<PAGE>
PROSPECTUS
Filed pursuant to Rule 424(b)(1)
File No. 333-20187
UNIVEC, INC.
1,500,000 Shares of Common Stock and
2,250,000 Redeemable Common Stock Purchase Warrants
This Prospectus relates to an offering (the "Offering") by UNIVEC, Inc.
(the "Company") of 1,500,000 shares of common stock, par value $.001 per share
(the "Common Stock"), and 2,250,000 redeemable common stock purchase warrants
(the "Warrants"). The shares of Common Stock and the Warrants offered hereby may
be purchased separately and will be transferable separately after issuance. The
Common Stock is being offered at $3.50 per share and the Warrants at $.10 per
Warrant.
Each Warrant entitles the registered holder thereof to purchase one share
of Common Stock at an exercise price of $4.50 per share, subject to adjustment
in certain events, at any time during the period commencing April 24, 1999 and
expiring on April 23, 2002. The Warrants are subject to redemption by the
Company at $.05 per Warrant at any time commencing April 24, 1999 (with the
prior written consent of Maidstone Financial, Inc., the representative of the
Underwriters (the "Representative")), on not less than 30 days prior written
notice to the holders of the Warrants, provided the closing bid price of the
Common Stock has been at least $8.00 for 20 consecutive trading days ending on
the third day prior to the date on which the Company gives notice of redemption.
The Warrants will be exercisable until the close of business on the day
immediately preceding the date fixed for redemption. The Common Stock and the
Warrants have been approved for quotation, subject to notice of issuance, on The
Nasdaq SmallCap Market under the trading symbols "UNVC" and "UNVCW",
respectively. See "Description of Securities -- Warrants."
Prior to the Offering, there has been no public market for the Common Stock
or Warrants, and there can be no assurance that any such market for the Common
Stock or Warrants will develop after the closing of the Offering, or that, if
developed, it will be sustained. The offering prices of the Common Stock and
Warrants and the terms of the Warrants were established by negotiations between
the Company and the Representative and do not necessarily bear any direct
relationship to the Company's assets, earnings, book value per share or other
generally accepted criteria of value.
The Company has registered for resale under a separate prospectus (the
"Selling Securityholder Prospectus") as part of the Registration Statement
warrants to purchase 1,750,000 shares of Common Stock (having terms identical to
the warrants offered hereby) and the shares of Common Stock issuable upon
exercise thereof, and 33,436 shares of Common Stock issuable upon exercise of
options. The warrants were issued in connection with a bridge financing
completed by the Company in December 1996. The National Association of
Securities Dealers, Inc. (the "NASD") has rendered an opinion only with regard
to the underwriting terms and arrangements in connection with the primary
offering by the Company of 1,500,000 shares of Common Stock and 2,250,000
Warrants. Therefore, no NASD member may participate in the offering by the
selling securityholders named in the Selling Securityholder Prospectus (the
"Selling Securityholders") of 1,750,000 warrants, the shares of Common Stock
issuable upon exercise of those warrants, or 33,436 shares of Common Stock
issuable upon exercise of options, without first submitting the terms and
arrangements to the NASD for review and approval. See "Underwriting." Each of
the Selling Securityholders has entered into an agreement not to sell or
otherwise dispose of any securities of the Company prior to April 23, 1999,
without the prior written consent of the Representative, which consent may not
be granted prior to April 24, 1998. The Company will not receive any proceeds
from the sale of the warrants or shares of Common Stock by the Selling
Securityholders, but will receive the exercise price of the warrants and options
exercised. See "Selling Securityholder Offering."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY INVESTORS WHO CAN BEAR THE RISK OF LOSS OF THEIR ENTIRE INVESTMENT
SHOULD INVEST. FOR A DESCRIPTION OF CERTAIN RISKS REGARDING AN INVESTMENT IN THE
COMPANY AND IMMEDIATE SUBSTANTIAL DILUTION, SEE "RISK FACTORS" COMMENCING ON
PAGE 9 AND "DILUTION" AT PAGE 22.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMIS-
SION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------
Per Share ......... $3.50 $.315 $3.185
- -------------------------------------------------------------------------------
Per Warrant ...... $.10 $.009 $.091
- -------------------------------------------------------------------------------
Total(3) ......... $5,475,000 $492,750 $4,982,250
===============================================================================
(footnotes appear on page 3)
----------------
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
MAIDSTONE FINANCIAL, INC. HGI INCORPORATED
----------------
The date of this Prospectus is April 24, 1997.
<PAGE>
[INSERT PICTURES]
ASPIRATING VS. NON-ASPIRATING:
With the aspirating syringe, the UNIVEC locking clip does not limit the user's
ability to withdraw and depress ("to aspirate") the plunger until the user locks
the syringe voluntarily.
With the non-aspirating syringe, the UNIVEC locking clip limits the user's
ability to aspirate the plunger and locks the syringe passively.
VACCINATION
NON-ASPIRATING
INSULIN
ASPIRATING
WITH NEEDLE
TUBERCULIN
NON-ASPIRATING
WITH NEEDLE
TUBERCULIN
NON-ASPIRATING
WITHOUT NEEDLE
TUBERCULIN
ASPIRATING
WITH NEEDLE
TUBERCULIN
ASPIRATING
WITHOUT NEEDLE
---------------------------
UNIVEC(R), and Rx Ultra(R) are registered trademarks of the Company. All
other trademarks appearing in this Prospectus are the property of their
respective holders.
2
<PAGE>
(1) Does not include additional compensation consisting of (i) a non-accountable
expense allowance payable to the Representative equal to 3% of the gross
proceeds of the Offering, of which $55,000 has been paid by the Company to
date, (ii) warrants (the "Underwriters' Warrants") entitling the
Underwriters to purchase an amount equal to 10% of the number of shares of
Common Stock and Warrants offered hereby (excluding the Over-Allotment
Option, as defined in footnote 3, below) for a purchase price of 165% of the
initial public offering price thereof, and (iii) a financial advisory
agreement with the Representative for 24 months commencing on the date of
the closing of the Offering for a fee of $4,416.67 per month, or an
aggregate of $106,000, payable in its entirety at the closing of the
Offering. In addition, the Company has agreed to pay the Representative,
under certain circumstances, a warrant solicitation fee of 8% of the
exercise price of each Warrant exercised and to indemnify the Underwriters
against certain civil liabilities, including those arising under the
Securities Act. See "Underwriting."
(2) After deducting discounts and commissions payable to the Underwriters, but
before payment of the Representative's non-accountable expense allowance
($164,250, or $188,887 if the Over-Allotment Option is exercised in full),
the financial advisory fee ($106,000) and the other expenses of the Offering
(estimated at $427,750) payable by the Company. See "Underwriting."
(3) The Company has granted the Underwriters an option, exercisable for a period
of 45 days after the closing of the Offering, to purchase up to an
additional 15% of the shares of Common Stock and/or Warrants offered hereby,
upon the same terms and conditions solely for the purpose of covering
over-allotments, if any (the "Over-Allotment Option"). If the Over-Allotment
Option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $6,296,250,
$566,662 and $5,729,588, respectively. See "Underwriting."
The Common Stock and Warrants are being offered by the Underwriters on a
"firm commitment" basis, subject to prior sale, when, as and if delivered to the
Underwriters and subject to certain conditions. Subject to the provisions of the
underwriting agreement between the Underwriters and the Company, the
Underwriters reserve the right to withdraw, cancel or modify the Offering and to
reject any order in whole or in part. It is expected that delivery of
certificates will be made against payment therefor at the office of the
Representative, 101 East 52nd Street, New York, New York 10022, on or about
May 1, 1997.
---------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK OR WARRANTS TO
STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK OR WARRANTS TO COVER
SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK OR WARRANTS MAINTAINED BY
THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
3
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act with respect to the
securities offered hereby (the "Registration Statement"). This Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits thereto as permitted by the Rules and Regulations of the Commission.
For further information with respect to the Company and such securities,
reference is made to the Registration Statement and to the exhibits filed
therewith. Statements contained in this Prospectus as to the contents of any
contracts or other documents referred to herein are not necessarily complete and
where such contract or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions of
such exhibit to which reference is made for a full statement of the provisions
thereof. The Registration Statement, including exhibits filed therewith, may be
inspected, without charge, at the principal office of the Commission located at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of all or any
part of the Registration Statement (including the exhibits thereto) also may be
obtained from the Public Reference Section of the Commission at its principal
office in Washington, D.C., at the Commission's prescribed rates. Electronic
registration statements made through the Electronic Data Gathering Analysis and
Retrieval system are publicly available through the Commission's web site at
http://www.sec.gov.
On the date of the Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports, proxy and
information statements and other information with the Securities and Exchange
Commission. Such reports, proxy and information statements and other information
can be inspected and copied at the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of such material also may be obtained from the Public Reference Section
of the Commission at prescribed rates. The Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically. The Company
intends to furnish its stockholders with annual reports containing audited
financial statements and such other reports as the Company deems appropriate or
as may be required by law.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus. Unless otherwise indicated or the context otherwise requires, all
references herein to the Company or UNIVEC include UNIVEC, Inc., a New York
corporation ("UNIVEC-NY"), which was merged into the Company on October 10,
1996, and Rx Ultra, Inc., a wholly owned subsidiary of UNIVEC. Except as
otherwise stated, all information assumes no exercise of the Over-Allotment
Option.
The Company
UNIVEC, Inc. (the "Company" or "UNIVEC") develops and markets safety
hypodermic syringes designed to protect the healthcare worker and patient
against cross-infection. The Company also sells and intends to develop other
hypodermic devices. In January 1997, the Company commenced production and sales
of its 1cc locking clip syringes, which are designed to make accidental or
deliberate reuse difficult. The accidental or deliberate reuse of syringes is a
frequent cause of the spread of the human immunodeficiency ("HIV") and hepatitis
viruses, as well as other blood-borne pathogens. The Company has received 510(k)
clearance from the U.S. Food and Drug Administration (the "FDA") to market its
locking clip syringes in the United States. In the first two months of 1997, the
Company sold approximately 1,777,000 locking clip syringes resulting in sales of
approximately $159,000.
Public health officials have encouraged the medical industry to develop
safer, more difficult to reuse, syringes, to prevent the spread of blood-borne
pathogens, such as HIV and hepatitis. In 1995, the House of Delegates --
American Medical Association requested "manufacturers of disposable hypodermic
needles and syringes to adopt designs to prevent reuse and to include in the
packaging clear directions for their correct disposal." In late 1995, UNICEF
recommended "the use of auto-destruct syringes instead of disposable, single use
syringes in order to avoid the hazards of unsafe injection practices." In 1996,
Brazil adopted a law requiring disposable syringes manufactured or marketed in
that country to include a safety device to prevent its reuse. During 1996, New
York State enacted legislation authorizing a limited number of pilot projects to
test the practicality and effectiveness of difficult to reuse syringes. Such
pilot tests are to be conducted, subject to funding, in state-operated
facilities, such as prisons, hospitals, youth detention facilities and
development centers.
The Company believes that its 1cc difficult to reuse syringes are more
effective than competitive syringes and that they are competitively priced. The
Company also believes that it is the only company that markets a difficult to
reuse syringe with a 1cc barrel, which is ideal for dispensing .05cc to .95cc
dosages of medicine (e.g., allergy, immunization and insulin medicines). It is
more difficult to deliver .05cc to .95cc dosages accurately with a syringe
barrel that is greater than 1cc. The Company does not know of any other company
that offers an aspirating syringe that can be locked. Healthcare workers need
aspirating syringes to mix medications in the syringe barrel and inject
medications intravenously. Furthermore, the Company believes that aspirating
syringes are preferred by diabetes patients and needle-exchange programs.
The Company's syringes will be assembled primarily by Harmac Medical
Products, Inc. ("Harmac"), one of the largest independent, privately-owned
contract manufacturers of disposable medical products in the United States,
using assembly and packaging equipment supplied by the Company. Sherwood Davis &
Geck ("Sherwood"), a subsidiary of American Home Products, will supply most of
the components for the syringes assembled by Harmac. Some of the Company's
syringes and its proprietary aspirating plunger will be manufactured by
INSERPOR, a contract manufacturer in Portugal.
The Company's initial marketing efforts will be directed primarily to
UNICEF, the World Health Organization ("WHO") and public hospitals and health
facilities in New York. The Company also intends to market its locking clip
syringes to (i) governments of developing countries, (ii) private hospitals and
health facilities in New York, New Jersey and Connecticut, and (iii) retail
distributors in the United States.
5
<PAGE>
The Company also plans to license its patents and proprietary manufacturing
processes relating to its locking clip and other syringe designs to established
medical device manufacturers. To stimulate demand for its safety syringes, the
Company plans to initiate promotional and educational campaigns directed at (i)
public health officers and other government officials responsible for public
health policies, (ii) doctors and administrators of healthcare facilities
responsible for treatment of HIV-AIDS patients, and (iii) liability insurance
companies. The Company plans to enter into arrangements with independent sales
agents and distributors in targeted markets and to hire a marketing director
following the completion of the Offering.
The Company is a Delaware corporation, incorporated on October 7, 1996, and
the successor by merger to UNIVEC, Inc., a New York corporation, incorporated on
August 18, 1992. The executive officers of the Company are located at 999
Franklin Avenue, Garden City, New York 11530 (telephone number (516) 294-1000).
The Offering
Securities Offered........ 1,500,000 shares of common stock, $0.001 par value
per share (the "Common Stock"), and 2,250,000
redeemable common stock purchase warrants (the
"Warrants"). Each Warrant entitles the holder
thereof to purchase one share of Common Stock at an
exercise price of $4.50 per share, subject to
adjustment in certain events. The shares of Common
Stock and the Warrants are separately tradeable and
transferable upon issuance. See "Description of
Securities" and "Underwriting."
Offering Price............. $3.50 per share of Common Stock and $.10 per
Warrant.
Terms of Warrants:
Exercise price............ $4.50 per share, subject to adjustment in certain
events. See "Description of Securities -- Warrants."
Exercise period ......... Any time during the period commencing April 24, 1999
and ending April 23, 2002.
Redemption............... Redeemable by the Company, with the prior written
consent of the Representative, at a price of $.05
per Warrant upon not less than 30 days prior written
notice to the holders of the Warrants at any time
commencing April 24, 1999, provided the closing bid
price of the Common Stock has been at least $8.00
for 20 consecutive trading days ending on the third
day prior to the date upon which the Company gives
notice of redemption. See "Description of Securities
-- Warrants."
Common Stock Outstanding:
Prior to the Offering..... 1,082,287(1) shares of Common Stock
After the Offering........ 2,621,054(2) shares of Common Stock
Warrants Outstanding:
Prior to the Offering..... 1,750,000 Warrants(3)
After the Offering........ 4,000,000 Warrants
Use of Proceeds............ The net proceeds of the Offering, aggregating
approximately $4,284,250, will be used (1) for the
purchase of equipment, (2) for marketing, promotion
and public relations, (3) for product development,
(4) for payment of promissory notes issued in
connection with
6
<PAGE>
a bridge financing completed in December 1996 (the
"Bridge Notes") and a demand promissory note issued
in December 1995, (5) for management salaries and
(6) for working capital and general corporate
purposes. See "Use of Proceeds."
Risk Factors............ The securities offered hereby involve a high degree
of risk and immediate substantial dilution to new
investors. Only investors who can bear the risk of
their entire investment should invest. See "Risk
Factors" and "Dilution."
Nasdaq SmallCap Market
Symbols................. Common Stock -- UNVC; Warrants -- UNVCW
- ------------
(1) Does not include (i) 3,750,042 shares reserved for issuance upon exercise of
outstanding options, at an exercise price of $3.50, expiring at various
dates from February 22, 1999 through April 11, 2007, (ii) 1,750,000 shares
issuable upon exercise of warrants ("Bridge Warrants") issued in connection
with a bridge financing completed in December 1996 (the "Bridge Financing"),
which warrants will be automatically converted into warrants having terms
identical to the Warrants offered hereby on the date of the Prospectus,
(iii) approximately 34,397 shares of Common Stock to be issued to a director
of the Company in exchange for the cancellation of amounts due to him
($120,390 as of March 31, 1997) concurrently with consummation of the sale
of the shares of Common Stock and Warrants offered hereby (the "Closing"),
(iv) 998,706 shares reserved for issuance upon exercise of options which may
be granted in the future pursuant to the Company's stock option plan, and
(v) 426,440 shares reserved for issuance upon conversion of the Company's
Series A 8% Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock"). See "Certain Transactions," "Management -- Stock Option Plan" and
"Description of Securities -- Series A Preferred Stock."
(2) Does not include (i) 3,745,672 shares reserved for issuance upon exercise of
outstanding options, at an exercise price of $3.50, expiring at various
dates from February 22, 1999 through April 11, 2007, (ii) 4,000,000 shares
issuable upon exercise of the Warrants and the warrants to be issued to
holders of Bridge Warrants upon the automatic conversion of the Bridge
Warrants on the date of the Prospectus, (iii) 998,706 shares reserved for
issuance upon exercise of options which may be granted in the future
pursuant to the Company's stock option plan, and (iv) 426,440 shares
reserved for issuance upon conversion of the Series A Preferred Stock.
Includes (i) approximately 34,397 shares of Common Stock to be issued to a
director of the Company concurrently with the Closing in exchange for the
cancellation of amounts due to him ($120,390 as of March 31, 1997) and (ii)
4,370 shares to be issued to an officer of the Company concurrently with the
Closing upon exercise of options. See "Certain Transactions," "Management --
Stock Option Plan" and "Description of Securities -- Series A Preferred
Stock."
(3) Represents the Bridge Warrants, which will convert automatically into
warrants having terms identical to the Warrants offered hereby on the date
of the Prospectus.
7
<PAGE>
Summary of Consolidated Financial Information
The summary consolidated financial information set forth below is derived
from and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements, including the notes thereto, appearing
elsewhere herein.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------
1995 1996
------------- ---------------
<S> <C> <C>
Sales ................................................... $1,106,930 $ 461,131
Gross profit ............................................. 90,400 114,373
Net loss ................................................ (946,014) (1,440,771)
Historical and pro forma net loss per common share ...... ($0.89) ($1.36)
Historical and pro forma weighted average number of com-
mon and common equivalent shares outstanding ............ 1,059,001 1,059,299
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------
Actual As Adjusted (1)
--------------- ---------------------
<S> <C> <C>
Working capital (deficit) ............ ($1,066,521) $3,203,780(2)
Total assets ........................ 2,463,589 4,823,598(3)
Accumulated deficit .................. (4,253,138) (2,447,145)(4)
Stockholders' equity (deficit) ...... (1,885,138) 2,494,005(5)
</TABLE>
- ------------
(1) Gives effect to the issuance and sale of the 1,500,000 shares of Common
Stock and 2,250,000 Warrants in the Offering and the application of the
estimated net proceeds thereof.
(2) Gives effect to (i) the payment of $15,949 by the Company for federal and
state withholding and payroll taxes incurred by an officer of the Company,
upon exercise of stock options; and (ii) the cancellation of $2,000 accrued
interest in respect of notes payable to stockholders in exchange for 2
shares of Series A Preferred Stock.
(3) Gives effect to (i) a deduction for the payment of $15,949 by the Company
for federal and state withholding and payroll taxes incurred by an officer
of the Company, upon exercise of stock options; and (ii) the receipt of net
proceeds of $4,284,250 from the issuance and sale of the 1,500,000 shares of
Common Stock and 2,250,000 Warrants in the Offering.
(4) Gives effect to (i) the reclassification of $2,386,785 of S corporation
undistributed losses to paid-in capital; and (ii) the write-off of adjusted
debt financing costs of $580,792 associated with the Bridge Financing
(deferred financing costs of $783,292 as of December 31, 1996 have been
reduced by $202,500 as a result of the surrender of 750,000 Bridge Warrants
to the Company for cancellation without consideration).
(5) Gives effect to (i) the issuance of an aggregate of 650 shares of Series A
Preferred Stock subsequent to December 31, 1996 in exchange for the
cancellation of approximately $650,000 due to certain stockholders and
affiliates of the Company; (ii) the issuance of approximately 34,397 shares
of Common Stock concurrently with the Closing in exchange for the
cancellation of amounts due to a director of the Company ($120,390 as of
March 31, 1997); (iii) the issuance of an aggregate of 4,370 shares of
Common Stock upon exercise of options by an officer of the Company, at an
exercise price of $3.50 per share, in exchange for the cancellation of
accrued compensation ($31,244); and (iv) the write-off of adjusted debt
financing costs of $580,792 associated with the Bridge Financing (deferred
financing costs of $783,292 as of December 31, 1996 have been reduced by
$202,500 as a result of the surrender of 750,000 Bridge Warrants to the
Company for cancellation without consideration).
8
<PAGE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk, including but not limited to the risk factors described below. Each
prospective investor should carefully consider the following risk factors before
making an investment decision.
1. Continuing Losses; Accumulated Deficit; Working Capital Deficit. Since
inception, the Company has experienced losses, including a net loss of
approximately $1,441,000 (on sales of approximately $461,000) for the year ended
December 31, 1996, as compared to a net loss of approximately $946,000 (on sales
of approximately $1,107,000) for the year ended December 31, 1995. The Company
expects to continue to incur operating losses until such time, if ever, as it
can generate significant sales of its locking clip syringes and reduce the cost
of sales of its locking clip syringes on a per unit basis so that it can realize
adequate gross profits to cover overhead expenses. There can be no assurance
that the Company will ever operate profitably. As of December 31, 1996, the
Company had an accumulated deficit of approximately $4,253,000 and a working
capital deficit of approximately $1,067,000. The Company's ability to operate
profitably depends upon market acceptance of its locking clip syringes, the
development of an effective sales and marketing organization, the development of
new products, and improvements to existing products and manufacturing processes.
There can be no assurance that the Company's locking clip syringes will achieve
a level of market acceptance in foreign or domestic markets to generate
sufficient revenues to become profitable. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements, including the notes thereto, appearing
elsewhere herein.
2. Ability to Continue as a "Going Concern"; Qualified Report of
Independent Accountants. The Company's consolidated financial statements for the
year ended December 31, 1996, indicate there is substantial doubt about the
Company's ability to continue as a going concern due to the Company's need to
generate cash from operations and obtain additional financing. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Report of Independent Accountants" on the Company's consolidated financial
statements appearing at page F-2 hereof.
3. Limited Operating History. Although the Company commenced operations in
August 1992, its operations have consisted primarily of the design of its
patented locking clip and plunger, the design of the manufacturing processes and
equipment for production of the locking clip syringe, the hiring of key
personnel, formulation of a marketing plan for the sale of its syringes, and the
negotiation of production and supply agreements with contract manufacturers and
suppliers of components to be used in the production of its syringes.
Accordingly, the Company has a limited operating history upon which an
evaluation of its business and prospects can be based. An investment in the
securities of the Company is subject to all of the risks involved in a newly
established business venture. Potential investors should be aware of the
problems, delays, expenses and difficulties encountered by companies at this
early stage of operations, many of which may be beyond the Company's control,
including but not limited to commencement of production, marketing and product
introduction, competition, market acceptance of the Company's difficult to reuse
syringes, and unanticipated problems and additional costs relating to the
development and testing of products. The Company's officers have limited
experience in the production and sale of medical devices. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Risk
Factors -- Limited Experience of Management in the Production and Sale of
Medical Devices" and "Management."
4. Ability to Manage Growth. The Company contemplates a rapid expansion of
its business. If the Company were to experience significant growth in the
future, such growth would likely result in new and increased responsibilities
for management personnel and place significant strain upon the Company's
management, operating and financial systems and resources. To accommodate such
growth and compete effectively, the Company must continue to implement and
improve its operational, financial, management and information systems,
procedures or controls, and to expand, train and manage its personnel. 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, management and
information systems, procedures or controls or to expand, train or manage
employees, could materially and adversely affect the Company's business,
financial condition and results of operations. See "Use of Proceeds," "Risk
Factors -- Dependence on Management," "Business -- Employees" and "Management --
Directors, Executive Officers and Key Employees."
9
<PAGE>
5. Government Regulation. The manufacture and distribution of medical
devices are subject to extensive regulation by the FDA and, in some instances,
by foreign and state governments. Approval by the FDA and foreign government
authorities is unpredictable and uncertain, and no assurance can be given that
the necessary approvals or clearances for the Company's products will be granted
on a timely basis or at all. Delays in receipt of, or a failure to receive, such
approvals or clearances, or the loss of any previously received approvals or
clearances, could have a materially adverse effect on the business, financial
condition and results of operations of the Company. Furthermore, approvals that
have been or may be granted are subject to continual review, and later discovery
of previously unknown problems may result in product labeling restrictions or
withdrawal of the product from the market. Moreover, changes in existing
requirements or adoption of new requirements or policies could adversely affect
the ability of the Company to comply with regulatory requirements. In addition,
there can be no assurance that the Company will not be required to incur
significant costs to comply with applicable laws and regulations in the future.
Failure to comply with applicable laws or regulatory requirements could have a
materially adverse effect on the Company's business, financial position and
results of operations. See "Business -- Government Regulation."
FDA and State Regulation. Pursuant to the Federal Food, Drug, and Cosmetic
Act, as amended, and the regulations promulgated thereunder (collectively, the
"FDC Act"), the FDA regulates the clinical testing, manufacture, labeling, sale,
distribution and promotion of medical devices. Before a new device can be
introduced into the market, a manufacturer must obtain FDA permission to market
through either the 510(k) pre-market notification process or the costlier,
lengthier and less certain pre-market approval ("PMA") application process. The
FDA has granted the Company 510(k) clearance to market its 1cc locking clip
syringe, which has been classified as a Class II device under the FDC Act, and
accordingly, the Company may market and sell its 1cc locking clip syringe in the
United States, subject to compliance with other applicable FDA regulatory
requirements. As a Class II device, performance standards may be developed for
the 1cc locking clip syringe which the product would then be required to meet.
Failure to meet those standards would require the Company to discontinue the
marketing of the product. Furthermore, manufacturers of medical devices are
subject to recordkeeping requirements and required to report adverse experiences
relating to the use of the device. Device manufacturers also are required to
register their establishments and list their devices with the FDA and with
certain state agencies and are subject to periodic inspections by the FDA and
certain state agencies. The FDC Act requires devices to be manufactured in
accordance with good manufacturing practices ("GMP") regulations, which impose
certain procedural and documentation requirements upon the Company with respect
to manufacturing and quality assurance activities. The FDA conducts periodic
audits and surveillance of the manufacturing, sterilizing and packaging
facilities of medical device manufacturers to determine compliance with GMP
requirements. The failure of a medical device manufacturer to be able to show in
the audit or post-market surveillance that it has adequately complied with GMP
requirements can result in penalties or enforcement proceedings being imposed on
the manufacturer. Harmac's facilities will be subject to extensive audits in the
future, pursuant to standard FDA procedure. No assurance can be given that when
Harmac is audited that it will be found to be in compliance with GMP
requirements, or that if it is not found in compliance, what penalties,
enforcement procedures or compliance effort will be levied on or required of
Harmac and/or the Company. Recently adopted GMP requirements, including those
pertaining to design control, are likely to increase the cost of GMP compliance.
Noncompliance with applicable FDA requirements, including GMP regulations, can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant pre-market clearance or pre-market approval for devices,
withdrawal of marketing approvals, and criminal prosecution. The FDA also has
the authority to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
Foreign Regulations. The introduction of the Company's products in foreign
markets will subject the Company to foreign regulatory clearances which may
impose additional substantive costs and burdens. The Company's products are
required to satisfy international manufacturing standards required by the
International Standards Organization ("ISO") for sale in certain foreign
countries. Although Harmac expects to achieve ISO 9001 certification by the end
of the second quarter of 1997, until Harmac obtains ISO 9001 certification, the
Company will have difficulty selling to some export accounts, particularly in
Europe. International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from country
to country. Many countries also impose product standards, packaging
requirements, labeling requirements and import restrictions on devices. In
addition, each country has its own tariff regulations, duties and tax
requirements.
10
<PAGE>
6. Product Acceptance; Demand for Locking Clip Syringes. The Company
expects to derive a significant portion of its revenues from sales of locking
clip syringes and/or licensing of its intellectual property. Despite increased
public awareness of the risks associated with conventional disposable syringes,
of the major syringe manufacturers only Becton-Dickinson and Company
("Becton-Dickinson") is manufacturing a difficult to reuse syringe for sale to
UNICEF and WHO. Accordingly, the Company's future success and financial
performance will depend almost entirely on its ability to successfully market
its locking clip syringes. There can be no assurance that the Company's
marketing efforts will be successful or that sales of the Company's difficult to
reuse syringes will generate sufficient revenues for the Company to become
profitable. Export sales, particularly in Europe, may be adversely affected
until the Company's contract manufacturers are able to manufacture the Company's
syringes in accordance with manufacturing standards required by the
International Standards Organization. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
7. Licensing. The Company intends to license its patents and proprietary
manufacturing processes relating to its locking clip and other syringe designs
to established medical device manufacturers worldwide. Although the Company has
granted Sherwood an option for a non-exclusive license to manufacture and sell
the Company's locking clip syringe in the United States, there can be no
assurance that Sherwood will exercise the option, that others will enter into
license arrangements with the Company, or that the Company will be successful in
its licensing efforts. See "Business."
8. Dependence on Certain Customers. The Company's initial marketing efforts
have been directed, to a significant extent, to relief agencies, including
UNICEF and WHO, which administered almost one billion injections to women and
children through immunization programs in developing countries in 1995. The
Company does not have a legally binding commitment from UNICEF or WHO and there
can be no assurance as to the number of locking clip syringes which UNICEF or
WHO will purchase from the Company. The failure of UNICEF, WHO or other relief
agencies to purchase the Company's locking clip syringes in substantial
quantities would have a materially adverse effect on the Company's business,
financial condition and results of operations. See "Business."
Furthermore, in 1996, New York State enacted legislation authorizing a
limited number of pilot projects to test the practicality and effectiveness of
difficult to reuse syringes. Such pilot tests are to be conducted, subject to
funding, in state-operated facilities, such as prisons, hospitals, youth
detention facilities, and development centers. New York State officials have
expressed an intent to buy the Company's syringes. However, the Company does not
have a legally binding commitment from purchasing agents for any of the New York
state-operated facilities, and there can be no assurance as to the number of
locking syringes which New York state-operated facilities will purchase from
the Company, if any.
9. Dependence on Certain Suppliers. The Company has entered into a letter
of understanding with INSERPOR, a Portuguese syringe manufacturer, for
production of its proprietary plungers, which satisfy tolerance limits for
assembly of its aspirating and non-aspirating syringes. If INSERPOR is unable or
not willing to supply sufficient quantities of the Company's proprietary
plungers, which satisfy such tolerance limits, the Company will be required to
obtain alternative sources of supply. The Company has contracted with Sherwood
to mold the non-aspirating plunger, and it has commenced discussions with Harmac
to mold the aspirating plunger; however, there can be no assurance that the
Company will be able to obtain an alternative source of supply on acceptable
terms. Furthermore, if the Company is able to obtain an alternative source of
supply, there can be no assurance that production of its locking clip syringes
will not be delayed. The Company's failure to obtain an alternate supplier for
its proprietary plunger or delays resulting from the selection of an alternate
supplier could have a materially adverse effect on the Company's business. See
"Business -- Suppliers."
The Company is dependent upon Sherwood for supplying syringe component sets
for the production of its locking clip syringes for other customers. Pursuant to
its supply agreement with the Company, Sherwood is only obligated to deliver
4,166,667 component sets per month. There can be no assurance that Sherwood will
be able to supply component sets in excess of that amount if the Company
receives orders for syringes in excess thereof, or that the Company will be able
to obtain additional component sets from alternative sources of supply on
favorable terms, if at all. Failure to obtain an adequate supply of syringes and
related components could result in the cancellation of orders and consequently,
could have a materially adverse effect on the Company's busi-
11
<PAGE>
ness. The Company also is dependent upon Sherwood to supply the Company's
proprietary plunger which satisfies tolerance limits for assembly of its
non-aspirating syringe. Sherwood has advised the Company that it anticipates
that it will be able to supply plungers which satisfy tolerance limits for
assembly of non-aspirating syringes by June 1997. Until Sherwood is able to
deliver such plungers, INSERPOR will be the sole supplier of plungers for
assembly of the Company's non-aspirating syringes. If Sherwood is unable to
supply sufficient quantities of the Company's proprietary plunger which
satisfies such tolerance limits, the Company will be required to obtain
alternative sources of supply. The Company has commenced discussions with Harmac
to mold the non-aspirating plunger; however, there can be no assurance that the
Company will be able to obtain an alternative source of supply on acceptable
terms. See "Business -- Suppliers."
10. Dependence on Certain Assemblers. The Company has entered into a
manufacturing agreement with Harmac for the assembly of the Company's locking
clip syringes. The equipment that the Company has supplied Harmac with for the
assembly of locking clip syringes is capable currently of producing 36 million
syringes per year. With further testing and certain modifications and
adjustments to the assembly equipment at Harmac, the Company expects to increase
capacity to 80 million syringes per year and to decrease its cost of sales on a
per unit basis. However, there can be no assurance that the Company will be able
to increase the production capacity at Harmac. Furthermore, there can be no
assurance that Harmac will produce syringes at costs sufficiently less than the
Company's selling prices so that gross profits are adequate to cover overhead
expenses. See "Business -- Production."
The Company has entered into a letter of understanding with INSERPOR for
the assembly of the Company's non-aspirating, locking clip syringes for WHO and
other UN-related immunization programs, as long as INSERPOR can supply the
required volume of syringes. During the first two months of 1997, INSERPOR
assembled approximately 1,777,000 locking clip syringes. INSERPOR is capable of
producing 30 million syringes per year, subject to certain modifications to
existing assembly equipment and additional equipment to subassemble the clip to
the plunger (clip assembly line). The Company expects to purchase the clip
assembly line with a portion of the net proceeds of the Offering. Currently,
INSERPOR is capable of producing only 12 million syringes per year. The Company
believes that INSERPOR will be able to increase its production capacity to 30
million syringes per year within twelve months following the completion of the
Offering. There can be no assurance that INSERPOR will produce quantities of
syringes at costs sufficiently less than the Company's selling prices so that
gross profits are adequate to cover overhead expenses. See "Business --
Production."
11. Interruptions to Production. The Company has commenced production of
clip-plunger subassemblies at Harmac's facilities, which it exports to INSERPOR
for final assembly. Although the Company expects to commence complete assembly
of its locking clip syringes at Harmac's facilities before the end of June 1997,
there can be no assurance that the commencement of production will not be
interrupted as a result of delays in obtaining supplies of components or in
complying with GMP requirements, including the attainment of acceptable quality
levels. The failure to timely produce locking clip syringes would delay receipt
of revenues and would have a materially adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors --
Dependence on Certain Suppliers" and "Business -- Production."
12. Limited Experience of Management in the Production and Sale of Medical
Services. The Company's management has had limited experience in the production
and sale of medical devices. There can be no assurance that the Company will be
able to compete successfully with the major syringe manufacturers. See "Risk
Factors -- Limited Operating History," "Risk Factors -- Competition" and
"Management."
13. Ability to Develop 3cc Syringe. The Company intends to develop 3cc
locking clip syringes for hospitals and health clinics in 1997, and anticipates
that production of the non-aspirating model will commence by 1998. In general,
hospitals and health clinics use more 3cc syringes than 1cc syringes, and may
not be willing to purchase the Company's 1cc locking clip syringes until such
time as the Company is able to offer 3cc syringes. However, there can be no
assurance that the 3cc designs selected for commercialization will be accepted
by hospitals and health clinics. Moreover, the Company has not yet selected a
product design for its aspirating model, nor has it selected a design for the
assembly equipment or an engineering firm to construct the equipment. The
Company's failure to timely select a design for an aspirating model, a design
for assembly equipment, or an engineering firm to construct such assembly
equipment could delay the production and commercial introduction of the
Company's 3cc syringe. Depending on the design selected, the Company may be
required to obtain 510(k) clearance from the FDA prior to commencing commercial
sales of its 3cc aspirating syringes in the United States. See "Business."
12
<PAGE>
14. Uncertainty Regarding Patents and Protection of Proprietary Technology;
Risk of Future Litigation. The Company's success will depend, in part, on the
strength of its patents, as well as its ability to preserve its trade secrets
and operate without infringing the proprietary rights of others. The Company's
policy is to seek protection of its proprietary position by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions and improvements that are important to the development of
its business. The Company holds three United States patents, including a patent
for its locking clip and has filed a United States patent application for its
aspirating plunger, and has filed patent applications for its locking clip in
Canada, Brazil, Mexico, certain European countries, Japan, South Korea, China,
Russia and Australia. In addition, the Company has acquired licensed rights for
United States patents on two other locking devices, which utilize different
locking apparatuses or methods than those claimed by the UNIVEC clip patents.
The Company licensed these patents to develop a 3cc locking syringe. The Company
has filed for patent protection in certain European Countries for one of these
licenses, which may be used in connection with the 3cc non-aspirating syringe
that the Company plans to develop.
There can be no assurance that pending or future applications for patents
and trademarks will mature into issued patents, or that the Company will
continue to develop its own patentable technologies. Furthermore, there can be
no assurance that any of the Company's patents or patents that may be issued in
the future will not be challenged, invalidated or circumvented in the future or
that the rights granted thereunder will provide a competitive advantage. In
addition, patent applications filed in foreign countries and patents granted in
such countries are subject to laws, rules and procedures that differ from those
in the United States. Patent protection in such countries may be different from
patent protection provided by the laws of the United States.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Accordingly, there can be no assurance that current
and potential competitors and other third parties have not filed or in the
future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or internationally.
The medical device industry in general has been characterized by
substantial competition and litigation regarding patent and other proprietary
rights. The Company intends to vigorously protect and defend its patents and
other proprietary rights relating to its proprietary technology. Litigation
alleging infringement claims against the Company (with or without merit), or
instituted by the Company to enforce patents and to protect trade secrets or
know-how owned by the Company or to determine the enforceability, scope and
validity of the proprietary rights of others, is costly and time consuming. If
any relevant claims of third-party patents are upheld as valid and enforceable
in any litigation or administrative proceedings, the Company could be prevented
from practicing the subject matter claimed in such patents, or would be required
to obtain licenses from the patent owners of each patent, or to redesign its
products or processes to avoid infringement. There can be no assurance that such
licenses would be available or, if available, would be available on terms
acceptable to the Company or that the Company would be successful in any attempt
to redesign its products or processes to avoid infringement. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling its products, which would have a materially adverse effect on the
Company's business, financial condition and results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. There can be no assurance that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology. See "Business -- Patents and Proprietary Rights" and "Risk Factors
- -- Competition."
15. Competition. The Company's principal competition is from manufacturers
of traditional disposable syringes. Becton-Dickinson, Sherwood and Terumo
Medical Corporation of Japan ("Terumo") control approximately 74%, 19% and 5%,
respectively, or a total of approximately 98%, of the worldwide syringe market,
and are substantially larger, more established and have significantly greater
financial, sales and marketing, distribution, engineering, research and
development and other resources than the Company. To the Company's knowl-
13
<PAGE>
edge, only Becton-Dickinson and Bader & Partner Medizintechnik GmbH ("Bader"), a
German machine tool manufacturer, distribute commercially a line of difficult to
reuse syringes, none of which allow for aspiration. The Bader DestroJect syringe
and the Becton-Dickinson SOLOSHOT syringe were developed originally for
WHO-UNICEF immunization programs. There can be no assurance that the major
syringe manufacturers or others will not commence production of difficult to
reuse syringes, or that the Company will be able to successfully compete in this
market. See "Business -- Difficult to Reuse Syringes" and "Business --
Competition."
16. Dependence on Third Parties for Marketing; Limited Marketing
Experience. The Company intends to sell its products primarily through sales
agents and third-party distributors and may, on a limited basis, sell products
independently. The Company has entered into a limited number of agreements with
sales agents for the sale of its products. There can be no assurance that the
Company will be able to obtain satisfactory arrangements with sales agents or
distributors or that the Company will generate substantial revenues from sales
by sales agents and distributors. See "Business -- Sales, Marketing and
Distribution."
17. Reliance on Foreign Sales. The Company believes that a significant
portion of its revenues will be derived from the sale of its locking clip
syringes in foreign markets, which will result in the Company being subject to
risks associated with foreign sales, including economic or political
instability, shipping delays, fluctuations in foreign currency exchange rates,
custom duties and export quotas and other trade restrictions, any of which could
have a materially adverse effect on the Company's business. Although the Company
intends to negotiate confirmed (irrevocable) letters of credit and to transfer
product title to the buyer when delivered to the shipper (f.o.b. warehouse),
there is no assurance that such terms will be acceptable to customers.
18. Product Liability. The manufacture and sale of medical products exposes
the Company to the risk of significant damages from product liability claims.
The Company maintains product liability insurance against product liability
claims in the amount of $5 million per occurrence and $5 million in the
aggregate. The Company also has applied for recall insurance, although there can
be no assurance that such coverage can be obtained at acceptable cost. There can
be no assurance that the coverage limits of the Company's insurance policies
will be adequate, that the Company will continue to be able to procure and
maintain such insurance coverage, that such insurance can be maintained at
acceptable costs, or that customers will be able to satisfy indemnification
claims. In addition, any successful claim against the Company in an amount
exceeding its insurance coverage could have a materially adverse effect on its
business, financial condition or results of operations.
19. Control of the Company; Ownership of Shares by Directors and Officers.
Upon completion of the Offering, officers and directors of the Company will
beneficially own in the aggregate approximately 43% of the outstanding shares of
the Company's Common Stock. Although these stockholders may or may not agree on
any particular matter that is the subject of a vote of the stockholders, these
stockholders may be effectively able to control the outcome of any issues which
may be subject to a vote of stockholders, including the election of directors,
proposals to increase the authorized capital stock, or the approval of mergers,
acquisitions, or the sale of all or substantially all of the Company's assets.
See "Security Ownership of Certain Beneficial Owners and Management."
20. Dependence on Management. The Company is dependent for the conduct of
its business on the experience, abilities and continued services of Joel
Schoenfeld, Chairman of the Board and Chief Executive Officer of the Company,
Dr. Alan H. Gold, President and a Director of the Company, David Shonfeld,
Director of Research and Development and a Director of the Company, and David
Chabut, Chief Financial Officer of the Company. The Company is dependent upon
Joel Schoenfeld for strategy, marketing and general management, Dr. Alan H. Gold
for functional definition of its products, David Shonfeld for product design to
meet functional requirements and David Chabut for financial management. Joel
Schoenfeld, David Shonfeld and David Chabut are employed by the Company pursuant
to employment agreements which expire on March 28, 2000, July 31, 1997 and
September 30, 1997, respectively. Dr. Alan H. Gold is professionally employed
by, and is the President of, the Long Island Plastic Surgical Group, and he only
works part-time with the Company. Although David Shonfeld is compensated on an
hourly basis, he currently is working on a full-time basis for the Company.
Furthermore, there is no plan of succession if one or more of the Company's
officers dies or becomes disabled. The loss of the services of Joel Schoenfeld,
Dr. Alan H. Gold, David Shonfeld or David Chabut could have a materially adverse
effect on the Company. See "Management."
14
<PAGE>
21. Broad Discretion in the Application of Net Proceeds. Approximately
$546,250, or approximately 12.8% of the net proceeds of the Offering have been
allocated to working capital and general corporate purposes. Accordingly,
management will have broad discretion with respect to that portion of the net
proceeds. See "Use of Proceeds."
22. Application of Net Proceeds to Pay Management Salaries. Approximately
$316,000, or approximately 7.3% of the net proceeds of the Offering may be used
to pay the salaries of Joel Schoenfeld, Chief Executive Officer of the Company
($192,000 per annum), and David Chabut, Chief Financial Officer of the Company
($120,000 per annum), until cash flow from operations are sufficient to pay such
salaries. See "Use of Proceeds" and "Management -- Employment Agreements."
23. Application of Net Proceeds to Pay Bridge Notes and 12 1/2% Promissory
Note. Approximately $1,125,000, or approximately 26.3% of the net proceeds of
the Offering, will be used to pay the Bridge Notes in the principal amount of
$1,000,000 issued in connection with the Bridge Financing and a 12 1/2% demand
promissory note in the principal amount of $125,000 issued to an individual
lender in December 1995. See "Use of Proceeds" and "Description of Securities --
Bridge Financing."
24. Office Lease with Related Party. Dr. Alan H. Gold, the President, a
director and principal stockholder of the Company, is the president and
stockholder of the owner of the premises occupied by the Company. See "Certain
Transactions."
25. Need for Additional Financing. Although the Company anticipates that
the net proceeds of the Offering, together with cash flow from operations, will
be sufficient to satisfy the Company's anticipated cash requirements for the 12
months following the date of the Prospectus, there can be no assurance that the
Company will not require additional financing at an earlier date. This will
depend upon the Company's ability to generate sufficient sales of its products
and the timing of required expenditures. If the Company is required to obtain
financing in the future, there can be no assurance that such financing will be
available on terms acceptable to the Company, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
26. Limitation on Director Liability. The Company's certificate of
incorporation provides that a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, with certain exceptions under Delaware law. This
may discourage stockholders from bringing suit against a director for breach of
fiduciary duty and may reduce the likelihood of derivative litigation brought by
stockholders on behalf of the Company against a director. In addition, the
Company's certificate of incorporation provides for mandatory indemnification of
directors and officers. See "Management -- Indemnification of Officers and
Directors and Limitation on Directors' Liability."
27. Absence of Dividends on Common Stock. Since inception, the Company has
not paid any cash dividends on its Common Stock and it does not anticipate
paying such dividends in the foreseeable future. The payment of dividends by the
Company is within the discretion of its Board of Directors and depends upon the
Company's earnings, capital requirements, financial condition and other factors
deemed relevant by the Board. The Company intends to retain earnings, if any, to
finance its operations. See "Dividends."
28. Dilution. Purchasers of Common Stock in the Offering will suffer
immediate dilution of $2.58 per share (or approximately 74%) in the net tangible
book value of their investment from the initial public offering price of $3.50
per share of Common Stock. See "Dilution."
29. Consideration Paid By Existing Stockholders. Officers, directors and
other existing stockholders acquired their shares of Common Stock at an average
per share price of $0.58 per share, substantially less than the initial public
offering price of $3.50 per share. Accordingly, investors in the Offering will
bear a disproportionate share of the risk of an investment in the Company. See
"Dilution."
30. Authorization and Discretionary Issuance of Preferred Stock. The
Company's Restated Certificate of Incorporation authorizes the issuance of
5,000,000 shares of "blank check" preferred stock with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could decrease the amount of earnings and assets
available for
15
<PAGE>
distribution to holders of Common Stock and adversely affect the relative voting
power or other rights of the holders of the Company's Common Stock. In the event
of issuance, the preferred stock could be used, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. Except for 2,500 shares of Series A Preferred Stock authorized for
issuance in exchange for the cancellation of amounts due to Joel Schoenfeld,
Flora Schoenfeld and two corporation's affiliated with Mr. Schoenfeld
(collectively, the "Schoenfeld Parties"), and Dr. Alan Gold, and payment of
dividends thereon in additional shares of Series A Preferred Stock, the Company
has no present intention to issue any shares of its preferred stock. However,
there can be no assurance that the Company will not issue shares of preferred
stock in the future. The Company has agreed with the Underwriters that, except
for issuances disclosed in or contemplated by this Prospectus, it will not issue
any securities, including but no limited to any shares of preferred stock, prior
to April 24, 1999, without the prior written consent of the Representative. See
"Certain Transactions" and "Description of Securities -- Preferred Stock."
31. No Assurance of Public Market; Determination of Public Offering Price;
Possible Volatility of Market Price for the Common Stock and Warrants. Prior to
the Offering, there has been no public trading market for the Common Stock or
the Warrants. Consequently, the initial public offering price of the Common
Stock and Warrants and the exercise price and other terms of the Warrants were
determined through negotiations between the Company and the Representative and
bear no relationship whatsoever to the Company's assets, book value per share,
results of operations or other generally accepted criteria of value. The
offering prices of the Common Stock and Warrants, as well as the exercise price
of the Warrants, should not be construed as indicative of their value. There can
be no assurance that an active trading market for the Common Stock and Warrants
will develop after the Offering or that, if developed, it will be sustained. As
a result, investors will be exposed to a risk of a decline in the market prices
of the Common Stock and Warrants after the Offering. The market prices of the
Common Stock and Warrants following the Offering may be highly volatile as has
been the case with the securities of many emerging companies. The Company's
operating results and various factors affecting the medical device industry may
impact the market price of the Company's securities to a significant degree. In
addition, in recent years the stock market has experienced a high level of price
and volume volatility, and market prices for the securities of many companies
have experienced wide price fluctuations not necessarily related to the
operating performance of such companies. There can be no assurance that the
market price of the Common Stock and the Warrants will not experience
significant fluctuations or decline below the initial public offering price.
32. Limited Underwriting Experience of Representative. The Representative
has served as the sole or managing underwriter of only three firm commitment
public offerings and participated in two other underwritten public offerings as
a member of the underwriting syndicate. Since the Representative's experience in
underwriting firm commitment public offerings is limited, there can be no
assurance that its lack of experience may not adversely affect the public
offering of the Company's securities and the subsequent development, if any, of
a trading market for the Company's securities. See "Risk Factors --
Representative's Influence on the Market; Possible Limitations on Market Making
Activities."
33. Informal Investigation of Underwriters. The Company has been advised
that each of the Underwriters is subject to an informal investigation commenced
in March 1996 by the Securities and Exchange Commission. To date, the Commission
has only requested certain documents from the Underwriters and the Underwriters
have not been advised of the status of the investigation. There can be no
assurance that a formal order of investigation will not be issued, or if issued,
that sanctions will not be imposed against the Underwriters. In October 1996,
the National Association of Securities Dealers, Inc. (the "NASD") commenced an
examination of certain of the Underwriters' previous underwritings and has
requested documents and information in connection with those underwritings. The
NASD examination is ongoing and no findings have been made to date. There can be
no assurance that such investigation or examination may not affect the
Underwriters' ability to maintain a market in the Common Stock and Warrants.
34. Representative's Influence on the Market; Possible Limitations on
Market Making Activities. A significant number of shares of Common Stock and
Warrants may be sold to customers of the Representative. Such customers
subsequently may engage in transactions for the sale or purchase of such
securities through or with the Representative. The Representative has indicated
that it intends to act as a market-maker and otherwise effect
16
<PAGE>
transactions in the Common Stock and Warrants. To the extent the Representative
acts as a market-maker in the Common Stock and Warrants, it may exert a
dominating influence in the markets for those securities. The prices and
liquidity of the shares of Common Stock and Warrants may be significantly
affected to the extent, if any, that the Representative participates in such
markets. Furthermore, the Representative may discontinue such activities at any
time or from time to time. The Representative also has the right to act as the
Company's exclusive agent in connection with any future solicitation of holders
of Warrants to exercise their Warrants. Applicable rules of the Securities and
Exchange Commission prohibit the Representative and any other soliciting
broker-dealers from engaging in any market making activities or solicited
brokerage activities with regard to the Common Stock and Warrants for a period
of up to five business days prior to the solicitation of the exercise of any
Warrants until the later of the termination of such solicitation activity or the
termination of any right the Representative may have to receive a fee for the
solicitation of the Warrants. As a result, the Representative and such
soliciting broker-dealers may be unable to continue to make a market for the
Common Stock and the Warrants during certain periods while the Warrants are
exercisable. Such a limitation, while in effect, could impair the liquidity and
market price of the Common Stock and the Warrants. See "Underwriting."
35. Representative's Potential Influence on the Company. The Company has
agreed that for three years following the date of the Prospectus, the
Representative may designate one person for election to the Company's Board of
Directors and that the Company will reasonably cooperate with the Representative
in respect of such designation. The election of such designee, if any, may
enable the Representative to exert influence on the Company. The Representative
has not designated any individual for election to the Company's Board of
Directors. See "Underwriting."
36. Possible Delisting. The Common Stock and Warrants have been approved,
subject to notice of issuance, for inclusion on The Nasdaq SmallCap Market. For
continued inclusion on the NASDAQ SmallCap Market, an issuer is required, among
other things, to have total assets of $2 million and total equity of $1 million
and the bid price of the listed security must be at least $1.00. The Nasdaq
Stock Market has proposed an amendment to its rules increasing the financial
criteria for continued inclusion on The Nasdaq SmallCap Market which would
require, among other things, that an issuer have net tangible assets of $2
million (or alternatively, net income of $500,000 in two of the most recent
three fiscal years, or a market capitalization of $35 million). There can be no
assurance that the Company will be able to satisfy the maintenance criteria for
continued inclusion of the Common Stock and Warrants on The Nasdaq SmallCap
Market. If the Company is unable to satisfy The Nasdaq SmallCap maintenance
criteria in the future, the Common Stock and Warrants may be delisted from
trading on The Nasdaq SmallCap Market, and if delisted, trading, if any, would
thereafter be conducted in the over-the-counter market in the so-called "pink
sheets" or the NASD's "Electronic Bulletin Board," and, consequently, an
investor could find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Company's securities.
37. Risk of Low-Priced Securities. The regulations of the Securities and
Exchange Commission promulgated under the Exchange Act require additional
disclosure relating to the market for penny stocks in connection with trades in
any stock defined as a penny stock. Commission regulations generally define a
penny stock to be an equity security that has a market price of less than $5.00
per share, subject to certain exceptions. Unless an exception is available,
those regulations require the delivery, prior to any transaction involving a
penny stock, of a disclosure schedule explaining the penny stock market and the
risks associated therewith and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). In addition, the
broker-dealer must provide the customer with current bid and offer quotations
for the penny stock, the compensation of the broker-dealer and its salesperson
in the transaction, and monthly account statements showing the market value of
each penny stock held in the customer's account. Moreover, broker-dealers who
recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. If the Company's securities become subject to the regulations
applicable to penny stocks, the market liquidity for the Company's securities
could be severely affected. In such an event, the regulations on penny stocks
could limit the ability of broker-dealers to sell the Company's securities and
thus the ability of purchasers of the Company's securities to sell their
securities in the secondary market.
17
<PAGE>
38. Shares Eligible for Future Sale. No assurance can be given as to the
effect, if any, that future sales of Common Stock, or the availability of shares
of Common Stock for future sales, will have on the market price of the Common
Stock from time to time. Sales of substantial amounts of Common Stock (including
shares issued upon the exercise of warrants or stock options), or the
possibility of such sales, could adversely affect the market price of the Common
Stock and Warrants and also impair the Company's ability to raise capital
through an offering of its equity securities in the future. Upon completion of
the Offering, the Company will have 2,621,054 shares of Common Stock
outstanding, of which only the 1,500,000 shares of Common Stock offered hereby
will be transferable without restriction under the Securities Act. The remaining
1,121,054 shares, issued in private transactions, will be "restricted
securities" (as defined in Rule 144 promulgated under the Securities Act) which
may be publicly sold only if registered under the Securities Act or if sold in
accordance with an applicable exemption from registration, such as Rule 144. In
general, under Rule 144, as currently in effect, subject to the satisfaction of
certain other conditions, a person, including an affiliate of the Company, who
has beneficially owned restricted securities for at least two years (which
holding period will be reduced to one year under a recent amendment to Rule 144
that becomes effective April 29, 1997), is entitled to sell (together with any
person with whom such individual is required to aggregate sales), within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class or, if the Common Stock
is quoted on The Nasdaq Stock Market or a national securities exchange, the
average weekly trading volume during the four calendar weeks preceding the sale.
A person who has not been an affiliate of the Company for at least three months
and who has beneficially owned restricted securities for at least three years
(which holding period will be reduced to two years under a recent amendment to
Rule 144 that becomes effective April 29, 1997) is entitled to sell such
restricted shares under Rule 144 without regard to any of the limitations
described above. Officers, directors and other securityholders of the Company
owning and/or having rights to acquire in the aggregate 2,926,726 shares of
Common Stock (exclusive of options to purchase 3,690,000 shares of Common Stock
that may not be exercised prior to the earliest of (x) April 12, 2006, (y) the
attainment of certain performance criteria, or (z) the occurrence of a "change
in control", as defined, of the Company), have entered into agreements not to
sell or otherwise dispose of any securities of the Company, including Common
Stock, prior to April 24, 1999 (the "Lock-Up Agreements"), without the prior
written consent of the Representative, which may be granted or withheld in the
sole and absolute discretion of the Representative; provided, however, that if
prior to April 24, 1999, the Company's shares of Common Stock are subject to a
tender offer and holders of the Company's Common Stock (other than the current
stockholders) agree to tender a majority of the outstanding shares of Common
Stock to the offeror, then the Representative shall release all stockholders
subject to the Lock-Up Agreement from the restrictions imposed thereby solely
for the purposes of tendering their shares of Common Stock to the offeror
pursuant to the terms of the tender offer. The Company has registered for resale
pursuant to the Selling Securityholder Prospectus (i) warrants to purchase
1,750,000 shares of Common Stock (having terms identical to the Warrants offered
hereby) and the shares of Common Stock issuable upon exercise thereof and (ii)
33,436 shares of Common Stock issuable upon exercise of options, subject to the
Lock-Up Agreements. The Representative has agreed that it will not release the
restrictions imposed by the Lock-Up Agreements with respect to the Warrants
offered pursuant to the Selling Securityholder Prospectus prior to April 24,
1998. Following expiration of the term of the Lock-Up Agreements, or the earlier
release of the restrictions contained therein, 1,121,054 shares will become
eligible for resale pursuant to Rule 144, subject to the volume limitations and
compliance with the other provisions of Rule 144, assuming the sale of the
shares pursuant to the Selling Securityholder Prospectus. Furthermore, the
holders of the Underwriters' Warrants (including the securities issuable upon
exercise thereof) have demand and piggyback registration rights with respect to
the shares of Common Stock and Warrants issuable upon exercise of the
Underwriters' Warrants. See "Description of Securities -- Registration Rights,"
"Description of Securities -- Shares Eligible for Future Sale," "Description of
Securities -- Options and Warrants," "Management -- Stock Option Plan," "Certain
Transactions," "Underwriting" and "Selling Securityholder Offering."
39. Effect of Issuance of Common Stock Upon Exercise of Warrants and
Options; Possible Issuance of Additional Options. Immediately after the
Offering, assuming the Over-Allotment Option is not exercised, the Company will
have an aggregate of approximately 12,833,128 shares of Common Stock authorized
but unissued and not reserved for specific purposes and an additional 9,545,818
shares of Common Stock unissued but reserved for issuance (i) upon exercise of
options (including options which may be granted in the future pursuant to the
Company's stock option plan), (ii) upon exercise of warrants (including the
Warrants), (iii) upon exercise of the Underwriters' Warrants (and the Warrants
included therein), and (iv) upon conversion of the Compa-
18
<PAGE>
ny's Series A Preferred Stock. All of such shares may be issued without any
action or approval by the Company's stockholders. Although there are no present
plans, agreements, commitments or undertakings with respect to the issuance of
additional shares or securities convertible into any such shares by the Company,
any shares of Common Stock issued would further dilute the percentage ownership
of the Company held by the public stockholders. The Company has agreed with the
Underwriters that, except for the issuances disclosed in or contemplated by this
Prospectus, it will not issue any securities, including but not limited to any
shares of Common Stock, prior to April 24, 1999, without the prior written
consent of the Representative. See "Underwriting."
The exercise of warrants or options and the sale of the underlying shares
of Common Stock (or even the potential of such exercise or sale) may have a
depressive effect on the market price of the Common Stock and the Warrants.
Moreover, the terms upon which the Company will be able to obtain additional
equity capital may be adversely affected since the holders of outstanding
warrants and options can be expected to exercise them, to the extent they are
able, at a time when the Company would, in all likelihood, be able to obtain any
needed capital on terms more favorable to the Company than those provided in the
warrants and options. See "Management -- Stock Option Plan," "Description of
Securities" and "Underwriting."
36. Adverse Effect of Redemption of Warrants. Under certain conditions, the
Warrants may be redeemed by the Company with the prior written consent of the
Representative, at a redemption price of $.05 per Warrant upon not less than 30
days prior written notice to the holders of such Warrants, provided the closing
bid price of the Common Stock has been at least $8.00 for 20 consecutive trading
days ending on the third day prior to the date the notice of redemption is
given. The Warrants will be exercisable until the close of business on the day
immediately preceding the date fixed for redemption. The redemption of the
Warrants could force the holders (i) to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for the holders to do
so, (ii) to sell the Warrants at the then current market price when they might
otherwise wish to hold the Warrants or (iii) to accept the redemption price,
which is likely to be substantially less than the market value of the Warrants
at the time of redemption. See "Description of Securities -- Warrants."
37. Need for Future Registration of Warrants; State Blue Sky Registration;
Exercise of Warrants. The Warrants will trade separately upon the completion of
the Offering. Although the Warrants will not knowingly be sold to purchasers in
jurisdictions in which the Warrants are not registered or otherwise qualified
for sale, purchasers may buy Warrants in the after-market or may move to
jurisdictions in which the Warrants and the shares of Common Stock underlying
the Warrants are not so registered or qualified. In this event, the Company
would be unable to issue shares of Common Stock to those persons desiring to
exercise their Warrants unless and until the Warrants and the underlying shares
of Common Stock are qualified for sale in jurisdictions in which such purchasers
reside, or an exemption from such qualification exists in such jurisdictions.
There can be no assurance that the Company will be able to effect any required
qualification.
The Warrants will not be exercisable unless the Company maintains a current
Registration Statement on file with the Commission through post-effective
amendments to the Registration Statement containing the Prospectus. Although the
Company has agreed to file appropriate post-effective amendments to the
Registration Statement containing the Prospectus and to maintain a current
Prospectus with respect to the Warrants, there can be no assurance that the
Company will file post-effective amendments necessary to maintain a current
Prospectus or that the Warrants will continue to be so registered. See
"Description of Securities -- Warrants."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
and Warrants offered hereby, after deducting underwriting discounts and other
expenses of the Offering, are estimated to be $4,284,250 ($4,998,738 if the
Over-Allotment Option is exercised in full). The Company expects to use the net
proceeds of the Offering as follows:
<TABLE>
<CAPTION>
Approximate
Amount Percent
------------- ---------
<S> <C> <C>
Equipment(1) ............................................. $1,442,000 33.7%
Marketing, promotion and public relations(2) ............... 585,000 13.6%
Product development(3) .................................... 270,000 6.3%
Payment of Bridge Notes and 12 1/2% Promissory Note(4) ..... 1,125,000 26.3%
Management salaries(5) .................................... $ 316,000 7.3%
Working capital and general corporate purposes(6) ......... 546,250 12.8%
----------- -------
Total ................................................... $4,284,250 100.0%
=========== =======
</TABLE>
- ------------
(1) Includes production equipment (mold and inserts, assembly machine, clip
attachment line, packaging machine and automatic loader), as well as
furniture, fixtures and equipment for a warehouse facility. Except for the
clip attachment line, which will be used by INSERPOR at its production
facility in Portugal to assemble the Company's syringes, all of the
production equipment will be used by Harmac at its production facility in
Buffalo, New York to assemble the Company's syringes. The Company will
retain ownership of the production equipment and neither INSERPOR nor Harmac
will acquire any interest therein, other than the right to use the equipment
in connection with the assembly of the Company's syringes.
(2) Includes the cost of hiring and retaining a marketing director and expenses
relating to market research, promotion (including advertising) and public
relations.
(3) Includes the cost of retaining a research and development officer and the
cost of developing prototype parts.
(4) A portion of the net proceeds of the Offering will be used to pay the Bridge
Notes in the principal amount of $1,000,000 and the Company's 12 1/2%
promissory note in the principal amount of $125,000. The Bridge Notes,
issued in connection with the Bridge Financing in the fourth quarter of
1996, bear interest at 8% per annum and are payable upon the earlier of
November 27, 1997 or the consummation of an initial public offering or
private placement of the Company's debt and/or equity securities resulting
in gross proceeds to the Company of at least $5,000,000. The net proceeds of
the Bridge Financing (approximately $820,000) were used in part to purchase
machinery ($235,000) and for sales and marketing ($235,000). The Company
used the remaining net proceeds as working capital. The 12 1/2% promissory
note was issued in December 1995 to an individual lender and is payable upon
demand. The proceeds of that loan were used as working capital.
(5) The Company may use approximately $316,000 of the net proceeds of the
Offering to pay the salaries of Joel Schoenfeld, Chief Executive Officer of
the Company ($196,000 per annum), and David Chabut, Chief Financial Officer
of the Company ($120,000 per annum), until cash flows from operations are
sufficient to pay such salaries. See "Management -- Employment Agreements".
(6) Includes working capital to support inventory and accounts receivable.
Additional proceeds from the exercise of the Over-Allotment Option and the
Warrants will be added to the Company's working capital and be available for
general corporate purposes. Pending application, the Company will invest the net
proceeds of the Offering in United States government securities, short term
certificates of deposit, money market securities, investment grade commercial
paper or other short-term interest-bearing investment-grade securities.
The Company has not determined the specific allocation of the net proceeds
within each of the various uses described above. Specific allocations of such
net proceeds will ultimately depend on the development of the Company's products
and the related technology and commercial acceptance of its products. The
Company anticipates, based on currently proposed plans and assumptions relating
to its operations, that the net proceeds of the Offering, together with cash
flow from operations, will be sufficient to satisfy the Company's anticipated
cash requirements for the 12 months following the date of the Prospectus.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
December 31, 1996, and (ii) such capitalization, as adjusted after giving effect
to the issuance and sale of the 1,500,000 shares of Common Stock and 2,250,000
Warrants in the Offering and the application of the net proceeds thereof. The
information set forth below should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------
Actual As Adjusted
--------------- ----------------------
<S> <C> <C>
Unearned income in connection with Supply and License Agreements. $ 1,683,788 $ 1,683,788
Notes due stockholders and affiliates (1) ........................... 121,371 --
Notes due officers (2) ............................................. 675,635 --
------------ --------------
2,480,794 1,683,788
Stockholders' equity:
Preferred Stock, par value $0.001; 4,997,500 shares authorized; none
issued and outstanding at September 30, 1996, and as adjusted ...... -- --
Series A 8% Cumulative Convertible Preferred Stock, par value
$0.001; 2,500 shares authorized; 1,269 issued and outstanding at
December 31, 1996; and 1,919 shares, as adjusted (3) ............... 1 2
Common Stock, par value $0.001; 25,000,000 shares authorized;
1,082,287 shares issued and outstanding at December 31, 1996 (4);
and 2,621,054 shares issued and outstanding, as adjusted (5) ...... 1,082 2,621
Additional paid-capital ............................................. 2,459,417 4,938,527 (6)
Accumulated deficit ................................................ (4,253,138) (2,447,145)(7)
Deferred offering costs ............................................. (92,500) --
------------ --------------
Stockholders' equity (deficit) ....................................... (1,885,138) 2,494,005
------------ --------------
Total capitalization ............................................. $ 595,656 $ 4,177,793
============ ==============
</TABLE>
- ------------
(1) Includes $4,998 payable to Joel Schoenfeld, and two companies affiliated
with Mr. Schoenfeld (the "Schoenfeld Parties"), and $116,373 payable to John
Frank, a director of the Company. Subsequent to December 31, 1996, the
Company issued 5 shares of Series A Preferred Stock to the Schoenfeld
Parties in exchange for the cancellation of the amounts payable to them.
Concurrently with the Closing, the Company will issue approximately 34,397
shares of Common Stock to Mr. Frank in exchange for the cancellation of the
amount payable to him ($120,390, including accrued interest, as of March 31,
1997). See "Certain Transactions" and "Description of Securities -- Series A
Preferred Stock."
(2) Includes amounts accrued for compensation payable to Joel Schoenfeld
($644,391) and David Chabut ($31,244). Subsequent to December 31, 1996, the
Company issued 644 shares of Series A Preferred Stock to Mr. Schoenfeld in
exchange for the cancellation of the amount payable to him. Mr. Chabut has
advised the Company that he intends to exercise options to purchase 4,370
shares of Common Stock concurrently with the Closing and pay the exercise
price thereof with a portion of the amount payable to him. See "Management
-- Summary Compensation Table" and "Certain Transactions."
(3) Represents 649 shares issued to the Schoenfeld Parties in exchange for the
cancellation of amounts payable to them and 1 share issued to Dr. Alan H.
Gold in exchange for unpaid interest included in accrued expenses. See
footnotes (1) and (2) above, "Certain Transactions" and "Description of
Securities -- Series A Preferred Stock."
(4) Does not include (i) 3,750,042 shares reserved for issuance upon exercise of
outstanding options, at an exercise price of $3.50, expiring at various
dates from February 22, 1999 through April 11, 2007 (including options to
purchase 3,690,000 shares granted subsequent to December 31, 1996); and (ii)
approximately 34,397 shares to be issued concurrently with the Closing to a
director of the Company in exchange for the cancellation of amounts payable
to him ($120,390 as of March 31, 1997). See "Management -- Stock Option
Plan" and "Certain Transactions."
21
<PAGE>
(5) Includes (i) approximately 34,397 shares to be issued to a director of the
Company concurrently with the Closing in exchange for the cancellation of
amounts payable to him; and (ii) 4,370 shares to be issued to an officer of
the Company concurrently with Closing upon exercise of stock options. Does
not include (i) 3,745,672 shares reserved for issuance upon exercise of
outstanding options, at an exercise price of $3.50, which expire at various
dates from February 22, 1999 through April 11, 2007 (including options to
purchase 3,690,000 shares granted subsequent to December 31, 1996); and (ii)
4,000,000 shares to be reserved for issuance upon exercise of the Warrants
and the warrants to be issued upon automatic conversion of the Bridge
Warrants on the date of the Prospectus. See "Management -- Stock Option
Plan," "Certain Transactions" and "Description of Securities."
(6) Gives effect to the reclassification of $2,386,785 of S corporation
undistributed losses to paid-in capital.
(7) Give effect to the write-off of adjusted debt financing costs of $580,792
associated with the Bridge Financing (deferred financing costs of $783,292
as of December 31, 1996 have been reduced by $202,500 as a result of the
surrender of 750,000 Bridge Warrants to the Company for cancellation without
consideration).
DILUTION
At December 31, 1996, the net tangible book value (deficit) of the Company
was ($2,090,430), or approximately ($1.93) per share of Common Stock, as
adjusted for the cancellation of approximately $650,000 of accrued expenses due
to certain stockholders and affiliates of the Company in exchange for 650 shares
of Series A Preferred Stock subsequent to December 31, 1996. The net tangible
book value of the Company is the tangible assets (total assets less intangible
assets, deferred financing and offering costs) less total liabilities. Dilution
per share represents the difference between the amount paid per share of Common
Stock by investors in the Offering, attributing no value to the Warrants.
After giving effect to (i) the issuance and sale of 1,500,000 shares of
Common Stock and 2,250,000 Warrants in the Offering, (ii) the cancellation of
amounts payable to a director of the Company ($120,390 as of March 31, 1997)
concurrently with the Closing in exchange for the issuance of approximately
34,397 shares of Common Stock, and (iii) the cancellation of amounts payable to
an officer of the Company ($15,295) concurrently with the Closing in exchange
for the issuance of 4,370 shares of Common Stock, but without taking into
account any other changes in net tangible book value subsequent to December 31,
1996, other than those described in the immediately preceding paragraph, the pro
forma net tangible book value of the Company as of December 31, 1996 would have
been $2,422,005, or $0.92 per share. This represents an increase in net tangible
book value per share of $2.85 to the Company's existing stockholders and an
immediate dilution of $2.58 per share (or 73.7% of the offering price) to new
stockholders purchasing shares of Common Stock in the Offering. The following
table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Public offering price per share ........................ $3.50
Net tangible book value before Offering ............... ($1.93)
Increase attributable to new investors ............... $2.85
-------
Pro forma net tangible book value after Offering ...... 0.92
-------
Dilution to new investors .............................. $2.58
=======
</TABLE>
22
<PAGE>
The information in the following table summarizes through December 31,
1996, as adjusted for (A) the issuance of approximately 34,397 shares of Common
Stock to a director of the Company concurrently with the Closing in exchange for
the cancellation of amounts due to him ($120,390 as of March 31, 1997), and (B)
the issuance of 4,370 shares of Common Stock to an officer of the Company
concurrently with the Closing upon exercise of options, (i) the number and
percentages of shares of Common Stock purchased from the Company, (ii) the
amount and percentage of consideration paid and (iii) the average price per
share paid to the Company, by existing stockholders and by new investors
pursuant to the Offering:
<TABLE>
<CAPTION>
Average
Price
Shares Purchased Total Consideration Paid Per Share
------------------------- ------------------------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ...... 1,121,054 42.8% $ 652,185 11.0% $0.58
New investors ............... 1,500,000 57.2% 5,250,000 89.0% $3.50
----------- ------- ----------- -------
2,621,054 100.0% $5,902,185 100.0%
</TABLE>
The information in the foregoing table does not give effect to (i)
3,745,672 shares reserved for issuance upon exercise of outstanding options, at
an exercise price of $3.50 per share, which expire at various dates from
February 22, 1999 through April 11, 2007 (including options to purchase
3,690,000 shares granted subsequent to December 31, 1996), (ii) 4,000,000 shares
to be reserved for issuance upon exercise of the Warrants and the warrants to be
issued upon automatic conversion of the Bridge Warrants on the date of the
Prospectus, (iii) $62,500 shares reserved for issuance upon exercise of the
Over-Allotment Option and the Warrants included therein, and (iv) 375,000 shares
reserved for issuance pursuant to the Underwriters' Warrants and the Warrants
included therein. See "Capitalization" and "Underwriting."
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 cash 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.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial information
regarding the results of operations and financial position of the Company for
the periods and at the dates indicated. The selected consolidated financial
information as of December 31, 1995 and 1996 and for the fiscal years ended
December 31, 1995 and 1996 have been derived from the audited consolidated
financial statements of the Company for those fiscal years. This information
should be read in conjunction with the Company's consolidated financial
statements (including the notes thereto) and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1995 1996
-------------- ----------------
<S> <C> <C>
Sales ................................................... $1,106,930 $ 461,131
Cost of sales .......................................... 1,016,530 346,758
----------- ------------
Gross profit .......................................... 90,400 114,373
Expenses:
Marketing ............................................. 115,431 189,930
Product development .................................... 299,498 218,532
General and administrative ........................... 433,012 753,122
Interest ............................................. 153,473 260,560
Royalties ............................................. 35,000 133,000
----------- ------------
Total expenses ....................................... 1,036,414 1,555,144
----------- ------------
Net loss ................................................ ($ 946,014) ($ 1,440,771)
=========== =============
Historical and pro forma net loss per common share ...... ($ 0.89) ($ 1.36)
Historical and pro forma weighed average number of common
and common equivalent shares outstanding ............... 1,059,001 1,059,299
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1995 1996
----------------- -----------------
<S> <C> <C>
Working capital (deficit) ............ ($ 1,462,499) ($ 1,066,521)
Total assets ........................ 606,917 2,463,589
Accumulated deficit .................. (2,812,367) (4,253,138)
Stockholders' equity (deficit) ...... (2,377,367) (1,885,138)
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and analysis should be read in conjunction with
the consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
Since inception, the Company's operations have consisted primarily of the
design, development, testing and evaluation of its locking clip syringes,
production processes, and production equipment, which include molds, inserts and
assembly machine. As of December 31, 1996, UNIVEC had no commercial sales of its
locking clip syringes. In the fourth quarter of 1995 and in 1996, the Company
sold lancets manufactured by Sherwood to one distributor, which resold the
lancets to retailers in Canada and the United States. The terms of purchase and
resale of these lancets was negotiated by the Company independently with
Sherwood and the distributor. The Company does not have a distribution agreement
or similar arrangement with Sherwood for lancets. In the first two months of
1997, the Company sold approximately 1,777,000 syringes produced by INSERPOR,
including over 900,000 to WHO.
In the second quarter of 1996, the Company entered into an agreement to buy
syringe components from Sherwood (the "Sherwood Supply Agreement"). In
connection with the Sherwood Supply Agreement, Sherwood sold all of its right,
title and interest in and to the production mold for the plunger, including the
mold inserts and insert base (together, the "Plunger Mold") to the Company in
consideration for an option to enter into a non-exclusive license to
manufacturer and sell the Company's locking clip syringes in the United States.
The Company also entered into a lease agreement with Sherwood pursuant to which
it leased back the Plunger Mold to Sherwood (the "Equipment Lease") for a period
of six years for use in the manufacture and production of the plungers as part
of the assembly of non-aspirating syringes using the Company's proprietary
design specifications. Sherwood is required to make aggregate rental payments of
$1,946,016 in 36 equal consecutive monthly installments of $54,056, over the
first three years of the term of the Equipment Lease. In consideration for said
lease payments, the Company agreed to pay Sherwood 14.925% of the cumulative
invoiced amount of components in excess of $3,350,000 up to a maximum invoiced
amount of $6,700,000 (or a maximum of $500,000). In addition, certain
stockholders of the Company agreed to pay Sherwood up to $1 million (less
14.925% of each dollar paid by the Company under the Sherwood Supply Agreement)
in the event the Company fails to pay a cumulative invoiced amount of $6.7
million over the first three years of the Sherwood Supply Agreement. In July
1996, the Company sold the Plunger Mold, subject to the Equipment Lease,
together with the Company's right to the payments under the Equipment Lease, to
a financial institution for net cash consideration of $1,600,000 ($1,837,904
less expenses of approximately $238,000). In connection with such sale, the
financial institution agreed to sell the Plunger Mold back to the Company for a
nominal amount upon expiration of the term of the Equipment Lease. The Company
has deferred recognition of approximately $1,684,000, which equals the net
proceeds from the lease payments received from Sherwood and the 34 payments sold
to a financial institution. Unearned income in connection with these agreements
will be recognized upon the sale of the Company's locking clip syringes which
include components supplied by Sherwood under the Sherwood Supply Agreement. See
"Business -- Suppliers" and "Certain Transactions."
In the United States, the Company's products are subject to regulation by
the FDA. In December 1994, the Company was granted 510(k) clearance by the FDA
for its locking clip syringe. In addition, the FDA requires the Company to be in
compliance with GMP requirements and to demonstrate that its devices are safe
and effective. At any time, the FDA can audit the Company's compliance with GMP
requirements and can require the Company to demonstrate that its products are
safe and effective. See "Risk Factors -- Government Regulation."
The Company has incurred net losses for each period since its inception.
The Company expects operating losses to continue until such time, if ever, as
the Company can sell significant units of its locking clip syringes, and it can
manufacture syringes at costs sufficiently lower than selling prices so that
gross profits cover overhead expenses. See "Risk Factors -- Continuing Losses;
Accumulated Deficit; Working Capital Deficit," " Risk Factors -- Limited
Operating History" and "Risk Factors -- Product Acceptance; Demand for Locking
Clip Syringes."
25
<PAGE>
Results of Operations
Fiscal Years Ended December 31, 1996 and 1995
Sales. Sales for the fiscal year ended December 31, 1996 ("Fiscal 1996")
decreased by approximately $646,000 as compared to the fiscal year ended
December 31, 1995 ("Fiscal 1995") as result of fewer resales of medical devices.
However, gross profits for Fiscal 1996 increased by approximately $24,000 as
compared to Fiscal 1995 as result of higher margins. During Fiscal 1996, the
Company had no sales of its locking clip syringes, but it resold lancets
manufactured by Sherwood to one distributor, which resold the lancets to
retailers in Canada and the United States. During Fiscal 1995, the Company had
no sales of its locking clip syringes, but it resold lancets manufactured by
Sherwood and syringes manufactured by INSERPOR, which did not utilize the
Company's locking clip.
Cost of Sales. Cost of sales for Fiscal 1996 decreased by approximately
$670,000 as compared to Fiscal 1995 as result of fewer resales of medical
devices. The cost of sales for Fiscal 1996 includes the purchase of lancets from
Sherwood and freight charges. The cost of sales for Fiscal 1995 includes the
purchase of lancets from Sherwood, the purchase of syringes from INSERPOR, and
freight charges.
Marketing. Marketing expenses for Fiscal 1996 (approximately $190,000)
increased by approximately $75,000, or 65%, as compared to Fiscal 1995
(approximately $115,000). This increase is primarily due to increased
expenditures for brochures and package design and, to a lesser extent, increased
expenditures for promotion.
Product Development. Product development expenses for Fiscal 1996
(approximately $219,000) decreased by approximately $80,000, or 27%, as compared
to Fiscal 1995 (approximately $299,000). This decrease is primarily due to a
reduction in legal fees for patents.
General and Administrative. General and administrative expenses for Fiscal
1996 (approximately $753,000) increased by approximately $320,000, or 74%, as
compared to Fiscal 1995 (approximately $433,000). This increase is principally
attributable to an increase in legal fees for the Sherwood Supply Agreement,
financing transactions and general corporate matters, and to a lesser extent,
higher payroll, including the salary of a full-time chief financial officer for
the entire Fiscal 1996 as compared to only four months of Fiscal 1995.
Interest Expense. Interest expense for Fiscal 1996 (approximately $261,000)
increased by approximately $108,000, or 71%, as compared to Fiscal 1995
(approximately $153,000), due to increased notes payable weighted for the period
of time the indebtedness was outstanding.
Royalty Expense. Royalty expense for Fiscal 1996 (approximately $133,000)
increased by approximately $98,000, or 280%, as compared to the 1995 interim
(approximately $35,000) as result of certain payments made to secure licensed
rights for patents covering two locking devices for hypodermic syringes
utilizing apparatuses or methods different than those covered by the Company's
locking clip patents. During Fiscal 1995, the Company made payments to secure
licensed rights relating to another patent. The Company licensed these patents
to develop a 3cc locking syringe.
Net Loss. The net loss for Fiscal 1996 (approximately $1,441,000) increased
by approximately $495,000, or 52%, as compared to the net loss for Fiscal 1995
(approximately $946,000), due to higher marketing, general and administrative,
royalty and interest expenses. This increase was offset partially by higher
gross profits and lower product development expenses. Because the Company
elected to be treated as an S corporation for 1995, the net loss for Fiscal 1995
and Fiscal 1996 was passed through to its stockholders. The accumulated deficit
of approximately $1,866,000 at the end of Fiscal 1994, when the Company was
treated as a C corporation, is available to offset future net income after the
Company's tax status returns to a C corporation in 1997 as a result of the
Offering.
Liquidity and Capital Resources
In Fiscal 1995 and Fiscal 1996, the Company's expenses have exceeded gross
profits from resales of hypodermic devices. Operations have been funded
primarily from (a) the receipt of two payments under the Sher-
26
<PAGE>
wood Lease Agreement and the assignment of the remaining 34 payments
(approximately $1,684,000), and (b) net proceeds of approximately $820,000 from
the issuance and sale of $1,000,000 principal amount of Bridge Notes and Bridge
Warrants to purchase 2,500,000 shares of Common Stock, for a total purchase
price of $1,000,000. See "Business -- Supplies," "Certain Transactions" and
"Description of Securities -- Bridge Financing."
The Company used cash from operating activities in Fiscal 1995 and Fiscal
1996. Net losses in each of these periods greatly affected net cash from
operations. In Fiscal 1995, the Company used cash from operations of
approximately ($530,000): (a) the increases to cash from operating activities
were mostly from accounts payable and accrued expenses of approximately $426,000
(including $171,000 payable to two officers) and issuance of Common Stock for
services of $35,000, and (b) the decreases to cash from operating activities
were primarily from a net loss of approximately ($946,000) and accounts
receivable of approximately ($63,000). In Fiscal 1996, the Company used cash
from operations of approximately ($1,217,000): (a) the increases to cash from
operating activities were mostly from accounts payable and accrued expenses of
approximately $456,000 (including $73,000 payable to two officers) and
depreciation, amortization and non cash charges of approximately $145,000 and
(b) the decreases to cash from operating activities were primarily from a net
loss of approximately ($1,441,000), accounts receivable of approximately
($86,000), and inventory of syringe components available for production of
approximately ($239,000).
The Company's investing activities have consisted primarily of expenditures
for production equipment, which totaled approximately $374,000 and $489,000 in
Fiscal 1995 and Fiscal 1996, respectively. The expenditures for Fiscal 1995 and
Fiscal 1996 were for assembly equipment and tools and dies to produce the
Company's proprietary clip. As of December 31, 1996, the Company is committed to
pay (approximately $45,000) for production equipment for its first syringe line
located at Harmac in Buffalo, New York. The Company intends to use a portion of
the net proceeds of the Offering to purchase a clip-attachment line for INSERPOR
in Portugal, a second production line for Harmac in Buffalo, New York, and
furniture, fixtures and equipment for a warehouse facility (approximately
$1,442,000).
The Company provided cash from financing activities in Fiscal 1995 and
Fiscal 1996. In Fiscal 1995, cash from financing activities was approximately
$1,011,000, provided primarily from the issuance of promissory notes for
$665,000 and the sale of equity securities to a director for $300,000. In Fiscal
1996, cash provided from financing activities was approximately $1,985,000: (a)
increases to cash were comprised primarily of approximately $1,684,000
contributed by unearned income from supply and licensing agreements with
Sherwood, $1,000,000 provided through the sale of Bridge Notes as part of the
Bridge Financing and $397,000 from the sale of promissory notes, and (b)
decreases to cash from financing activities were primarily from payments of
promissory notes ($937,000), deferred financing costs ($179,500) and deferred
offering costs ($92,500).
The Company expects to incur additional operating losses and cash
requirements at least through 1997. These losses will continue until such time
as the Company builds up sufficient sales and margins to offset expenses, which
include continuing product and machine development for new syringe products. The
timing and amounts of these cash requirements will depend on many factors, some
of which are beyond the Company's control, such as the progress of the Company's
product development projects, improvements to existing manufacturing processes,
and sales of Company products at prices sufficient to cover expenses. The
Company expects that the net proceeds of the Offering, together with cash flow
from operations, will be sufficient to satisfy its anticipated cash requirements
for the 12 months following the date of the Prospectus.
The Company's consolidated financial statements for the year ended December
31, 1996, indicate that there is substantial doubt about the Company's ability
to continue as a going concern due to the Company's need to attain profitable
operations and to obtain adequate long-term financing. See Note 2 of Notes to
the Company's consolidated financial statements appearing elsewhere herein.
27
<PAGE>
BUSINESS
UNIVEC develops and markets safety hypodermic syringes designed to protect
the healthcare worker and patient against cross-infection. The Company also
sells and intends to develop other hypodermic devices. In January 1997, the
Company commenced production and sales of its 1cc locking clip syringes, which
are designed to make accidental or deliberate reuse difficult. The accidental or
deliberate reuse of syringes is a frequent cause of the spread of the human
immunodeficiency and hepatitis viruses, as well as other blood-borne pathogens.
The Company has received 510(k) clearance from the U.S. Food and Drug
Administration to market its locking clip syringes in the United States.
The Company offers aspirating and non-aspirating models of its lcc locking
clip syringes. With the aspirating syringe, the UNIVEC locking clip does not
limit the user's ability to withdraw and depress ("to aspirate") the plunger
until the user locks the syringe voluntarily. With the non-aspirating syringe,
the UNIVEC locking clip limits the user's ability to aspirate the plunger and
locks the syringe passively.
In addition to marketing its safety syringes, the Company resells medical
devices of other companies (e.g., traditional disposable syringes and lancets,
which are hypodermic devices used in conjunction with blood testing). To date,
the Company's revenues have been derived almost exclusively from resales of
traditional disposable devices and lancets. The Company seeks to resell other
medical devices that promote safety and complement its hypodermic syringes. The
Company's management expects the relative significance of its resale activities
to decrease over time as sales of its safety syringes increase.
Problems Associated with Traditional Disposable Syringes
Accidental or deliberate reuse of disposable syringes poses a serious risk
of transmitting HIV-AIDS, hepatitis and other blood-borne pathogens for patients
and injection drug users. Disposable syringes are used traditionally in
developed countries and by many relief agencies such as UNICEF and WHO.
Intravenous drug users, who share syringes or use syringes discarded by
hospitals, medical clinics and laboratories, doctors or diabetic patients, are
extremely susceptible to HIV, hepatitis and other blood-borne pathogens. An
article in the May 1996 American Journal of Public Health for Disease Control
written by an epidemiologist for the Center for Disease Control and Prevention
estimates that nearly half of all new HIV infections are occurring in
intravenous drug users ("IDUs"). The article indicates that in New York City the
number of IDUs at risk (69,000) exceeds the number of men who have sex with
other men at risk ("MSM"), and that the number of IDUs at risk in Chicago
(10,500) and Detroit (3,460) is 87% and 71%, respectively, of the number of MSMs
at risk in those cities.
Relief agencies, including UNICEF and WHO, administered almost a billion
injections to women and children through immunization programs in developing
countries in 1995. WHO reported that surveys carried out in four of its six
regions indicated that up to a third of immunization injections were unsterile.
But immunization injections account for less than 10% of injections administered
within the health sector. The United Nations estimates that more than half of
all non-immunization injections in developing countries are unsafe. According to
an article in the New York Times on July 7, 1996, an estimated 21.8 million
adults and children worldwide are infected with HIV, 90% of whom live in
developing countries.
As a result of the findings in the United States and developing countries,
public health officials have encouraged the medical industry to develop safer
syringes to prevent the spread of blood-borne pathogens, such as HIV and
hepatitis. In 1995, the House of Delegates -- American Medical Association
requested "manufacturers of disposable hypodermic needles and syringes to adopt
designs to prevent reuse and to include in the packaging clear directions for
their correct disposal." In late 1995, UNICEF recommended "the use of auto-
destruct syringes instead of disposable, single use syringes in order to avoid
the hazards of unsafe injection practices." In 1996, Brazil adopted a law
requiring disposable syringes manufactured or marketed in that country to
include a safety device to prevent its reuse. During 1996, New York State
enacted legislation authorizing a limited number of pilot projects to test the
practicality and effectiveness of difficult to reuse syringes. Such pilot tests
are to be conducted, subject to funding, in state-operated facilities, such as
prisons, hospitals, youth detention facilities and development centers.
28
<PAGE>
As a result of the increase in the incidence of HIV-AIDS cases, there has
also been considerable discussion concerning over-the-counter sales of
non-prescription syringes and needle exchange programs, in which intravenous
drug users exchange used syringes for sterile syringes. However, political and
social concerns that over-the-counter sales of non-prescription syringes and
needle exchange programs encourage and condone illegal drug use have limited the
access of intravenous drug users to sterile syringes, including those with the
added safety feature of a locking device to discourage reuse. Nevertheless, 41
states, including Connecticut, Florida, Ohio, Michigan, Texas and Virginia, have
legalized over-the-counter sales of non-prescription syringes.
Since the introduction of the disposable syringe in the late 1940's, two
types of features have been developed to deter the spread of blood-borne
pathogens as a result of accidental or deliberate reuse of syringes --
needle-stick prevention devices and difficult to reuse syringes.
Needle Stick Prevention
Needle-stick prevention devices are designed to prevent accidental puncture
injuries to health care workers and patients before, during, and after the use
of hypodermic syringes and needles. Statistics indicate that less than 1% of all
reported HIV infections in the United States are attributed to needle-stick
injuries. The most prevalant needle stick prevention device, the extendible
barrel sleeve, is not a substitute for features that render a syringe difficult
to reuse; however, it can be combined with devices that make a syringe difficult
to reuse. Needle-stick prevention methods include:
Retracting Needles, which through mechanical devices incorporated in the
syringe, pull back the needle into the barrel after use. These devices are
effective needle-stick prevention devices; however, operators must manually
trigger the retraction of needles. Retracting needle devices that automatically
trigger with a single use of the syringe can render the syringe design difficult
to reuse. However, such devices are prone to malfunction and are costly to
manufacture due to the complexity of the mechanics required to retract the
needle.
Self-Destruct Needles, which permit the needle to be collapsed or deformed
into a shape which cannot result in a needle-stick injury. Although
self-destruct needle devices are mechanically simpler than retracting needle
devices, less prone to malfunction and less costly to manufacture, such devices
are effective only if the operator triggers the self-destruct feature.
Extendible Barrel Sleeves, which enclose the barrel of the syringe in a
second cylinder which the operator extends before and after use to cover the tip
of the needle. The extendible barrel sleeves often lock in their extended
position after use. In virtually all designs, the operator of the syringe must
manually extend the barrel sleeve after use. The sleeve does not prevent
multiple use of the syringe before the operator encloses the barrel. However,
extendible barrel sleeves are more cost-effective than the other alternatives
and can be combined with a device that makes the syringe difficult to reuse.
Becton Dickinson and Sherwood distribute traditional (1cc and 3cc) syringes with
extendible barrel sleeves called safety syringes at a wholesale price of $0.18
to $0.21.
Difficult to Reuse Syringes
To the Company's knowledge, only Bader and Becton-Dickinson distribute
commercially, a line of difficult to reuse syringes, none of which allow for
aspiration. Both companies developed their syringes for WHO and UNICEF
immunization programs.
Relative to the Bader and Becton-Dickinson syringes, the Company believes
that its 1cc locking clip syringes are more effective and that they are
competitively priced. Unlike its competitors, the Company markets a locking clip
syringe with a 1cc barrel, which is ideal for dispensing .05cc to .95cc dosages
of medicine (e.g., allergy, immunization and insulin medicines). It is more
difficult to deliver .05cc to .95cc dosages accurately with a syringe barrel
that is greater than 1cc. Also unlike its competitors, the Company offers an
aspirating syringe that healthcare workers can lock. Healthcare workers need
aspirating syringes to mix medications in the syringe barrel and inject
medications intravenously. Furthermore, the Company believes that aspirating
syringes are preferred by diabetes patients and needle-exchange programs.
Bader
The Bader DestroJect syringe is a non-aspirating syringe developed for use
with WHO's and UNICEF's Expanded Programme on Immunization ("EPI") manufactured
since 1992 by Bader, a German machine tool
29
<PAGE>
manufacturer. The DestroJect syringe, available in a 1.5 cc size, delivers a
.5cc dose, which is the dosage for many immunizations. To deliver a dosage other
than .5cc, the Company believes that Bader would have to modify components of
the DestroJect syringe. Bader can supply DestroJect syringes in a special
dispensing carton which doubles as the disposal box for used syringes. The
disposal box is designed to incinerate the used syringes reducing them to ash
and an inert block of plastic and metal residue.
Becton-Dickinson
The Becton-Dickinson SOLOSHOT syringe is a non-aspirating syringe
specifically designed for the EPI. Becton-Dickinson can package the SOLOSHOT
syringes in an incineration box similar to that used by Bader. The SOLOSHOT
syringe, available in a 3cc size, delivers a .5cc dose, which is the dosage for
many immunizations. To deliver a dosage other than .5cc, the Company believes
that Becton-Dickinson would have to modify components of the SOLOSHOT syringe.
UNIVEC
The Company has developed a 1cc locking clip syringe for aspirating and
non-aspirating applications, which is ideally suited for dispensing accurate
dosages of allergy, immunization and insulin medicines. The Company's 1cc
locking clip syringe can deliver dosages of up to .95cc. With the aspirating
syringe, the UNIVEC locking clip does not limit the user's ability to withdraw
and depress ("to aspirate") the plunger until the user locks the syringe
voluntarily. With the non-aspirating syringe, the UNIVEC locking clip limits the
user's ability to aspirate the plunger and locks the syringe passively.
When the non-aspirating syringes are assembled, the syringe clip is placed
on the ratcheted plunger in the position needed to limit dosage as desired. When
the operator depresses the plunger, the clip travels down the barrel by an equal
distance. Withdrawal of the plunger by any amount embeds the prongs into the
barrel and the user cannot retract the plunger.
The Company's 1cc, non-aspirating, syringe was developed for the needs of
immunization programs of EPI. Using existing components, the Company can limit
its non-aspirating syringe to any dosage between .05cc and .95cc; however, the
Company will have to modify its existing assembly machine to produce syringes
with a nominal dosage less than .95cc. Recently, the EPI has prioritized its
program for immunizing children under one for tuberculosis ("TB"). In 1997 for
TB immunization, the EPI expects to vaccinate 100 million children and to buy
100 million 1cc tuberculin syringes. The dosage for a TB vaccination is .05cc.
After the Company modifies its assembly machine, it will be able to produce a
syringe limited to a nominal dosage amount of .05cc. Without modifications to
components, the difficult to reuse syringes of Bader and Becton-Dickinson can
only deliver a dosage of .5cc. For the EPI, the Company plans to distribute its
locking clip syringes in incinerating cartons similar to those distributed by
Bader and Becton-Dickinson.
The Company's 1cc aspirating syringe works similarly to the non-aspirating
model, except that the clip prongs do not engage the barrel until the operator
withdraws the plunger completely. Once the operator does so, the clip catches a
single ratchet and travels down the barrel as the plunger is depressed and the
operator cannot withdraw the plunger.
The Company's 1cc aspirating syringe was developed for healthcare workers,
who need to mix medications in the syringe barrel and inject medicines
intravenously. Furthermore, the Company believes that aspirating syringes are
preferred by diabetes patients and needle-exchange programs. The Company does
not know of any other Company that offers an aspirating syringe that can be
locked.
The Company intends to develop a 3cc syringe with a luer (needleless) tip
for use in hospitals and health clinics in 1997. In general, hospitals and
health clinics use more 3cc syringes than 1cc syringes. Hospitals and clinics
will have the choice of an aspirating or non-aspirating plunger and a choice of
a syringe barrel with or without an extendible needle sheath. It is anticipated
that production of the Company's 3cc non-aspirating syringe will commence by
1998. See "Risk Factors -- Ability to Develop 3cc Syringe."
30
<PAGE>
Sales, Marketing and Distribution
The Company's initial marketing efforts will be directed primarily to
UNICEF, WHO and public hospitals and health facilities in New York. The Company
also intends to market its locking clip syringes to (i) governments of
developing countries, (ii) private hospitals and health facilities in New York,
New Jersey and Connecticut, and (iii) retail distributors in the United States.
The Company also plans to license its patents and proprietary manufacturing
processes relating to its locking clip and other syringe designs to established
medical device manufacturers. To stimulate demand for its safety syringes, the
Company plans to initiate promotional and educational campaigns directed at (i)
public health officers and other government officials responsible for public
health policies, (ii) doctors and administrators of healthcare facilities
responsible for treatment of HIV-AIDS patients, and (iii) liability insurance
companies. The Company plans to enter into arrangements with independent sales
agents and distributors in targeted markets and to hire a marketing director
after the Closing.
Production
The Company's syringes will be assembled primarily by Harmac, one of the
largest independent, privately-owned contract manufacturers of medical products
in the United States, at its production facility in Buffalo, New York. The
Company has entered into a manufacturing agreement with Harmac for the assembly
of syringes, using assembly and packaging equipment supplied by the Company. The
manufacturing agreement may be terminated by Harmac or the Company upon 90 days'
prior written notice at the end of any calendar year. Sherwood will supply most
of the components for the syringes assembled by Harmac. See "Business --
Suppliers." The Company has commenced production of clip-plunger subassemblies
at Harmac's facilities, which it exports to INSERPOR for final assembly of its
syringes. The Company expects that Harmac will commence complete assembly of its
syringes before the end of June 1997. The Company's assembly equipment currently
can operate at approximately 45% of its rated capacity. The Company expects
production of its syringes at Harmac will be at or close to 100% of its rated
capacity before the end of 1997. See "Risk Factors -- Dependence on Certain
Assemblers" and "Risk Factors -- Interruptions to Production."
The Company also has entered into a letter of understanding with INSERPOR,
a Portuguese syringe manufacturer, for the assembly by INSERPOR of
non-aspirating syringes for orders, if any, received from relief agencies such
as WHO, using syringe components supplied by INSERPOR. In addition, INSERPOR
will manufacture the Company's proprietary plunger for its aspirating and
non-aspirating syringes. INSERPOR commenced production of the Company's syringes
in January 1997. The Company has sold approximately 1,777,000 locking clip
syringes produced by INSERPOR, including over 900,000 to WHO. See "Risk Factors
- -- Dependence on Certain Assemblers."
Initially, the Company will produce only 1cc locking clip syringes in
aspirating and non-aspirating models. The Company's syringes consist of a
standard needle, barrel, rubber stopper, a ratcheted plunger designed by the
Company, and a pronged stainless steel locking clip designed by the Company. The
Company has obtained a patent on its stainless steel locking clip, and has been
granted a patent for the design of a plunger which, when combined with the
locking clip, results in a narrow barrelled difficult to reuse, locking syringe.
The locking clip and plunger can be assembled, with minor modifications, into
barrels manufactured by Becton-Dickinson, Sherwood, Terumo and other syringe
manufacturers. The plunger is made from plastic materials which are readily
available from numerous sources and is currently manufactured by Sherwood and
INSERPOR. The locking clip is made of stainless steel and cut and formed for the
Company by Harmac. The Company owns or otherwise controls all production tooling
used by suppliers of these components.
Capacity can be expanded by purchasing new production systems. The Company
plans to use a portion of the net proceeds of the Offering to acquire production
equipment for an additional production line to be placed at Harmac and a clip
attachment line to be placed at INSERPOR.
Suppliers
The Company has entered into a supply agreement with Sherwood (the
"Sherwood Supply Agreement"), pursuant to which Sherwood has agreed to supply
the Company with at least 50 million syringe component sets per year (or
4,166,667 per month), each set consisting of a syringe barrel, with or without a
permanently pre-
31
<PAGE>
attached needle and sheath or separate hooded needle, and a plunger tip and up
to 8,333,333 non-aspirating syringe plungers per month, against receipt of
purchase orders from the Company at specified prices, subject to revision for
cost increases (not to exceed 5% during any twelve month period). In addition,
in order for Sherwood to commit to the minimum supply requirements under the
Sherwood Supply Agreement, the Company has agreed to pay Sherwood 14.925% of the
cumulative invoiced amount of components in excess of $3,350,000 up to a maximum
invoiced amount of $6,700,000 (or a maximum of $500,000) and Joel Schoenfeld,
Dr. Alan H. Gold, David Shonfeld and John Frank agreed, jointly and severally,
to pay Sherwood up to $1,000,000 (less $0.14925 for each dollar paid to Sherwood
under the Sherwood Supply Agreement) in the event the Company fails to pay a
cumulative invoiced amount of $6,700,000 over the first three years of the
Sherwood Supply Agreement. The Sherwood Supply Agreement is for a term of five
years, but may be extended under certain circumstances if prior thereto Sherwood
enters into a license agreement to manufacture and sell the Company's locking
clip syringe. In connection with the Sherwood Supply Agreement, Sherwood sold
all of its right, title and interest in and to the production mold for the
plunger, including the mold inserts and insert base (together, the "Plunger
Mold") to the Company in consideration for an option to enter into a
non-exclusive license to manufacturer and sell the Company's locking clip
syringes in the United States (the "License Agreement"). The Company also
entered into a lease agreement with Sherwood pursuant to which it leased back
the Plunger Mold to Sherwood (the "Equipment Lease") for a period of six years
for use in the manufacture and production of the plungers as part of the
assembly of non-aspirating syringes using the Company's proprietary design
specifications. Sherwood is required to make aggregate rental payments of
$1,946,016 in 36 equal consecutive monthly installments of $54,056, over the
first three years of the term of the Equipment Lease. In July 1996, the Company
sold the Plunger Mold, subject to the Equipment Lease, together with the
Company's right to the payments under the Equipment Lease, to a financial
institution for net cash consideration of $1,600,000 ($1,837,904 less expenses
of approximately $238,000). In connection with such sale, the financial
institution agreed to sell the Plunger Mold back to the Company for a nominal
amount upon expiration of the term of the Equipment Lease.
Sherwood has the right to exercise its option to enter into the License
Agreement at any time prior to November 30, 1999. Upon exercise of the option,
Sherwood is required to pay the Company a royalty advance of $100,000, against
which royalty payments may be offset. Under the License Agreement, Sherwood is
required to pay the Company a royalty equal to 5% of net sales. The License
Agreement may be terminated by Sherwood upon 30 days prior written notice. If on
or before February 1, 1998, the Company receives a bona fide written offer from
an unrelated third party to exclusively license the Company's patent rights for
its locking clip syringe, Sherwood, within 30 days notice of such offer, has the
right to exercise its option to enter into the License Agreement or to enter
into an exclusive license on the same terms and conditions set forth in the
third party offer. In the event of a third party offer, the Company has the
right to buy-out the option rights granted Sherwood for $100,000.
Competition
The Company's principal competition is from traditional disposable
syringes. Becton-Dickinson, Sherwood and Terumo control approximately 74%, 19%
and 5%, respectively, or a total of approximately 98%, of the worldwide syringe
market, and are substantially larger, more established and have significantly
greater financial, sales and marketing, distribution, engineering, research and
development and other resources than the Company. To the Company's knowledge,
only Becton-Dickinson and Bader, a German machine tool manufacturer, distribute
commercially a line of difficult to reuse syringes, none of which allow for
aspiration. The Bader DestroJect syringe and the Becton-Dickinson SOLOSHOT
syringe were developed specifically for WHO-UNICEF-EPI immunization programs.
The Bader DestroJect syringe and the Becton-Dickinson SOLOSHOT syringe were
designed to dispense a dosage of .5cc only, whereas the UNIVEC 1cc locking clip
syringe was designed to dispense dosages from .05cc to .95cc. The Company
believes that UNIVEC syringes are more effective than competitive difficult to
reuse syringes and that they are competitively priced. There can be no assurance
that the major syringe manufacturers or others will not commence production of
1cc difficult to reuse syringes, or locking syringes which aspirate, or that the
Company will be able to successfully compete in this market.
Patents and Proprietary Rights
The Company's policy is to seek patent protection for all developments,
inventions and improvements that are patentable and which have potential value
to the business of the Company and to protect as trade secrets other
confidential and proprietary information.
32
<PAGE>
In 1995, the Company was granted a United States patent for a locking clip
device not biased against the plunger. The patent is broad enough to include
several applications of the design covering the first series of products to be
marketed by the Company. The Company also has filed a United States patent
application for a plunger design which, in conjunction with its patented locking
clip, results in a narrow barrel difficult to reuse syringe that allows for
aspiration during use. In addition, the Company has licensed the rights to two
other locking device patents. The Company licensed these patents to develop a
3cc locking syringe. The Company is obligated to make certain minimum annual
royalty payments in respect of the licensed rights to these two locking device
patents and, to the extent the Company's products utilize the claims and designs
of the licensed patents, to pay royalties to the owner of the licensed patents
ranging from 2% to 6% of net sales (or in the case of products produced under
sublicenses granted to third parties, 10% to 40% of royalties received from
those parties).
The Company also has filed patent applications for its locking clip and
aspirating plunger in certain foreign countries participating in the Patent
Cooperation Treaty (Canada, Brazil, Mexico, certain European countries, Japan,
South Korea, China, Russia and Australia). However, patent applications filed in
foreign countries and patents granted in such countries are subject to laws,
rules and procedures that differ from those in the United States, and
accordingly, patent protection in such countries may be different from patent
protection provided by United States laws. Strategically, the Company seeks
manufacturing processes and agreements that will enable it to have reliable
quality and the lowest production costs. By protecting its manufacturing
processes, which enable the quality and cost competitiveness of its products,
the Company believes that it can defend market share regardless of foreign
patent protections, which are often unenforceable or non-existent in many world
markets (e.g., China and India). See "Risk Factors -- Uncertainty Regards
Patents and Proprietary Technology; Risk of Future Litigation."
The Company has patents and licenses suitable for a 3cc syringe. All of
these inventions have U.S. patent protection, but most of these inventions lack
foreign patent protection. However, the Company has filed for patent protection
in certain European countries for one of its licenses, which is the basis for
the 3cc non-aspirating syringe that the Company plans to develop. For the
aspirating model, the choice of design will depend upon certain factors,
including patent protection, manufacturing costs, ability to control quality and
product features. It is anticipated that production of the Company's 3cc
non-aspirating syringe will commence by 1998. See "Risk Factors -- Uncertainty
Regarding Patents and Proprietary Technology; Risk of Future Litigation."
The future success of the Company may depend upon the strength of its
patents. The Company believes that the scope of its patents and licenses is
sufficient to prevent competitors from introducing devices of similar design to
its current products and that its patents are valid and enforceable. However,
there can be no assurance that the Company's patents will not be challenged,
invalidated or circumvented in the future or that the rights granted thereunder
will provide a competitive advantage.
The Company is not aware of any patent infringement claims against the
Company or of any infringement of the Company's patents. Litigation to enforce
patents issued to the Company, to protect proprietary information owned or
licensed by the Company, or to defend the Company against claimed infringement
of the rights of others, could be costly and could divert the resources of the
Company from other planned activities. There can be no assurance that the
Company would be successful in any such litigation.
The Company protects its proprietary information and trade secrets,
including all aspects of its syringe assembly system, through confidentiality
agreements with its employees and suppliers.
The Company has registered trademarks UNIVEC(R), and Rx Ultra(R), and the
symbol representing no second use, (i.e., the number 2 crossed out inside of a
circle), with the United States Patent and Trademark Office. See "Risk Factors
- -- Uncertainty Regarding Patents and Protection of Proprietary Technology."
33
<PAGE>
Government Regulation
The manufacture and distribution of medical devices are subject to
extensive regulation by the FDA and, in some instances, by foreign and state
governments. Pursuant to the Federal Food, Drug, and Cosmetic Act, as amended,
and the regulations promulgated thereunder (collectively, the "FDC Act"), the
FDA regulates the clinical testing, manufacture, labeling, sale, distribution
and promotion of medical devices. Before a new device can be introduced into the
market, a manufacturer must obtain FDA permission to market through either the
510(k) pre-market notification process or the costlier, lengthier and less
certain pre-market approval ("PMA") application process. The FDA has granted the
Company 510(k) clearance to market its 1cc locking clip syringe, which has been
classified as a Class II device under the FDC Act, and accordingly, the Company
may market and sell its 1cc locking clip syringe in the United States, subject
to compliance with other applicable FDA regulatory requirements. As a Class II
device, performance standards may be developed for the 1cc locking clip syringe
which the product would then be required to meet. Failure to meet those
standards would require the Company to discontinue the marketing of the product.
Furthermore, manufacturers of medical devices are subject to recordkeeping
requirements and required to report adverse experiences relating to the use of
the device. Device manufacturers are also required to register their
establishments and list their devices with the FDA and with certain state
agencies and are subject to periodic inspections by the FDA and certain state
agencies.
Medical devices are subject to strict federal regulations regarding the
quality of manufacturing ("Good Manufacturing Practices" or "GMP"). GMP
regulations impose certain procedural and documentation requirements upon the
Company with respect to manufacturing and quality assurance activities. The FDA
conducts periodic audits and surveillance of the manufacturing, sterilizing and
packaging facilities of medical device manufacturers to determine compliance
with GMP requirements. The failure of a medical device manufacturer to be able
to show in the audit or post-market surveillance that it has adequately complied
with GMP requirements can result in penalties or enforcement proceedings being
imposed on the manufacturer. These procedures may include a product recall of a
product or a "cease distribution" order which would require the manufacturer to
direct its distributors and sales agents to stop selling products, as well as
other enforcement sanctions. Harmac's manufacturing facilities have been
certified as satisfying GMP requirements. Harmac's facilities will be subject to
extensive audits in the future, pursuant to standard FDA procedure. No assurance
can be given that when Harmac is audited that it will be found to be in
compliance with GMP requirements, or that if it is not found in compliance, what
penalties, enforcement procedures or compliance effort will be levied on or
required of Harmac and/or the Company. Recently adopted GMP requirements,
including those pertaining to design control, are likely to increase the cost of
GMP compliance. Noncompliance with applicable requirements, including GMP
requirements, can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant pre-market clearance or pre-
market approval for devices, withdrawal of marketing approvals, and criminal
prosecution. The FDA also has the authority to request repair, replacement or
refund of the cost of any device manufactured or distributed by the Company.
The introduction of the Company's products in foreign markets will also
subject the Company to foreign regulatory clearances which may impose additional
substantive costs and burdens. The Company's products are required to satisfy
international manufacturing standards for sale in certain foreign countries.
Harmac expects to achieve ISO 9001 certification by the end of the second
quarter of 1997. However, until Harmac obtains ISO 9001 certification, the
Company will have difficulty selling to some export accounts, particularly in
Europe. INSERPOR expects to obtain ISO 9002 in 1997. International sales of
medical devices are subject to the regulatory requirements of each country. The
regulatory review process varies from country to country. Many countries also
impose product standards, packaging requirements, labeling requirements and
import restrictions on devices. In addition, each country has its own tariff
regulations, duties and tax requirements.
The approval by the FDA and foreign government authorities is unpredictable
and uncertain, and no assurance can be given that the necessary approvals or
clearances for the Company's products will be granted on a timely basis or at
all. Delays in receipt of, or a failure to receive, such approvals or
clearances, or the loss of any previously received approvals or clearances,
could have a materially adverse effect on the business, financial condition and
results of operations of the Company. Furthermore, approvals that have been or
may be granted are subject to continual review, and later discovery of
previously unknown problems may result in prod-
34
<PAGE>
uct labeling restrictions or withdrawal of the product from the market.
Moreover, changes in existing requirements or adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. There can be no assurance that the Company will not be
required to incur significant costs to comply with applicable laws and
regulations in the future. Failure to comply with applicable laws or regulatory
requirements could have a materially adverse effect on the Company's business,
financial position and results of operations.
Facilities
The Company occupies its executive offices in Garden City, New York
(comprised of approximately 1,200 square feet of space) pursuant to a lease
which expires in December 1998; however, the Company may extend the term of the
lease for an additional two years. Rental expense for the space is $28,704 per
annum, subject to an increase of 4% per annum in each subsequent year. Dr. Alan
H. Gold, the President, a Director and principal stockholder of the Company, is
the president and a stockholder of the owner of the premises, the Long Island
Plastic Surgical Group.
The Company is seeking approximately 25,000 square feet of warehouse space,
and intends to use a portion of the net proceeds of the Offering for furniture,
fixtures and equipment for a warehouse facility.
Employees
As of April 1, 1997, the Company employed five persons, including one in
sales and marketing, one in research and development, one in regulatory affairs
and quality assurance and two in financial administration. The Company also has
engaged the services of several independent contractors. None of the Company's
employees is covered by a collective bargaining agreement.
The Company intends to hire a full-time marketing director upon completion
of the Offering and to staff its warehouse facility with four people.
Litigation
The Company is not involved in any legal proceedings.
35
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The directors, executive officers and key employees of the Company are as
follows:
Name Age Position
- ---- ---- --------
Joel Schoenfeld 52 Chairman of the Board; Chief Executive
Officer; and a Director
Alan H. Gold* 50 President and a Director
David Shonfeld 41 Director of Research and Development
and a Director
David Chabut 38 Chief Financial Officer
Flora Schoenfeld 51 Treasurer and Secretary
John Frank* 57 Director
Richard Lerner* 52 Director
- ------------
* Member of Audit Committee
Joel Schoenfeld, the founder of the Company, has been Chairman of the Board
and Chief Executive Officer of the Company since its inception in August 1992.
Mr. Schoenfeld was the founder and President of J&B Schoenfeld, a global trading
company whose main focus was on the import, export and processing of pelts and
hides, specializing in trade with the USSR and Europe.
In 1988, Mr. Schoenfeld formed the American-Russian International Trading
Company ("AMRU"), which advised on trade agreements between the USSR and United
States. AMRU's broad base of interest and expertise enabled it to take on such
diverse projects as a joint venture with the Soviet government and military
known as AMRU-STAR, the representation of the Soviet Space Agency to Washington,
D.C., the introduction of western advertising to the USSR in conjunction with
another American company, Transportation Displays, Inc. ("TDI"), and the
construction of a studio producing children's films for international
distribution.
As a result of the political changes in the former USSR, Mr. Schoenfeld
sought to further his business strategies. In 1990, he founded Joel Schoenfeld &
Associates in Garden City, New York. With affiliate offices in Moscow, San Jose,
London, and Boston, the company's purpose was to originate, structure,
capitalize, negotiate and advise on the implementation of import and export
trade transactions, projects and programs.
Mr. Schoenfeld has been a commercial attache and a consultant to a number
of foreign and multinational governments. Currently, Mr. Schoenfeld is an
advisor to United Nations Development Programs ("UNDP"). Previously, he served
as:
o Senior Advisor to the Costa Rican Ambassador to the United Nations
o Senior Advisor and Coordinator, Chief of Staff to the Chairman of the
Committee of States Parties to the International Covenant on Civil and
Political Rights to the United Nations
o Senior Economic and Trade Advisor to the United Nations Commission on
Transnational Corporations
Mr. Schoenfeld is the husband of Flora Schoenfeld.
Alan H. Gold, M.D., has been President of the Company since July 1996 and a
Director of the Company since inception in August 1992. Dr. Gold has been a
plastic surgeon since 1972, and is president of the Long Island Plastic Surgical
Group. He is a vice president and board member of Day-Op Center of Long Island,
a privately-owned surgery center in New York. Dr. Gold is a medical advisor to
the UNDP.
David Shonfeld has been Director of Research and Development of the Company
since its inception in August 1992. From December 1988 to February 1992, he was
Vice President of Research and Development of Shyder, Inc. (a designer of air
purification systems). In 1986 and 1987, he was a participant in a "think-tank"
for Israel Aircraft Industries, developing a new security system for Israel's
borders. From 1983 to 1986, he super-
36
<PAGE>
vised a project involving "high-speed fiber optic communications" for IBM
France. From 1980 to 1983, he continued his university studies at Israel's
Technion Institute, majoring in physics and specializing in electronics and
electro-optics. From 1977 to 1980, he worked as a manager of automation,
robotics and production systems for Aloni Tiles, an international manufacturing
concern.
David Chabut has been the Chief Financial Officer of the Company since
October 1995. From January 1994 to September 1995 and from April 1992 to January
1993, Mr. Chabut was a self-employed financial consultant. From February 1993 to
December 1993, he was chief operating officer for MediMax, Inc. (which invested
in accounts receivable financing of health care providers), where he directed
marketing, treasury and administration. From August 1982 to March 1992, Mr.
Chabut was a senior consultant for Coopers & Lybrand in Chicago and New York
where he advised several companies about improving or starting operations. Mr.
Chabut is a CPA and earned an MBA from the University of Michigan.
Flora Schoenfeld has been Treasurer and Secretary of the Company since its
inception in August 1992. Since March 1992, she also has been Treasurer and
Secretary of Joel Schoenfeld & Associates. From 1980 to 1992, she was Treasurer
and Secretary of J & B Schoenfeld, Inc. Flora Schoenfeld is the wife of Joel
Schoenfeld.
John Frank has been a consultant to the Company in the areas of corporate
development and strategic planning since its inception in August 1992. Mr. Frank
has been Chief Information Officer of The Hartford Steam Boiler Inspection and
Insurance Co. since August 1996. From October 1994 to August 1996, he was
Special Projects Manager for Electronic Data Systems Corporation. From August
1993 to September 1994, he was the chief auditor of Travelers Insurance
Companies. From September 1991 to July 1993, he was a principal of Lipera Frank
Inc., of which he was a co-founder. From January 1982 to September 1991, Mr.
Frank was a partner of Coopers & Lybrand, where he managed strategic planning
and financial management engagements for Fortune 500 clients. Mr. Frank is a CPA
and earned an MBA from Harvard University.
Richard Lerner has been a Director of the Company since inception in August
1992. He is President of Lerner, Gordon & Hirsch, P.C., a law firm.
All directors hold office until the annual meeting of stockholders of the
Company following their election or until their successors are duly elected and
qualified. Officers are appointed by the Board of Directors and serve at its
discretion.
Directors do not receive any cash compensation from the Company for service
as members of the Board of Directors; however, the Company reserves the right to
adopt a policy providing for compensation of independent directors.
37
<PAGE>
Summary Compensation Table
The following table sets forth the compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and each other executive officer
of the Company whose salary and bonus for the years ended December 31, 1995 and
1996 exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------- -------------------------------
Other Annual
Name and Principal Position Year Salary Compensation Securities Underlying Options
- ---------------------------------- ------- -------------- --------------- -------------------------------
<S> <C> <C> <C> <C>
Joel Schoenfeld, Chairman of the
Board and Chief Executive
Officer ........................ 1996 $192,000(1) -- --
David Chabut, Chief Financial
Officer ........................ 1996 $104,051(2) $ 15,949(3) 20,513(4)
</TABLE>
- ------------
(1) The Company accrues compensation expense for Joel Schoenfeld at a rate of
$192,000 per annum, plus benefits, which include a car allowance
(approximately $8,500) and life/disability/health insurance (approximately
$7,500).
(2) Includes health insurance benefits.
(3) Represents the amount to be reimbursed to Mr. Chabut for taxes incurred in
connection with his exercise of certain stock options described in footnote
(4) below.
(4) Represents options granted to Mr. Chabut at $3.50 per share, exercisable
until March 31, 1999. Mr. Chabut has exercised options to purchase 16,143
shares and has advised the Company that he intends to exercise options to
purchase an additional 4,370 shares concurrently with the Closing. See
"Management -- Stock Options" and "Certain Transactions."
Employment Agreements
The Company has entered into an employment agreement with Joel Schoenfeld
pursuant to which he serves as Chairman of the Board and Chief Executive Officer
of the Company at a salary of $192,000 per annum. The agreement provides Mr.
Schoenfeld with life, disability and health insurance benefits. The Company also
has agreed to reimburse Mr. Schoenfeld for automobile lease payments under his
existing vehicle lease, or alternatively, to provide him with an automobile
allowance of $10,800 per annum, and at the expiration of the vehicle lease, to
pay him the fair market value of the vehicle if he elects to exercise the option
to purchase the vehicle pursuant to the lease. The employment agreement expires
on March 28, 2000.
The Company has entered into an employment agreement with David Chabut
pursuant to which he serves as Chief Financial Officer of the Company at a
salary of $120,000 per annum (including health insurance benefits). The
agreement expires on September 30, 1997.
David Shonfeld is employed as Director of Research and Development of the
Company pursuant to an employment agreement which expires on July 30, 1997. The
agreement may be terminated by the Company or Mr. Shonfeld upon not less than 30
days prior written notice at any time after December 31, 1996. Under the
agreement, Mr. Shonfeld is compensated at the rate of $50 per hour for research
and development performed on a project basis.
The employment agreements with Messrs. Schoenfeld, Chabut and Shonfeld
contain non-competition covenants that prohibit each of them, directly or
indirectly, from engaging in a competitive business (as defined) for a period of
twelve months following the termination of employment. The foregoing restriction
does not apply to Mr. Schoenfeld if the Company does not offer to extend or
renew his employment following the expiration of his employment agreement on
terms not less favorable to him than those set forth in his employment
agreement.
38
<PAGE>
Stock Options
The following table contains information concerning the grant of stock
options to Joel Schoenfeld and David Chabut (the "Named Executive Officers")
during the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
Number of Shares Percent of Total Options
Underlying Options Granted to Employees in Exercise Price
Name Granted Fiscal Year Per Share Expiration Date
- ----------------------- --------------------- --------------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Joel Schoenfeld ...... 0 -- -- --
David Chabut ......... 20,513 100% $3.50 March 31, 1999
</TABLE>
The following table summarizes for each of the Named Executive Officers the
total number of unexercised options, if any, held at December 31, 1996, and the
aggregate dollar value of in-the-money, unexercised options, held at December
31, 1996. The value of the unexercised, in-the-money options at December 31,
1996, is the difference between their exercise or base price and the value of
the underlying Common Stock on December 31, 1996, at an assumed price of $3.50
per share.
Aggregated Option Exercises -- January 1, 1996 --
December 31, 1996 and December 31, 1996 Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Shares Acquired Upon Number of Securities In-The-Money
Exercise of Options during Underlying Unexercised Options at
Fiscal 1996 Options at December 31, 1996 December 31, 1996
---------------------------- -------------------------------- -------------------------------
Name Number Value Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------- --------- ----------------- -------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Joel Schoenfeld ... -- -- -- -- -- --
David Chabut ...... 16,143* -- 4,370 -- -- --
</TABLE>
- ------------
* The Company will reimburse Mr. Chabut for $15,949 in taxes incurred by him in
connection with the exercise of these options.
Stock Option Plan
The Board of Directors has adopted, and the Company's stockholders have
approved, the 1996 Stock Option Plan (the "Plan"). The Plan is to be
administered by the Board of Directors or a committee thereof. Pursuant to the
Plan, options to purchase 4,709,219 shares of Common Stock may be granted to
directors, employees (including officers) and consultants to the Company
(collectively, "Plan participants").
The Plan authorizes the issuance of incentive stock options ("ISOs"), as
defined in Section 422A of the Internal Revenue Code of 1986, as amended, and
non-qualified stock options ("NQSOs", and together with ISOs, "Options").
Consultants and directors who are not also employees of the Company are eligible
for grants of only NQSOs. The exercise price of each ISO may not be less than
100% of the fair market value of the Common Stock at the time of grant, except
that in the case of a grant to an employee who owns 10% or more of the
outstanding stock of the Company or a subsidiary or parent of the Company (a
"10% Stockholder"), the exercise price may not be less than 110% of the fair
market value on the date of grant. The aggregate fair market value of the shares
covered by ISOs granted under the Plan that become exercisable by a Plan
participant for the first time in any calendar year is subject to a $100,000
limitation. The exercise price of each NQSO is determined by the Board, or
committee thereof, in its discretion; provided that the exercise price of an
NQSO granted a 10% Stockholder may not be less than 110% of the fair market
value on the date of grant.
Options to purchase 3,710,513 shares of Common Stock have been granted
pursuant to the Plan, including Time Accelerated Restricted Stock Options to
purchase 3,690,000 shares of Common Stock granted to officers and directors of
the Company at an exercise price of $3.50 per share. Time Accelerated Restricted
Stock Options are exercisable commencing upon the earliest of (i) April 12,
2006, (ii) April 24, 2000, if the Company has at least $30,000,000 in gross
revenues and net income of at least $2,000,000 for the fiscal year ended
December 31, 1999, (iii) April 24, 2001, if the Company has at least $45,000,000
in gross revenues and net income of at least $3,000,000 for the fiscal year
ended December 31, 2000, (iv) April 24, 2002, if the Company has at least
39
<PAGE>
$60,000,000 in gross revenues and net income of $4,000,000 for the fiscal year
ended December 31, 2001, or (v) immediately upon the occurrence of a "change in
control" (as defined) of the Company. In no event may a Time Accelerated
Restricted Stock Option be exercised after the tenth anniversary of the date of
grant. Time Accelerated Restricted Stock Options to purchase 2,130,000 shares
and 120,000 shares have been granted to Joel Schoenfeld and David Chabut,
respectively. ISOs to purchase an additional 20,513 shares also have been
granted to Mr. Chabut under the Plan. Mr. Chabut has exercised options to
purchase 16,143 shares and intends to exercise options to purchase an additional
4,370 shares concurrently with the Closing. See "Management -- Stock Options"
and "Certain Transactions."
Subject to the provisions of the Plan, the Board, or committee thereof, has
the authority to determine the individuals to whom the stock options are to be
granted, the number of shares to be covered by each option, the type of option,
the exercise period, the restrictions, if any, on the exercise of the option,
the terms for the payment of the exercise price and other terms and conditions.
Payments by holders of options upon exercise of any option may be made (as
determined by the Board or a committee thereof) in cash, by delivery of shares
of Common Stock or such other form of payment as may be permitted under the
Plan.
Indemnification of Officers and Directors and Limitation on Directors' Liability
The Company's Restated Certificate of Incorporation provides for
indemnification of directors and officers in conformity with Section 145 of the
Delaware General Corporation Law, as amended (the "DGCL"), which authorizes the
Company to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions.
Insofar as indemnification for liabilities arising under the Securities 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 Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
The Company's Restated Certificate of Incorporation also contains a
provision eliminating the personal liability of a director to the Company or its
stockholders for damages for breach of fiduciary duty as a director to the
fullest extent permitted by the DGCL, as the same exists or may thereafter be
amended.
CERTAIN TRANSACTIONS
From its inception in August 1992, the Company's operations have been
funded through advances from Joel Schoenfeld, Flora Schoenfeld and two companies
affiliated with Mr. Schoenfeld (collectively, the "Schoenfeld Parties"), and
certain other stockholders of the Company. As of December 30, 1996, the amount
due to these stockholders and affiliates with respect to the repayment of these
advances (including accrued interest) was as follows: the Schoenfeld Parties --
$1,160,877; Dr. Alan H. Gold -- $115,665; and John Frank -- $118,390. The
Company issued its demand promissory notes evidencing its obligation to repay
the foregoing advances, together with accrued interest on the outstanding
principal amount thereof at 8% per annum. On December 30, 1996 and January 24,
1997, the Schoenfeld Parties and Dr. Alan H. Gold exchanged for cancellation
their notes for an aggregate of 1,160 shares and 115 shares, respectively, of
the Company's Series A Preferred Stock. See "Description of Securities -- Series
A Preferred Stock." Concurrently with the Closing, the Company will issue
approximately 34,397 shares of Common Stock to Mr. Frank, a director of the
Company, in exchange for the cancellation of the amount payable to him ($120,390
as of March 31, 1997). In addition, as of December 31, 1996, the Company had
accrued compensation payable to the Schoenfeld Parties in the amount of
$644,391, including management fees of $382,191 for periods prior to June 30,
1994. Since June 30, 1994, the Company has recorded a salary expense for Mr.
Schoenfeld in lieu of management fees due to affiliates of Mr. Schoenfeld. See
"Management -- Summary Compensation Table." On March 12, 1997, the Company
issued 644 shares of Series A Preferred Stock to Mr. Schoenfeld in exchange for
the cancellation of the amount payable to him for unpaid compensation.
40
<PAGE>
In connection with the formation of the Company, and in consideration for
the dilution resulting to Joel Schoenfeld and Flora Schoenfeld (the then owner
of all of the Company's outstanding shares) from the issuance by the Company of
333,333 shares and 205,128 shares to Dr. Alan H. Gold and David Shonfeld,
respectively, each of Dr. Gold and David Shonfeld delivered to Flora Schoenfeld
his promissory note in the amount of $750,000, the payment of which each of them
agreed to secure by a pledge of his shares. The promissory notes were
subsequently transferred to Joel Schoenfeld, the husband of Flora Schoenfeld,
who is the Chief Executive Officer and Chairman of the Board of the Company. The
promissory notes are non-interest bearing and payable on demand.
In connection with the Sherwood Supply Agreement, Joel Schoenfeld, Dr. Alan
H. Gold, David Shonfeld and John Frank agreed, jointly and severally, to pay
Sherwood up to $1,000,000 (less $0.14925 for each dollar paid to Sherwood under
the Sherwood Supply Agreement) in the event the Company fails to pay a
cumulative invoiced amount of $6,700,000 over the first three years of the
Sherwood Supply Agreement. See "Business -- Suppliers."
On October 10, 1996, UNIVEC-NY, the then owner of all of the outstanding
capital stock of the Company, was merged with and into the Company, solely for
the purpose of effecting a change in its state of incorporation from New York to
Delaware. In the merger, shareholders of UNIVEC-NY received 10,256.3954 shares
of Common Stock for each share of UNIVEC-NY common stock owned, with the total
number of shares issuable to each shareholder rounded up to the nearest whole
share.
The Company occupies its executive offices, consisting of approximately
1,200 square feet of space, pursuant to a lease which expires in December 1998;
however, the Company has the right to extend the term of the lease for an
additional two years. Rental expense for the space is $28,704 per annum, subject
to an increase of 4% per annum in each subsequent year. Dr. Alan H. Gold, the
President, a Director and principal stockholder of the Company, is the president
and a stockholder of the owner of the premises, the Long Island Plastic Surgical
Group.
In December 1996, David Chabut, the Chief Financial Officer of the Company,
exercised options to purchase 16,143 shares of Common Stock, having an exercise
price of $3.50 per share, the exercise price of which was paid for by the
cancellation of amounts payable to him for accrued, but unpaid compensation
($44,000) and certain advances ($12,500). Mr. Chabut has advised the Company
that he intends to exercise options to purchase an additional 4,370 shares of
Common Stock (at $3.50 per share) concurrently with the Closing, and to pay the
exercise price of these options by cancellation of amounts payable to him for
accrued but unpaid compensation ($15,295). The Company has agreed to pay the
remaining amount due to Mr. Chabut ($15,949) for federal and state withholding
and payroll taxes incurred by him in connection with the exercise of such
options. See "Management -- Stock Options."
All future transactions between the Company and its directors, officers and
owners of more than five percent of the Company's voting securities will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties and will be approved by a majority of the disinterested directors
of the Company.
41
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Common Stock immediately prior to and after the
Offering by (i) each stockholder known by the Company to be a beneficial owner
of more than five percent of the outstanding Common Stock, (ii) each director of
the Company and each executive officer of the Company listed in the Summary
Compensation Table under the caption "Management -- Summary Compensation Table"
and (iii) all directors and officers as a group.
<TABLE>
<CAPTION>
Percentage of Common
Stock Benefically
Amount and Owned
Nature of Beneficial -------------------------------------------
Name Ownership(1) Before Offering(2) After Offering(3)
- ------------------------------------------ ---------------------------- --------------------- -------------------
<S> <C> <C> <C>
Joel and Flora Schoenfeld(4) ............ 333,333(5)(6) 30.80% 12.72%
Alan H. Gold, M.D.(4) .................. 333,333(5) 30.80% 12.72%
David Shonfeld(4) ........................ 256,410(6) 23.69% 9.78%
John Frank(7) ........................... 141,275(8) 12.40%(9) 5.34%(10)
Richard Lerner ........................ 41,026 3.79% 1.57%
David Chabut(4) ........................ 20,513(11) 1.89%(12) *
All directors and executive officers as a
group (7 persons) ..................... 1,125,890(13)(14) 98.48%(15) 42.59%(16)
</TABLE>
- ------------
* Less then 1%
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated, subject to community property
laws, where applicable. For purposes of computing the percentage of
outstanding shares held by each person or group of persons named above as
of the date of the Prospectus, any security which such person or group of
persons has the right to acquire within 60 days after such date is deemed
to be outstanding for the purpose of computing the percentage ownership for
such person or persons, but is not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person. Accordingly, the
information presented in the foregoing table does not include shares of
Common Stock issuable upon (i) conversion of the Series A Preferred Stock
(which may not be converted prior to April 24, 1999) or (ii) Time
Accelerated Restricted Stock Options (which may not be exercised prior to
the earliest of (x) April 24, 2006, (y) the attainment of certain financial
performance criteria or (z) the occurrence of a "change in control," as
defined). See "Description of Securities -- Series A Preferred Stock" and
"Management -- Stock Option Plan."
(2) Except as otherwise stated, calculated on the basis of 1,082,287 shares of
Common Stock issued and outstanding.
(3) Except as otherwise stated, calculated on the basis of 2,621,054 shares of
Common Stock issued and outstanding. Gives effect to (i) the issuance and
sale of 1,500,000 shares of Common Stock in the Offering, (ii) the issuance
to a director of the Company concurrently with the Closing of approximately
of 34,397 shares of Common Stock in exchange for the cancellation of
amounts payable to him ($120,390 as of March 31, 1997), and (iii) the
issuance to an officer of the Company concurrently with the Closing of
4,370 shares upon exercise of an option. See "Certain Transactions."
(4) Address is c/o the Company, 999 Franklin Avenue, Garden City, New York
11530.
(5) All of the shares owned by Dr. Gold have been pledged to secure certain
indebtedness to Joel Schoenfeld. Dr. Gold retains voting and dispositive
power with respect to the pledged shares until the occurrence of a default
in the payment of the indebtedness secured by the pledged shares.
Accordingly, the pledged shares have been included in the number of shares
beneficially owned by Dr. Gold and excluded from the number of shares
beneficially owned by Mr. Schoenfeld. See "Certain Transactions."
(6) All of the shares owned by Mr. Shonfeld have been pledged to secure certain
indebtedness to Joel Schoenfeld. Mr. Shonfeld retains voting and
dispositive power with respect to the pledged shares until the occurrence
of a default in the payment of the indebtedness secured by the pledged
shares. Accordingly, the pledged shares have been included in the number of
shares beneficially owned by Mr. Shonfeld and excluded from the number of
shares beneficially owned by Mr. Schoenfeld. See "Certain Transactions."
(7) Address is c/o The Hartford Steam Boiler Insurance & Inspection Co., P.O.
Box 5204, One State Street, Hartford, Connecticut 06102-5024.
(8) Includes approximately 34,397 shares to be issued to Mr. Frank concurrently
with the Closing in exchange for cancellation of amounts payable to him
($120,390, including accrued interest, as of March 31, 1997), and 22,236
shares issuable upon exercise of options, at an exercise price of $3.50 per
share, which expire on February 22, 1999.
<PAGE>
(9) Calculated on the basis of 1,138,920 shares of Common Stock issued and
outstanding.
(10) Calculated on the basis of 2,643,290 shares of Common Stock issued and
outstanding.
(11) Includes 4,370 shares issuable upon exercise of options, at an exercise
price of $3.50 per share, which expire on March 31, 1999. Mr. Chabut has
advised the Company that he intends to exercise options to purchase these
shares concurrently with the Closing. See "Certain Transactions."
(12) Calculated on the basis of 1,086,657 shares of Common Stock issued and
outstanding.
(13) For purposes of this calculation, shares of Common Stock beneficially owned
by more than one person have only been included once.
(14) Includes 22,236 shares and 4,370 shares issuable upon exercise of options
held by Messrs. Frank and Chabut, respectively, and approximately 34,397
shares to be issued to Mr. Frank concurrently with the Closing in exchange
for cancellation of amounts payable to him ($120,390 as of March 31, 1997).
See footnotes (8) and (11) above.
(15) Calculated on the basis of 1,143,290 shares of Common Stock issued and
outstanding.
(16) Calculated on the basis of 2,643,290 shares of Common Stock issued and
outstanding.
42
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, $0.001 par value per share, 2,500 shares of Series A 8%
Cumulative Convertible Preferred Stock, $0.001 par value per share (the "Series
A Preferred Stock"), and 4,997,500 shares of "blank check" preferred stock,
$0.001 par value per share. As of the date of the Prospectus, 1,082,287 shares
of Common Stock and 1,919 shares of Series A Preferred Stock are issued and
outstanding.
The following are brief descriptions of the securities offered hereby and
other securities of the Company. The rights of the holders of shares of the
Company's capital stock are established by the Company's Restated Certificate of
Incorporation, the Company's By-laws and Delaware law. The following statements
do not purport to be complete or give full effect to statutory or common law,
and are subject in all respects to the applicable provisions of the Restated
Certificate of Incorporation, By-laws and state law.
Common Stock
Holders of the Common Stock are entitled to one vote per share, and subject
to the rights of holders of the Series A Preferred Stock or any other series of
preferred stock, to receive dividends when, as and if declared by the Board of
Directors and to share ratably in the assets of the Company legally available
for distribution to holders of Common Stock in the event of the liquidation,
dissolution or winding up of the Company. Holders of the Common Stock do not
have subscription, redemption, conversion or preemptive rights.
Each share of Common Stock is entitled to one vote on any matter submitted
to the holders, including the election of directors. Holders of Common Stock do
not have cumulative voting rights; therefore, holders of a majority of the
outstanding shares of Common Stock entitled to vote for the election of
Directors may elect all of the Directors to be elected, if they so choose, and
in such event, the holders of the remaining shares will not be able to elect any
of the Company's Directors. Except as otherwise required by the DGCL, all
stockholder action (other than the election of Directors, who are elected by
plurality vote), is subject to approval by a majority of the shares of Common
Stock present at a stockholders' meeting at which a quorum (a majority of the
issued and outstanding shares of Common Stock) is present in person or by proxy,
or by written consent pursuant to Delaware law.
All shares of Common Stock outstanding are fully paid and non-assessable,
and the shares of Common Stock offered hereby and the shares of Common Stock
issuable upon exercise of the Warrants, when issued upon payment of the purchase
price set forth on the cover page of the Prospectus or payment of the exercise
price specified in the Warrants, as the case may be, will be fully paid and
non-assessable.
The Board of Directors is authorized to issue additional shares of Common
Stock within the limits authorized by the Company's Restated Certificate of
Incorporation without further stockholder action. The Company has agreed with
the Underwriters that it will not issue any securities, including but not
limited to shares of Common Stock, prior to April 24, 1999, except as disclosed
in or contemplated by this Prospectus, without the prior written consent of the
Representative.
Warrants
The Warrants offered hereby will be issued in registered form under a
Warrant Agreement (the "Warrant Agreement") between the Company and Continental
Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent").
Each Warrant will be separately transferable and will entitle the
registered holder thereof to purchase one share of Common Stock at $4.50 per
share (subject to adjustment as described below) commencing April 24, 1999 and
ending April 23, 2002 (the "Exercise Period"). The exercise price and the number
of shares of Common Stock issuable upon the exercise of each Warrant are subject
to adjustment in the event of a stock split, stock dividend, recapitalization,
merger, consolidation or certain other events. A holder of Warrants may exercise
such Warrants by surrendering the certificate evidencing such Warrants to the
Warrant Agent, together with
43
<PAGE>
the form of election to purchase on the reverse side of such certificate
attached thereto properly completed and executed and the payment of the exercise
price and any transfer tax. If less than all of the Warrants evidenced by a
Warrant certificate are exercised, a new certificate will be issued for the
remaining number of Warrants.
The Company has authorized and reserved for issuance a number of shares of
Common Stock sufficient to provide for the exercise of the Warrants. When
issued, upon payment of the exercise price specified in the Warrants, each share
of Common Stock will be fully paid and nonassessable. Holders of Warrants will
not have any voting or other rights as stockholders of the Company unless and
until Warrants are exercised and shares issued pursuant thereto.
The Warrants may be redeemed by the Company, at a price of $.05 per
Warrant, upon not less than 30 days prior written notice at any time during the
Exercise Period, with the prior written consent of the Representative, provided
the average of the closing bid quotations of the Common Stock, during the period
of twenty (20) consecutive trading days ending on the third day prior to the
date upon which notice of redemption is given, as reported on The Nasdaq
SmallCap Market (or if the Common Stock is not quoted thereon, the closing sale
price of the Common Stock on the Nasdaq National Market or other principal
securities exchange upon which the Common Stock is then quoted or listed, or
such other reporting system that provides closing sale prices for the Common
Stock), has been at least $8.00 per share. The Warrants will be exercisable
until the close of business on the day immediately preceding the date fixed for
the redemption of the Warrants in the notice of redemption.
The Company will pay the Representative a fee of 8% of the exercise price
of each Warrant exercised, provided (i) the market price of the Common Stock on
the date the Warrant was exercised was equal to or greater than the Warrant
exercise price on that date, (ii) the exercise price of the Warrant was
solicited by a member of the NASD, (iii) the Warrant was not held in a
discretionary account, (iv) the disclosure of compensation arrangements was made
in documents provided to the holders of the Warrants, (v) the solicitation of
the exercise of the Warrant was not a violation of Rule 101 of Regulation M
under the Exchange Act and (vi) the Representative is designated in writing as
the soliciting NASD member. The Representative and any other soliciting
broker/dealers will be prohibited from engaging in any market making activities
or solicited brokerage activities with regard to the Company's securities during
the periods prescribed by Rule 101 of Regulation M before the solicitation of
the exercise of any Warrant until the later of the termination of such
solicitation activity or the termination of any right the Representative and any
other soliciting broker/dealer may have to receive a fee for the solicitation of
the exercise of the Warrants.
For a holder of a Warrant to exercise the Warrant, there must be a current
registration statement on file with the Securities and Exchange Commission and
various state securities commissions. The Company will be required to file
post-effective amendments to the registration statement when events require such
amendments and to take appropriate action under state securities laws. While it
is the Company's intention to file post-effective amendments when necessary and
to take appropriate action under state securities laws, there can be no
assurance that the Company will file all post-effective amendments required to
maintain the effectiveness of the registration statement or that the Company
will take all appropriate action under state securities laws. If the
registration statement is not kept current for any reason, the Warrants will not
be exercisable, and holders thereof may be deprived of value.
Options and Warrants
Options. As of the date of the Prospectus, there are outstanding options to
purchase an aggregate of 3,750,042 shares of Common Stock at an exercise price
of $3.50, which expire at various dates from February 22, 1999 through April 11,
2007, including Time Accelerated Restricted Stock Options to purchase 3,690,000
shares. See "Management -- Stock Option Plan." David Chabut, Chief Financial
Officer of the Company, has advised the Company that he intends to exercise
options to purchase 4,370 shares of Common Stock concurrently with the Closing.
See "Certain Transactions." In addition, 998,706 shares of Common Stock have
been reserved for issuance upon exercise of options which may be granted in the
future pursuant to the Company's 1996 Stock Option Plan. See "Management --
Stock Option Plan."
Warrants. As of the date of the Prospectus, there are outstanding warrants
to purchase an aggregate of 1,750,000 shares of Common Stock having terms
identical to the Warrants offered hereby. See "Description of Securities --
Bridge Financing."
44
<PAGE>
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without further stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
that could decrease the amount of earnings and assets available for distribution
to holders of Common Stock or adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. As of
the date of the Prospectus, no shares of preferred stock are outstanding, other
than the 1,919 shares of Series A Preferred Stock owned by the Schoenfeld
Parties and Dr. Alan H. Gold. Except for shares of Series A Preferred Stock
which may be issued in payment of dividends on the Series A Preferred Stock, the
Company has no present intention to issue any shares of preferred stock. The
Company has agreed with the Underwriters that, except for issuances disclosed in
or contemplated by this Prospectus, it will not issue any securities, including
but no limited to any shares of preferred stock, prior to April , 1999, without
the prior written consent of the Representative. See "Certain Transactions" and
"Description of Securities -- Series A Preferred Stock."
Series A Preferred Stock
The Board of Directors has authorized the issuance of up to 2,500 shares of
Series A Preferred Stock, of which 1,919 shares, owned by the Schoenfeld Parties
and Dr. Alan H. Gold are outstanding. The terms of the Series A Preferred Stock
are as follows:
Dividend Rights. Holders of Series A Preferred Stock are entitled to
receive, prior to the payment of cash dividends on the Common Stock, cumulative
dividends at the rate of $80 per share per annum, and no more, when, as and if
declared by the Company's Board of Directors, out of funds legally available
therefor. Dividends on the Series A Preferred Stock are payable, in the sole and
absolute discretion of the Board of Directors, in cash, additional shares of
Series A Preferred Stock (based upon the liquidation value thereof), or a
combination thereof. Dividends may not be paid or declared on, and no other
distributions may be made with respect to, and no expenditure shall be made for
the purchase, redemption or retirement of, any of the Company's capital stock
junior to or in parity with the Series A Preferred Stock, unless all cumulative
dividends payable on the Series A Preferred Stock for all prior annual dividend
periods have been paid. The Company has agreed with the Underwriters that it
will not declare or pay any cash dividends on the Series A Preferred Stock
without the prior written consent of the Representative.
Redemption. The Series A Preferred Stock is not subject to redemption.
Liquidation Rights. Subject to the prior rights of the Company's creditors
and the holders of senior securities, the holders of the Series A Preferred
Stock are entitled to receive, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, $1,000 per share, plus
accrued and unpaid dividends. If, in any such case, the assets of the Company
are insufficient to make such payment in full, then the available assets will be
distributed among the holders of the Series A Preferred Stock and any other
series of preferred stock which is in parity with the Series A Preferred Stock,
ratably in proportion to the full amount to which each holder would be entitled.
Conversion Rights. Each share of Series A Preferred Stock is convertible
into 222.22 shares of Common Stock (the "conversion rate"), subject to
adjustment in certain events, at the option of the holder thereof commencing
April 24, 1999. The conversion rate is subject to adjustment in the event of a
stock split, stock dividend, recapitalization, merger, consolidation or certain
other events. The right of conversion with respect to the shares of the Series A
Preferred Stock called for redemption will terminate at the close of business on
the business day preceding the date fixed for redemption. Upon conversion, no
payment or allowance will be made in respect of any accrued but unpaid dividends
on the Series A Preferred Stock.
Voting Rights. Holders of Series A Preferred Stock have no voting rights,
except as may be required by law.
45
<PAGE>
Statutory Provisions Affecting Stockholders
Following the consummation of the Offering, the Company will be subject to
Section 203 of the Delaware General Corporation Law, the State of Delaware's
"business combination" statute. In general, such statute prohibits a publicly
held Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless (i) the transaction in which the interested stockholder
obtained such status or the business combination is approved by the Board of
Directors prior to the date the interested stockholder obtained such status;
(ii) upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by (a) persons who are directors and
officers and (b) employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or (iii) on or subsequent to
such date the "business combination" is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the "interested stockholder." A "business combination" includes mergers, asset
sales and other transactions resulting in financial benefit to a stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of a corporation's
voting stock. The statute could prohibit or delay mergers or other takeover or
change in control attempts with respect to the Company and, accordingly, may
discourage attempts to acquire the Company.
Bridge Financing
In November and December 1996, the Company sold an aggregate of 40 Units,
each Unit consisting of the Company's 8% promissory note in the principal amount
of $25,000 (the "Bridge Notes") and Bridge Warrants to purchase 62,500 shares of
Common Stock for a purchase price of $25,000 per Unit (or an aggregate of
$1,000,000). The Bridge Notes are payable upon the earlier of November 27, 1997
or the consummation of an initial public offering or private placement of the
Company's debt and/or equity securities resulting in gross proceeds to the
Company of at least $5,000,000. Each Bridge Warrant entitles the registered
holder thereof to purchase one share of Common Stock at an exercise price of
$4.50 per share, subject to adjustment in certain events, at any time during the
period commencing November 27, 1997 and ending on November 26, 2001. The Bridge
Warrants will convert automatically into warrants having terms identical to the
Warrants being offered in the Offering on the date of the Prospectus. The net
proceeds of the Bridge Financing (approximately $820,000) were used in part to
purchase machinery ($235,000) and for sales and marketing ($235,000). The
Company used the remaining net proceeds as working capital, including the
payment of some of the expenses of the Offering. Bridge Warrants to purchase
750,000 shares have been surrendered to the Company for cancellation without
consideration.
Registration Rights
Investors who acquired Bridge Warrants in connection with the Bridge
Financing have the right to request registration of the Bridge Warrants (or
securities issued in exchange therefor) and the shares of Common Stock issued or
issuable upon exercise thereof in any registration statement filed by the
Company with the Commission under the Securities Act (with certain exceptions)
for the issuance and sale of its securities. The Company has registered for
resale pursuant to the Selling Securityholder Prospectus warrants to purchase
1,750,000 shares of Common Stock (having terms identical to the Warrants offered
hereby) issued on the date of the Prospectus upon automatic conversion of the
Bridge Warrants, and the shares of Common Stock issuable upon exercise of those
warrants. The Company also has registered for resale pursuant to the Selling
Securityholder Prospectus 33,436 shares of Common Stock issuable upon exercise
of an option granted to an individual who through an affiliated entity, provided
the Company with debt financing in 1995. The Company granted that individual
piggyback and demand registration rights with respect to those shares. Investors
in the Bridge Financing and the optionee have agreed not to sell or otherwise
dispose of securities of the Company, including shares of Common Stock (except
under certain circumstances in connection with a third party tender offer for
the Common Stock), prior to April 24, 1999, without the prior written consent of
the Representative, which may be granted or with-
46
<PAGE>
held in the sole and absolute discretion of the Representative. The
Representative has agreed that it will not release the restrictions imposed by
the Lock-Up Agreements with respect to the Warrants offered by the Selling
Securityholder Prospectus prior to April 24, 1998. See "Selling Securityholder
Offering."
Shares Eligible for Future Sale
Upon completion of the Offering, the Company will have 2,621,054 shares of
Common Stock outstanding, of which 1,500,000 will be transferable under the
Securities Act. The remaining 1,121,054 shares, issued in private transactions,
will be "restricted securities" (as that term is defined in Rule 144 promulgated
under the Securities Act) which may be publicly sold only if registered under
the Securities Act or if sold in accordance with an applicable exemption from
registration, such as Rule 144. In general, under Rule 144 as currently in
effect, subject to the satisfaction of certain other conditions, a person,
including an affiliate of the Company, who has beneficially owned restricted
securities for at least two years (which holding period will be reduced to one
year under an amendment to Rule 144 that becomes effective April 29, 1997), is
entitled to sell (together with any person with whom such individual is required
to aggregate sales), within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or, if the Common Stock is quoted on The Nasdaq Stock Market or a
national securities exchange, the average weekly trading volume during the four
calendar weeks preceding the sale. A person who has not been an affiliate of the
Company for at least three months, and who has beneficially owned restricted
securities for at least three years (which holding period will be reduced to two
years under an amendment to Rule 144 that becomes effective April 29, 1997) is
entitled to sell such restricted shares under Rule 144 without regard to any of
the limitations described above. Officers, directors and other securityholders
of the Company owning and/or having rights to acquire in the aggregate 2,926,726
shares of Common Stock (exclusive of options to purchase 3,690,000 shares of
Common Stock that may not be exercised prior to the earliest of (x) April 12,
2006, (y) the attainment of certain performance criteria, or (z) the occurrence
of a "change in control", as defined, of the Company), have entered into
agreements not to sell or otherwise dispose of any securities of the Company,
including shares of Common Stock, prior to April 24, 1999 (the "Lock-Up
Agreements"), without the prior written consent of the Representative, which may
be granted or withheld in the sole and absolute discretion of the
Representative; provided, however, that if prior to April 24, 1999, the
Company's shares of Common Stock are subject to a tender offer and holders of
the Company's Common Stock (other than the existing stockholders) agree to
tender a majority of the outstanding shares of Common Stock to the offeror, then
the Representative shall release all stockholders subject to the Lock-Up
Agreement from the restrictions imposed thereby solely for the purpose of
tendering their shares of Common Stock to the offeror pursuant to the terms of
the tender offer. The Company has registered for resale pursuant to the Selling
Securityholder Prospectus (i) warrants to purchase 1,750,000 shares of Common
Stock (having terms identical to the Warrants offered hereby) and the shares of
Common Stock issuable upon exercise thereof, and (ii) 33,436 shares of Common
Stock issuable upon exercise of options, subject to the Lock-Up Agreements. The
Representative has agreed that it will not release the restrictions imposed by
the Lock-Up Agreements with respect to the Warrants offered by the Selling
Securityholder Prospectus prior to April 24, 1998. Following expiration of the
term of the Lock-Up Agreements, or the earlier release of the restrictions
contained therein, 1,121,054 shares will become eligible for resale pursuant to
Rule 144, subject to the volume limitations and compliance with the other
provisions of Rule 144, assuming the sale of all shares pursuant to the Selling
Securityholder Prospectus. Furthermore, the holders of the Underwriters'
Warrants (including the securities issuable upon exercise thereof) have demand
and piggyback registration rights with respect to the shares of Common Stock and
Warrants issuable upon exercise of the Underwriters' Warrants. See "Description
of Securities -- Registration Rights," "Description of Securities -- Options and
Warrants," "Management -- Stock Option Plan," "Certain Transactions,"
"Underwriting" and "Selling Securityholder Offering."
As a result of the Offering, an additional 2,250,000 shares of Common Stock
(2,587,500 if the Over-Allotment Option is fully exercised) will be subject to
issuance upon the exercise of the Warrants offered hereby.
As of April 1, 1997, there were eight record holders of the Common Stock.
Dividend Policy
Since its inception, the Company has not paid any dividends on its Common
Stock and it does not anticipate paying such dividends in the foreseeable
future. The Company intends to retain earnings, if any, to finance its
operations.
47
<PAGE>
Reports to Stockholders
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
certified public accountants after the end of each fiscal year, and will make
available such other periodic reports as the Company may deem to be appropriate
or as may be required by law. The Company's fiscal year end is December 31. The
Company has filed a Registration Statement on Form 8-A with the Commission to
register under, and be subject to the reporting requirements of, the Exchange
Act.
Transfer Agent and Warrant Agent
The Company has engaged Continental Stock Transfer & Trust Company to act
as Transfer Agent for the Company's Common Stock and Warrant Agent for the
Warrants.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the Company has agreed to sell to the Underwriters
named below, for whom Maidstone Financial Inc. is acting as representative (in
such capacity, the "Representative"), and the Underwriters have severally, and
not jointly, agreed to purchase, the number of shares of Common Stock and
Warrants set forth opposite their respective names below.
Shares of
Underwriters Common Stock Warrants
------------ --------------- ----------
Maidstone Financial, Inc. ......... 505,000 757,500
HGI Incorporated .................. 845,000 1,267,500
The Rockefeller Group, Inc. ...... 150,000 225,000
---------- ----------
Total ............................ 1,500,000 2,250,000
========== ==========
The Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent. The Underwriters are committed to
purchase all of the shares of Common Stock and Warrants offered hereby, if any
are purchased.
The Representative has advised the Company that the Underwriters propose
initially to offer the 1,500,000 shares of Common Stock and 2,250,000 Warrants
to the public at the respective initial public offering prices set forth on the
cover page of this Prospectus and that it may allow to selected dealers who are
members of the NASD concessions not in excess of $0.1575 per share of Common
Stock and $.0045 per Warrant, of which not more than $.07875 per share of Common
Stock and $.00225 per Warrant may be re-allowed to certain other dealers.
The Underwriting Agreement also provides that the Representative will
receive a non-accountable expense allowance of 3% of the gross proceeds of the
Offering, of which $55,000 has been paid by the Company to date. The Company
also has agreed to pay all expenses in connection with qualifying the shares of
Common Stock and the Warrants offered hereby for sale under the laws of such
states as the Representative may designate, including expenses of counsel
retained for such purpose by the Underwriters.
Pursuant to the Over-allotment Option, which is exercisable for a period of
45 days after the closing of the Offering, the Underwriters may purchase up to
15% of the total number of shares of Common Stock and Warrants offered hereby,
solely to cover over-allotments.
The Company has agreed to sell to the Underwriters, for nominal
consideration, the Underwriters' Warrants to purchase an amount equal to 10% of
the number of shares of Common Stock and Warrants sold to the public. The
Underwriters' Warrants shall be exercisable for a period of five years
commencing April 24, 1998 at an exercise price equal to 165% of the offering
price of the shares of Common Stock and Warrants sold to the public in the
Offering. The Underwriters' Warrants are not transferable prior to April 24,
1998, except to officers of the Underwriters, members of the selling group and
their officers and partners.
The Company has agreed that, upon written request of the then holder(s) of
a majority of the Warrants and the shares of Common Stock issued and/or issuable
upon exercise of the Underwriters' Warrants (the "Underwriters' Warrant Shares")
which were originally issued to the Underwriters or to their designees, made at
any time within the period commencing one year and ending five years after the
date of the Prospectus, the Company will file, at its sole expense, no more than
once, a registration statement under the Securities Act registering the
Underwriters' Warrant Shares. The Company has agreed to use its best efforts to
cause the registration statement to become effective. The holders of the
Underwriter's Warrants may demand registration without exercising the
Underwriters' Warrants and, in fact, are never required to exercise same.
The Company has also agreed that if, at any time within the period
commencing one year and ending five years after the date of the Prospectus, it
should file a registration statement with the Commission pursuant to the
Securities Act, regardless of whether some of the holders of the Underwriters'
Warrants and the Underwriters' Warrant Shares shall have therefore availed
themselves of any of the registration rights above, the Company, at its own
expense, will offer to said holders (with certain exceptions) the opportunity to
register or qualify the Underwriters' Warrant Shares. The objection of a
subsequent underwriter to the above "piggyback" registration rights would
preclude such inclusion.
49
<PAGE>
In addition to the demand and "piggyback" registration rights, the Company
will cooperate with the then holders of the Underwriters' Warrants and
Underwriters' Warrant Shares in the preparation and execution of any
registration statement required in order to sell or transfer the Underwriters'
Warrant Shares and will supply all information required therefore, but such
additional expenses of such registration statement will be pro-rated between the
Company and the holders of the Underwriters' Warrants and Underwriters' Warrant
Shares according to the aggregate sales price of the securities being issued.
For the life of the Underwriters' Warrants, the holders thereof are given,
at nominal cost, the opportunity to profit from a rise in the market price of
the Common Stock with a resulting dilution in the interest of other
stockholders. Further, such holders may be expected to exercise the
Underwriters' Warrants at a time when the Company would in all likelihood be
able to obtain equity capital on terms more favorable than those provided in the
Underwriters' Warrants.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock and
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase Common Stock or Warrants for the purpose of stabilizing their
respective market prices, The Underwriters also may create a short position for
the account of the Underwriters by selling more shares of Common Stock or
Warrants in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase shares of Common Stock or
Warrants in the open market following completion of the Offering to cover all or
a portion of such short position. The Underwriters may also cover all or a
portion of such short position by exercising the Over-Allotment Option. In
addition, the Representative, on behalf of the Underwriters, may impose "penalty
bids" under contractual arrangements with the Underwriters whereby it may
reclaim from an Underwriter (or dealer participating in the Offering) for the
account of other Underwriters, the selling concession with respect to shares of
Common Stock and Warrants that are distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock and Warrants at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken they may be discontinued at
any time.
The Company has agreed not to issue any shares of Common Stock, preferred
stock or any warrants, options or other rights to purchase Common Stock or
preferred stock prior to April 24, 1999, without the prior written consent of
the Representative, except as contemplated by or as disclosed in the Prospectus.
Officers, directors and other securityholders of the Company owning and/or
having rights to acquire in the aggregate 2,926,726 shares of Common Stock
(exclusive of options to purchase 3,690,000 shares of Common Stock that may not
be exercised prior to the earliest of (x) April 12, 2006, (y) the attainment of
certain performance criteria, or (z) the occurrence of a "change in control", as
defined, of the Company), have entered into agreements not to sell or otherwise
dispose of any securities of the Company, including shares of Common Stock
(except under certain circumstances in connection with a third party tender
offer for the Common Stock), prior to April 24, 1999, without the prior written
consent of the Representative, which may be granted or withheld in the sole and
absolute discretion of the Representative. The Representative has agreed that it
will not release the restrictions imposed by the Lock-Up Agreements with respect
to the Warrants offered by the Selling Securityholder Prospectus prior to April
24, 1998. See "Description of Securities -- Shares Eligible for Future Sale."
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against liabilities in connection with the
Offering, including liabilities under the Securities Act.
The Representative has informed the Company that it has been advised by the
Underwriters that they do not expect sales to discretionary accounts to exceed
2% of the shares of Common Stock and Warrants offered hereby.
The Representative has served as the sole or managing underwriter of only
three firm commitment public offerings and participated in two other
underwritten public offerings as a member of the underwriting syndicate. Since
the Representative's experience in underwriting firm commitment public offerings
is limited, there can be no assurance that its lack of experience may not
adversely affect the public offering of the Company's securities and the
subsequent development, if any, of a trading market for the Company's
securities. See "Risk Factors -- Representative's Influence on the Market;
Possible Limitations on Market Making Activities."
50
<PAGE>
The Company has been advised that each of the Underwriters is subject to an
informal investigation commenced in March 1996 by the Securities and Exchange
Commission. To date, the Commission has only requested certain documents from
the Underwriters and the Underwriters have not been advised of the status of the
investigation. There can be no assurance that a formal order of investigation
will not be issued, or if issued, that sanctions will not be imposed against the
Underwriters. In October 1996, the NASD commenced an examination of certain of
the Underwriters' previous underwritings and has requested documents and
information in connection with those underwritings. The NASD examination is
ongoing and no findings have been made to date. There can be no assurance that
such investigation or examination may not affect the Underwriters' ability to
maintain a market in the Common Stock and Warrants.
The Company has agreed that upon closing of the Offering it will, for a
period of not less than three years, engage a designee of the Representative as
advisor to the Board. In addition and in lieu of the Representative's right to
designate an advisor, the Company has agreed, if requested by the Representative
during such three year period, to nominate and use its best efforts to cause the
election of a designee of the Representative as a director of the Company. The
Representative has not yet designated any such person.
The Representative intends to act as a market maker for the Common Stock
and Warrants after the closing of the Offering.
The Company will pay the Representative a fee of 8% of the exercise price
of each Warrant exercised, provided (i) the market price of the Common Stock on
the date the Warrant was exercised was equal to or greater than the Warrant
exercise price on that date, (ii) the exercise price of the Warrant was
solicited by a member of the NASD, (iii) the Warrant was not held in a
discretionary account, (iv) the disclosure of compensation arrangements was made
in documents provided to the holders of the Warrants, (v) the solicitation of
the exercise of the Warrant was not a violation of Rule 101 of Regulation M
under the Exchange Act and (vi) the Representative is designated in writing as
the soliciting NASD member. The Representative and any other soliciting
broker/dealers will be prohibited from engaging in any market making activities
or solicited brokerage activities with regard to the Company's securities during
the periods prescribed by Rule 101 of Regulation M before the solicitation of
the exercise of any Warrant until the later of the termination of such
solicitation activity or the termination of any right the Representative and any
other soliciting broker/dealer may have to receive a fee for the solicitation of
the exercise of the Warrants.
The Representative acted as placement agent for the Bridge Financing, for
which it received selling commissions of $100,000 and a non-accountable expense
allowance of $30,000.
The Company has agreed to retain the Representative as a management and
financial advisor for a period of 24 months commencing on the date of the
Prospectus at a fee equal to $4,166.67 per month. The entire fee ($106,000) is
payable at the closing of the Offering. In its capacity as an advisor to the
Company, the Representative will be obligated to provide general financial
advisory services to the Company on an as-needed basis with respect to possible
future financing or acquisitions by the Company and related matters. The
Representative is not obligated to provide any minimum number of hours of
advisory services to the Company.
In addition, the Company has agreed to engage a financial public relations
firm reasonably satisfactory to the Representative. The public relations firm
will not be associated with the Representative or HGI Incorporated or any of the
respective affiliates. Such firm, or an acceptable substitute firm, shall be
continuously engaged until a date 24 months from the closing of the Offering.
The initial public offering prices of the shares of Common Stock and
Warrants offered hereby and the initial exercise price and other terms of the
Warrants have been determined by negotiation between the Company and the
Representative and do not necessarily bear any direct relationship to the
Company's assets, earnings, book value per share or other generally accepted
criteria of value. Factors considered in determining the offering prices of the
shares of Common Stock and Warrants and the exercise price of the Warrants
included the business in which the Company is engaged, the Company's financial
condition, an assessment of the Company's management, the general condition of
the securities markets and the demand for similar securities of comparable
companies.
The National Association of Securities Dealers, Inc. (the "NASD") has
advised the Underwriters that it is not issuing any opinion at this time that it
has no objection to any underwriting compensation to be received or
51
<PAGE>
any other terms and arrangements of an offering by the Underwriters or any NASD
member in connection with a sale by the Selling Securityholders. Therefore, no
NASD member would be permitted to participate in a public offering by the
Selling Securityholders of 1,750,000 warrants, the shares of Common Stock
issuable upon exercise of those warrants or the 33,436 shares of Common Stock
issuable upon exercise of options, without filing and receiving an opinion from
the NASD that it has no objection to the underwriting compensation or other
terms and arrangements of an offering. (Member firms of the NASD are referred to
Notice To Members 88-101 for guidance.) As a result, the Selling Securityholders
may be subject to delays or limitations which will affect the liquidity of their
securities.
The Representative has given a representation to the NASD that in the event
any Underwriter enters into any arrangement or intends to sell any of the
warrants or shares to be offered by Selling Securityholders in an offering of
securities, that the Underwriter will make a filing with the NASD, disclosing in
detail the proposed terms and arrangements of any contemplated offer, sale, or
purchase of Selling Securityholder securities in a timely manner so as to permit
the NASD ample time to review and render an opinion as to the reasonableness of
the terms and arrangements of the offering, prior to commencement of the
distribution, including any additional disclosure the NASD may deem necessary.
There can be no assurance that the NASD will issue an opinion that it has no
objections to the underwriting compensation or other terms and arrangements of
an offering. Therefore, absent such an opinion, no NASD member, including the
Underwriters, would be permitted to participate in a public offering by the
Selling Securityholders of 1,750,000 warrants, the shares issuable upon exercise
of those warrants or the 33,436 shares of Common Stock issuable upon exercise of
options.
SELLING SECURITYHOLDER OFFERING
The Company has registered for resale under a separate prospectus (the
"Selling Securityholder Prospectus") as part of the Registration Statement
warrants to purchase 1,750,000 shares of Common Stock (having terms identical to
the warrants offered hereby) and the shares of Common Stock issuable upon
exercise thereof, and 33,436 shares of Common Stock issuable upon exercise of an
option granted to an individual who, through an affiliated entity, provided debt
financing to the Company in 1995. Those warrants were issued in connection with
a bridge financing completed by the Company in December 1996. Each of the
selling securityholders named in the Selling Securityholder Prospectus (the
"Selling Securityholders") has entered into an agreement not to sell or
otherwise dispose of any securities of the Company (except under certain
circumstances in connection with a third party tender offer for the Common
Stock) prior to April 24, 1999, without the prior written consent of the
Representative, which may be granted or withheld in the sole and absolute
discretion of the Representative. The Representative has agreed that it will not
consent to the sale of any of the warrants offered by the Selling
Securityholders pursuant to the Selling Securityholder Prospectus prior to April
24, 1998. See "Description of Securities -- Bridge Financing," "Description of
Securities -- Registration Rights" and "Description of Securities -- Shares
Eligible for Future Sale."
The Company will not receive any proceeds from the sale of the warrants or
shares of Common Stock by the Selling Securityholders, but will receive the
exercise price of the warrants and options exercised. Sales of the securities
offered by the Selling Securityholders, or even the potential for such sales,
would likely have an adverse effect on the market price of the Company's
securities.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Snow Becker Krauss P.C., 605 Third Avenue, New York, New York
10158-0125. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Gersten, Savage, Kaplowitz, Fredericks & Curtin,
LLP, 101 East 52nd Street, New York, New York 10022-6018.
EXPERTS
The consolidated balance sheet as of December 31, 1996 and the consolidated
statements of operations, stockholders' deficiency and cash flows for each of
the two years in the period ended December 31, 1996, included in the Prospectus,
have been included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
52
<PAGE>
Univec, Inc. and Subsidiary
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
------
<S> <C>
Report of Independent Accountants ...................................................... F-2
Consolidated Balance Sheet as of December 31, 1996 .................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 ... F-4
Consolidated Statements of Stockholders' Deficiency for the years ended December 31, 1996 F-5
and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995 ... F-6
Notes to Consolidated Financial Statements ............................................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Univec, Inc.:
We have audited the accompanying consolidated balance sheet of Univec, Inc.
and Subsidiary (the "Company") as of December 31, 1996 and the related
consolidated statements of operations, stockholders' deficiency and cash flows
for each of the two years in the period ended December 31, 1996. 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 Univec, Inc.
and Subsidiary as of December 31, 1996 and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations since its inception and has a net capital deficiency that raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with regard to these matters are also discussed in Note 2.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Coopers & Lybrand L.L.P.
Melville, New York
February 17, 1997, except for
Note 15 as to which
the date is April 15,
1997.
F-2
<PAGE>
Univec, Inc. and Subsidiary
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31,
1996
-------------
<S> <C>
ASSETS:
Cash and cash equivalents ......................................................... $ 328,446
Restricted cash .................................................................. 32,500
Accounts receivable ............................................................... 149,633
Inventory ........................................................................ 239,371
Prepaid expenses other current assets ............................................. 51,462
------------
Total current assets ............................................................ 801,412
Fixed assets, net .................................................................. 806,885
Patent rights, net ............................................................... 72,000
Deferred financing costs, net ...................................................... 783,292
------------
Total assets ..................................................................... $ 2,463,589
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Bridge notes payable ............................................................... $ 1,000,000
Accounts payable .................................................................. 547,738
Accrued expenses .................................................................. 175,195
Notes payable ..................................................................... 125,000
Patent acquisition liability ...................................................... 20,000
------------
Total current liabilities ......................................................... 1,867,933
Unearned income in connection with supply and licensing agreements ............... 1,683,788
Notes payable to officers ......................................................... 675,635
Notes payable to stockholders ...................................................... 116,373
Due to affiliates .................................................................. 4,998
------------
Total liabilities ............................................................... 4,348,727
Commitments (Notes 2 and 12)
Stockholders' deficiency:
Preferred stock $.001 par value; 4,997,500 shares authorized; none issued and
outstanding ....................................................................
Series A 8% Cumulative Convertible Preferred Stock, $.001 par value, 2,500 shares
authorized; 1,269 shares issued and outstanding ................................ 1
Common stock $.001 par value; 25,000,000 shares authorized; issued and outstanding
1,082,287 shares ................................................................. 1,082
Additional paid-in capital ...................................................... 2,459,417
Accumulated deficit ............................................................... (4,253,138)
Less deferred offering costs ...................................................... (92,500)
------------
Total stockholders' deficiency .................................................. (1,885,138)
------------
Total liabilities and stockholders' deficiency ................................... $ 2,463,589
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
Univec, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------
1996 1995
----------------- -----------
<S> <C> <C>
Sales ............................................................ $ 461,131 $1,106,930
Cost of sales ................................................... 346,758 1,016,530
-------------- ------------
Gross profit ................................................... 114,373 90,400
Expenses:
Marketing ...................................................... 189,930 115,431
Product development ............................................. 218,532 299,498
General and administrative .................................... 753,122 433,012
Interest ...................................................... 260,560 153,473
Royalties ...................................................... 133,000 35,000
-------------- ------------
Total expenses ................................................ 1,555,144 1,036,414
-------------- ------------
Net loss ...................................................... $(1,440,771) $ (946,014)
============== ============
Historical and pro forma net loss per share (Note 1) ............ $ (1.36) $ (.89)
============== ============
Historical and pro forma weighted average common stock outstanding
(Note 1) ......................................................... 1,059,299 1,059,001
============== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
Univec, Inc. and Subsidiary
Consolidated Statement of Stockholders' Deficiency
<TABLE>
<CAPTION>
Series A Preferred Common Stock
--------------------- --------------------------
Shares Amount Shares Amount
--------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ........................... 1,025,641 $ 1,025
Issuance of stock .................................... 33,360 34
Shareholder payment of company liability ............
Net loss for the year ended December 31, 1995 .........
------ ------ ---------- -------
Balance, December 31, 1995 ........................... 1,059,001 1,059
Conversion of indebtedness to Series A
Preferred Stock .................................... 1,269 1
Exercise of stock options ........................... 16,143 16
Expenses paid through issuance of common stock ...... 7,143 7
Payment of offering costs ...........................
Warrants issued in connection with private placement
Net loss for the year ended December 31, 1996 .........
------ ------ ---------- -------
Balance, December 31, 1996 ........................... 1,269 $ 1 1,082,287 $ 1,082
====== ====== ========== =======
<CAPTION>
Additional Deferred Total
Paid-in Accumulated Offering Stockholders'
Capital Deficit Costs Equity
------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ........................... $ 98,975 $ (1,866,353) $ (1,766,353)
Issuance of stock .................................... 299,966 300,000
Shareholder payment of company liability ............ 35,000 35,000
Net loss for the year ended December 31, 1995 ......... (946,014) (946,014)
----------- -------------- ----------- -------------
Balance, December 31, 1995 ........................... 433,941 (2,812,367) (2,377,367)
Conversion of indebtedness to Series A
Preferred Stock .................................... 1,268,999 1,269,000
Exercise of stock options ........................... 56,484 56,500
Expenses paid through issuance of common stock ...... 24,993 25,000
Payment of offering costs ........................... (92,500) (92,500)
Warrants issued in connection with private placement 675,000 675,000
Net loss for the year ended December 31, 1996 ......... (1,440,771) (1,440,771)
----------- -------------- ----------- -------------
Balance, December 31, 1996 ........................... $ 2,459,417 $ (4,253,138) $ (92,500) $ (1,885,138)
============ ============== =========== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
Univec, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $ (1,440,771) $ (946,014)
Adjustments to reconcile net loss to net cash used in operating activities:
Payment of Company liability by stockholder issuance of stock for
services ................................................................ 35,000
Depreciation, amortization and other non cash charges .................... 144,941 18,616
Changes in assets and liabilities:
Accounts receivable .................................................... (86,307) (63,326)
Inventory ............................................................. (239,371)
Prepaid expenses and other current assets ............................... (51,462)
Accounts payable and accrued expenses .................................. 455,740 425,735
-------------- -------------
Net cash used in operating activities ................................. (1,217,230) (529,989)
-------------- -------------
Cash flows from investing activities:
Purchase of fixed assets ................................................ (489,005) (373,990)
Payment on note for acquisition of patent ................................. (30,000) (35,000)
-------------- -------------
Net cash used in investing activities ................................. (519,005) (408,990)
-------------- -------------
Cash flows from financing activities:
Proceeds from Bridge Note ................................................ 1,000,000
Proceeds from issuance of common stock .................................... 300,000
Payment of notes ......................................................... (937,000)
Proceeds from issuance of notes .......................................... 397,000 665,000
Issuance of notes to officers ............................................. 108,844
Advances from affiliates/stockholders, net .............................. 36,571 46,430
Deferred debt financing costs ............................................. (179,500)
Deferred offering costs ................................................... (92,500)
Unearned income on supply and licensing agreements ........................ 1,683,788
Restricted funds ......................................................... (32,500)
--------------
Net cash provided by financing activities .............................. 1,984,703 1,011,430
-------------- -------------
Net increase in cash ................................................... 248,468 72,451
Cash at beginning of period ................................................ 79,978 7,527
-------------- -------------
Cash at end of period ...................................................... $ 328,446 $ 79,978
============== =============
Supplemental disclosures:
Cash paid during the year for:
Interest ................................................................. $ 53,599 $ 52,899
Income taxes ........................................................... 2,733 350
Supplemental disclosures of noncash investing and financing activities:
Expenses paid through the issuance of common stock. ..................... $ 25,000
Conversion of debt to affiliates into Series A Preferred Stock. (See
Note 8) .................................................................. 1,269,000 $ 35,000
Shares of common stock issued to an officer of the Company through
conversion of an outstanding note payable. (See Notes 8 and 15) ......... 56,500
Warrants issued in connection with a debt offering ........................ 675,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
Univec, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Operations and Reorganization:
Univec, Inc. (the "Company" or "Univec") was incorporated on August 18,
1992 in the State of New York. The Company was formed to develop, produce,
market medical products and resell medical devices of other companies on a
global basis.
On October 7, 1996, the Company formed a wholly-owned subsidiary organized
under the laws of Delaware. The new corporation has been authorized with
25,000,000 shares of common stock, $.001 par value and 5,000,000 shares of
preferred stock, $.001 par value. The Company merged with its wholly-owned
subsidiary, with the wholly-owned subsidiary being the surviving corporation.
Accordingly, the Company issued 10,256 for each outstanding common share of the
parent company. The accompanying financial statements of the Company
retroactively reflect the foregoing reorganization to present the current
capitalization.
2. Going Concern:
The financial statements have been prepared on a going concern basis, which
contemplates realization of assets and liquidation of liabilities in the
ordinary course of business. The Company has a working capital deficit of
$1,066,521 and a stockholders' deficiency of $1,885,138 as of December 31, 1996.
The ability to continue as a going concern is dependent, among other things,
upon the Company's obtaining adequate long-term financing and the attainment of
profitable commercial operations. Management has signed a letter of intent to
raise additional working capital through an initial public offering ("IPO").
Although management expects that the above factors will allow the Company
to continue as a going concern, there is no assurance that the financing will be
consummated or revenues from product sales will generate profitable operations.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
3. Summary of Significant Accounting Policies:
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Rx Ultra, Inc., which was incorporated on
February 2, 1996. All material intercompany balances and transactions have been
eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments, purchased with
original maturities of three months or less, to be cash equivalents. At December
31, 1996, the Company had $32,500 of restricted cash which is to be used to pay
costs associated with the private placement (see Note 10).
Inventory
Inventory is valued at the lower of cost, determined by the first-in,
first-out method, or market.
Fixed Assets
Fixed assets are stated at original cost less accumulated depreciation.
Fixed assets are depreciated on a straight-line basis over a five to seven-year
useful life depending on the nature of the asset. Maintenance and repairs are
charged to expense as incurred; renewals and improvements which extend the life
of assets are capitalized. Gains or losses on the disposal of fixed assets are
charged to operations.
F-7
<PAGE>
Univec, Inc. and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
Patent Rights and Royalties
Patent rights acquired are capitalized and amortized on a straight line
basis over an estimated useful life of seven years. Royalties based on future
revenues will be charged to operations when and if they are incurred (see
Note 5).
Product Development
Research and development costs are expensed as incurred.
Income Taxes
The Company records its income taxes under the provisions of the Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes," (SFAS
No. 109). This method requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under SFAS No. 109,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse (see Note 11).
The Company had elected treatment as an S corporation for Federal and state
income taxation as of January 1, 1995. S corporation taxable income, whether
distributed or not, is passed through and taxed at the stockholder level.
Accordingly, for the above referenced period, no provision for Federal income
taxes is included in the accompanying statements of operations.
Loss per Share
Loss per share has been computed by dividing net losses by the weighted
average number of common shares outstanding during each period. Retroactive
restatement has been made to all share and per share amounts for the
reorganization discussed in Note 1.
Pro forma loss per share does not differ from historical loss per share,
and there is no effect in converting from an S corporation to a C corporation in
1996 and 1995.
Revenue Recognition
Revenues are recognized when products are shipped. Unearned income in
connection with the supply and licensing agreements are recognized upon sale of
the product supplied by the manufacturer (see Note 12).
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Deferred Offering Costs
At December 31, 1996, the Company has deferred offering costs aggregating
$92,500, in connection with an expected public offering of its equity
securities. If the offering is unsuccessful, such costs will be charged to
operations.
Debt Financing Costs
At December 31, 1996, the Company has incurred debt issuance costs
aggregating $783,292 in connection with a private placement of debt completed
during December 1996 (see Note 10). These costs have been capitalized and are
being amortized to interest expense using the effective interest method over the
life of the related debt. As of December 31, 1996, $71,208 of such costs was
charged to interest expense.
F-8
<PAGE>
Univec, Inc. and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist of cash deposits. Cash balances are held
principally at one financial institution.
The Company's contract manufacturers are concentrated among a few suppliers
and assemblers. The loss of any one supplier or assembler could have a
significant impact on the Company's financial position or results of operations.
Sales for 1996 and 1995 resulted primarily from the resale of medical
devices manufactured by others.
Newly Issued Accounting Standards
Effective 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." SFAS
No. 121 requires that an entity shall review, long-lived assets and certain
identifiable intangibles to be held and used, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If an asset is identified as impaired, the entity shall estimate
future cash flows (undiscounted and without interest) which are expected to
result from the use of the asset and its eventual disposition. If the sum of the
future cash flows is less than the carrying amount of the asset, the entity
shall recognize an impairment loss in accordance with this pronouncement. The
adoption of this statement did not have an impact on the Company's financial
position and results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which established financial accounting and reporting standards
for stock based plans. The Statement requires the Company to choose between
accounting for issuances of stock and other equity instruments to employees
based on their fair value or to continue to use an intrinsic value based method
and disclosing the pro forma effects such accounting would have had on the
Company's net income and earnings per share. The Company has elected to use the
intrinsic value based method, which does not result in compensation cost. Due to
the minimal number of options issued in fiscal 1996 and 1995, the effects of the
adoption are not significant.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
4. Fixed Assets:
Fixed assets consist of the following:
Construction in progress - machinery ...... $ 90,015
Factory equipment ........................ 756,572
Office equipment ........................... 21,335
----------
867,922
Less accumulated depreciation ............ (61,037)
----------
$ 806,885
==========
Depreciation expense was $57,733 and $2,814 in fiscal 1996 and 1995,
respectively.
5. Patent Rights:
On June 30, 1994, the Company entered into an exclusive license agreement
with the estate of an inventor related to two patents for a difficult to reuse
syringe. Such agreement includes fixed payments aggregating $112,000 through
June, 1997. Thereafter, the Company is required to pay quarterly royalty
payments of 5% of net sales of product manufactured by Univec under the license
agreement or 10% of the difference between net
F-9
<PAGE>
Univec, Inc. and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
sales and purchase price of product manufactured under the license agreement by
third parties for Univec shall be made. Univec may grant non-exclusive
sublicenses under the agreement, in which case 10% of any royalties collected by
Univec would be payable to the inventor's estate. If the manufactured product
does not use the difficult to reuse syringe of the type discussed in the patent,
no royalties are due, other than the minimum annual licensing fees.
Patent rights consist of the following:
Patent rights ..................... $ 112,000
Less accumulated amortization ...... (40,000)
----------
$ 72,000
==========
Amortization expense for fiscal 1996 and 1995 was $16,000, respectively.
The Company paid $92,000 through December 31, 1996 in connection with this
agreement, and the remaining fixed payments of $20,000 are scheduled to mature
in fiscal 1997.
6. Accrued Expenses:
Accrued expenses consist of the following:
Payroll ............... $ 36,000
Payroll taxes ......... 22,499
Interest ............... 23,502
Professional fees ...... 45,694
Royalties ............... 25,000
Other .................. 22,500
----------
$ 175,195
==========
7. Notes Payable:
On February 9, 1995, the Company entered into a term note agreement with an
available line of $600,000. This facility is collateralized by the assets of the
Company and bears interest at a rate of 16%. As of December 31, 1995, $540,000
was outstanding under this agreement. During July 1996, the Company repaid the
outstanding balance. Interest expense for fiscal 1996 and 1995 approximated
$60,600 and $49,000, respectively, in connection with this agreement.
In December 1995, the Company issued a demand note payable of $125,000. The
note is collateralized by the assets of the Company and bears an interest rate
of 12-1/2%. Interest expense for 1996 and 1995 approximated $15,600 and $1,300,
respectively. The note agreement contains an option to convert the note into
common shares of the Company at the IPO price (35,715 shares at a proposed share
price of $3.50).
8. Notes Payable to Officers and Stockholders:
In September 1996, the Company entered into an agreement to convert the
outstanding balance of approximately $732,000 owed two officers into notes due
the earlier of two years following an IPO or September 30, 1999. During December
1996, one of the officers converted $56,500 of the indebtedness into common
shares (16,143 shares, at a proposed share price of $3.50).
In December 1996, the Company converted $161,000 of notes payable to
stockholders into Series A Preferred Stock (see Note 13). The remaining $116,373
balance at December 31, 1996 will automatically be converted into common shares
upon the consummation of an IPO (33,250 shares at a proposed share price of
$3.50).
F-10
<PAGE>
Univec, Inc. and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
9. Due to Affiliates:
Upon founding of the Company in August 1992, pending Univec's obtaining its
own financing, the Company's costs were funded by Joel Schoenfeld, an owner
officer of the Company, and JS Associates, and J&B Schoenfeld (together with
Joel Schoenfeld, the "Affiliates"), each of whose sole stockholder is Joel
Schoenfeld. These costs, representing research and development, market analysis
and development and various administrative costs (including office salaries and
rental of office space), were accrued by Univec as paid by the Affiliates. Such
costs have been included in the statement of operations based on the type of
costs incurred to be reimbursed to the Affiliates. The related liability has
been recorded on the balance sheet as due to affiliates. These advances are due
on demand and bear interest at a rate of 8% per annum. Interest expense for
fiscal 1996 and 1995 in connection with these advances approximated $76,100 and
$78,000, respectively. In December 1996, the Company converted $1,108,342 of
these notes to Series A Preferred Stock (see Note 13).
10. Bridge Note:
During December 1996, the Company raised $1,000,000 through a private
placement of 40 units with each unit consisting of an 8% bridge note in the
principal amount of $25,000 and warrants to purchase 62,500 shares of common
stock. Each warrant entitles the holder to purchase one share of common stock at
an exercise price of $4.50 per share at any time during the period commencing
November 27, 1997 and ending on November 26, 2001. The net proceeds of
approximately $820,000 were used for sales and marketing, capital expenditures,
working capital, and general corporate expenses.
These uncollateralized notes are payable upon the earlier of November 27,
1997 or the consummation of an initial public offering, private placement of
debt or equity securities resulting in gross proceeds of at least $5,000,000.
All the warrants issued in connection with the placement were valued at $675,000
and will be amortized to interest expense over the expected term of the debt.
11. Income Taxes:
The Company has cumulative losses of $4,253,138 as of December 31, 1996.
Losses aggregating approximately $1,900,000 which were incurred prior to the
Company changing its tax status to an S corporation would be available should
the Company return to C corporation status. The Company's net operating loss for
tax purposes differs from the loss for financial reporting purposes as a result
of certain costs being capitalized and expensed over a five-year period for tax
purposes. The Company has recorded a full valuation allowance against the
potential future benefit of such deferred tax assets.
Upon closing of the proposed public offering, the Company's income tax
status as an S corporation will terminate. The Company will convert to a C
corporation and will be subject to both Federal and state income taxes.
Accordingly, the Company will record a deferred tax asset of approximately
$760,000 resulting from net operating loss carryforwards and a corresponding
valuation allowance of approximately $760,000. Any income tax adjustment
required as a result of the conversion will be reflected in the period C
corporation status becomes effective.
In addition, the undistributed losses of the S corporation through the date
of consummation of the offering will be reclassified to additional paid-in
capital.
12. Commitments:
On January 1, 1995, the Company entered into an exclusive license agreement
with two inventors related to a patent for an insertable element which prevents
reuse of a disposable syringe. To maintain this license agreement in force, the
Company is required to pay an annual minimum licensing of $10,000. In order for
the agreement to remain exclusive, exclusivity payments of $25,000 in 1996 and
1995 and $50,000 annually thereafter, are required to be made. In both fiscal
1996 and 1995, $35,000 was charged to operations in connection
F-11
<PAGE>
Univec, Inc. and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
with this agreement. Under the license agreement, royalty payments of 2% of net
sales of product manufactured and 25% of sublicense royalties received shall be
made for products which use a modification of the specific insertable element as
shown and described in the licensed patent rights. Royalty payments of 6% of net
sales of product manufactured and 40% of sublicense royalties received shall be
made for products that use the specific insertable element. If the manufactured
product does not use the difficult to reuse syringe of the type discussed in the
patent, no royalties are due, other than the minimum annual licensing fees.
On February 28, 1996, the Company entered into an exclusive license
agreement with an inventor related to a patent for a difficult to reuse
hypodermic syringe. The Company is required to pay a royalty advance of $10,000,
which will be applied towards future royalties. As of December 31, 1996, $10,000
was charged to operations in connection with this agreement. In addition,
royalty payments of 2% of net sales of product manufactured and 10% of
sublicense royalties received shall be made for products which use a
modification of the specific embodiment as shown and described in the licensed
patent rights. Royalty payments of 6% of net sales of product manufactured and
25% of sublicense royalties received shall be made for products that use the
specific embodiment. If the manufactured products which use a modification of
the difficult to reuse syringe of the type discussed in the patent, no royalties
are due, other than the minimum annual licensing fees.
On March 25, 1996, the Company entered into an exclusive license agreement
with an inventor related to a patent for a difficult to reuse hypodermic
syringe. The Company was required to pay $10,000 upon the execution of the
agreement and an additional two payments of $20,000 on the six-month and
one-year anniversaries to maintain the agreement. In connection with this
agreement, the Company has also agreed to pay $15,000 upon signing of a separate
consultation agreement and $39,000 over the next twenty months for consultation
assistance in the development of manufacturing and assembly equipment. As of
December 31, 1996, $72,000 was charged to operations. In addition, royalty
payments of 2% of net sales of product manufactured and 10% of sublicense
royalties received shall be made for products which use a modification of the
specific embodiment as shown and described in the licensed patent rights.
Royalty payments of 7% of net sales of product manufactured and 25% of
sublicense royalties shall be made for products that use the specific
embodiment. If the manufactured product does not use the difficult to reuse
syringe of the type discussed in the patent, no royalties are due, other than
the minimum annual licensing fees.
On May 30, 1996, the Company entered into a five-year supply and licensing
agreement with a manufacturer. The supply agreement requires the manufacturer to
supply Univec with approximately 50,000,000 syringe components per year. In
connection with this supply agreement, the manufacturer sold a production mold
and inserts to Univec for nominal consideration, and subsequently leased back
the equipment. Under this lease, the lessee is required to make payments over
three years approximating $1,946,000 to Univec. In July 1996, Univec assigned
its rights to the last 34 lease payments to an unrelated corporation for
approximately $1.6 million. Certain stockholders of the Company have agreed to
pay the manufacturers up to $1,000,000 (less $0.14925 for each dollar paid by
the Company under the agreement) if Univec does not purchase $6,700,000 of
products from the manufacturer over the first three years of the agreement.
Simultaneous with the supply agreement, the Company granted the
manufacturer the option to license the Company's product providing the
manufacturer the right to manufacture and sell the Company product to certain
segments of the market for a royalty of 5% of sales of the licensed product.
Unearned income in connection with these agreements will be recognized in income
upon the sale of the Company's product supplied by the manufacturer. No amounts
have been recognized in income in 1996.
The Company has executed employment agreements, expiring through March
2000, with certain executive officers of the Company. Future payments under such
agreements are as follows:
1997 ................................ $282,000
1998 ................................ 192,000
1999 ................................ 192,000
2000 ................................ 192,000
---------
$858,000
=========
F-12
<PAGE>
Univec, Inc. and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
The Company leases office space under an operating lease that expires in
December 1998 from a stockholder and officer of the Company. Minimum future
rentals under this lease are $28,704 through fiscal 1998. Rent expense for
fiscal 1996 and 1995 was $27,600, respectively.
13. Equity:
The following share and per share amounts have been restated to reflect the
reorganization as described in Note 1.
In February 1995, the Company's board of directors and stockholders
approved the sale of 33,360 shares of the common stock to a stockholder of the
Company for an aggregate purchase price of $300,000. The individual also
received the option to purchase 22,236 additional shares of common stock at the
initial public offering price. The agreement expires on February 22, 1999.
In June 1995, the Company's board of directors and stockholders approved a
Share Option Agreement between the Company and an individual. The individual has
the option to purchase 33,436 shares of the common stock at the initial public
offering price. As of December 31, 1996, no options were exercised. The
agreement expires on June 30, 1998.
In December 1995, a stockholder of the Company gave 10,256 shares of his
common stock to a creditor of the Company to satisfy a liability for services
rendered. The Company has recorded a $35,000 contribution to paid-in capital.
On December 14, 1996, the Company issued 7,143 shares at a price of $3.50
per share in exchange for the cancellation of $25,000 of indebtedness payable to
a consultant for the Company.
In connection with the reorganization in October 1996 (see Note 1), the
Company authorized the issuance of 1,269 shares of Series A Preferred Stock to
certain officers in exchange for the cancellation of notes due to affiliate and
payable to stockholders of $1,269,000.
Series A preferred shares are entitled to receive, prior to the payment of
cash dividends of the common stock, cumulative dividends at a rate of $80 per
share per annum. In addition, preferred stockholders are entitled to a
liquidation preference of $1,000 per share, plus accrued and unpaid dividends.
Each share of Series A Preferred Stock is convertible at the earlier of two
years following an IPO or September 30, 1999 into 222.22 shares of common stock
($4.50 per share). Holders of these shares have no voting rights.
14. Stock Option Plan:
The Board of Directors has adopted, and the Company's stockholders have
approved, the 1996 Stock Option Plan (the "Plan"). The Plan is to be
administered by the Board of Directors or a committee thereof. Pursuant to the
Plan, options to purchase 4,709,219 shares of common stock may be granted to
directors, employees (including officers) and consultants to the Company
(collectively, "Plan participants"). The Plan authorizes the issuance of
incentive stock options ("ISOs"), as defined in Section 422A of the Internal
Revenue Code of 1986, as amended, and non-qualified stock options ("NQSOs", and
together with ISOs, "Options"). Consultants and directors who are not also
employees of the Company are eligible for grants of only NQSOs. The exercise
price of each ISO may not be less than 100% of the fair market value of the
common stock at the time of grant, except that in the case of a grant to an
employee who owns 10% or more of the outstanding stock of the Company or a
subsidiary or parent of the Company (a "10% Stockholder"), the exercise price
may not be less than 110% of the fair market value on the date of grant. The
aggregate fair market value of the shares covered by ISOs granted under the Plan
that become exercisable by a Plan participant for the first time in any calendar
year is subject to a $100,000 limitation. The exercise price of each NQSO is
determined by the Board, or committee thereof, in its discretion; provided that
NQSO granted a 10% Stockholder be no less than 110% of the fair market value on
the date of grant. On December 14, 1996, the Company granted ISOs to an officer
of the Company to purchase 20,513 shares of common stock at an exercise price of
$3.50 per share. As of December 31, 1996, 16,143 options were exercised.
F-13
<PAGE>
Univec, Inc. and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
The Company has set aside Options to purchase 4,500,000 shares of common
stock based on the criteria listed below. These Options will become exercisable
commencing upon the earlier of (x) nine years after the effective date of the
option, or (y) two years after the effective date of the option, provided that
in the case of clause (y), the Company shall have obtained (i) at least
$30,000,000 in gross revenues and after tax net income of at least $2,000,000 in
the second full fiscal year following the effective date, or (ii) at least
$45,000,000 in gross revenues and $3,000,000 in after-tax net income in the
third full fiscal year following the effective date, or (iii) at least
$60,000,000 in gross revenues and $4,000,000 in after-tax net income in the
fourth full fiscal year following the effective date.
15. Subsequent Event:
In January and March 1997, the Company authorized the issuance of 650
shares of Series A 8% Cumulative Convertible Preferred Stock to certain
shareholders of common stock in exchange for amounts due of $650,000.
In April 1997, the Company granted options to purchase 3,690,000 shares of
common stock to certain officers and directors at $3.50 per share in accordance
with the Company's stock option plan (see note 14). In addition, certain debt
holders surrendered warrants to purchase 750,000 shares of common stock (see
note 10), to the Company for cancellation without consideration.
F-14
<PAGE>
=============================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations in connection with the Offering other
than those contained in the Prospectus and, if given or made, such other
information and representations must not be relied upon as having been
authorized by the Company or the Underwriters. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that there had been no change in affairs of the Company since the
date hereof. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities offered hereby by anyone in
jurisdictions 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
anyone to whom it is unlawful to make such offer or solicitation.
-----------------------------------
TABLE OF CONTENTS
Page
------
Additional Information ........................... 4
Prospectus Summary .............................. 5
Risk Factors .................................... 9
Use of Proceeds ................................. 20
Capitalization ................................. 21
Dilution ....................................... 22
Dividend Policy ................................. 23
Selected Consolidated Financial Information . 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................... 25
Business ....................................... 28
Management ....................................... 36
Certain Transactions ........................... 40
Security Ownership of Certain Beneficial
Owners and Management ........................... 42
Description of Securities ........................ 43
Underwriting .................................... 49
Selling Securityholder Offering .................. 52
Legal Matters .................................... 52
Experts .......................................... 52
Index to Consolidated Financial Statements ...... F-1
-----------------------------------
Until May 19, 1997, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
==============================================================================
<PAGE>
==============================================================================
1,500,000 SHARES OF COMMON STOCK
AND 2,250,000 REDEEMABLE
COMMON STOCK PURCHASE
WARRANTS
UNIVEC, INC.
----------
Prospectus
----------
[GRAPHIC OMITTED] MAIDSTONE FINANCIAL, INC.
[GRAPHIC OMITTED] HGI Incorporated
April 24, 1997
==============================================================================
