenses, customer list of DataMed,
customer contracts, furniture, fixtures and equipment, names, telephone
numbers, trade names and copyrighted materials. Included in the
obligations assumed by NMRO are accounts payable (excluding intercompany
payables), certain accrued expenses not to exceed approximately $127,000,
various capital lease obligations, a new lease on approximately 10,500
square feet of office space in which DataMed's operations are located,
accrued payroll and vacation pay for DataMed employees and certain sales
commissions. In March 1998, the Company, NMRO and SAT agreed to settle
DataMed's accrued expenses, certain other provisions of the Asset Purchase
Agreement and certain provisions of the Interim Management Agreement
entered into between the Company and NMRO effective July 1, 1997 by payment
of approximately $200,000 by the Company to SAT.
Following the closing, SAT employed certain employees of DataMed,
including Bart K. Valdez, who was the Chief Financial Officer of the
Company and the Director of Operations of DataMed.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which management
believes to be material, and there are no such proceedings which are known
to be contemplated
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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:
Officer or
Name Age Position Director Since
- ---- --- -------- --------------
Michael I. Ruxin, M.D. 52 Chairman of the Board 1989
and CEO
Thomas F. Marcinek 44 President and COO 1998
William J. Collard 57 Secretary/Treasurer, 1995
Director and Wyndgate
President
Gerald F. Willman, Jr. 41 CFO, Director and Wyndgate 1995
Vice-President
Gordon E. Segal, M.D. 46 Director 1997
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.
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THOMAS F. MARCINEK was elected as President and Chief Operating
Officer in March 1998. From 1994 until joining the Company, he was the
President and owner of Prax Information Systems, Wantagh, New York, a
practice management software consulting company. From 1990-1994, he was
the President of the Data Technologies Group, a division of Henry Schein,
Inc., Melville, New York. From 1985-1990, he was the Vice President of MIS
for that same company.
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 and Chief Financial
Officer since April 1998. 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.
GORDON E. SEGAL, M.D., has been a director of the Company since April
1997. Since December 1995, he has been co-founder and principal of M & S
Ventures, a privately held investment venture capital firm specializing in
biotechnology and health care companies. From January 1992 to December
1995, Dr. Segal was a private venture capitalist. Dr. Segal received a
B.A. degree in 1973 from Southern Methodist University and an M.D. degree
in 1978 from the University of Tennessee. Dr. Segal is a licensed physician
in New York and is a board certified anesthesiologist.
COMMITTEES
The Company's Audit/Systems Committee acts as the liaison between the
Company and its independent public accountants. Its sole current member is
Dr. Ruxin. The Audit Committee did not hold any meetings during 1997. 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.
47
<PAGE>
The Company's Compensation Committee, which will recommend
compensation levels to the Board of Directors, consists of Dr. Ruxin and
Mr. Collard, who have met once 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.
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, Ronald O. Gilcher, M.D.,
and Edward P. Scott, M.D. The Scientific Advisory Committee has had two
formal meetings as a group, and it is anticipated that the Scientific
Advisory Committee will meet semi-annually. 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 and which vest over a five year period and
are exercisable until January 2006. In August 1997, the Company issued Dr.
Gilcher and Dr. Scott options to purchase 10,000 and 1,500 shares,
respectively, of the Company's Common Stock, exercisable at $1.81 per
share, which vest over a five year period and are exercisable until August
2007.
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
48
<PAGE>
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.
EDWARD P. SCOTT, M.D. has been the Medical Director and Chief
Executive Officer of Lifeblood/Mid-South Regional Blood Center, Memphis,
Tennessee from 1986 to present. Dr. Scott graduated from Mississippi State
University in 1970 and received his M.D. degree from the University of
Mississippi Medical School in 1973. He is certified by the American Board
of Internal Medicine, the American Board of Pathology, Blood Banking (1981)
and the American Board of Internal Medicine, Hematology (1982). He was a
member of the American Association of Blood Banks Managerial Think Tank in
1989, and a member of its Standards Committee from 1993-1996. He is the
author or co-author of numerous published medical journal articles, book
chapters and abstracts.
SIGNIFICANT CONSULTANT
ALAN K. GEDDES is a financial consultant to the Company. Mr. Geddes
has been Vice President and Chief Financial Officer of EDnet, Inc., a
publicly held company based in San Francisco, California, since 1996. From
1986 to 1996, Mr. Geddes was the Chief Financial Officer of Oncogenetics,
Inc., Phoenix, Arizona and IMAR Corporation, San Rafael, California, both
emerging companies in medical technology, in addition to founding his own
company, California Pacific Leasing, Inc., San Rafael, California.
Previously, he served as Corporate Controller at Fiberplastics, Inc., Corte
Madera, California, in corporate management at Bio-Rad Laboratories,
Richmond, California, as Plant Controller with Abbott Laboratories,
Pasedena, California and a Financial Analyst with Litton Industries,
Woodland Hills, California. Mr. Geddes received a B.A. degree in 1971 from
the University of California and an M.B.A. degree in finance from Utah
State University in 1974.
49
<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, 1997:
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Restricted
Name and Stock Options Other
Position Year Salary Bonuses Awards & SARs Compensation
-------- ---- ------ ------- --------- ------ -------------
($$) ($$) ($$) (##) ($$)
<S> <C> <C> <C> <C> <C> <C>
Michael I. Ruxin, 1997 $190,000 -0- -0- -0- $ 17,936(1)
Chairman and CEO 1996 $195,000 -0- -0- -0- $ 16,520(2)
1995 $190,000 -0- -0- -0- $ 16,520(2)
Joseph F. Dudziak, 1997 $110,000 -0- -0- 125,000(3) $ 29,800(4)
President and 1996 $110,000 -0- -0- 25,000(5) $ 4,800(6)
COO(11) 1995 $105,000 -0- -0- 100,000(5) $ 4,800(6)
William J. Collard, 1997 $100,000 -0- -0- -0- $ 16,400(7)
Secretary/Treasurer 1996 $100,000 -0- -0- -0- $188,400(7)
and Director, 1995 $100,000 -0- -0- -0- $ 30,400(7)
Wyndgate President
Bart K. Valdez, 1997 $100,000 -0- -0- 50,000(8) $ 55,000(8)
CFO and Director 1996 $ 98,000 -0- -0- 30,000(9) -0-
of Operations for 1995 $ 49,000 -0- -0- 20,000(9) -0-
DataMed
Gerald F. 1997 $ 95,000 -0- -0- -0- $ 25,000(10)
Willman, Jr. 1996 $ 95,000 -0- -0- -0- $ 8,000(10)
CFO and Director, 1995 $ 87,000 -0- -0- -0- -0-
and Vice President
of Wyndgate
</TABLE>
________________
(1) Dr. Ruxin received $5,000 per annum in life insurance premiums and a
$1,078 per month car allowance.
(2) Dr. Ruxin received $5,000 per annum in life insurance premiums and a
$960 per month car allowance.
(3) In August 1997, Mr. Dudziak's 125,000 options were modified in the
following respects: (a) such options become immediately and fully
vested and became exercisable over a ten year period and (b) the
exercise price of the options was reduced to $1.81 per share which was
the estimated fair value of the Company's shares of Common Stock of
the time of grant.
(4) Mr. Dudziak received a $400 per month car allowance and received
$25,000 for moving expenses.
(5) 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.
(6) Mr. Dudziak received a $400 per month car allowance.
(7) Mr. Collard received a $450 per month car allowance in 1995, 1996 and
1997. In 1995, Mr. Collard received $25,000 under his non-compete
agreement. In 1996, Mr. Collard received $175,000 under his non-
compete agreement and reimbursement for a vacation in the approximate
amount of $8,000. In 1997, Mr. Collard received approximately $11,000
for tax expenses related to the May 1995 Wyndgate merger.
(8) Mr. Valdez received a lump sum payment of $55,000 in December 1997
upon the sale of DataMed and immediately and fully vested options to
purchase 50,000 shares granted in August 1997 exercisable over a ten
50
<PAGE>
year period at $1.81 per share. 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.
(9) In 1995, Mr. Valdez received options to purchase 20,000 shares
exercisable at $2.45 per share. In September 1996, Mr. Valdez
received options to purchase 30,000 shares exercisable at $2.50 per
share. These options vested at the rate of 20% per year. These
options were effectively forfeited upon the sale of DataMed and were
re-granted as described in footnote (8) above. 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.
(10) In 1996, Mr. Willman received approximately $8,000 for reimbursement
for a vacation. In 1997, Mr. Willman received approximately $25,000
for tax expenses related to the May 1995 Wyndgate merger.
(11) Mr. Dudziak retired from the Company in March 1998.
EMPLOYMENT AGREEMENTS
As a condition to the April 14, 1998 financing discussed under THE
COMPANY - FINANCING AGREEMENTS above, each of the Company's Officers and
certain employees provided the lenders with undated releases of their
respective employment agreements and tendered resignations, which are being
held in escrow. Until the releases are accepted by the lenders, the
employment agreements between the Company and each of its Officers are
still in effect.
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
21/2% 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. Payment
of the $115,000 was made in January 1998, after having been voluntarily
deferred by Dr. Ruxin. 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's employment 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
51
<PAGE>
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. Mr. Collard received approximately $8,000 for vacation related
expenses during 1996. During 1997, Mr. Collard received approximately
$11,000 for tax expenses related to the May 1995 Wyndgate merger.
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.
Mr. Willman received approximately $8,000 for vacation related expenses in
1996. During 1997, Mr. Willman received approximately $25,000 for tax
expenses related to the May 1995 Wyndgate merger.
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.
52
<PAGE>
COMPENSATION OF DIRECTORS
Members of the Company's Board of Directors are not compensated in
their capacities as Board Members. The Company reimburses all of its
officers, directors and employees for accountable expenses incurred on
behalf of the Company and has granted certain of its Board Members stock
options under the Company's Amended and Restated Stock Option Plan.
53
<PAGE>
STOCK OPTION PLAN
The Company has adopted its Amended and Restated Stock Option Plan
(the "Plan") which provides for the issuance of options to purchase up to
2,200,000 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 the Compensation Committee. At its
discretion, the Compensation Committee may determine the persons to whom
Options may be granted and the terms thereof. As noted above, the
Compensation Committee may issue options to the Directors.
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 Compensation 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 Compensation
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.
54
<PAGE>
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 Compensation 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 Compensation Committee
may provide that each Option granted under the Plan will terminate as of a
date fixed by the Compensation 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.
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
55
<PAGE>
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 Compensation 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.
STOCK COMPENSATION PLAN
The Board of Directors of the Company has approved the 1997 Employee
Stock Compensation Plan ("Stock Compensation Plan"), to support and
increase the Company's ability to attract, retain and compensate persons of
experience and ability and whose services are considered valuable.
A maximum of 100,000 shares of the Company's common stock are
issuable under the terms of the Stock Compensation Plan. The Stock
Compensation Plan provides for compensation through the award of Common
Stock in payment for services rendered or in recognition of past services
of performances rendered to the Company or as a bonus. Shares subject to
a stock award are valued at not less than 100% of their fair market value
on the date the award is granted, whether or not they are subject to
restrictions.
The Stock Compensation Plan is administered by the Compensation
Committee. Stock Compensation Plan participants may be selected by the
Compensation Committee from: (i) key employees of the Company; (ii)
officers and directors of the Company; (iii) consultants or advisors to the
Company; and a (iv) lawyer, law firm, accountant or accounting firm, or
other professionals or professional firms engaged by the Company. The
Compensation Committee has broad discretion to determine the number of
shares which may be granted to participants. The award of Common Stock
will be granted on such terms and conditions as the Board determines. The
Compensation Committee also may interpret the Stock Compensation Plan and
is empowered to make all other determinations deemed necessary or advisable
for the administration of the Stock Compensation Plan. The Board may
suspend, terminate, modify or amend the Stock Compensation Plan.
56
<PAGE>
Under the present provisions of the Internal Revenue Code ("Code") and
regulations thereunder, the recipient of an award of common stock will
recognize ordinary income upon award of the stock, in an amount equal to
the fair market value of the shares on the date of the award, and the
Company will be entitled to a deduction (as a compensation expense) in the
same amount in the year the shares are awarded. The recipient's tax basis
for the Common Stock issued under a stock award will generally be equal to
the fair market value of the shares on the date of award. Upon disposition
of those shares, the recipient will realize a capital gain (or loss) equal
to the difference between the tax basis and the amount realized upon
disposition. Any subsequent resale of these shares will not result in any
further tax consequences to the Company. The Stock Compensation Plan is
not qualified under Section 401(a) of the Code.
Stock awards granted under the Stock Compensation Plan confer no right
upon any participant with respect to continuation of employment and do not
interfere with the employee's or the Company's right to terminate
employment at any time.
OPTION/SAR GRANTS TABLE
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, 1997:
OPTION GRANTS IN 1997
---------------------
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES EXERCISE EXPIRATION
NAME GRANTED IN 1997 PRICE DATE
---- ------- ------- ----- ----
<S> <C> <C> <C> <C>
Joseph F. Dudziak 125,000(1) 25.5% $1.81 08/25/07
Bart K. Valdez 50,000(2) 10.2% $1.81 08/25/07
</TABLE>
_______________
(1) On August 25, 1997, Mr. Dudziak's received options to purchase 125,000
shares of Common Stock, such options are immediately vested and the
exercise price of the options is $1.81 per share.
(2) On August 25, 1997, Mr. Valdez received options to purchase 50,000
shares of Common Stock and such options are immediately vested, the
options are exercisable for a period of ten years, without regard to
Mr. Valdez's employment status with the Company and the exercise price
is $1.81 per share.
57
<PAGE>
AGGREGATED OPTION EXERCISES IN 1997 AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS AT
SHARES OPTIONS AT FY-END FY-END($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE
NAME ON EXERCISE REALIZED UNEXERCISABLE /UNEXERCISABLE
---- ----------- -------- -------------- --------------
<S> <C> <C> <C> <C>
Joseph F. Dudziak -0- -0- 100,000/0 $0.00
Bart K. Valdez -0- -0- 50,000/0 $0.00
</TABLE>
No options were exercised during 1997 by the Company's executive
officers.
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.
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.
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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.
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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.
Amount and Nature of
Name and Address Beneficial
of Shareholder Ownership (1) Percent of Class
- -------------- -------------------- ----------------
Michael I. Ruxin, M.D. 906,250(2) 11.1%
12600 W. Colfax
Suite A-500
Lakewood, CO 80215
Thomas F. Marcinek -0- 0%
11121 Sun Center Drive
Suite C
Rancho Cordova, CA 95670
William J. Collard 613,006(3)(4) 7.5%
11121 Sun Center Drive
Suite C
Rancho Cordova, CA 95670
Gerald F. Willman, Jr. 882,514(5) 10.9%
11121 Sun Center Drive
Suite C
Rancho Cordova, CA 95670
Lori J. Willman 882,514(6) 10.9%
11121 Sun Center Drive
Suite C
Rancho Cordova, CA 95670
Gordon E. Segal 256,250(7) 3.1%
340 W. 57th
Apt. 9J
New York, NY 10019
All Directors and 2,658,020 32.6%
Executive Officers as
a group (5 persons)
________________
(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.
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(2) Includes 6,250 shares underlying warrants issued in connection with
the purchase of the 10% Notes.
(3) Includes 15,000 shares underlying warrants issued in connection with
the purchase of the 10% Notes.
(4) 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.
(5) 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.
(6) Includes 536,033 shares owned by Gerald F. Willman, Jr., the spouse of
Lori J. Willman.
(7) Includes 6,250 shares underlying warrants issued in connection with
the 10% Notes. Does not include 30,000 shares underlying unvested
options.
CHANGE IN CONTROL
In April 1998, the Company entered into financing arrangements with
two non-affiliated companies pursuant to which, among other things, the
Company's Officers, Directors and certain employees executed releases of
their employment agreements and resignations, which are being held in
escrow by the lenders. Under the loan commitment documents, the lenders
have the right to cancel all management and employee contracts, and if the
Company defaults on the terms of the commitments, the resignations of the
Directors, Officers and employees will immediately be effective. There can
be no assurance that the lenders will not invoke their right to terminate
such contracts, thus effecting an immediate change in the management and
control of the Company.
In addition, the lenders have the right to appoint five members to the
Company's Board of Directors, which would then consist of nine members.
The lender's designees will constitute a majority of the then Board of
Directors, and will be able to shape the policies and procedures of the
Company, to determine when and if dividends would be paid, and to determine
the circumstances under which the Company may be sold or merged, along with
other important corporate decisions.
As consideration for the loan commitments, the Company has agreed to
issue warrants to purchase from 7,000,000 to 12,000,000 shares of Common
Sock at $.25 per share. In addition, in the event the Company were to
default under the terms of the loan commitments, the outstanding principal
and any unpaid interest may be converted, at the option of the lenders,
into approximately 70 million shares of the Company's Common Stock on the
basis of one share of Common Stock for each $.05 of debt. If the lenders
were to exercise their warrants, or convert any of the outstanding debt
into Common Stock upon default, the lenders would own and control a
majority of the then outstanding Common Stock. Since the Company does not
have cumulative voting, this concentration of voting control would mean
that the lenders would be able to elect all of the Directors of the
Company.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1996, Michael I. Ruxin, William J. Collard, Joseph F. Dudziak,
Gordon Segal and Bart K. Valdez, officers and directors of the Company,
purchased convertible notes which accrued interest at the rate of 10% per
annum ("10% Notes") in the principal amounts of $25,000, $60,000, $50,000,
$25,000 and $11,200, respectively, in the 10% Note offering by the Company.
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.
In March 1997, Drs. Segal and Ruxin, and Messrs. Collard and Valdez were
repaid the principal amounts of their 10% Notes, plus interest thereon.
Joseph F. Dudziak converted his 10% Note, plus the accrued interest
thereon, into a total of 14,414 shares of Common Stock.
Dr. Ruxin personally guaranteed the Company's $1 million line of
credit which was repaid from proceeds of the Company's February 1997 public
offering and various capital lease obligations currently totaling
approximately $160,000. Additionally, Dr. Ruxin has personally guaranteed
$1.5 million of the Fronteer Line of Credit. See THE COMPANY - FINANCING
AGREEMENTS.
In August 1997, the Company entered into a four year employment
agreement with Hollis Gailey, the spouse of William J. Collard, an Officer
and Director of the Company. Ms. Gailey provides international business
services for Wyndgate, including researching international requirements for
exporting Wyndgate's software, securing international business, working
with the Australian Red Cross and New Zealand Blood Service and acting as
a liaison to certain potential international clients. The agreement
provides for an annual salary of $86,000 and cost of living increases at
the rate of 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.
During 1997, the Company also paid Ms. Gailey $30,000 in consideration of
her entering into the employment agreement with the Company, and agreed to
pay $60,000 in deferred compensation, payable in three equal annual
installments in 1998, 1999, and 2000. In January 1998, the Company paid
Ms. Gailey $20,000 in connection with the deferred compensation amount.
Ms. Gailey's employment under the employment agreement may be terminated by
Ms. Gailey in the event of the sale by the Company of substantially all of
its assets, the sale, exchange or other disposition in one transaction or
a series of transactions 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, the
Company files a voluntary bankruptcy petition, or a petition seeking to
reorganize, dissolve or liquidate, an petition for involuntary bankruptcy
or similar proceeding is filed, and remains undismissed for a period of 30
days, or the Company seeks or consents to the appointment of a trustee,
receiver or liquidator or there are material changes in her duties and
responsibilities without her written consent. The Company may terminate
the employment agreement by reason of Ms. Gailey's death or permanent
disability or for cause as set forth in the employment agreement.
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<PAGE>
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. Any business opportunity outside such areas of interest maybe
entered into by any officer or director of the Company without the officer
or director first offering the business opportunity to the Company.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 40,000,000 shares of Common
Stock, $.01 par value. There are 8,148,255 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 134 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 shareholders.
Excluding 1,456,988 Class A Warrants described below, the Company has
outstanding options and warrants to purchase an aggregate of 8,759,118
shares of Common Stock. 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 the Amended and Restated Stock Option
Plan and the Stock Compensation Plan pursuant to which an aggregate of
1,457,802 shares of Common Stock have been reserved for issuance.
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<PAGE>
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
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.
10% NOTES
The Company issued $751,200 principal amount of convertible 10% Notes
(the "10% Notes") accruing interest at the rate of 10% per annum until
maturity, which was March 6, 1997. Holders of $423,500 principal amount of
10% Notes have converted the principal amount of their 10% Notes, plus
accrued interest thereon, into an aggregate of 121,003 shares of Common
Stock, of which 28,000 were converted at December 31, 1996, at the rate of
one share per $3.75 of interest and principal. In addition, 187,800 shares
of Common Stock are issuable upon exercise of warrants issued in
conjunction with the 10% Note offering. The 121,003 shares issued upon
conversion of the 10% Notes and the 187,800 shares underlying the warrants
have been registered under a Registration Statement on Form SB-2.
CLASS A WARRANTS
Each Class A Common Stock Purchase Warrant (the "Class A Warrants")
entitles the 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 prior to February 11, 2000. In addition to customary anti-dilution
provisions, the exercise price of the Class A Warrants may be adjusted if
the Company issues Common Stock or Common Stock purchase rights at a price
less than the then exercise price.
The Class A Warrants are subject to redemption by the Company at $.55
per Class A Warrant at any time until February 11, 1999, and thereafter at
$.75 per Class A Warrant at any time until their expiration, on 30 days'
prior written notice to the holders of Class A Warrants, provided that the
daily trading price per share of Common Stock has been as least $5.46 (120%
of the Class A 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
64
<PAGE>
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
Class A Warrants will be exercisable until the close of the business day
preceding the date fixed for redemption, if any.
The Class A Warrants are subject 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 Company's Registration Statement No. 333-11723) 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 Class A 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 Class A Warrants may be exercised upon surrender of the Class A
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 Class
A Warrant certificate completed and executed as indicated, accompanied by
full payment of the exercise price (by cashier's or certified check payable
to the Company) to the Warrant Agent for the number of warrants being
exercised. The Class A 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.
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SELLING SECURITY HOLDERS
This Prospectus covers the proposed sale of 12,000,000 shares of
Common Stock which underly Common Stock Purchase Warrants issued or
issuable in connection with the Heng Fung Loan and the Fronteer Line of
Credit in April 1998. See THE COMPANY-FINANCING TRANSACTIONS.
The Company will not receive any of the proceeds from the sale of the
Shares by the Selling Security Holders.
The following table sets forth certain information concerning the
beneficial ownership of Common Stock by each Selling Security Holder as of
the date of this Prospectus:
<TABLE>
<CAPTION>
Shares Shares Owned After
Shares to be Underlying Offering Warrants
Shares Owned Warrants Sold Warrants to -------- Owned
Prior to Owned Prior in the be Sold in After
Name Offering to Offering Offering the Offering Number Percentage Offering
- ---- -------- ----------- -------- ------------ ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Heng Fung -0- 6,000,000 -0- 6,000,000 (1) -0- -0- % -0-
Finance
Company
Limited
Fronteer -0- 1,000,000 (2) -0- 1,000,000 (1) -0- -0- -0-
Capital, Inc.
</TABLE>
_________________
(1) Represents shares underlying warrants to purchase Common Stock,
exercisable at $.25 per share until April 14, 2008.
(2) An additional five million Warrants, exercisable at $.25 per share
until April 14, 2008, will be issued to Fronteer Capital, Inc. if the
Company draws any amounts on the Fronteer Line of Credit. See THE
COMPANY - FINANCING AGREEMENTS.
PLAN OF DISTRIBUTION
Sales of the Selling Security Holders' Shares may be effected from
time to time in transactions (which may include block transactions) in the
over-the counter market, in negotiated transactions, or a combination of
such methods of sale, at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. The
Selling Security Holders have advised the Company that they have not
entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of its securities. The
Selling Security Holders may effect such transactions by selling Common
Stock directly to purchasers or to or through broker-dealers which may act
as agents or principals. Such broker-dealers may receive compensation in
the form of discounts, concessions, or commissions from the Selling
Security Holders and/or the purchasers of Common Stock for whom such
broker-dealers may act as agents or to whom they sell as principals, or
both. RAF Financial Corporation, the underwriter of the
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Company's initial public offering, will receive normal and ordinary
brokerage commissions on sales of Shares made on behalf of Selling
Security Holders. Sales of the Shares may be made pursuant to this
Prospectus or pursuant to Rule 144 adopted under the Securities Act of
1933, as amended. The Selling Security Holders and any broker-dealers that
act in connection with the sale of the Common Stock might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act
and any commission received by them and any profit on the resale of the
shares of Common Stock as principal might be deemed to be underwriting
discounts and commissions under the Securities Act. Such arrangement may
necessitate a filing with the National Association of Securities Dealers,
Inc. pursuant to Notice to Members 88-101. The Selling Security Holders may
agree to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
If any of the following events occurs, this Prospectus will be amended
to include additional disclosure before offers and sales of the Selling
Shareholders' shares are made: (a) to the extent the securities are sold
at a fixed price or by option at a price other than the prevailing market
price, such price would be set forth in the prospectus, (b) if the
securities are sold in block transactions and the purchaser wishes to
resell, such arrangements would be disclosed in the prospectus and (c) if
the compensation paid to broker-dealers is other than usual and customary
discounts, concessions or commissions, disclosure of the terms of the
transaction in the prospectus would be included.
Because the Selling Security Holders may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act,
the Selling Security Holders will be subject to prospectus delivery
requirements under the Securities Act.
LEGAL MATTERS
Legal matters in connection with the Shares 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.
EXPERTS
The consolidated financial statements of Global Med Technologies, Inc.
as of December 31, 1997 and 1996, and for the years then ended appearing in
this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and
auditing.
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SHARES ELIGIBLE FOR FUTURE SALE
The Company presently has outstanding 8,148,255 shares of Common
Stock. Holders of 4,254,936 shares have entered into lock up agreements
with the Representative.
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 one year 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 two 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 shares of
Common Stock and Warrants and could impair the Company's ability to raise
capital through the sale of its equity securities. See RISK FACTORS.
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. The Company is 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
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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 interim reports and such other reports as the Company may
determine necessary. 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.
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GLOSSARY
COMMUNITY BLOOD CENTERS - Community Blood Centers or CBCs are typically not
for profit blood centers usually affiliated with a 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 existing character-based SAFETRACE(R) 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(R) 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(R) software product.
GUI - GUI refers to the Graphical User Interface, most commonly seen as the
icon driven windows on PCs. Special software development 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.
SAFETRACE(R) - SAFETRACE(R) is the blood bank information management system
developed by Wyndgate using EDEN-OA(R) in conjunction with eight California
blood centers. The SAFETRACE(R) software product contains the following
application modules: Donor Recruitment; Donor Management; Laboratory
Management; Special Procedures; Inventory-Distribution; and Billing.
SAFETRACE TX(TM) - SAFETRACE TX(TM) 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.
70
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
GLOBAL MED TECHNOLOGIES, INC.
YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Global Med Technologies, Inc.
Consolidated Financial Statements
Years ended December 31, 1997 and 1996
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' 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. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Global Med
Technologies, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/
Denver, Colorado
April 10, 1998, except for
Note 1, as to which the date
is April 20, 1998
F-1
<PAGE>
Global Med Technologies, Inc.
Consolidated Balance Sheets
(In thousands except par value information)
DECEMBER 31
1997 1996
-----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,370 $ 489
Accounts receivable-trade, net of
allowance for uncollectible accounts
of $175 and $75 at December 31, 1997
and 1996, respectively 175 875
Unbilled revenues, net of allowance
for uncollectible accounts of $125
at December 31, 1997 and 1996 158 326
Prepaid expenses and other assets 256 196
Deferred offering costs - 486
-------------------------------
Total current assets 2,959 2,372
Equipment and fixtures, at cost:
Furniture and fixtures 367 67
Machinery and equipment 303 -
Computer hardware and software 1,166 613
-------------------------------
1,836 680
Less accumulated depreciation and
amortization (665) (189)
-------------------------------
1,171 491
Capitalized software development costs,
less accumulated amortization of $403
and $163 at December 31, 1997 and
1996, respectively 136 376
-------------------------------
Total assets $ 4,266 $ 3,239
===============================
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
DECEMBER 31
1997 1996
------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 324 $ 483
Accrued expenses 599 731
Accrued payroll 398 243
Accrued compensated absences 449 352
Noncompete accrual 150 150
Unearned revenue 2,761 1,359
Short-term debt - 1,097
Notes payable (including $181 to
related parties at December 31,
1996) - 651
Current portion of capital lease
obligations 229 169
Net liabilities of discontinued
operations 631 1,132
-------------------------------
Total current liabilities 5,541 6,367
Capital lease obligations, less
current portion 198 232
Commitments and contingencies - -
Stockholders' deficit:
Preferred stock, $.01 par value:
Authorized shares - 10,000
None issued or outstanding - -
Common stock, $.01 par value:
Authorized shares - 40,000
Issued and outstanding shares -
8,148 and 4,994 at December
31, 1997 and 1996, respectively 82 50
Additional paid-in capital 13,420 4,282
Accumulated deficit (14,975) (7,692)
-------------------------------
Total stockholders' deficit (1,473) (3,360)
-------------------------------
Total liabilities and stockholders'
deficit $ 4,266 $ 3,239
===============================
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Global Med Technologies, Inc.
Consolidated Statements of Operations
(In thousands except per common share information)
YEAR ENDED DECEMBER 31
1997 1996
------------------------------
Revenues:
Software sales and consulting $ 2,209 $ 3,648
Hardware and software, obtained
from vendors 297 928
-------------------------------
2,506 4,576
Cost of revenues:
Software sales and consulting 1,373 937
Hardware and software, obtained
from vendors 224 946
-------------------------------
1,597 1,883
-------------------------------
Gross profit 909 2,693
Operating expenses:
Payroll and other 1,487 1,524
General and administrative 1,115 879
Sales and marketing 1,458 948
Research and development 3,757 1,538
Provision for doubtful accounts 100 19
Depreciation and amortization 409 162
-------------------------------
Loss from continuing operations before
other income (expense) (7,417) (2,377)
Other income (expense):
Interest income 168 25
Interest expense (86) (209)
Other (81) (250)
--------------------------------
Loss from continuing operations (7,416) (2,811)
Loss from discontinued operations (880) (1,681)
Gain on sale of discontinued operations 1,013 -
-------------------------------
Net loss $ (7,283) $ (4,492)
===============================
Basic and diluted loss per share of
common stock:
Loss from continuing operations $(0.96) $(0.63)
Gain (loss) from discontinued
operations 0.02 $(0.37)
-------------------------------
Net loss $(0.94) $(1.00)
===============================
Weighted average of common shares
outstanding 7,728 4,499
===============================
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Global Med Technologies, Inc.
Consolidated Statements of Stockholders' Deficit
(In thousands)
Common Stock Additional
--------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
----------------------------------------------
Balance, December 31, 1995 3,949 $39 $ 1,702 $(3,200) $(1,459)
Issuance of common stock-
January 1996 exercise
of common stock warrants
related to May 1995
private placement 150 2 448 - 450
January 1996 issuance of
Series A preferred
stock converted to
common stock 67 1 249 - 250
Issuance of common stock
from exercise of stock
options under Company's
stock option plan - - 1 - 1
Issuance of common stock
related to July 1996
private placement 800 8 1,732 - 1,740
Grants of common stock
options to a business
advisory enterprise - - 45 - 45
Issuance of common stock
related to conversion of
certain 10% notes 28 105 - 105
Net loss - - - (4,492) (4,492)
----------------------------------------------
Balance, December 31, 1996 4,994 50 4,282 (7,692) (3,360)
Issuance of warrants related
to January 1997 12% notes - - 79 - 79
Issuance of common stock
related to conversion
of certain 10% notes 93 1 348 - 349
Initial public offering,
including underwriter's
overallotment option-
net of offering expenses 2,914 29 8,197 - 8,226
Share adjustments related to
May 1995 private placement
common stock 120 1 (1) - -
Issuance of common stock
from exercise of stock
options under Company's
stock option plan 15 - 21 - 21
Issuance of common stock to
a corporate marketing
enterprise 12 1 25 - 26
Option grants under the
Company's stock option
plan - - 314 - 314
Option grants to a business
advisory enterprise - - 155 - 155
Net loss - - - (7,283) (7,283)
----------------------------------------------
Balance, December 31, 1997 8,148 $82 $13,420 $(14,975) $(1,473)
==============================================
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Global Med Technologies, Inc.
Consolidated Statements of Cash Flows
(In thousands)
YEAR ENDED DECEMBER 31
1997 1996
------------------------------
OPERATING ACTIVITIES
Net loss $ (7,283) $ (4,492)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss from discontinued operations 880 1,681
Gain on sale of discontinued
operations (1,013) -
Depreciation 409 162
Amortization 240 97
Loss on disposal of assets 2 -
Expense related to issuance of
common stock, options and warrants 549 45
Changes in operating assets and
liabilities:
Accounts receivable-trade, net 700 (857)
Unbilled revenues, net 168 (326)
Prepaid expenses and other assets (60) (190)
Accounts payable (159) 418
Accrued expenses (132) 645
Accrued payroll 155 207
Accrued compensated absences 97 91
Noncompete accrual - (175)
Unearned revenue 1,402 1,088
-------------------------------
Net cash used in continuing operations (4,045) (1,606)
Net cash used in discontinued operations (1,255) (1,040)
-------------------------------
Net cash used in operating activities (5,300) (2,646)
INVESTING ACTIVITIES
Purchases of equipment and fixtures (781) (67)
Capital expenditures of discontinued
operations (58) (105)
Net proceeds from sale of discontinued
operations 1,000 -
Increase in software development costs - (70)
-------------------------------
Net cash provided by (used in)
investing activities 161 (242)
FINANCING ACTIVITIES
Borrowings on short-term debt 450 715
Principal payments on short-term debt (1,547) (118)
Principal payments under capital lease
obligations (207) (130)
Principal payments under capital lease
obligations of discontinued operations (107) (223)
Principal payments on notes payable (327) -
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Global Med Technologies, Inc.
Consolidated Statements of Cash Flows (continued)
(In thousands)
YEAR ENDED DECEMBER 31
1997 1996
-------------------------------
FINANCING ACTIVITIES (CONTINUED)
Issuance of notes payable $ - $ 651
Issuance of common stock 8,272 2,546
Deferred offering costs 486 (486)
-------------------------------
Net cash provided by financing
activities 7,020 2,955
-------------------------------
Net increase in cash and cash equivalents 1,881 67
Cash and cash equivalents at beginning
of period 489 422
-------------------------------
Cash and cash equivalents at end
of period $ 2,370 $ 489
================================
Supplemental disclosures:
The Company entered into capital lease obligations of approximately
$130,000 and $585,000 in 1997 and 1996, respectively, including $343,000
related to discontinued operations in 1996.
During 1997, convertible 10% notes payable of approximately $324,000 and
related accrued interest of approximately $25,000 were converted into
93,003 shares of common stock at $3.75 per share (see Note 8).
During 1996, convertible 10% notes payable of approximately $100,000 and
related accrued interest of approximately $5,000 were converted into
28,000 shares of common stock at $3.75 per share (see Note 8).
Interest expense approximates interest paid.
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
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). 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. Subsequent to the merger, the businesses of both Wyndgate and
National MRO have been operated as divisions of the Company. Also, the
National MRO and Wyndgate divisions are now referred to as DataMed
International (DataMed) and Wyndgate Technologies (Wyndgate), respectively
(see Note 2).
DESCRIPTION OF BUSINESS
The Company, through Wyndgate, provides information management software
products and services to the health care industry. The Company, through
its DataMed division, which is shown in the accompanying consolidated
financial statements as discontinued operations (see Note 2), was in the
business of providing substance abuse testing management services.
LIQUIDITY AND MANAGEMENT'S PLANS
From inception to December 31, 1997, the Company incurred cumulative net
losses of approximately $15 million. The Company expects to continue to
incur net losses until 1999, and possibly thereafter, until its existing
SAFETRACE(R) software product is completely implemented and operational
within the Company's customers' information system environments and until
its transfusion services software product (to be known as SAFETRACE TX(TM),
which is currently in beta testing, is established in its markets (see
Note 10 and Note 11). On April 14, 1998 and as amended on April 16, 1998
and on April 20, 1998, the Company entered into two financing agreements
with two related parties, which are not affiliated with the Company, as
follows: a loan of $1.5 million and a line of credit of up to $1.65
million. Both the loan and the line of credit accrue interest at 12%
per annum to be paid monthly, with principal and any unpaid interest to be
repaid upon maturity of 366 days after April 14, 1998. The Company agreed
to pay a finder's fee of 9% of the amounts drawn upon the line of credit to
RAF Financial Corporation (RAF). RAF is related to the lenders and was
also the lead underwriter for the Company's February 1997 initial public
offering.
Pursuant to the agreements, the lenders will have certain rights which will
include the right to appoint five members to the Company's Board of
Directors, the option to cancel all management and employee contracts and
the right to veto any contract for employment, loans or leases valued over
$250,000.
Upon signing of the loan, the lender received 6 million detachable warrants
which are convertible at $.25 each for one share of the Company's common
stock. The exercise price of the detachable warrants is substantially below
the market price for the Company's common stock at the grant date of April
14, 1998. If the Company draws upon the line of credit, the lender will
receive 6 million detachable warrants, in total, which are convertible at
$.25 each for one share of the Company's common stock. If the Company does
not draw upon the line of credit, the lender will receive 1 million
detachable warrants with the same conditions. The warrants are exercisable
over a 10-year period from April 14, 1998. The Company must use its best
efforts to register the common stock underlying the detachable warrants
on or before July 14, 1998. If the Company defaults on the loan or the
line of credit, the debt, including any interest, can be converted into
shares of the Company's common stock on the basis of one share for each
$.05 of debt.
F-8
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Under current accounting rules regarding discounted warrants, these
financings may result in material non-cash charges to the Statement of
Operations in 1998. Management has not completed the assessment of the
amounts to be charged to expense.
In light of the Company's projected earnings and cash flow, management
believes the Company has the financial resources with this additional
financing to maintain its planned level of operations for the next twelve
months without obtaining additional financing. Management, however,
recognizes that even with the current financing, the Company will need to
obtain additional capital in 1999, or may be required to substantially
reduce its software development programs and other operating expenses.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its Wyndgate division. All significant interdivision
accounts and transactions have been eliminated.
REVENUE RECOGNITION
Revenue from the provision of maintenance services, included in software
sales and consulting revenue, is recognized on a straight-line basis over
the maintenance term.
Revenue from the provision of implementation and consulting services,
included in software sales and consulting revenue, is recognized as
services are performed.
Revenue from software development contracts, included in software sales and
consulting revenue, 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 resale of hardware and software, obtained from vendors,
is recognized at the time the hardware and software are delivered to
customers.
Revenue from sales of software licenses, included in software sales and
consulting revenue, 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.
F-9
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1997, the AICPA issued Statement of Position ("SOP") 97-2,
SOFTWARE REVENUE RECOGNITION, which changes the requirements for revenue
recognition effective for transactions the Company will enter into beginning
January 1, 1998. Prior years are not required to be restated. The Company
hasn't yet completed its assessment of the impact SOP 97-2 will have on its
financial statements.
UNBILLED REVENUES
Unbilled revenues at December 31, 1997 and 1996 are generally billable and
collectible within one year.
UNEARNED REVENUE
Included in unearned revenue at December 31, 1997 and 1996 is approximately
$33,000 and $52,000, respectively, of unperformed professional services
related to an agreement between the EDEN-OA Blood Bank Users Group (the
Royalty Group) and Wyndgate (see Note 10). At December 31, 1997, $1
million of the unearned revenue balance is related to an agreement between
the Company (through its Wyndgate division) and Ortho Diagnostic Systems,
Inc., a subsidiary of Johnson & Johnson (see Note 10). At December 31,
1997, approximately $485,000 and $400,000 of the unearned revenue balance
is related to agreements between The Institute for Transfusion Medicine and
the Company for a transfusion services software product (to be known as
SAFETRACE TX(TM)) development agreement (see Note 10 and Note 11) and a
SAFETRACE(R) software license agreement, respectively. The remaining
unearned revenue balance at December 31, 1997 of $843,000 primarily
consists of unearned SAFETRACE(R) maintenance revenue, sales of
SAFETRACE(R) licenses and related postcontract customer support, and
re-sales of hardware and software which are not recognizable as revenue at
December 31, 1997 pursuant to the Company's revenue recognition accounting
policies discussed above.
SIGNIFICANT CUSTOMERS
During 1997, two Wyndgate customers, Haemonetics Corporation and Belle
Bonfils Memorial Blood Center, each accounted for approximately 33% and 10%
of the Company's total revenues from continuing operations.
F-10
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During 1996, one Wyndgate customer, Gulf Coast Regional Blood Center,
accounted for approximately 29% of the Company's total revenues from
continuing operations.
Accounts receivable from the above customers was approximately $60,000 and
$205,000 at December 31, 1997 and 1996, respectively. Unbilled revenues
from the above customers was approximately $160,000 at December 31, 1997.
CREDIT AND MARKET RISK
Accounts receivable at December 31, 1997 are derived entirely from
SAFETRACE(R) sales and related services and resales of hardware and
software to blood centers and blood center service providers located in the
United States. The Company, historically, does not require collateral or
other security to support customer receivables. In order to reduce credit
risk, the Company requires substantial down payments and progress payments
during the course of an installation of its software products. The Company
establishes allowances for doubtful accounts based upon factors surrounding
the credit risk specific to customers. Losses and allowances have
generally been within management's expectations.
Accounts receivable turnover trends have generally slowed from previously
expected rates due to certain delays experienced to date related to
implementation of Wyndgate's blood bank management information system
software product (SAFETRACE(R)).
NOTE RECEIVABLE
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 initially
extended to December 31, 1997 and was further extended until June 30, 1998.
The Note accrues interest at an annual rate of prime plus two percent and
is primarily collateralized by the Development Company's technology. At
December 31, 1996, the Company offset the Note with an allowance in the
amount of $250,000 and the related expense is included in other expenses in
the accompanying consolidated statements of operations. The Company
believes it prudent to fully reserve for the Note based on the current
financial position of the Development Company.
F-11
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT AND FIXTURES
Equipment and fixtures are stated at cost. Depreciation and amortization,
which includes amortization of assets under capital leases (see Note 5), 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
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate assets might be impaired
and the undiscounted cash flows estimated to be generated by these assets
are less than the carrying amounts of those assets.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain software development and production costs
once technological feasibility has been achieved. Software development
costs incurred prior to achieving technological feasibility are included in
research and development expense in the accompanying consolidated
statements of operations.
Capitalized software development costs are reported at the lower of
unamortized cost or net realizable value. Commencing upon the initial
product release or when software development revenue has begun to be
recognized, these costs are amortized based on the straight line method
over the estimated life, generally two to five years. Fully amortized
software costs are removed from the financial records. For the years ended
December 31, 1997 and 1996, the Company recorded approximately $240,000 and
$97,000 of amortization of capitalized software costs, respectively, based
on the straight-line method. Amortization of capitalized software costs is
included in cost of revenues in the accompanying consolidated statements of
operations.
F-12
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MALPRACTICE INSURANCE
The Company maintains 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, management believes
the Company has adequately provided for the ultimate liability, if any,
from the settlement of such potential claims (see Note 11).
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of the accompanying consolidated statements 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 using the liability method. Deferred
income taxes are provided for temporary differences in recognizing certain
income and expense items for financial reporting and tax reporting purposes.
LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All loss per share amounts for
all periods have been presented, and where appropriate, restated to conform
to the Statement 128 requirements.
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
F-13
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
2. DISCONTINUED OPERATIONS
On August 18, 1997, the Company entered into an asset purchase agreement
with National Medical Review Offices, Inc. (NMRO) to sell its DataMed
division to NMRO contingent upon approval from the Company's stockholders.
In conjunction with the sale, the Company and NMRO also entered into a
management agreement where NMRO agreed effective July 1, 1997 to assume
the direction and control of the business and operations of DataMed.
Accordingly, NMRO has managed the business and assumed ownership
responsibility for the operational results from July 1, 1997 through the
date of final close. On December 15, 1997, upon stockholders' approval,
the Company finalized the sale of the assets and operations of DataMed to
NMRO for approximately $1 million in proceeds, net of various closing costs
and the assumption of certain liabilities.
The accompanying consolidated financial statements and related footnotes
reflect DataMed as discontinued operations.
F-14
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. DISCONTINUED OPERATIONS (CONTINUED)
The operating results of the discontinued operations reflected in the
Company's consolidated statements of operations are summarized as
follows (in thousands):
SIX MONTHS
ENDED YEAR ENDED
JUNE 30 DECEMBER 31
1997 1996
------------------------------
Substance abuse testing
and other revenue $ 2,953 $ 6,458
Cost of revenue 2,151 4,587
-------------------------------
Gross profit $ 802 $ 1,871
===============================
Net loss $ (880) $ (1,681)
===============================
The net liabilities of the discontinued operations are summarized as
follows (in thousands):
DECEMBER 31
1997 1996
------------------------------
Current assets $ - $ 1,022
Equipment and fixtures, net - 738
Current liabilities (631) (2,426)
Long-term liabilities - (466)
-------------------------------
Net liabilities $ (631) $ (1,132)
===============================
3. NONCOMPETE AGREEMENTS
The Company has entered into noncompete agreements with three key
employees, two of which also serve on the Company's Board of Directors, 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 (see Note 10). At
December 31, 1997, $150,000 remains payable whenever sufficient cash flow
is available as determined by the Company's Board of Directors (see Note
11).
F-15
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. INCOME TAXES
The Company has net operating loss carryforwards of approximately
$10,276,000 which expire in the years 2006 to 2012. Such net operating
loss carryforwards are subject to limitation on usage due to the change in
ownership resulting from the February 1997 initial public offering (see
Note 8).
The components of the deferred tax provision, which arise from temporary
differences between financial and tax reporting, are presented below:
1997 1996
-------------------------------
(IN THOUSANDS)
Cash to accrual adjustment $ (296) $ (59)
Allowance for uncollectible
accounts receivable - 98
Accelerated depreciation (243) (46)
Unearned revenue and accrued expenses 800 435
Capitalized software 203 (10)
Net operating loss carryforward 2,328 1,236
Valuation allowance (2,792) (1,654)
-------------------------------
Total deferred provision $ - $ -
===============================
Variations from the federal statutory rate are as follows:
1997 1996
-------------------------------
(IN THOUSANDS)
Expected benefit from federal income
taxes at statutory rate of 34% $ (2,476) $ (1,527)
Effect of permanent differences 17 -
Valuation allowance 2,792 1,780
State tax benefit, net of federal
benefit (401) (247)
Other 68 (6)
-------------------------------
$ - $ -
===============================
F-16
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. INCOME TAXES (CONTINUED)
The components of the net accumulated deferred income tax asset as of
December 31, 1997 and 1996 are as follows:
1997 1996
-------------------------------
(IN THOUSANDS)
Deferred tax assets:
Cash to accrual adjustment $ - $ 296
Excess of capital losses over
capital gains 79 79
Net operating loss carryforward 4,059 1,731
Allowance for uncollectible accounts
receivable 217 217
Unearned revenue and accrued expenses 1,466 666
Valuation allowance (5,576) (2,784)
-------------------------------
245 205
Deferred tax liabilities:
Capitalized software (54) 149
Accelerated depreciation 299 56
-------------------------------
245 205
-------------------------------
Deferred tax asset, net $ - $ -
===============================
F-17
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. LEASES
The Company leases equipment and office space. Rental expense under
operating leases, included in general and administrative expenses in
the accompanying consolidated statements of operations, for the years
ended December 31, 1997 and 1996 was approximately $325,000 and $135,000,
respectively. Certain leases of equipment and fixtures are classified as
capital leases. A principal stockholder of the Company has personally
guaranteed repayment of certain capital lease obligations. Included in
equipment and fixtures in the accompanying consolidated balance sheets are
the following assets held under capital leases on behalf of continuing
operations:
DECEMBER 31
1997 1996
-------------------------------
(IN THOUSANDS)
Furniture and fixtures $127 $ 55
Machinery and equipment 179 -
Computer hardware and software 582 507
-------------------------------
Assets under capital lease 888 562
Less accumulated amortization (468) (166)
--------------------------------
Assets under capital lease, net $420 $396
================================
The following represents the minimum lease payments remaining under capital
leases and the future minimum lease payments for all noncancelable
operating leases included in continuing operations at December 31, 1997:
CAPITAL OPERATING
LEASES LEASES
-------------------------------
(IN THOUSANDS)
1998 $ 282 $ 417
1999 116 421
2000 73 433
2001 37 396
2002 21 268
-------------------------------
Total minimum lease payments 529 $1,935
=================
Less amount representing interest (102)
--------------
Present value of minimum lease payments 427
Less current portion of obligations
under capital lease (229)
--------------
Obligations under capital lease,
less current portion $ 198
==============
F-18
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. SHORT-TERM DEBT
The Company maintained a $25,000 unsecured revolving credit line with a
bank which accrued interest at an annual rate of prime plus one percent or
a minimum of ten percent and matured on March 1, 1997. Amounts
outstanding under this revolving line of credit were $25,000 at December
31, 1996. In April 1997, the Company repaid this revolving line of credit,
including accrued interest, from a portion of the net proceeds of the
February 1997 initial public offering (the Offering). See Note 8 for a
further description of the Offering.
The Company maintained a $1 million line of credit with a bank secured by
substantially all of the Company's assets except for those assets under
lease agreements (see Note 5), which accrued interest at an annual rate of
prime plus two percent and which matured on February 12, 1997. Amounts
outstanding under this line of credit were $970,000 at December 31, 1996.
In February 1997, the Company repaid this line of credit, including accrued
interest, from a portion of the net proceeds of the Offering.
The Company maintained a $55,000 unsecured line of credit with a bank which
accrued interest at an annual rate of 14.75 percent. Amounts outstanding
under this line of credit were $50,000 at December 31, 1996. In February
1997, the Company repaid this line of credit, including accrued interest,
from a portion of the net proceeds of the Offering.
During 1996, the Company entered into a $25,000 unsecured promissory note
with an individual which accrued interest at an annual rate of twelve
percent. At December 31, 1996, $25,000 was outstanding under this
promissory note. In February 1997, the Company repaid this promissory note,
including accrued interest, from a portion of the net proceeds of the
Offering.
As of December 31, 1997, the Company does not have any outstanding or
available short-term debt other than its capital lease obligations (see
Note 5).
The Company incurred interest expense on short-term debt, excluding
interest expense on capital lease obligations, of approximately $10,000 and
$151,000 for the years ended December 31, 1997 and 1996, respectively (see
Note 8).
F-19
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. STOCK OPTION PLANS
The Company has a Second Amended and Restated Stock Option Plan for
employees, officers, directors and consultants of the Company (the Stock
Option Plan). The Stock Option Plan provides for the issuance of options
to purchase up to 2.2 million shares of common stock. As of December 31,
1997, the Company has issued 14,480 shares of common stock in connection
with the exercise of 14,480 stock options granted under the Stock Option
Plan (see Note 8). As of December 31, 1997, there were a total of
2,185,520 shares of common stock reserved for future issuance under the
Stock Option Plan, including 860,218 shares of common stock underlying
stock options outstanding and unexercised. Additionally and as of December
31, 1997, there were a total of approximately 445,000 vested stock options
under the Stock Option Plan which were exercisable at an average exercise
price of approximately $1.85 per share and which expire in 2002 to 2007(see
Note 10).
The terms of any options granted under the Stock Option Plan are not
required to be identical as long as they are not inconsistent with the
express provisions of the Stock Option 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 Stock Option Plan are either fully vested upon
the date of grant or vest over five years at the rate of twenty percent per
year. The exercise price for incentive options may not be less than one-
hundred percent 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 one-hundred and ten percent 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 eighty-five percent of the fair market value
of the common stock on the grant date.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25), and
related Interpretations in accounting for its stock options because, as
discussed below, the alternative fair value accounting provided for by
Financial Accounting Standard No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (Statement No. 123), requires use of option valuation models
that were not developed for use in valuing the stock options. Pursuant to
APB 25 and because the exercise price of the Company's stock options,
granted to employees, equals or exceeds the estimated market price of the
underlying common stock on the date of grant, no compensation expense is
recognized.
F-19
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. STOCK OPTION PLANS (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. Prior to the Offering, the fair value of these options was
estimated at the date of grant using the minimum value method available to
nonpublic companies under Statement No. 123 (see Note 8). Under this
method, option value is determined as the excess of the fair value of the
common stock at the date of grant over the present value of both the
exercise price and the expected dividend payments, each discounted at the
risk-free rate, over the expected exercise life of the option. As a result
of the Offering, the Company uses the Black-Scholes option pricing model to
determine the fair value of options granted subsequent to December 31,
1996. A risk-free rate of approximately 5.8% and 5.3% for the years ended
December 31, 1997 and 1996, respectively; and a weighted-average expected
life of ten years and a dividend yield of 0% were used for the years ended
December 31, 1997, 1996 and 1995; volatility factors of the expected market
price of the Company's stock of $1.394 and $1.362 for the year ended December
31, 1997.
For the purposes of pro forma disclosures, the estimated fair value of the
employee options is amortized to expense over the options' vesting period.
The Company's pro forma information follows (in thousands, except per share
amounts):
1997 1996
-------------------------------
Pro forma net loss $(7,513) $(4,582)
Pro forma net loss per share $ (0.97) $ (1.02)
Because Statement No. 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected
until 2001.
F-21
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. STOCK OPTION PLANS (CONTINUED)
A summary of the Company's stock option activity and related information
regarding the Stock Option Plan are as follows:
INCENTIVE STOCK NONQUALIFIED STOCK
OPTION PLAN OPTION PLAN
---------------------------------------------------------
STOCK STOCK
NUMBER OF OPTION NUMBER OF OPTION
STOCK PRICE STOCK PRICE
OPTIONS RANGE OPTIONS RANGE
---------------------------------------------------------
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 (480) 1.54 - -
Forfeited (4,920) 1.54 - 2.50 - -
---------------------------------------------------------
Outstanding,
December 31, 1996 504,100 1.00 - 3.75 63,529 1.54 - 3.75
Granted 371,248 1.54 - 2.00 381,691 1.00 - 2.875
Exercised (14,000) 1.54 - -
Forfeited (421,350) 1.00 - 3.75 (25,000) 2.50
---------------------------------------------------------
Outstanding,
December 31, 1997 439,998 $1.81 - $3.75 420,220 $1.00 - $3.75
=========================================================
The weighted average fair values of options granted during the years ended
December 31 were:
1997 1996
--------------------------
Stock price equals exercise price $1.96 $2.90
Stock price greater than exercise price $1.89 $ -
Stock price less than exercise price $1.83 $ -
During the second quarter of 1996, the Company entered into an agreement
with a business advisory enterprise (the 1996 Stock Option Agreement). In
connection with the 1996 Stock Option Agreement, the Company granted
160,000 stock options at an exercise price of $2.50 per share. The Company
recognized expense in 1996 related to these options of $45,000. During
1997, the Company and the business advisory enterprise agreed to change
certain terms and conditions of the 1996 Stock Option Agreement. As a
result, the Company recognized expense in 1997 of $155,000. These amounts
are included in sales and marketing expense in the accompanying
consolidated statements of operations. These options were not granted as
part of the Company's Stock Option Plan and are not included in the summary
of the Company's stock option activity table above. To date, no options
have been exercised as a result of the 1996 Stock Option Agreement.
During 1997, the Company recognized expense of $314,000 related to certain
grants of stock options within the Company's Stock Option Plan. This
amount consists of approximately $146,000 included in sales and marketing
expense, $136,000 included in general and administrative expense, $22,000
included in research and development expense and $10,000 included in costs of
revenue in the accompanying 1997 consolidated statement of operations.
F-22
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. STOCKHOLDERS' EQUITY AND NOTES PAYABLE
In May 1995, the Company completed a private placement of 150,000 units at
$5 per unit (the May 1995 Private Placement). Each unit consisted of two
shares of common stock ($2.45 each) and one common stock warrant ($0.10
each), exercisable at $3.00 per share for a period of three years from the
closing date of the May 1995 Private Placement. 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. In addition and as a
result of the Offering, the Company issued 120,000 shares of common stock
during the first quarter of 1997 in connection with the May 1995 Private
Placement provision for a share adjustment since the price per common share
in the Company's Offering was less than $4.90 per share.
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 second quarter of 1996, the Company conducted an offering
consisting of convertible notes with detachable common stock warrants and
which accrue interest at an annual rate of ten percent (the 10% Notes).
The 10% Notes matured in three years from the date of issuance and were
convertible into common stock of the Company at $3.75 per share. In
addition, each note holder received one detachable 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 net proceeds from the 10% Note offering amounted to approximately
$751,000. Approximately $181,000 of the net proceeds from the 10% Notes
issuance were received from certain individuals who individually are
beneficial owners of over 5% of the outstanding common stock of the Company
and other officers, directors and employees of the Company under the same
terms and conditions as nonaffiliates. During the first quarter of 1997,
certain note holders converted approximately $349,000 of principal and
accrued interest into 93,003 shares of common stock. Common stock issuable
related to the detachable warrants provided in conjunction with the 10%
Notes amounts to 187,800 shares (see Note 10). During the fourth quarter
of 1996, certain note holders converted $105,000 of principal and accrued
interest into 28,000 shares of common stock. Interest expense related to
the 10% Notes was approximately $5,000 in 1997 and approximately $43,000 in
1996.
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 $1.74 million and
were primarily used for working capital purposes.
F-23
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. STOCKHOLDERS' EQUITY AND NOTES PAYABLE (CONTINUED)
During January 1997, the Company received $450,000 from two unaffiliated
investors related to an offering consisting of notes which accrued interest
at an annual rate of twelve percent (the 12% Notes). In connection with
the 12% Notes, the Company issued 150,000 common stock warrants which are
exercisable at eighty-five percent of the price per share of the Company's
common stock included in the Offering. In the first quarter of 1997, the
Company incurred $79,000 of expense in connection with the issuance and
registration of the 150,000 warrants which is included in other expenses in
the accompanying 1997 consolidated statement of operations. During
February 1997, the Company used a portion of the net proceeds from the
Offering to repay $450,000, plus accrued interest of approximately $5,000,
related to the 12% Notes.
During February 1997, the Company completed an initial public offering (the
Offering) whereby it issued 1,337,000 units, each unit consisting of two
shares of common stock and one common stock purchase warrant (the Units),
at $7.00 per Unit. Net proceeds from the Offering (including net proceeds
from the underwriter's overallotment option) were approximately $8.2
million.
In March 1997, the Company paid approximately $355,000 to certain holders
of the 10% Notes, who did not convert their 10% Notes and accrued interest
into common stock, from a portion of the net proceeds of the Offering (see
Note 11). Approximately $190,000 of the $355,000 was paid to affiliates of
the Company under the same terms and conditions as nonaffiliates.
During 1997, holders of 14,000 common stock options, which were originally
within the Company's Stock Option Plan, exercised their options at an
exercise price of $1.54 per share (see Note 7).
In the fourth quarter of 1997, the Company adopted a stock compensation
plan (the Stock Compensation Plan). The Stock Compensation Plan provides
for the issuance of up to 100,000 shares of common stock to employees,
consultants and others involved in the Company's business. During the
fourth quarter of 1997, the Company issued 12,500 shares of common stock to
a corporate marketing enterprise. These shares were issued under the Stock
Compensation Plan. The Company recognized approximately $26,000 in expense
related to this issuance. This amount is included in sales and marketing
expense in the accompanying 1997 consolidated statement of operations. As
of December 31, 1997, there were a total of 87,500 shares of common stock
reserved for future issuance under the Stock Compensation Plan (see Note
10).
F-24
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. STOCKHOLDERS' EQUITY AND NOTES PAYABLE (CONTINUED)
Certain members of the Company's Scientific Advisory Committee serve as
officers and directors of certain of the Company's customers. In addition,
these members also are beneficial owners of the Company's common stock
through grants of stock options and through the Company's 1996 10% Note
offering (see Note 7).
9. CONTRIBUTIONS TO RETIREMENT PLAN
The Company has a 401(k) retirement plan which covers eligible employees,
as defined, of the Company (the 401(k) Plan). Employees may defer up to
fifteen percent of their annual compensation up to the maximum amount as
determined by the Internal Revenue Service. Under the 401(k) Plan, the
Company, at its discretion, may make contributions to the plan. No Company
contributions were made to the 401(k) Plan in 1997 or 1996. The Company
paid 401(k) Plan administrative expenses of approximately $4,000 for the
years ended December 31, 1997 and 1996. Such 401(k) Plan expenses are
included in general and administrative expenses in the accompanying
consolidated statements of operations.
10. COMMITMENTS AND CONTINGENCIES
The Company has entered into ten long-term employment agreements with
certain management employees, eight of which are in effect at December 31,
1997, and the initial terms are generally for three to five years. Certain
of the eight employment 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. Four of the employment agreements would require the Company
to pay a lump-sum payment of up to $2.5 million if the Company terminates
employment for any reason other than cause or disability. At December 31,
1997, the aggregate commitment for future salaries payable through May
2001, excluding bonuses, is approximately $1.4 million. If all agreements
are extended, the additional commitment for future salaries will be
approximately $1.5 million. During 1997, the Company incurred and paid
approximately $830,000 in connection with the eight employment agreements
described above. This amount consists of $500,000 included in payroll and
other expense and $330,000 included in research and development expense in
the accompanying 1997 consolidated statements of operations.
F-25
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 developed SAFETRACE(R) software product and
services or any other of its software-related products and services. In
addition, the Company applied for certain regulatory approval of its
SAFETRACE(R) software product during October 1995. The Company was
permitted to market the SAFETRACE(R) software product during the review
process. In April 1997, Wyndgate received notification from the United
States Food and Drug Administration of their finding of substantial
equivalence of the SAFETRACE(R) software product. This determination
permits the Company to continue to market the SAFETRACE(R) software product
in the United States.
In January 1993, Wyndgate entered into an agreement with the Royalty Group
to develop the Blood Bank Management Information System Software (BBMIS).
As part of the consideration for the Royalty Group funding approximately
$1.1 million of the development of BBMIS (currently known as SAFETRACE(R))
Wyndgate agreed to pay 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. Royalty expenses related to
this agreement were approximately $65,000 and $323,000 for the years ended
December 31, 1997 and 1996, respectively, and are included in cost of
revenues in the accompanying consolidated statements of operations. The
time period under the royalty schedule is based upon the first date of
customer invoicing, which was September 14, 1995 (see Note 1). 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 (the ITxM Agreement) with The Institute for
Transfusion Medicine (ITxM) to develop Commercial Centralized Transfusion
System Software (Commercial CTS Software). The ITxM Agreement requires
that the Commercial CTS Software (the Company's transfusion services
software product, currently in beta testing and to be known as SAFETRACE
TX(TM)) be completed by December 16, 1997. If not timely completed, the
Company would be subject to certain monetary penalties. The ITxM
F-26
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Agreement provides for a royalty payment to ITxM from the Company for
revenues received from the eventual sale of SAFETRACE TX(TM), net of
certain fees and charges. The royalty period starts with the first
commercial transfer for value of SAFETRACE TX(TM) by the Company. The
royalty amounts for each year are higher if the sales of SAFETRACE TX(TM)
are initiated by ITxM. The royalty payments range from ten or five percent
in year one to two or one percent in year ten and thereafter. Through
December 31, 1997, the Company has not incurred any royalty expenses
related to the ITxM Agreement. During the fourth quarter of 1997, the
Company recognized $485,000 in SAFETRACE TX(TM) development expense related
to a further agreement between the Company and ITxM regarding certain
monetary penalties as defined in the ITxM Agreement (see Note 1 and Note
11). This amount is included in research and development expense in the
accompanying 1997 consolidated statement of operations.
During November 1996, the Company (through its Wyndgate division) entered
into an agreement with Ortho Diagnostic Systems, Inc. (ODSI), a subsidiary
of Johnson & Johnson (the Ortho Agreement). The Ortho 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 (see Note 1). The Ortho Agreement provided that
until May 14, 1997 (the Exclusivity Period), ODSI had 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 would not, directly or through any
intermediary, accept, encourage, solicit, entertain or otherwise discuss
any acquisition of any of the Company's common stock, business, property or
know-how, including the Technology, with any person or entity other than
ODSI or an affiliate thereof and would not otherwise encumber the ability
of ODSI or an affiliate thereof to enter into any arrangement with the
Company concerning the Technology.
Pursuant to the Ortho Agreement, the Company 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 a
security interest with a bank which was in effect at the time the Ortho
Agreement was negotiated) of any kind or nature, any of the Technology.
F-27
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In May 1997, the Company received communication from ODSI that it had not
yet completed an internal evaluation of the Company's Technology and would
not be prepared at the conclusion of the Exclusivity Period to discuss a
transaction between the Company and ODSI. ODSI requested, and the Company
agreed, that ODSI be permitted to continue its evaluation of the Company's
Technology, on a non-exclusive basis, with the intent of responding to the
Company by July 14, 1997 regarding whether or not ODSI would propose some
form of transaction with the Company. On July 14, 1997, the Company and
ODSI (collectively the Parties) agreed to a further extension to September
30, 1997. In connection with the extension to September 30, 1997, ODSI
relinquished its right of first refusal. On September 17, 1997, the
Parties agreed to a further extension to December 31, 1997. On December
22, 1997, the Parties agreed to a further extension to June 30, 1998. In
connection with the extension to June 30, 1998, the Parties agreed that
ODSI has until December 31, 1998 to elect to require the Company (through
Wyndgate) to provide certain software development services as defined in
the Ortho Agreement (see Note 1).
As of December 31, 1997, the Company had 4,628,908 shares of common stock
reserved for future issuance as a result of the following: 2,185,520 shares
underlying unexercised stock options granted within the Company's Stock
Option Plan, 860,218 of which are outstanding and exercisable at $1.00 to
$3.75 per share and which expire in 2002 through 2007 (see Note 7); 160,000
shares underlying unexercised stock options granted to a business advisory
enterprise pursuant to the 1996 Stock Option Agreement, which are
exercisable at $2.50 per share and expire in 2002 (see Note 7); 187,800
shares underlying warrants granted in connection with the 10% Note
offering, which are exercisable at $3.75 per share and expire in 1999 (see
Note 8); 1,858,088 shares underlying warrants issued in connection with the
Offering, the underwriter's overallotment option and other warrants granted
to the Company's underwriter, which are exercisable at $4.55 to $7.51 per
share and which expire in 2000 through 2002 (see Note 8); 150,000 shares
underlying warrants granted in connection with the 12% Notes, which are
exercisable at $2.98 per share and which expire in 1999 (see Note 8) and
87,500 unissued shares in connection with the Stock Compensation Plan (see
Note 8).
F-28
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. SUBSEQUENT EVENTS
In January 1998, the Company and ITxM agreed (the "January 1998 Agreement")
that the Company would not be required to pay monetary penalties in the
approximate amount of $485,000 to ITxM, which were incurred as a result of
delays in development of SAFETRACE TX(TM), in consideration of the Company
providing to ITxM additional maintenance services and product upgrades and
substitute liquidated damage provisions for delays. The first of such
revised dates and liquidated damage provisions was April 3, 1998, by which
the Company was to initiate beta testing of SAFETRACE TX(TM) or pay $500
per day. SAFETRACE TX(TM) was delivered to ITxM for beta testing on April 6,
1998, which was within the grace period provided for in the January 1998
Agreement. Pursuant to the January 1998 Agreement, beta testing of
SAFETRACE TX(TM) is to be completed by July 17, 1998, or the Company will
face liquidated damages of $1,000 per day.
In January 1998 and in connection with a May 1995 noncompete agreement, the
Company's Board of Directors approved payment of $115,000 to the Company's
Chairman and Chief Executive Officer. The remaining noncompete amount of
$35,000 remains payable to a management employee of the Company's Wyndgate
division who is also a shareholder of the Company (see Note 3).
In January 1998, the Company and its Chairman and CEO were informed of a
lawsuit filed by a former employee of a DataMed customer seeking
undisclosed damages as a result of a March 1995 alleged erroneous substance
abuse test result issued by a DataMed Medical Review Officer (MRO).
Management believes that all mandated and necessary MRO procedures were
performed and correctly executed. Legal proceedings tend to be
unpredictable and costly. However, based on the currently available
information, management believes that the resolution of this legal
proceeding will not have a material adverse effect on the Company's
operating results, financial position or cash flow. Although the Company
has not received a final determination from its malpractice insurance
carrier regarding insurance coverage for this matter, management believes
that any damages arising out of this pending case are adequately covered by
the Company's malpractice insurance coverage and recorded accruals. No
range of a reasonably possible loss can be estimated because in this
matter, the complaint is silent as to the amount of damages sought. The
Company's deductible for such claims is approximately $5,000 and is
included in accrued expenses in the accompanying consolidated balance sheet
as of December 31, 1997 (see Note 1).
On February 9, 1998, the Company's common stock and warrants were delisted
from the Nasdaq Small-Cap Market, and commenced trading on the Bulletin
Board.
F-29
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
___________ Shares
____________________________
PROSPECTUS
____________________________
_________, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
A. The Colorado Business Corporation Act (the "Act") allows
indemnification of directors, officers, employees and agents of the Company
against liabilities incurred in any proceeding in which an individual is
made a party because he was a director, officer, employee or agent of the
Company if such person conducted himself in good faith and reasonable
believed his actions were in, or not opposed to, the best interests of the
Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. A person must be
found to be entitled to indemnification under this statutory standard by
procedures designed to assure that disinterested members of the Board of
Directors have approved indemnification or that, absent the ability to
obtain sufficient numbers of disinterested directors, independent counsel
or shareholders have approved the indemnification based on a finding that
the person has met the standard. Indemnification is limited to reasonable
expenses. In addition, the Company's By-Laws provide that the Company
shall have the power to indemnify its officers, directors, employees and
agents to the extent permitted by the Act.
Specifically, the Act provides as follows:
"7-109-102. AUTHORITY TO INDEMNIFY DIRECTORS
(1) Except as provided in subsection (4) of this section, a
corporation may indemnify a person made a party to a proceeding
because the person is or was a director against liability incurred in
the proceeding if:
(a) The person conducted himself or herself in good faith;
and
(b) The person reasonably believed:
(I) In the case of conduct in an official capacity
with the corporation, that his or her conduct was in the corporation's
best interests; and
(II) In all other cases, that his or her conduct was at
least not opposed to the corporation's best interests; and
(c) In the case of any criminal proceeding, the person had
no reasonable cause to believe his or her conduct was unlawful.
(2) A director's conduct with respect to an employee benefit
plan for a purpose the director reasonably believed to be in the
interests of the participants in or beneficiaries
II-1
<PAGE>
of the plan is conduct that satisfies the requirement of subparagraph
(II) of paragraph (b) of subsection (1) of this section. A director's
conduct with respect to an employee benefit plan for a purpose that
the director did not reasonably believe to be in the interests of the
participants in or beneficiaries of the plan shall be deemed not to
satisfy the requirements of paragraph (a) of subsection (1) of this
section.
(3) The termination of a proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent is not, of itself, determinative that the director did not
meet the standard of conduct described in this section.
(4) A corporation may not indemnify a director under this
section:
(a) In connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the
corporation; or
(b) In connection with any other proceeding charging that
the director derived an improper personal benefit, whether or not
involving action in an official capacity, in which proceeding the
director was adjudged liable on the basis that he or she derived an
improper personal benefit.
(5) Indemnification permitted under this section in connection
with a proceeding by or in the right of the corporation is limited to
reasonable expenses incurred in connection with the proceeding.
7-109-103. MANDATORY INDEMNIFICATION OF DIRECTORS
Unless limited by its articles of incorporation, a corporation
shall indemnify a person who was wholly successful, on the merits or
otherwise, in the defense of any proceeding to which the person was a
party because the person is or was a director, against reasonable
expenses incurred by him or her in connection with the proceeding.
7-109-105. COURT-ORDERED INDEMNIFICATION OF DIRECTORS
(1) Unless otherwise provided in the articles of incorporation,
a director who is or was a party to a proceeding may apply for
indemnification to the court conducting the proceeding or to another
court of competent jurisdiction. On receipt of an application, the
court, after giving any notice the court considers necessary, may
order indemnification in the following manner:
(a) If it determines that the director is entitled to
mandatory indemnification under section 7-109-103, the court shall
order indemnification, in which case the court shall also order the
corporation to pay the director's reasonable expenses incurred to
obtain court-ordered indemnification.
II-2
<PAGE>
(b) If it determines that the director is fairly and
reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not the director met the standard of conduct
set forth in section 7-109-102(1) or was adjudged liable in the
circumstances described in section 7-109-102(4), the court may order
such indemnification as the court deems proper; except that the
indemnification with respect to any proceeding in which liability
shall have been adjudged in the circumstances described in section
7-109-102(4) is limited to reasonable expenses incurred in connection
with the proceeding and reasonable expenses incurred to obtain court-
ordered indemnification.
7-109-106. DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION OF
DIRECTORS
(1) A corporation may not indemnify a director under section
7-109-102 unless authorized in the specific case after a determination
has been made that indemnification of the director is permissible in
the circumstances because the director has met the standard of conduct
set forth in section 7-109-102. A corporation shall not advance
expenses to a director under section 7-109-104 unless authorized in
the specific case after the written affirmation and undertaking
required by section 7-109-104(1)(a) and (1)(b) are received and the
determination required by section 7-109-104(1)(c) has been made.
(2) The determinations required by subsection (1) of this
section shall be made:
(a) By the board of directors by a majority vote of those
present at a meeting at which a quorum is present, and only those
directors not parties to the proceeding shall be counted in satisfying
the quorum; or
(b) If a quorum cannot be obtained, by a majority vote of
a committee of the board of directors designated by the board of
directors, which committee shall consist of two or more directors not
parties to the proceeding; except that directors who are parties to
the proceeding may participate in the designation of directors for the
committee.
(3) If a quorum cannot be obtained as contemplated in paragraph
(a) of subsection (2) of this section, and a committee cannot be
established under paragraph (b) of subsection (2) of this section, or,
even if a quorum is obtained or a committee is designated, if a
majority of the directors constituting such quorum or such committee
so directs, the determination required to be made by subsection (1) of
this section shall be made:
(a) By independent legal counsel selected by a vote of the
board of directors or the committee in the manner specified in
paragraph (a) or (b) of subsection (2) of this section or, if a quorum
of the full board cannot be obtained and a committee cannot be
established, by independent legal counsel selected by a majority vote
of the full board of directors; or
(b) By the shareholders.
II-3
<PAGE>
(4) Authorization of indemnification and advance of expenses
shall be made in the same manner as the determination that
indemnification or advance of expenses is permissible; except that, if
the determination that indemnification or advance of expenses is
permissible is made by independent legal counsel, authorization of
indemnification and advance of expenses shall be made by the body that
selected such counsel.
7-109-107. INDEMNIFICATION OF OFFICERS, EMPLOYEES, FIDUCIARIES, AND
AGENTS
(1) Unless otherwise provided in the articles of incorporation:
(a) An officer is entitled to mandatory indemnification
under section 7-109-103, and is entitled to apply for court-ordered
indemnification under section 7-109-105, in each case to the same
extent as a director;
(b) A corporation may indemnify and advance expenses to an
officer, employee, fiduciary, or agent of the corporation to the same
extent as to a director; and
(c) A corporation may also indemnify and advance expenses
to an officer, employee, fiduciary, or agent who is not a director to
a greater extent, if not inconsistent with public policy, and if
provided for by its bylaws, general or specific action of its board of
directors or shareholders, or contract.
7-109-108. INSURANCE
A corporation may purchase and maintain insurance on behalf of a
person who is or was a director, officer, employee, fiduciary, or
agent of the corporation, or who, while a director, officer, employee,
fiduciary, or agent of the corporation, is or was serving at the
request of the corporation as a director, officer, partner, trustee,
employee, fiduciary, or agent of another domestic or foreign
corporation or other person or of an employee benefit plan, against
liability asserted against or incurred by the person in that capacity
or arising from his or her status as a director, officer, employee,
fiduciary, or agent, whether or not the corporation would have power
to indemnify the person against the same liability under section
7-109-102, 7-109-103, or 7-109-107. Any such insurance may be
procured from any insurance company designated by the board of
directors, whether such insurance company is formed under the laws
of this state or any other jurisdiction of the United States or
elsewhere, including any insurance company in which the corporation
has an equity or any other interest through stock ownership or
otherwise.
7-109-109. LIMITATION OF INDEMNIFICATION OF DIRECTORS
(1) A provision treating a corporation's indemnification of, or
advance of expenses to, directors that is contained in its articles
of incorporation or bylaws, in a resolution of its shareholders or
board of directors, or in a contract, except an insurance
II-4
<PAGE>
policy, or otherwise, is valid only to the extent the provision is not
inconsistent with sections 7-109-101 to 7-109-108. If the articles of
incorporation limit indemnification or advance of expenses,
indemnification and advance of expenses are valid only to the extent
not inconsistent with the articles of incorporation.
(2) Sections 7-109-101 to 7-109-108 do not limit a corporation's
power to pay or reimburse expenses incurred by a director in
connection with an appearance as a witness in a proceeding at a time
when he or she has not been made a named defendant or respondent in
the proceeding.
7-109-110. NOTICE TO SHAREHOLDERS OF INDEMNIFICATION OF DIRECTOR
If a corporation indemnifies or advances expenses to a director
under this article in connection with a proceeding by or in the right
of the corporation, the corporation shall give written notice of the
indemnification or advance to the shareholders with or before the
notice of the next shareholders' meeting. If the next shareholder
action is taken without a meeting at the instigation of the board of
directors, such notice shall be given to the shareholders at or before
the time the first shareholder signs a writing consenting to such
action."
B. Article VI of the Registrant's Amended and Restated Articles of
Incorporation provides for the elimination of personal liability for
monetary damages for the breach of fiduciary duty as a director except for
liability (i) resulting from a breach of the director's duty of loyalty to
the Registrant or its shareholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the
law; (iii) for approving payment of distributions to shareholders to the
extent that any such actions are illegal under the Act; or (iv) for any
transaction from which a director derives an improper personal benefit.
This Article further provides that the personal liability of the
Registrant's directors shall be eliminated or limited to the fullest extent
permitted by the Act.
C. The Underwriting Agreement between the Registrant and the Underwriters
provides that the Underwriters will indemnify and hold harmless the
Registrant, the directors of the Registrant, and each person, if any, who
controls the Registrant within the meaning of Section 15 of the Securities
Act of 1933, as amended (the "1933 Act"), against any and all losses,
claims, demands, liabilities and expenses (including reasonable legal or
other expenses) to which it may become subject, arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or in any Blue Sky Application or
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, resulting from the use of written information furnished to the
Registrant by the Underwriters or any participating dealer for use in the
preparation of the Registration Statement or in any Blue Sky Application.
II-5
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
-------------------------------------------
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection
with the issuance and distribution of the securities being offered. All
expenses are estimated.
Registration and filing fee . . . . . . . . . . . . . $ 6,102
NASD filing fee . . . . . . . . . . . . . . . . . . . 2,300
Printing. . . . . . . . . . . . . . . . . . . . . . . 1,000
Accounting fees and expenses . . . . . . . . . . . . 20,000
Legal fees and expenses . . . . . . . . . . . . . . . 20,000
Blue Sky fees and filing fees . . . . . . . . . . . . 1,000
Transfer and Warrant Agent fees . . . . . . . . . . . -0-
Miscellaneous . . . . . . . . . . . . . . . . . . . . 9,598
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000
=========
Item 26. Recent Sales of Unregistered Securities
---------------------------------------
During the past three years, the Registrant has issued its securities
to the following persons for cash or other consideration indicated in
transactions that were not registered under the 1933 Act.
II-6
<PAGE>
I.
May 1995 Private Placement
--------------------------
Share
Name No. of Unit (1) Consideration Adjustment (2)
- ---- --------------- ------------- --------------
Ms. Elizabeth Kitchen & 10,000 $ 50,000 8,000
Guy B. Nutter
I. Stephen Davis, MD 10,000 50,000 8,000
William C. Dickey, MD 1,000 5,000 800
Metropolitan Pathologists 5,000 25,000 4,000
Profit Sharing Trust
FBO Gary D. Dickey, MD
Metropolitan Pathologists 19,000 95,000 15,200
Profit Sharing Trust
FBO William C. Dickey, MD
Herbert H. Maruyama, MD 10,000 50,000 8,000
Wilshire Center Geriatrics 10,000 50,000 8,000
Medical Group, Inc. DBPP
FBO Eugene Seymour, MD
Resources Trust Company 10,000 50,000 8,000
FBO Nancy S. Rogers
IRA dtd 3/22/84 # I ###-##-####
Robert L. Messenbaugh, MD 10,000 50,000 8,000
Herbert L. Jacobs, MD 15,000 75,000 12,000
Stewart Weinerman, MD 10,000 50,000 8,000
Patrick A. Zoellner, MD 5,000 25,000 4,000
Hal Cohn, MD 5,000 25,000 4,000
Susan H. Sipf 10,000 50,000 8,000
Kenneth Manfre, MD 20,000 100,000 16,000
------- -------- -------
TOTAL 150,000 $750,000 120,000
======= ======== =======
______________
(1) Each unit consisted of two shares of Common Stock and one Common Stock
Purchase Warrant exercisable at $3.00 per share until June 1, 1998.
(2) In March 1997, each Unit holder received a pro rata "Share Adjustment"
based upon the extent that the initial public offering price per share
of Common Stock in the Company's public offering ($3.50) was less than
$4.90.
II-7
<PAGE>
The offers and sales set forth in I above were made in reliance upon
the exemption from registration provided by Section 4(2) of the 1933 Act
and/or Regulation D and Rule 506 adopted thereunder. All of the purchasers
are known to the Registrant's president, Michael I. Ruxin, or were referred
to him by other purchasers in this offering or by clients of the
Registrant. Based upon Dr. Ruxin's knowledge of the purchasers and upon
written representations made by the purchasers, the Registrant believes all
but four of the purchasers were accredited investors at the time of their
purchases. The four non-accredited purchasers are medical doctors and,
therefore, based upon their knowledge of Registrant's business and their
representations, the Registrant believes each was capable of evaluating the
merits and risks of an investment in the Registrant. No broker/dealers
were involved in the sale and no commissions were paid. All purchasers
represented that they purchased the securities for investment, and all
certificates issued to the purchasers were impressed with a restrictive
legend advising that the shares represented by the certificates may not be
sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration
established. The Registrant's transfer agent will be advised to place
"stop transfer" instructions against the transfer of these certificates.
II.
May 1995 Wyndgate Merger
------------------------
Consideration
(No. of
Name No. of Shares* Wyndgate Shares)
---- -------------- ---------------
William J. Collard 653,006 1,999
Gerald F. Willman, Jr. 570,033 1,745
Lori J. Willman 368,481 1,128
Timothy J. Pellegrini 368,480 1,128
--------- -----
TOTAL 1,960,000 6,000
========= =====
______________
* Based upon the conversion factor of 326.6667 multiplied by the number
of Wyndgate shares.
The offers and sales set forth in II above were made in reliance upon
the exemption from registration provided by Section 4(2) of the 1933 Act.
No broker/dealers were involved in the sale and no commissions were paid.
All such persons represented that they acquired the securities for
investment, and all certificates issued to the persons were impressed with
a restrictive legend advising that the shares represented by the
certificates may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. The Registrant's transfer agent will be advised
to place "stop transfer" instructions against the transfer of these
certificates.
II-8
<PAGE>
III.
In June 1995, in connection with Joseph F. Dudziak being employed as
the president of the Registrant, the Registrant issued Mr. Dudziak
Incentive Stock Options to purchase 100,000 shares exercisable at $2.45 per
share until June 2005. In September 1996, the Registrant issued Mr.
Dudziak Incentive Stock Options to purchase 25,000 shares exercisable at
$2.50 per share until September 2006. In August 1997, Mr. Dudziak's
125,000 options were modified in the following respects: (a) 55,248 and
69,752 of the 125,000 options were granted as Incentive Stock Options and
Non-Qualified Stock Options, respectively, (b) such options are immediately
and fully vested and (c) the exercise price of the options was reduced to
$1.81 per share. The Registrant relied on Section 4(2) of the Securities
Act of 1933, as amended, in connection with the original issuance of the
option to Mr. Dudziak.
II-9
<PAGE>
IV.
January 1996 Warrant Exercises
------------------------------
Name No. of Shares Consideration*
---- ------------- -------------
William C. Dickey, MD 1,000 $ 3,000
& Karen N. Dickey
Metropolitan Pathologists 19,000 57,000
Profit Sharing Trust
Robert L. Messenbaugh, MD 10,000 30,000
Metropolitan Pathologists 5,000 15,000
Profit Sharing Trust
FBO Gary D. Dickey, MD
Resources Trust Company 10,000 30,000
FBO Nancy S. Rogers
IRA dtd 3/22/84 #I ###-##-####
Patrick A. Zoellner, MD 5,000 15,000
Eric D. Sipf 10,000 30,000
Herbert H. Maruyama, MD 10,000 30,000
Stewart Weinerman, MD 10,000 30,000
Eugene Seymour, MD 3,333 9,999
Wilshire Center Geriatrics 6,667 20,001
Medical Group DBPP, Inc.FBO
Eugene Seymour, M.D.
Herbert L. Jacobs, MD 15,000 $ 45,000
Kenneth Manfre, MD 20,000 60,000
Hal Cohn, MD 15,000 45,000
Charles Citrin 10,000 30,000
------- -------
TOTAL 150,000 $450,000
======= =======
______________
* Based upon an exercise price of $3.00 per share.
The offers and sales set forth in IV above were made in reliance upon
the exemption from registration provided by Section 4(2) of the 1933 Act
and/or Regulation D and Rule 506 adopted thereunder. The purchasers set
forth in this section IV are the same purchasers as set forth under I above
who exercised the warrants they acquired as part of the units sold
described under I above.
II-10
<PAGE>
All but four of the purchasers were accredited investors. See the
description under I above. No broker/dealers were involved in the sale and
no commissions were paid. All purchasers represented that they purchased
the securities for investment, and all certificates issued to the
purchasers were impressed with a restrictive legend advising that the
shares represented by the certificates may not be sold, transferred,
pledged or hypothecated without having first been registered or the
availability of an exemption from registration established. The
Registrant's transfer agent will be advised to place "stop transfer"
instructions against the transfer of these certificates.
V.
January 1996 Series A Preferred Stock Offering
----------------------------------------------
Name No. of Shares* Consideration
---- ------------- -------------
Ronald O. Gilcher, MD 66,667 $250,000
______________
* Initially issued as Series A Preferred Stock, but converted into a
like number of shares of Common Stock in May, 1996.
The offer and sale to Dr. Gilcher was made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act. No
broker/dealers were involved in the sale and no commissions were paid. Dr.
Gilcher represented that he purchased the securities for investment, and
the certificate issued to him was impressed with a restrictive legend
advising that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established. The
Registrant's transfer agent will be advised to place "stop transfer"
instructions against the transfer of his stock certificate.
VI.
Shares issued pursuant to Settlement Agreements
-----------------------------------------------
Name No. of Shares Consideration
---- ------------- -------------
Frontline Marketing, Inc. 20,408 Release of Claims
(shares issued Oct. 1995)
Robert S. Verhey 10,000 Release of Claims
------ (shares issued May 1996)
TOTAL 30,408
======
The issuances set forth in VI above were made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act. No
broker/dealers were involved in the sale and no commissions were paid. The
persons represented that they acquired the securities for investment, and
the certificates issued to the persons were impressed with a restrictive
legend advising that the shares represented by the certificates may not be
sold, transferred, pledged or
II-11
<PAGE>
hypothecated without having first been registered or the availability of an
exemption from registration established. The Registrant's transfer agent
will be advised to place "stop transfer" instructions against the transfer
of these certificates.
VII.
Options issued to Scientific Advisory Committee
-----------------------------------------------
Name Number of Options Expiration Date
---- ----------------- ---------------
William C. Dickey, MD 2,500 January, 2006
Cathy Bryan 1,000 January, 2006
Ronald O. Gilcher, MD 1,000 January, 2006
The options issued to the members of the Registrant's Scientific
Advisory Committee were made in reliance upon the exemption from
registration provided by Section 4(2) of the 1933 Act. The consideration
for the issuance of the options was the agreement by the named individuals
to serve on the Registrant's Scientific Advisory Committee. The options
were issued pursuant to the Registrant's nonqualified stock option plan and
are exercisable at $3.75 per share, and vest over a five year period. No
broker/dealers were involved in the sale and no commissions were paid. All
option certificates were impressed with a restrictive legend advising that
the options represented by the certificates may not be sold, transferred,
pledged or hypothecated without having first been registered or the
availability of an exemption from registration established.
VIII.
In April 1996, the Registrant entered into an agreement with LMU &
Company ("LMU"), which was amended in November 1996, January 1997 and
October 1997. As partial consideration for LMU's services under the
agreement as amended, the Registrant issued LMU an option to purchase
160,000 shares of the Registrant's Common Stock, exercisable at $2.50 per
share. The option became exercisable on March 19, 1997 as the average bid
price for the Registrant's Common Stock was at least $3.50 for five
consecutive trading days as provided for in the October 1997 amendment.
The issuance of the option to LMU was made in reliance upon the exemption
from registration provided by Section 4(2) of the 1933 Act. No
broker/dealers were involved in the sale and no commissions were paid. LMU
represented that LMU acquired the option for investment and not with a view
to distribution.
II-12
<PAGE>
IX.
1996 10% 3-Year Convertible Notes*
----------------------------------
Name Consideration No. of Warrants**
---- ------------- ---------------
Arnold E. Prince $25,000 6,250
Richard Sher 50,000 12,500
Bart Valdez 11,200 2,800
Wilshire Center Geriatrics 50,000 12,500
Medical Group, Inc.
Eugene Seymour, M.D. Trustee
Eugene H. Seymour, M.D. 50,000 12,500
Underwood Family Partners 100,000 25,000
Jeffrey Appel 25,000 6,250
Benjamin R. Budraitis 10,000 2,500
Joseph F. Dudziak 50,000 12,500
Neill and Nita Freeman 25,000 6,250
Thomas R. Sakaguchi 20,000 5,000
James Sakaguchi 27,500 6,875
Ellen Sakaguchi 12,500 3,125
Michael Lipkin 35,000 8,750
Thomas R. Ulie 50,000 12,500
William J. Collard 60,000 15,000
Michael I. Ruxin, M.D. 25,000 6,250
Ralph Grills, Jr. 50,000 12,500
Gordon Segal, MD 25,000 6,250
Harris A. Cahn 25,000 6,250
Joel C. Newman, MD 25,000 6,250
------- -------
Total $751,200 187,800
======= =======
_______________
* Convertible at $3.75 per share.
** One warrant for each $4 purchase exercisable over a three year
period commencing June 26, 1996 at $3.75 per share.
II-13
<PAGE>
The offers and sales set forth in IX above were made in reliance upon
the exemption from registration provided by Section 4(2) of the 1933 Act
and/or Regulation D and Rule 506 adopted thereunder. Based upon
information known to the Registrant, and representations made by each of
the purchasers, the Registrant believes that all but three of the
purchasers were accredited investors. The three non-accredited purchasers
are family members of one of the Registrant's employees. Based upon such
relationship, upon information known to the Registrant and representations
made by each of these three purchasers, the Registrant believes that they
were able to evaluate the merits and risks of an investment in the
Registrant. No broker/dealers were involved in the sale and no commissions
were paid. All of such purchasers represented that they purchased the
securities for investment, and all Notes issued to the purchasers were
impressed with a restrictive legend advising that the Notes may not be
sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration
established.
X.
July 1996 Private Placement
---------------------------
Name Number of Consideration
---- Shares Paid
------ ----
Hugo Brooks 10,000 $ 25,000
Lawrence M. Underwood 5,000 12,500
Paul R. Hoover & 10,000 25,000
Janet F. Hoover, JTWROS
Battersea Capital, Inc. 10,000 25,000
ESN Financial, LP 20,000 50,000
Anil & Bina Patel, JTWROS 10,000 25,000
Michal & Renata Pivonka, JTWROS 50,000 125,000
William B. & 10,000 25,000
Cheryl A. Bacon, JTWROS
Vannette F. Poole 20,000 50,000
John L. Moran 20,000 50,000
William R. Teele 10,000 25,000
Alan David Cohen 10,000 25,000
Peter & Luba Bondra, JTWROS 40,000 100,000
Harvey D. Rhoads 2,500 6,250
II-14
<PAGE>
E. Pat Manuel 25,000 62,500
Allen E. Hoyt 10,000 25,000
Richard Kay 20,000 50,000
Mildred J. Geiss 7,000 17,500
Clyde William & 10,000 25,000
Valerie J. Pray, JTWROS
Barry Slosberg 10,000 25,000
Bradley Subler 2,000 5,000
Andrew E. Kauders 6,000 15,000
Richard J. N. Leonard 6,000 15,000
David Hickey 10,000 25,000
Georgia M. Dunston 10,000 25,000
TradeLink, L.L.C. 10,000 25,000
Robert M. Kassenbrock 40,000 100,000
Laurence P. Emrie 4,000 10,000
Larry & Michelle 5,000 12,500
Weinstein, JTWROS
Underwood Family Partners, LTD 20,000 50,000
Amar & Vangie Romero, JTWROS 6,000 15,000
Consulting on Government 10,000 25,000
Procurement-FBO J.S. Sansome
Lawrence E. & 10,000 25,000
Jeanne R. Keith, JTWROS
Riley Wilson - dba 20,000 50,000
RW Enterprises
John Solomita 10,000 25,000
William Vasey 10,000 25,000
Tadahiko Nakamura 30,000 75,000
Robert W. & 4,000 10,000
Rhonda W. Braun, JTWROS
Donald H. & 2,000 5,000
Mary Lou Wilbois, JTWROS
Jon and Laurie Lindvall 4,000 10,000
II-15
<PAGE>
Maurice S. Cohen 10,000 25,000
Wilbert D. Pearson 10,000 25,000
Georgina S. Caslavka 10,000 25,000
Lynne D. Caslavka 6,000 15,000
Voss Boreta 10,000 25,000
Keith D. & 10,000 25,000
Carolyn P. McDonald, JTWROS
Howard I. Saiontz 10,000 25,000
James A. Newsham III & 5,000 12,500
Vivian M. Newsham, JTWROS
William C. & 10,000 25,000
Mary Claire McCormick, JTWROS
Patrick M. Sheridan 4,000 10,000
Thomas D. Fiorino 20,000 50,000
Richard G. Belcher 10,000 25,000
Scot C. Irwin 5,000 12,500
Alan Goldstein 10,000 25,000
Maurice and Stacy
Gozlan, JTWROS 10,000 25,000
Howard Wall 20,000 50,000
William C. Meyer 4,000 10,000
Jeffrey M. Savell 7,000 17,500
James A. & 15,000 37,500
Joann Wiedenhoeft, JTWROS
A. Thomas Tenenbaum 6,000 15,000
Brenman Key & Bromberg 10,000 25,000
401K Profit Sharing Plan
FBO Thomas R. Bromberg
Brenman Key & Bromberg 20,000 50,000
401K Profit Sharing Plan
FBO Albert Brenman
Stuart McNab 1,000 2,500
George Thompson 9,500 23,750
II-16
<PAGE>
Brenman Key & Bromberg 14,000 35,000
401K Profit Sharing Plan
FBO A. Thomas Tenenbaum
Kenneth Higgins 5,000 12,500
Richard T. Baldwin 20,000 50,000
------- ---------
Total 800,000 $2,000,000
======= =========
The offers and sales set forth in X above were made in reliance upon
the exemption from registration provided by Section 4(2) of the 1933 Act
and/or Regulation D and Rule 506 adopted thereunder. RAF Financial
Corporation acted as the Placement Agent for the offering for which it
received a commission of 10% of the amount of securities sold in the
offering and a 3% expense allowance. Based upon representations made by
each of the purchasers in the offering, the Registrant believes that all
but four of the purchasers are "accredited investors" as that term is
defined in Rule 501 of Regulation D. With respect to the four non-accredited
investors, the Registrant believes, based upon each investor's
representations, that each non-accredited investor was capable of
evaluating the merits and risks of their investment in the Registrant. All
of such purchasers represented that they purchased the securities for
investment, and all certificates issued to purchasers were impressed with
a restrictive legend advising that the shares represented by the
certificates may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. The Registrant's transfer agent will be advised
to place "stop transfer" instructions against the transfer of these
certificates.
XI.
Employee Stock Options
----------------------
During the past three years, the Registrant has granted approximately
330,000 incentive stock options and approximately 78,000 non-qualified
stock options to approximately 60 employees of the Registrant and others
pursuant to the Registrant's Amended and Restated Stock Option Plan not
shown elsewhere within Item 26. The options are exercisable at prices
ranging from $1.54 to $3.75 over a ten year period. No consideration was
paid by the employees of the Registrant or others in connection with the
issuance of the options. Only five employees have exercised their options,
for an aggregate of 14,480 shares of the Company's Common Stock. The
issuance of the options and sales of the shares were made in reliance upon
the exemption from registration provided by Section 3(b) of the Securities
Act of 1933, as amended, and Rule 701 adopted thereunder. No
broker/dealers were involved in the sale and no commissions were paid. All
purchasers purchased the securities for investment, and all option
certificates issued to purchasers were impressed with a restrictive legend
advising that the shares represented by the certificates may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established. All the
shares underlying these options have been registered under a Registration
Statement on Form S-8.
II-17
<PAGE>
XII.
January 1997 Bridge Financing
-----------------------------
In January 1997, the Registrant borrowed $450,000 from two
individuals. The loans were evidenced by promissory notes, and were repaid
with proceeds from the Registrant's February 1997 public offering. The
Registrant issued warrants to purchase 150,000 shares of Common Stock to
the two lenders in connection with the loans, which are exercisable at
$2.975 per share of the Common Stock included in the Units sold in the
Registrant's recent public offering. One of the lenders, Robert M.
Kassenbrock, is also a shareholder of the Registrant. The issuance of the
promissory notes and the warrants were made in reliance upon the exemption
from registration provided by Section 3(b) of the Securities Act of 1933,
as amended, and Rule 504 of Regulation D adopted thereunder. No
commissions were paid to any broker/dealers in connection with the
issuances. The warrant certificates issued to the lenders were impressed
with a restrictive legend advising that the warrants and underlying shares
may not be sold, transferred, pledged or hypothecated without having first
been registered or the availability of an exemption from registration
established.
XIII.
August 1997 Option Grants
-------------------------
In August 1997, the Registrant granted options to purchase a total of
45,000 shares of Common Stock to two persons, which options and/or the
underlying shares of Common Stock were neither incentive stock options nor
non-qualified stock options registered under the Registrant's registration
statement on Form S-8. These options are exercisable at $1.81 per share
over a ten year period from the date of grant. The option recipients were
business consultants to the Registrant. The options were granted in
reliance upon the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended. No commissions were paid to any
broker/dealers in connection with the issuances. The option certificates
issued to the consultants were impressed with a restrictive legend advising
that the options and underlying shares may not be sold, transferred,
pledged or hypothecated without having first been registered or the
availability of an exemption from registration established.
XIV.
April 1998 Issuance of Warrants
-------------------------------
In April 1998, as consideration for two loan commitments, the
Registrant granted warrants to purchase an aggregate of seven million
shares of Common Stock, exercisable at $.25 per share over a ten year
period. If the Registrant draws down any amounts of the line of credit
portion of the loan commitments, then the lender is entitled to receive
warrants to purchase an additional five million shares of Common Stock. As
part of the loan commitments, the lenders have the right to designate up to
five members of the Registrant's Board of Directors. The loan commitments
are further described in the section entitled THE COMPANY - FINANCING
TRANSACTIONS in the attached Prospectus. The loan commitments require the
Registrant to register the shares of Common Stock underlying the warrants,
which shares are the subject of this Registration Statement. The warrants
were granted in reliance upon the exemption from registration provided by
Section 4(2) of the
II-18
<PAGE>
Securities Act of 1933, as amended. RAF Financial Corporation received a
commission in connection with the loan commitments.
Item 27. Exhibits and Financial Schedules
--------------------------------
The following is a complete list of exhibits filed as part of this
Registration Statement, which Exhibits are incorporated herein.
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation, filed June 2,
1995(1)
3.2 Articles of Amendment to the Articles of Incorporation, filed
March 5, 1996(1)
3.3 Articles of Amendment to the Articles of Incorporation, filed May
30, 1996(1)
3.4 Bylaws, as amended(1)
4.1 Form of Representative's Warrants to Purchase Units(1)
4.2 Form of Class A Common Stock Purchase Warrant Certificate(1)
4.3 Specimen copy of stock certificate for Common Stock, $.01 par
value(1)
5 Opinion of Brenman Bromberg & Tenenbaum, P.C.*
10.1 Lease Agreement, dated April 15, 1992, and Lease Addendums, dated
April 8, 1992 and October 21, 1994(1)
10.2 Lease Agreement, dated July 19, 1995, and Lease Addendum(1)
10.3 Employment Agreement, dated May 24, 1995, between the Registrant
and Michael I. Ruxin, as amended July 8, 1995, August 1, 1995,
September 21, 1995 and July 15, 1996(1)
10.4 Employment Agreement, dated May 24, 1995, between the Registrant
and William J. Collard, as amended July 22, 1996(1)
10.5 Employment Agreement, dated June 28, 1995, between the Registrant
and Joseph F. Dudziak(1)
10.6 Employment Agreement, dated February 8, 1996, between the
Registrant and L. E. "Gene" Mundt(1)
10.7 Amended and Restated Stock Option Plan, as amended on May 5,
1995, May 29, 1996 and December 11, 1996(1)
II-19
<PAGE>
10.7(A) Amendment, dated March 31, 1997, to the Amended and Restated
Stock Option Plan(2)
10.8 Voting Agreement, dated May 23, 1995(1)
10.9 Shareholders' Agreement dated August 16, 1991, as amended on May
5, 1995 September 1996, June 24, 1996, July 25, 1996, Consent and
Waiver, dated July 12, 1996, and Rescission of Shareholder's
Agreement, dated June 22, 1996(1)
10.10 Agreement dated April 8, 1996, between the Registrant and LMU &
Company, and Stock Purchase Option, dated April 8, 1996(1)
10.11 Form of Drug Testing Service Contract(1)
10.12 Form of License Agreements(1)
10.13 Warrant Agreement, dated February 11, 1997, between Global Med
Technologies, Inc. and American Securities Transfer & Trust,
Inc.(1)
10.14 Exclusivity and Software Development Agreement, dated November
14, 1996, between and among Global Med Technologies, Inc. and
Ortho Diagnostic Systems Inc.(1)
10.15 Amendment, dated November 14, 1996, to Agreement dated April 8,
1996, between the Registrant and LMU & Company, and Stock
Purchase Option, dated April 8, 1996(1)
10.16 Amendment, dated January 14, 1997, to Agreement dated April 8,
1996, between the Registrant and LMU & Company, and Stock
Purchase Option, dated April 8, 1996(1)
10.17 Interim Management Agreement, dated July 7, 1997, between the
Registrant and National Medical Review Offices, Inc.(1)
10.18 Asset Purchase Agreement, dated August 18, 1997, between the
Registrant and National Medical Review Offices, Inc.(1)
10.19 Third Amendment to Exclusivity and Software Development
Agreement, dated September 17, 1997 between Global Med
Technologies, Inc. and Ortho Diagnostic Systems, Inc.(1)
10.20 Second Amended and Restated Stock Option Plan, as amended October
3, 1997 and December 2, 1997(3)
10.21 Fourth Amendment to Exclusivity and Software Development
Agreement, dated December 22, 1997 between Global Med
Technologies, Inc. and Ortho Diagnostic Systems, Inc.(4)
II-20
<PAGE>
10.22 Development Agreement, dated July 12, 1996 between Global Med
Technologies, Inc. and The Institute for Transfusion Medicine,
dated July 12, 1996, as amended January 12, 1998(4)
10.23 Loan Commitment, dated April 14, 1998, between Heng Fung Finance
Company Limited and the Company, as amended on April 16, 1998(4)
10.24 Loan Commitment, dated April 14, 1998, between Fronteer Capital,
Inc. and the Company, as amended on April 16, 1998(4)
10.25 Amendment to Loan Commitment, dated April 16, 1998, between Heng
Fung Finance Company Limited and the Company(4)
10.26 Amendment to Loan Commitment, dated April 16, 1998, between
Fronteer Capital, Inc. and the Company(4)
10.27 Second Amendment to Loan Commitments, dated April 20, 1998
between the Company, Heng Fung Finance Company Limited and
Fronteer Capital, Inc.(4)
21 Subsidiaries of the Company(1)
23.1 Consent of Independent Auditors
23.2 Consent of Brenman Brombert & Tenenbaum, P.C.*
27.1 Financial Data Schedule for December 31, 1997(4)
27.2 Restated Financial Data Schedule for December 31, 1996(4)
99 Proxy and Right of First Refusal Agreement, dated November 14,
1996, between and among Ortho Diagnostic Systems Inc. and Michael
I. Ruxin, William J. Collard, Gerald F. Willman, Jr., Lori J.
Willman, Timothy J. Pellegrini and Gordon Segal.(1)
_______________
* To be filed by amendment
(1) The documents identified are incorporated by reference from the
Company's Registration Statement on Form SB-2 (No. 333-11723).
(2) Incorporated by reference from the Company's Registration Statement on
Form S-8 (No. 333-28155)
(3) Incorporated by reference from the Company's Registration Statement on
Form S-8 (No. 333-45031).
(4) Incorporated by reference from the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997.
Item 28. Undertakings
------------
The undersigned Registrant will:
(a)(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3)
II-21
<PAGE>
of the Securities Act; (ii) reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information in the registration statement; and (iii) include any additional
or changed material information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
The undersigned Registrant will provide to the Underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters
to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant 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 Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant 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 Registrant 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
Securities Act and will be governed by the final adjudication of such
issue.
II-22
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City and County of Denver, State of
Colorado on May 14, 1998.
GLOBAL MED TECHNOLOGIES, INC.
By: /s/ Michael I. Ruxin
------------------------------------
Michael I. Ruxin, Chairman
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Michael I. Ruxin Chairman of the Board May 14, 1998
- --------------------------- of Directors, Principal
Michael I. Ruxin Executive Officer and
Director
/s/ Thomas F. Marcinek President and Chief May 14, 1998
- --------------------------- Operating Officer
Thomas F. Marcinek
/s/ William J. Collard Secretary/Treasurer and May 14, 1998
- --------------------------- Director
William J. Collard
/s/ Gerald F. Willman, Jr. Chief Financial Officer May 14, 1998
- ---------------------------
Gerald F. Willman, Jr.
/s/ Gordon Segal Director May 14, 1998
- ---------------------------
Gordon Segal
II-23
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated April 10, 1998, except for Note 1 as to
which the date is April 20, 1998, in the Registration Statement (Form SB-2)
and related Prospectus of Global Med Technologies, Inc. for the registration
of 12,000,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
-------------------------------
Ernst & Young LLP
Denver, Colorado
May 11, 1998
