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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|_|Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 1997
|_|Transition report under Section 13 or 15(d) of the Securities Act of 1934 for
the transition period from _____________ to ________________
Commission file number 0-22413
UNIVEC, INC.
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(Name of Small Business Issuer in its Charter)
Delaware 11-3163455
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organizatio Identification No.)
999 Franklin Avenue, Garden City, NY 11530
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(Address of Principal Executive Offices (Zip Code)
(516) 294-1000
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(Issuer's Telephone Number, Including Area
Code) Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Common Stock Purchase Warrants
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
-- --
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Revenues for the issuer's most recent fiscal year were $744,751.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the closing price at which the stock was sold on March
13, 1998 was $2,523,373.
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ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes___ No___
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of March 13, 1998, the issuer had 2,981,769 shares of common stock,
$.001 par value, outstanding.
Transitional Small Business Disclosure Format: Yes ___ No _X_
DOCUMENTS INCORPORATED BY REFERENCE
None
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Part I
Item 1. Description of Business.
UNIVEC, Inc. (the "Company" or "UNIVEC") develops, assembles, licenses
and markets safety hypodermic syringes designed to protect the healthcare worker
and patient against cross-infection. The Company also from time to time sells
other medical devices and intends to develop other medication delivery systems.
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.
In 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.
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 accurate dosages
of medicine (e.g., allergy, immunization and insulin medicines). It is more
difficult to deliver up to a .95cc dosage accurately with a syringe barrel that
is greater than 1cc. The Company does not know of any other company that offers
a lcc 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 initial marketing efforts have been directed primarily to
international relief agencies, including the International Red Cross, UNICEF and
the World Health Organization ("WHO"), as well as to public hospitals and health
facilities in the Northeastern United States. Pursuant to programs of
international relief agencies, the Company has shipped its lcc locking clip
syringe to over 30 countries. The Company also intends to market its locking
clip syringes to (i) governments of developing countries, (ii) private hospitals
and health facilities in the Northeastern United States, and (iii) distributors
in the United States. The Company also plans to license its patents and
proprietary manufacturing processes relating to its 1cc locking clip and other
syringe designs. To stimulate demand for its safety syringes, the Company plans
to initiate promotional and educational campaigns directed at (i)
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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 and hepatitis patients, and (iii)
liability insurance companies.
Problems Associated With Traditional Disposable Syringes
In developing countries, accidental or deliberate reuse of disposable
syringes poses a serious risk of transmitting HIV-AIDS, hepatitis and other
blood-borne pathogens. At a conference in September 1997, UNICEF and WHO stated
jointly that "the consequences of re-use are striking. Current estimates put the
number of Hepatitis B cases provoked by four reuses of a syringe at up to 3,740
cases per 100,000 fully immunized children and the number of HIV infections at
81. When these risks are computed against current evidence of the reuse of
syringes, the total global morbidity due annually (to reuse) stands at around 10
million cases of Hepatitis B, 1.8 million cases of Hepatitis C, and 750,000
cases of HIV."
Relief agencies, including UNICEF and WHO, expect to administer almost
a billion injections to women and children through immunization programs in
developing countries in 1998 and 3.5 billion immunizations by 2005. 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.
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
(the "CDC") estimates that nearly half of all new HIV infections are occurring
in intravenous drug users ("IDUs'"). In the United States, up to 30% of pregnant
mothers infected with HIV transmit the virus to their babies, according to the
CDC. Based on a study of children with HIV, who received care at Children's
Hospital of Wisconsin, researchers estimated that the mean total lifetime costs
of caring for children with HIV was over $418,000. In Russia, where HIV-AIDS is
nearly an epidemic because of intravenous
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drug use, Health Ministry figures suggest that it will cost at least $5 billion
a year to treat Russia's AIDS patients in the year 2000 or 50% of Russia's
projected budget for healthcare in that year.
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.
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 and WHO recommended
"the use of auto-destruct syringes instead of disposable, single use syringes in
order to avoid the hazards of unsafe injection practices." 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.
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 prevalent 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
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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 costly to manufacture due to the complexity
of the mechanics required to retract the needle. Retractable Technologies, Inc.
(Texas) markets the Vanish Point(R), a 3cc syringe, at a retail price of $0.50
to hospitals and other health clinics. The Company believes that Vanish Point(R)
provides effective needle stick protection; however, it does not believe that
Vanish Point(R) provides adequate protection against deliberate reuse.
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 at a wholesale price of $0.18 to $0.21. The Company is
developing an extendible barrel sleeve for its 1cc locking clip syringe, as well
as for a 3cc locking syringe to be developed by the Company.
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
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they are competitively priced. Unlike its competitors, the Company markets a
locking clip syringe with a 1cc barrel, which is ideal for dispensing up to a
.95cc dosage of medicine (e.g., allergy, immunization and insulin medicines). It
is more difficult to deliver dosages less than 1cc accurately with a syringe
barrel that is greater than 1cc. Also unlike its competitors, the Company offers
a lcc 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 Programmed on Immunization ("EPI")
manufactured since 1992 by Bader, a German machine tool 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.
Becton-Dickinson
Designed in collaboration with UNICEF, the Becton-Dickinson UNIJECT is
a pre-filled or unit-dose syringe for immunization injections. The Company
believes that its 1cc locking clip syringe delivers medication more accurately
than the UNIJECT. Furthermore, the Company believes that its 1cc locking clip
syringe is easier to hold and inject medications with than the Becton-Dickinson
UNIJECT syringe.
The Becton-Dickinson SOLOSHOT syringe is a non-aspirating syringe
specifically designed for the EPI. 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,
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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.
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 is developing a 3cc, non-aspirating syringe with a luer
(needleless) tip for use in hospitals and health clinics in 1999. In general,
hospitals and health clinics use more 3cc syringes than 1cc syringes. Hospitals
and clinics will have the choice of a syringe barrel with or without an
extendible barrel sleeve.
In March 1998, UNIVEC licensed rights to a United States patent for a
pre-filled or unit-dose syringe which is similar in function to the
Becton-Dickson UNIJECT syringe. The Company believes that its licensed design
for a pre-filled syringe will compete successfully with the Becton-Dickinson
UNIJECT design once it is developed.
Sales, Marketing and Distribution
The Company's initial marketing efforts have been directed primarily to
international relief agencies, including the International Red Cross, UNICEF and
WHO, as well as to public hospitals and health facilities in the Northeastern
United States. Pursuant to programs of international
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relief agencies, the Company has shipped its lcc locking clip syringe to over 30
countries. The Company also intends to market its locking clip syringes to (i)
governments of developing countries, (ii) private hospitals and health
facilities in the Northeastern United States, and (iii) distributors in the
United States. The Company also plans to license its patents and proprietary
manufacturing processes relating to its 1cc locking clip and other syringe
designs. 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 and hepatitis patients, and (iii) liability insurance
companies.
Production
The Company's lcc locking syringes are being assembled by a contract
manufacturer in Portugal pursuant to a letter of intent that the Company intends
to renew prior to its expiration in November 1998. The Portuguese manufacturer
also molds the Company's proprietary plungers for its domestic assembly
facility. The Company owns stamping and assembly equipment at the Portuguese
manufacturer. Currently, the Portuguese manufacturer is unable to offer the
Company credit terms because of its limited financial resources. The Company is
the primary customer of the Portuguese manufacturer.
The Company has commenced production of clip-plunger subassemblies for
its lcc locking clip syringe and intends to commence assembly of its 1cc locking
clip syringe before the end of 1998 at its Mineola, New York production
facility. To ensure a sufficient supply of clip-plunger subassemblies, the
Company has entered into a non-binding letter of intent with a Long Island
contract manufacturer to produce up to 25,000,000 of these subassemblies on an
exclusive basis. The Long Island manufacturer owns the machinery for its
production of clip-plunger subassemblies.
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 locking clip and plunger can be
assembled, with minor modifications, into barrels manufactured by
Becton-Dickinson, Sherwood, Terumo and other syringe manufacturers. A variety of
domestic and foreign manufacturers supply the components for the Company's lcc
locking clip syringe. 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 barreled difficult to
reuse, locking syringe. The stainless steel for the locking clip and the plastic
for the syringe barrels and plungers is readily available from
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several sources. The syringe barrels for most of the syringes sold by the
Company have been manufactured by the Portuguese contract manufacturer. However,
the Company is pursuing alternate sources of supply for certain components.
Should there be a need for a certain component from an alternate supplier, there
can be no assurance that the Company will be able to obtain it on acceptable
terms, and there can be no assurance that production of certain configurations
of its lcc locking syringes will not be delayed. Delays resulting from the
selection of an alternate supplier to produce certain components could have a
materially adverse effect on the Company's business.
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 and
UNIJECT syringes 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 up 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
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.
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
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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.
The Company has licensed the rights to a locking device patent to
develop a 3cc locking syringe. The Company is obligated to make certain minimum
annual royalty payments in respect of the licensed rights to this locking device
patent and, to the extent the Company's products utilize the claims and designs
of the licensed patent, to pay royalties to the owner of the licensed patent
ranging from 2% to 6% of net sales (or in the case of products produced under
sublicenses granted to third parties, 25% to 40% of royalties received from
those parties). This invention has U.S. patent protection, but lacks
foreign patent protection. However, the Company has filed for patent protection
in certain European countries for this invention.
The Company also has licensed the rights to a patent to develop a
pre-filled or unit dose syringe. The Company is obligated to make certain
minimum annual royalty payments in respect of the licensed rights to this patent
and, to the extent the Company's products utilize the claims and designs of the
licensed patent, to pay royalties to the owner of the licensed patent of 5% of
net sales, including net sales under sublicenses granted by the Company. This
invention has U.S. patent protection, but lacks foreign patent protection.
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.
Government Regulation
The manufacture and distribution of medical devices are subject to
extensive regulation by the FDA in the United States, and in some instances, by
foreign and state regulatory authorities. 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
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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 standards for effectiveness and
safety could require the Company to discontinue the manufacturing and/or
marketing of the product in the United States. 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. 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. The Company's manufacturing facilities have not
been certified as satisfying GMP requirements. The Company's facilities will be
subject to extensive audits in the future, pursuant to standard FDA procedure.
No assurance can be given that when the Company 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 the Company. The FDA also has the authority to request
repair, replacement or refund of the cost of any device manufactured or
distributed by the Company, and the failure to meet standards for safety and
effectiveness could require the Company to discontinue marketing and/or
manufacturing its product in the United States. Currently, the Company has no
domestic sales, and its product is assembled by a contract manufacturer in
Portugal which is not regulated by the FDA unless the Portuguese product is sold
in the United States.
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. 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,
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each country has its own tariff regulations, duties and tax requirements. The
Company's products are required to satisfy international manufacturing standards
for sale in certain foreign countries. Although the Company's Portuguese
contract manufacturer expects to obtain ISO 9002 by the end of 1998, until the
contract manufacturer in Portugal obtains ISO 9002 certification, the Company
could have difficulty selling to certain export accounts, particularly in
Europe. Currently, sales to international relief agencies, the Company's primary
market, are not affected by ISO certification or other foreign regulations other
than those regulations which have been imposed by the international relief
agencies, with which the Company has been in compliance.
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 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. 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.
Employees
As of March 1, 1998, the Company employed 5 persons, including two in
sales and marketing, one in research and development and two in financial
administration. The Company also has engaged the services of several independent
contractors, including a company which provides production employees for its
facility in Mineola, New York. None of the Company's employees is covered by a
collective bargaining agreement.
Item 2. Description of Property.
The Company occupies its executive offices in Garden City, New York
(comprised of approximately 1,200 square feet of space) pursuant to a lease that
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 $28,680 per annum,
subject to an increase of 4% per annum in
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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 also occupies a light manufacturing facility in Mineola,
New York pursuant to a lease that expires in October 1998. Minimum future
rentals under this lease are $27,000 for fiscal 1998. At the option of the
Company, the lease can be extended for two renewal periods: from November 1998
to October 1999 for $3,400 per month and from November 1999 to October 2000 for
$3,500 per month.
Item 3. Legal Proceedings.
On February 11, 1998, the Company commenced a lawsuit against American
Home Products Corporation and its subsidiary, Sherwood, Davis & Geck
("Sherwood") in the Supreme Court of the State of New York, Nassau County (Index
No 98-003963) seeking money damages of $500,000,000, plus punitive damages,
alleging fraud, fraudulent inducement, prima facie tort, tortuous interference
with contract, tortuous interference with existing and prospective business
relationships, breach of fiduciary duty, breach of duty of good faith and fair
dealing, breach of confidentiality and misuse of confidential information.
The action arises out of Sherwood's failure to produce components
satisfying the Company's tolerances. There can be no assurance that the Company
will obtain a significant monetary judgment, if any, against Sherwood, or that
the Company's prosecution of the lawsuit will not consume a significant amount
of the Company's limited management and monetary resources.
The Company is not involved in any other legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through the
solicitations of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 1997.
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Since April 24, 1997, the Company's Common Stock and redeemable
Common Stock Purchase Warrants ("Warrants") have traded on the Nasdaq SmallCap
Market under the symbols "UNVC" and "UNVCW", respectively.
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Set forth below are the high and low closing sale prices for the Common
Stock and Warrants on the Nasdaq SmallCap Market for each quarter since April
24, 1997.
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Common Stock Warrants
("UNVC") ("UNVCW")
Quarter Ended High Low High Low
------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
June 30, 1997 (since April 24, 1997) $10.125 $21.625 $ 7.688 $ 0.438
September 30, 1997 $ 4.438 $31.500 $ 1.750 $ 0.313
December 31, 1997 $ 2.500 $01.125 $ 0.813 $ 0.219
March 31, 1998 (through March 27, 1998) $ 1.875 $71.375 $ 0.625 $ 0.219
</TABLE>
(b) As of February 18, 1998, there were 45 holders of record of the
Common Stock. The Company believes that there were over 800 beneficial owners of
the Common Stock as of that date.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements, including the notes
thereto, appearing elsewhere in this report.
The Company has commenced production of its 1cc locking clip syringe at
a contract manufacturer in Portugal and has commenced production of clip-plunger
subassemblies at its Mineola, New York production facility. The Company owns
stamping and assembly equipment at the Portuguese contract manufacturer. Before
the end of 1998, the Company intends to commence assembly of its 1cc locking
clip syringe at its Mineola, New York production facility. To ensure a
sufficient supply of clip-plunger subassemblies, the Company has entered into a
non-binding letter of intent with a Long Island contract manufacturer to produce
up to 25,000,000 of these subassemblies on an exclusive basis. The Long Island
contract manufacturer owns the machinery for its production of clip-plunger
subassemblies. As of March 1998, the Company has sufficient equipment capacity
to generate an operating profit, assuming sufficient orders. Management
anticipates that sales for the three months ended March 31, 1998 will exceed
sales for the three months ended December 31, 1997.
13
<PAGE>
Results of Operations
Fiscal Years Ended December 31, 1997 and 1996
Product Sales. Product sales for the fiscal year ended December 31,
1997 ("Fiscal 1997") increased by approximately $284,000 as compared to the
fiscal year ended December 31, 1996 ("Fiscal 1996") as result of increased sales
of disposable medical devices. In order to fill demand for difficult to reuse
syringes from January to June 1997, the Company obtained and sold an inventory
of difficult to reuse syringes of an alternative design. From July to December
1997, production of the Company's patented 1cc locking clip syringe was
sufficient to meet demand. Some of the revenues for Fiscal 1997 were
attributable to resales of lancets and traditional disposable syringes. Revenues
for Fiscal 1996 were derived primarily from resales of lancets.
Income on Supply and Licensing Agreements. In the second quarter of
1996, the Company entered into an agreement to buy syringe components from
Sherwood (the "Sherwood Supply Agreement"). In consideration for the Sherwood
Supply Agreement and an option to enter into a non-exclusive license to
manufacture and sell the Company's locking clip syringes in the United States,
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. 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. 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 consideration for aggregate rental payments from Sherwood 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. Certain stockholders of
the Company agreed to pay Sherwood up to $1,000,000 (less 14.925% of each dollar
paid by the Company under the Sherwood Supply Agreement) in the event the
Company failed to pay a cumulative invoiced amount of $6,700,000 over the first
three years of the Sherwood Supply Agreement, provided Sherwood was able to
deliver 100,000,000 plungers that met specified tolerances during such period.
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. Because of
the related party guarantees, the Company deferred recognition of approximately
$1,684,000, which equals the net proceeds from the lease payments received and
the 34 payments sold to a financial institution. Unearned income in connection
with these agreements was to be recognized upon the sale of the Company's
locking clip syringes that include components supplied by Sherwood under the
Sherwood Supply Agreement.
During Fiscal 1997, Sherwood acknowledged that it was unable to produce
plungers that met the Company's tolerances, and it returned the Plunger Mold to
the Company. Because the related party guarantees are no longer effective, the
Company has recognized all of the deferred income related to the Sherwood Supply
Agreement during Fiscal 1997. For tax reporting, the Company recognized the
deferred income from the Sherwood Supply Agreement on its 1996 S corporation
return.
14
<PAGE>
Cost of Product Sales. Cost of product sales for Fiscal 1997 increased
by approximately $152,000 as compared to Fiscal 1996. The cost of product sales
for Fiscal 1997 includes primarily the purchase of difficult to reuse syringes.
From January to June 1997, cost of product sales includes primarily the purchase
of difficult to reuse syringes of an alternative design to the Company's
patented 1cc locking clip syringe; from July to December 1997, cost of product
sales includes primarily the manufacture of UNIVEC's patented 1cc locking clip
syringe by the Portuguese contract manufacturer engaged by the Company to
produce its branded products. The cost of product sales for Fiscal 1996 includes
primarily the purchase of lancets.
Marketing. Marketing expense for Fiscal 1997 increased by approximately
$258,000 as compared to Fiscal 1996. This increase is due primarily to
expenditures associated with promoting the Company's locking syringes to target
markets. During Fiscal 1996, the Company decided to spend money on fixed assets
for production rather than marketing.
Product Development. Product development expenses for Fiscal 1997
increased by approximately $109,000 as compared to Fiscal 1996. This increase is
due primarily to expenditures for research and development for safety hypodermic
devices other than the Company's 1cc locking clip syringe. During Fiscal 1996,
the Company decided to spend money on fixed assets for production rather than
product development.
General and Administrative. General and administrative expenses for Fiscal
1997 increased by approximately $762,000 as compared to Fiscal 1996. This
increase is due primarily to increased insurance expenses, professional fees and
expenses associated with the first month of production at its production
facility in Mineola, New York. Included in general and administrative expenses
for Fiscal 1997 is approximately $388,000 in compensation paid in Common Stock
or options to purchase Common Stock issued to consultants; without these
non-cash expenses, general and administrative expenses would have been
approximately $1,128,000, an increase of approximately $375,000 over Fiscal
1996.
Royalty Expense. Royalty expense for Fiscal 1997 decreased by
$73,000 as compared to Fiscal 1996. This decrease is due primarily to
the Company not electing to continue two licensing agreements.
15
<PAGE>
Interest Expense, Net. Net interest expense for Fiscal 1997 increased
by approximately ($491,000) as compared to Fiscal 1996. This increase is due to
the write-off of deferred financing costs as result of the repayment of
promissory notes issued in connection with a bridge financing completed in the
fourth quarter of 1996, which resulted in a non cash charge of approximately
($783,000). Excluding this non cash charge, Fiscal 1997 would have net interest
income of approximately $32,000.
Net Loss. The net loss for Fiscal 1997 decreased by approximately
$268,000 as compared to Fiscal 1996. This decrease is due primarily to non-cash
income recognized from the Sherwood Supply Agreement of approximately
$1,684,000, offset by non-cash expenses of approximately $1,171,000. See the
discussion of General and Administrative Expenses and Interest Expense,
Net, above. Earnings before interest, taxes, depreciation, amortization and
other income ("EBITDA") for Fiscal 1996 was approximately ($1,106,000), as
compared to approximately ($2,002,000) for Fiscal 1997 or an increase of
approximately ($896,000) over Fiscal 1996, which is due primarily to increased
operating expenses (as discussed above), offset partially by higher gross
profits.
Liquidity and Capital Resources
In Fiscal 1997 and 1996, the Company used cash from operating
activities. Net losses in each of these periods greatly affected net cash from
operations. For Fiscal 1997, increased inventory and decreased accounts payable
and accrued expenses were significant uses of cash in addition to the net loss
adjusted for non-cash charges. For Fiscal 1996, increased accounts receivable
and inventory were significant uses of cash in addition to the net loss adjusted
for non-cash charges.
During May 1997, the Company received net proceeds of approximately
$4,997,000 from the sale of 1,725,000 shares of Common Stock and 2,587,500
common stock purchase warrants in its initial public offering. The Company used
approximately $1,031,000 of such net proceeds to pay the principal amount
($1,000,000) and accrued interest (approximately $31,000) on its bridge notes.
The Company's investing activities have consisted primarily of
expenditures for production equipment. Commencing in May 1997, the Company
placed orders to purchase assembly machines, presses, and tools
16
<PAGE>
to increase its capacity to produce safety locking syringes. As of December 31,
1997, the Company had outstanding purchase orders of approximately $900,000 to
purchase syringe components and production equipment.
The Company had available cash of approximately $1,200,000, but no
accounts receivable, at the end of Fiscal 1997. However, as a result of
investments in factory equipment and inventory in anticipation of increased
levels of sales (as to which there can be no assurance), as well as continuing
losses, as of February 28, 1998 the Company only had available cash of
approximately $286,000, plus accounts receivable of approximately $274,000. The
Company is seeking additional long term financing, which may involve
dilution to existing stockholders. However, there can be no assurance as to
when, if ever, the Company will be able to obtain additional long term
financing. Furthermore, there can be no assurance as to whether any additional
long term financing will be sufficient to sustain the current level of
operations until such time, if ever, as the Company achieves profitable
operations. Until the Company achieves profitable operations, it may have to
curtail some of its operations.
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve risks and
uncertainties, including market acceptance of the Company's products, timely
development and acceptance of new products, impact of competitive products,
development of an effective organization, interruptions to production, and other
risks detailed from time to time in the Company's SEC reports and its Prospectus
dated April 24, 1997 (as supplemented by the Prospectus Supplement dated April
29, 1997) forming a part of its Registration Statement on Form SB-2 (File No.
333-20187),
17
<PAGE>
as amended, which was declared effective by the Commission on April 24,
1997.
Item 7. Financial Statements.
The financial statements follow Item 13 of this report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The Company did not have any changes in or disagreements with its
accountants on accounting and financial disclosure.
18
<PAGE>
Item III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(A) of the Exchange Act.
Directors, Executive Officers and Key Employees
The directors, executive officers and key employees of the Company are
as
follows:
Name Age Position
- ---- --- --------
Joel Schoenfeld 53 Chairman of the Board; Chief Executive
Officer; and a Director
Alan H. Gold 51 President and a Director
David Chabut 39 Chief Financial Officer
Flora Schoenfeld 52 Treasurer and Secretary
John Frank 58 Director
Richard Lerner 53 Director
David Jay 68 Director
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.
19
<PAGE>
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 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.
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
20
<PAGE>
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.
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.
David Jay has been a Director of the Company since January 1998. Prior
to his retirement in 1993, he was a CPA.
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.
Meetings of the Board of Directors and Information Regarding Committees
The Board of Directors has one standing committee, an Audit committee,
The Audit Committee is composed of Dr. Gold, Mr. Frank and Mr. Lerner. The
duties of the Audit committee include recommending the engagement of independent
auditors, reviewing and considering actions of management in matters relating to
audit functions, reviewing with independent auditors the scope and results of
its audit engagement, reviewing reports from various regulatory authorities,
reviewing the system of internal controls and procedures of the company, and
reviewing the effectiveness of procedures intended to prevent violations of law
and regulations. The Audit committee held two meetings in 1997.
The Board of Directors held seven meetings in 1997. All Directors
attended at least 75% of the total number of Board meetings and meetings of
committees on which they served during the period they served thereon during
1997.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Officers, Directors and persons who own more than ten percent of a
registered class of the Company's equity securities within specified time
periods to file certain reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "Commission"). Officers, Directors and
ten percent stockholders are required by regulation to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on a review of copies
of such reports received by the Company and written representations from such
persons concerning the necessity to file such reports, the Company is not aware
of any failures to file reports or report transactions in a timely manner during
21
<PAGE>
the fiscal year ended December 31, 1997, except that Dr. Gold did not timely
file a Form 5 reporting the grant of a stock option in December 1998.
Item 10. Executive Compensation.
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 year ended December 31,
1997 exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Other Annual Securities
Name and Principal Position Year Salary Compensation Underlying Options
- --------------------------- ---- ------ ------------ ------------------
<S> <C> <C> <C> <C>
Joel Schoenfeld, Chairman of the 1997 $226,189(1) -- 2,130,000(2)
Board and Chief Executive 1996 $192,000(1) -- --
Officer
David Chabut, Chief Financial 1997 $120,000(3) -- 120,000(2)
Officer 1996 $104,051(3) $15,949(4) 20,513(5)
</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
$9,800 in 1997 and $8,500 in 1996) and life/disability/health and car insurance
(approximately $24,400 in 1997 and $7,500 in 1996).
(2) Represents Time Accelerated Restricted Stock Options having an exercise
price of $3.50 per share. "Management - Stock Option Plan."
(3) Includes health insurance benefits.
(4) Represents the amount reimbursed to Mr. Chabut for taxes incurred in
connection with his exercise of certain stock options described in footnote (5)
below.
(5) Represents options granted to Mr. Chabut at $3.50 per share. These options
have been exercised.
Employment Arrangements
Joel Schoenfeld serves as Chairman of the Board and Chief Executive
Officer of the Company pursuant to an employment agreement which expires on
March 28, 2000. The agreement provides Mr. Schoenfeld with a salary of $192,000
per annum and 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 agreement contains a
non-competition covenant
22
<PAGE>
that prohibits him, directly or indirectly, from engaging in a competitive
business (as defined) for a period of twelve months following the termination of
his employment. The foregoing restriction does not apply 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.
The Company pays David Chabut a salary of $120,000 per annum (including
health insurance benefits) for serving as Chief Financial Officer of the
Company.
23
<PAGE>
Stock Options
The following table contains information concerning the grant of stock
options to Joel Schoenfeld and David Chabut (collectively, the "Named Executive
Officers") during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Number of Shares Percent of Total Options
Underlying Options Granted to Employees in Exercise Price Expiration
Name Granted Fiscal Year Per Share Date
- ---- ------- ----------- --------- ----
Joel Schoenfeld 2,130,000 72.2% $3.50 April 11, 2007
David Chabut 120,000 4.1% 3.50 April 11, 2007
</TABLE>
The following table summarizes for each of the Named Executive Officers
the total number of unexercised options, if any, held at December 31, 1997, and
the aggregate dollar value of in-the-money, unexercised options, held at
December 31, 1997. The value of the unexercised, in-the-money options at
December 31, 1997, is the difference between their exercise or base price
($3.50), and the fair market value of the underlying Common Stock on December
31, 1997. The closing bid price of the Common Stock on December 31, 1997 was
$1.438.
AGGREGATED OPTION EXERCISES -- JANUARY 1, 1997 --
DECEMBER 31, 1997 AND DECEMBER 31, 1997 OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Shares Acquired Upon Number of Securities In-The-Money
Exercise of Options Underlying Unexercised Options at
During Fiscal 1997 Options at December 31, 1997 December 31, 1997
------------------------ ----------------------------- ----------------------------
Name Number Value Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ------ -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joel Schoenfeld None None None 2,130,000 None None
David Chabut 4,370 None None 120,000 None None
</TABLE>
Stock Option Plan
The Company's Amended 1996 Stock Option Plan (the "Plan") authorizes
the grant of options to purchase 4,709,219 shares of Common Stock to directors,
employees (including officers) and consultants to the Company (collectively,
"Plan participants"). Options to purchase 4,315,513 shares of Common Stock have
been granted pursuant to the Plan, including Time Accelerated Restricted Stock
Options to purchase 4,125,000 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 24, 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,
24
<PAGE>
(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 $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 and exercised
by Mr. Chabut under the Plan.
25
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning the
beneficial ownership of the Common Stock as of March 1, 1998 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 Named Executive Officer and (iii) all directors and officers as a group.
<TABLE>
<CAPTION>
Amount and Percentage of Common
Nature of Beneficial Stock Beneficially
Name Ownership(1) Owned (2)
- ---- ------------ ---------
<S> <C> <C>
Joel and Flora Schoenfeld(3)....................... 613,743(4) 20.58%
Alan H. Gold, M.D.(3).............................. 343,333(4)(5) 11.48% (6)
Andrew Jay (7)..................................... 200,560(8) 6.51% (9)
John Frank(10)..................................... 153,775(11) 5.12% (12)
Richard Lerner(3).................................. 41,026 1.38%
David Jay (7)...................................... 6,435(13) *
David Chabut(3).................................... 20,513 *
All directors and executive
officers as a group
(7 persons)....................................... 1,178,825(14)(15) 39.11% (16)
</TABLE>
- ------------
* Less than 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 March 1, 1998, 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).
(2) Except as otherwise stated, calculated on the basis of 2,981,769 shares
of Common Stock issued and outstanding.
26
<PAGE>
(3) Address is c/o the Company, 999 Franklin Avenue, Garden City, New York
11530.
(4) 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.
(5) Includes 10,000 shares upon exercise of presently exercisable options.
(6) Calculated on the basis of 2,991,769 shares of Common Stock issued and
outstanding.
(7) Address for Andrew Jay is c/o David Jay, 58 Ruby Lane, Plainview, New
York 11803. Andrew Jay is the son of David Jay and David Jay is the
father of Andrew Jay.
(8) Includes 100,000 shares issuable upon exercise of presently exercisable
options. Does not include shares owned by David Jay, as to which Andrew
Jay disclaims beneficial ownership.
(9) Calculated on the basis of 3,081,769 shares of Common Stock issued and
outstanding.
(10) Address is c/o The Hartford Steam Boiler Insurance & Inspection Co., P.O.
Box 5204, One State Street, Hartford, Connecticut 06102-5024.
(11) Includes 22,236 shares issuable upon exercise of options, at an exercise
price of $3.50 per share, which expire on February 22, 1999.
(12) Calculated on the basis of 3,004,005 shares of Common Stock issued and
outstanding.
(13) Does not include shares owned by his son, Andrew Jay, as to which David
Jay disclaims beneficial ownership.
(14) For purposes of this calculation, shares of Common Stock beneficially
owned by more than one person have only been included once.
(15) Includes 32,236 shares issuable upon exercise of presently exercisable
options. See footnotes (5) and (11) above.
(16) Calculated on the basis of 3,014,005 shares of Common Stock issued and
outstanding.
27
<PAGE>
Item 12. Certain Relationships and Related 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. On May 2, 1997, the Company issued
34,397 shares of Common Stock to Mr. Frank, a director of the Company, in
exchange for the cancellation of $120,390 payable to him. 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. 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.
In connection with the formation of the Company, and in consideration
for the dilution resulting to 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 (a former Director of
the Company), respectively, each of Dr. Gold and David Shonfeld delivered to
Flora Schoenfeld his non-interest bearing, demand promissory note in the amount
of $750,000, the payment of which each of them agreed to secure by a pledge of
his shares.
On November 21, 1997, following a default in payment of his promissory
note, Flora Schoenfeld purchased the 256,410 shares owned by David Shonfeld as a
secured party under a pledge agreement with David Shonfeld and pursuant to
Section 9-504(3) of the Uniform Commercial Code as in effect in New York for a
total purchase price of $515,384, or $2.01 per share, representing the average
of the high and low bid prices per share of Common Stock during the preceding 30
day period. The purchase price for the shares was credited against the $750,000
due Flora Schoenfeld under David Shonfeld's promissory notes.
28
<PAGE>
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 failed to pay a
cumulative invoiced amount of $6,700,000 over the first three years of the
Sherwood Supply Agreement, provided Sherwood was able to deliver 100,000,000
plungers that met the Company's tolerances during such period. In the third
quarter of 1997, Sherwood acknowledged that it was unable to produce plungers
that met the Company's tolerances. Consequently, the individual guarantees are
no longer effective. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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). On May 2, 1997, Mr. Chabut exercised
options to purchase an additional 4,370 shares of Common Stock (at $3.50 per
share) and paid the exercise price of these options by cancellation of amounts
payable to him for accrued but unpaid compensation ($15,295). The Company paid
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.
29
<PAGE>
Item l3. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits Description
-------- -----------
3.1* Restated Certificate of Incorporation of the Registrant.
3.2* By-laws of the Registrant, as amended.
4.1* Agreement and Plan of Merger dated as of October 7, 1996
between the Registrant and UNIVEC, Inc., a New York
corporation.
4.2* Form of Warrant between the Registrant and the
underwriters of the Registrant's initial public offering.
4.3* Form of Warrant Agreement.
4.4* Specimen Common Stock Certificate.
4.5* Specimen Warrant Certificate (included as Exhibit A to
Exhibit 4.3 herein).
4.8* Registration Rights Agreement.
10.1* O.E.M. Supply Agreement dated May 30, 1996, between the
Registrant and Sherwood Medical Company ("Sherwood") (1).
10.2* Guaranty of Certain Stockholders of the Registrant in favor
of Sherwood.
10.3* Equipment Lease dated May 30, 1996 between the Registrant
and Sherwood.
10.4* Purchase Agreement dated as of June 27, 1996 between the
Registrant and Paramount Financial Corporation.
10.5* Share Option Agreement dated June 5, 1995, between the
Registrant and Leonard N. Tarr.
10.6* Amended 1996 Stock Option Plan of the Registrant.
10.7* Employment Agreement dated as of January 1,
1997 between the Registrant and Joel
Schoenfeld.
10.8* Promissory notes of Dr. Alan H. Gold payable to Flora
Schoenfeld.
21.1* List of Subsidiaries.
27.1 Financial Data Schedule.
------
* Incorporated by reference from the Registrant's Registration Statement
on Form SB-2 (File No. 333-20187) declared effective on April 24, 1997.
(1) Confidential treatment has been requested for certain portions of
this document.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the fiscal
quarter ended December 31, 1997.
30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 31, 1998
UNIVEC, INC.
By: s/Joel Schoenfeld By: s/David Chabut
--------------------- --------------------
Joel Schoenfeld David Chabut
Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant on March 31, 1998 in the capacities indicated.
s/Joel Schoenfeld Chairman of the Board,
- --------------------
Joel Schoenfeld Chief Executive Officer
and a Director (Principal
Executive Officer)
s/David Chabut Chief Financial Officer
- --------------------
David Chabut (Principal Financial and
Accounting Officer)
s/Alan H. Gold, M.D. President and a Director
- --------------------
Alan H. Gold, M.D.
s/John Frank Director
- --------------------
John Frank
s/Richard Lerner Director
- --------------------
Richard Lerner
s/David Jay Director
- --------------------
David Jay
31
<PAGE>
UNIVEC, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND
FOR THE TWO YEARS ENDED DECEMBER 31, 1997
Univec, Inc. and Subsidiary
Index to Consolidated Financial Statements
Page
Report of Independent Accountants F-2
Consolidated Balance Sheet as of December 31, 1997
September 30, 1996 (unaudited) F-3
Consolidated Statements of Operations for the years ended F-4
December 31, 1997 and 1996 (inception) to
September 30, 1996 (unaudited)
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F6 - F7
Notes to Consolidated Financial Statements F8 - F17
<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, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1997. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Univec,
Inc. and Subsidiary as of December 31, 1997 and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1997, 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 incurred recurring losses
from operations since its inception which raises substantial doubt about the
Company's ability to continue as a going concern. Management believes that it
has made the necessary investments in machinery and equipment and intellectual
technology to provide production capacity such that, upon attainment of
sufficient sales orders, the Company will generate operating profits.
Management's plans with regard to these matters are further discussed in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Melville, New York Coopers & Lybrand L.L.P.
March 17, 1998.
<PAGE>
Univec, Inc. and Subsidiary
Consolidated Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Cash and cash equivalents $ 1,209,481
Restricted cash 57,000
Inventory 719,516
Prepaid expenses other current assets 87,349
-----------
Total current assets 2,073,346
Fixed assets, net 1,544,166
Patent rights, net 56,000
-----------
Total assets $ 3,673,512
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 184,327
Accrued expenses 102,162
Other current liabilities 57,000
-----------
Total liabilities 343,489
Commitments and contingencies (Note 8)
Stockholders' equity (Note 1):
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; 1,919 shares issued
and outstanding 2
Common stock $.001 par value; 25,000,000 shares authorized;
issued and outstanding 2,981,769 shares 2,982
Additional paid-in capital 5,266,163
Accumulated deficit (1,939,124)
-----------
Total stockholders' equity 3,330,023
-----------
Total liabilities and stockholders' equity $ 3,673,512
===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
Univec, Inc. and Subsidiary
Consolidated Statements of Operations
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Product sales $ 744,751 $ 461,131
Income on supply and licensing agreements 1,683,788
----------- -----------
Total revenues 2,428,539 461,131
Expenses:
Cost of product sales 499,216 346,758
Marketing 447,717 189,930
Product development 327,059 218,532
General and administrative 1,515,514 753,122
Royalties 60,000 133,000
Interest expense 751,486 260,560
----------- -----------
Total expenses 3,600,992 1,901,902
----------- -----------
Net loss $(1,172,453) $(1,440,771)
Dividends on preferred stock 153,520
----------- -----------
Loss attributable to common stockholders $(1,325,973) $(1,440,771)
=========== ===========
Share information (Note 1):
Basic earnings per share
Net loss per share $ (.59)
===========
Pro forma net loss per share $ (1.36)
===========
Average shares outstanding 2,250,357 1,059,299
========== ===========
Diluted earnings per share
Net loss per share $ (.59)
==========
Pro forma net loss per share $ (1.36)
===========
Average shares outstanding 2,250,357 1,059,299
========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
Univec, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Series A Preferred Common Stock
---------------------- -----------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 1,059,001 $ 1,059
Conversion of indebtedness to Series A
Preferred Stock 1,269 1
Common stock issued:
Stock options exercised 16,143 16
Common stock issued to pay liabilities 7,143 7
Payment of offering costs
Warrants issued in connection with private placement
Net loss
----- --------- --------- ----------
Balance, December 31, 1996 1,269 1 1,082,287 1,082
Conversion of indebtedness to Series A
Preferred Stock 650 1
Common stock issued:
Common stock offering 1,725,000 1,725
Common stock issued to pay debt 70,112 71
Stock option exercised 4,370 4
Issuance of common stock for consulting fees 100,000 100
Payment of deferred offering costs
Contributed capital
Stock options issued to non-employees
Net loss
----- --------- --------- ----------
Balance, December 31, 1997 1,919 $ 2 2,981,769 $ 2,982
===== ========= ========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Additional Deferred Total
Paid-in Accumulated Offering Stockholders'
Capital Deficit Costs Equity
------- ------- ----- ------
<S> <C> <C> <C> <C>
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
Common stock issued:
Stock options exercised 56,484 56,500
Common stock issued to pay liabilities 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 (1,440,771) (1,440,771)
----------- ------------ --------- -----------
Balance, December 31, 1996 2,459,417 (4,253,138) (92,500) (1,885,138)
Conversion of indebtedness to Series A
Preferred Stock 649,999 650,000
Common stock issued:
Common stock offering 4,994,817 4,996,542
Common stock issued to pay debt 245,319 245,390
Stock option exercised 15,291 15,295
Issuance of common stock for consulting fees 131,150 131,250
Payment of deferred offering costs 92,500 92,500
Contributed capital (3,486,467) 3,486,467
Stock options issued to non-employees 256,637 256,637
Net loss (1,172,453) (1,172,453)
----------- ------------ --------- -----------
Balance, December 31, 1997 $ 5,266,163 $ (1,939,124) $ - $ 3,330,023
=========== ============ =====---= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Univec, Inc. and Subsidiary
Consolidated Statements of Cash Flows
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,172,453) $(1,440,771)
Adjustments to reconcile net loss to net cash used
in operating activities:
Issuance of common stock for services 131,250
Issuance of stock options to non-employees 256,637
Depreciation, amortization and other non-cash charges 888,675 144,941
Income on supply and licensing agreements (1,683,788)
Changes in assets and liabilities:
Accounts receivable 149,633 (86,307)
Inventory (480,145) (239,371)
Prepaid expenses and other current assets (35,887) (51,462)
Accounts payable and accrued expenses (338,925) 455,740
----------- -----------
Net cash used in operating activities (2,285,003) (1,217,230)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (826,664) (489,005)
Payment on note for acquisition of patent (20,000) (30,000)
----------- -----------
Net cash used in investing activities (846,664) (519,005)
----------- -----------
Cash flows from financing activities:
Repayment of bridge note (1,000,000)
Proceeds from bridge note 1,000,000
Proceeds from issuance of common stock, net 4,996,542
Payment of notes (16,340) (937,000)
Proceeds from issuance of notes 57,000 397,000
Restricted funds (24,500) (32,500)
Issuance of notes to officers 108,844
Advances from affiliates/stockholders, net 36,571
Deferred debt financing costs (179,500)
Deferred offering costs (92,500)
Unearned income on supply and licensing agreements 1,683,788
----------- -----------
Net cash provided by financing activities 4,012,702 1,984,703
----------- -----------
Net increase in cash and cash equivalents 881,035 248,468
Cash and cash equivalents, beginning of period 328,446 79,978
----------- -----------
Cash and cash equivalents, end of period $ 1,209,481 $ 328,446
=========== ===========
Continued
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
Univec, Inc. and Subsidiary
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
Supplemental disclosures:
<S> <C> <C>
Cash paid during the year for:
Interest $ 40,128 $ 53,599
Income taxes 4,011 2,733
Supplemental disclosures of noncash investing and
financing activities:
Expenses paid through the issuance of common stock
$ 25,000
Conversion of indebtedness to Series A Preferred Stock. (See Note 9) $ 650,000 1,269,000
Conversion of indebtedness to common stock 245,390
Conversion of officer note to common stock 15,295 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.
<PAGE>
Univec, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Significant Accounting Policies:
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, license and
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.
Public Offering
During May 1997, the Company completed an initial public offering (the
"Offering) of 1,725,000 shares of common stock and 2,587,500 redeemable common
stock purchase warrants with net proceeds received of $4,996,542.
Simultaneous with the Offering, the Company utilized a portion of the net
proceeds to pay down the $1,000,000 in bridge financing that was issued in
December 1996 and expensed the remaining unamortized debt financing costs of
$783,292 to interest expense during fiscal 1997. In addition, 1,750,000 bridge
warrants originally issued were exchanged for warrants with identical terms as
the ones issued in connection with the Offering. The remaining 750,000 bridge
warrants were surrendered to the Company without additional consideration
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
6, 1996. All material intercompany balances and transactions have been
eliminated.
Pro Forma Presentation
As a result of the change in tax status in connection with the public offering,
pro forma per share information is presented on the accompanying statement of
operations for 1996 as if the Company had always been a C corporation.
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, 1997, the Company had $57,000 of restricted cash held as collateral for the
Company's outstanding letter of credit, which is included in other current
liabilities.Inventory
<PAGE>
Inventory is valued at the lower of cost, determined by the first-in, first-out
method, or market. The cost elements of inventory include material, labor and
overhead. One supplier provided approximately 95% of the Company's purchases in
1997.
Fixed Assets
Fixed assets are stated at original cost less accumulated depreciation. Fixed
assets are depreciated on a straight-line basis over the estimated useful lives
of the asset. Leasehold improvements are amortized over the life of the
improvement or the term of the lease, whichever is shorter. Construction in
progress is depreciated when the related assets are placed into service.
Maintenance and repairs are charged to expense as incurred; renewals and
improvements which extend the life of assets are capitalized. Upon retirement or
disposal, the asset cost and related accumulated depreciation and amortization
are eliminated from the respective accounts and the resulting gain or loss, if
any, is included in the results of operations.
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 Notes 5 and 8).
Product Development
Research and development costs are expensed as incurred.
Income Taxes
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, no provision for Federal income taxes was included in the
accompanying statements of operations for the year ended December 31, 1996.
On the closing of the public offering during April 1997, the Company's income
tax status as an S corporation was terminated. The Company converted to a C
corporation and is now subject to both federal and state income taxes.
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. 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.
Loss per Share
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS
No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share.
Earnings per share amounts for all periods have been restated to
conform to the SFAS No. 128 requirements. Retroactive
restatement has been made to all share and per share amounts for
the reorganization described above.
<PAGE>
Pro forma basic and diluted loss per share does not differ from historical loss
per share, as there is no effect from the Company converting from an S
corporation to a C corporation.
Product Revenue Recognition
Product sales are recognized when products are shipped.
Income on Supply and Licensing Agreements
During May 1996, the Company entered into a five-year supply and licensing
agreement with a manufacturer. The supply agreement required the manufacturer to
supply the Company with up to 50,000,000 sets of syringe components per year and
100,000,000 non-aspirating plungers. In connection with this supply agreement,
the manufacturer sold a production mold and inserts to the Company for nominal
consideration, and subsequently leased back the equipment. Under this lease, the
lessee was required to make payments over a three-year period approximating
$1,946,000 to the Company. In July 1996, the Company assigned its rights to the
last 34 lease payments to an unrelated entity for approximately $1.6 million.
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's 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 was to be recognized in income upon the sale of the
Company's product supplied by the manufacturer.
During 1997, the manufacturer informed the Company that it was unable to produce
the non-aspirating plunger to the Company's specifications. As a result, the
Company is no longer required to make the minimum purchase requirements as
discussed above, and has fully recognized all previously unearned income into
current operations.
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.
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 and may, at times, exceed insurable amounts. The Company
believes it mitigates its risks by investing in or through major financial
institutions. Recoverability is dependent upon the performance of the
institutions.
During 1997, approximately 74% of product sales was to one customer. Fiscal 1996
net sales resulted primarily from the resale of medical devices manufactured by
others.
<PAGE>
The Company's contract manufacturers are concentrated among a few suppliers and
assemblers. Management believes there are a number of suppliers available to
provide component parts utilized in the Company's product.
Newly Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 becomes effective in fiscal 1998. Management
does not believe that this change will have a significant impact on the
Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which establishes
standards for reporting information about operating segments. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 becomes effective in fiscal
1998. Management has not yet evaluated the effect of this change on the
Company's financial statement disclosures.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to the
current year presentation.
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 an accumulated deficit of
$1,939,124 as of December 31, 1997. The ability to continue as a going concern
is dependent, among other things, upon the Company's obtaining additional
working capital through long-term financing or equity infusion and the
attainment of profitable commercial operations.
Management believes that it has made the necessary investments in machinery and
equipment and intellectual technology to provide production capacity, such that
upon attainment of sufficient sales orders, the Company will generate operating
profits. Management recognizes that the Company must obtain such sales orders to
enable it to continue operations. The Company will continue to require
additional working capital until such time as operating profits are achieved.
Management's plans include consideration of alliances or other strategic
partnerships with entities interested in the Company's operations. The Company
has also retained investment advisors to assist with the possible sale of debt
or equity securities and is evaluating equipment financing alternatives. The
Company is also expanding its marketing efforts to generate sales from existing
and new sources.
Management expects that these efforts will provide sales to generate operating
profits in 1998, which, along with additional financing will allow the Company
to continue as a going concern.
<PAGE>
However, there is no assurance that additional financing will be obtained or
revenues from product sales will generate profitable operations. The financial
statements do not include any adjustments that might result from the outcome of
these matters.
3. Inventories:
Components of inventories are as follows:
Raw material $ 496,290
Work-in-process 32,299
Finished goods 190,927
---------------
$ 719,516
===============
4. Fixed Assets:
Fixed assets consist of the following:
Estimated
useful lives
in years
Construction in progress - machinery - $ 454,489
Factory equipment 7 1,183,466
Office equipment 5 25,993
Leasehold improvements 1 30,638
------------
1,694,586
Less accumulated depreciation (150,420)
------------
$ 1,544,166
============
Depreciation expense was $86,598 and $57,733 in fiscal 1997 and 1996,
respectively. Construction in progress consists of additions and improvements to
machinery and equipment.
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 non-reusable syringe.
Such agreement included payments aggregating $112,000 which amounts were fully
paid by 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 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 non-reusable
syringe of the type discussed in the patent, no royalties are due, other than
the minimum annual licensing fees.
<PAGE>
Patent rights consist of the following:
Patent rights $ 112,000
Less accumulated amortization (56,000)
-----------
$ 56,000
===========
Amortization expense for fiscal 1997 and 1996 was $16,000, respectively.
6. Accrued Expenses:
Accrued expenses consist of the following:
Professional fees $ 21,444
Royalties 25,000
Other 55,718
------------
$ 102,162
============
7. Income Taxes:
The components of deferred taxes as of December 31, 1997 are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 634,617
Other 106,544
------------
Total deferred tax asset 741,161
------------
Deferred tax liabilities:
Property and equipment 36,522
------------
Total deferred tax liability 36,522
------------
Net deferred tax asset 704,639
Valuation allowance (704,639)
------------
$ -
============
The following is a reconciliation of the reported income tax benefit
attributable to continuing operations to the expected income tax expense
(benefit) utilizing federal statutory tax rates.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Expected income tax expense (benefit) $ 24,472 $ (489,862)
Benefit of S corporation status 544,323
Deferred benefit arising from conversion to
C corporation status (718,200)
Valuation allowance on deferred tax assets arising
from conversion 704,639
Change in valuation allowance arising in current year (13,662)
State income tax expense (benefit), net of federal
income tax effect 2,751 (54,461)
---------- ---------
$ - $ -
========== =========
</TABLE>
<PAGE>
The Company has cumulative losses of $5,425,591 as of December 31, 1997 which
includes C corporation losses incurred prior to the Company changing its tax
status to an S corporation during fiscal 1995. 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.
In 1997, the Company recorded a valuation allowance with respect to the future
benefits and net operating loss carryforwards which expire in 2007 reflected in
deferred tax assets as a result of the uncertainty of their ultimate
realization.
8. Commitments and Contingencies:
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 plastic 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
$50,000 annually thereafter, are required to be made. 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 do not use
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 non-reusable
syringe of the type discussed in the patent, no royalties are due, other than
the minimum annual licensing fees.
During fiscal 1997 and 1996, the Company paid $60,000 and $35,000,
respectively, under this agreement.
The Company has an employment agreement with an officer of the Company expiring
during March 2000. Future payments under such agreements are as follows:
1998 $ 192,000
1999 192,000
2000 80,000
----------
$ 464,000
==========
The Company leases office space under an operating lease from a stockholder and
officer of the Company. Minimum future rentals under this lease are $28,680
through fiscal 1998. At the option of the Company, the lease can be extended for
an additional two years subject to an increase of 4% per annum in each
subsequent year. Rent expense for fiscal 1997 and 1996 was $28,680 and $27,600,
respectively.
In November 1997, the Company entered into an operating lease agreement for a
manufacturing facility which expires in October 1998. Minimum future rentals
under the agreement are $27,000. The Company has an option to extend the lease
term for two renewal periods at $3,400 per month for the period from November
1998 to October 1999, and $3,500 per month from November 1999 to October 2000.
Rent expense for fiscal 1997 was $5,400.
<PAGE>
9. Equity:
The following share and per share amounts have been restated to reflect the
reorganization as described in Note 1.
Common Stock
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 addition, during December 1996, the Company
converted $56,500 of debt to an officer into 16,143 shares of common stock.
In May 1997, the Company issued 35,715 and 34,397 shares, respectively, at a
price of $3.50 per share in exchange for the cancellation of notes payable of
$125,000 and $120,390, respectively.
In May 1997, 4,370 stock options were exercised at a price of $3.50 in exchange
for the cancellation of debt of $15,295 to an officer.
In December 1997, the Company issued 100,000 shares with a value of $131,250 as
compensation to a consultant of the Company.
Preferred Stock
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.
In January and March 1997, the Company issued 650 shares of Series A Preferred
Stock to certain shareholders in exchange for amounts due of $650,000.
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 and may be redeemed at the option of the Company, at $1,000 per share
(aggregate liquidation preference of $1,919,000). 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 into 222.22 shares of common stock commencing April 24, 1999.
Holders of these shares have no voting rights.
Warrants
As of December 31, 1997, the Company has outstanding 4,487,500 of redeemable
common stock purchase warrants ("warrants"). The holders of the warrants are
subject to lock-up agreements until April 24, 1998. Each warrant entitles the
holder to purchase one share of common stock at an exercise price of $4.50,
subject to adjustment. The warrants are subject to redemption by the Company at
$.05 at any time commencing April 24, 1999 through April 23, 2002, provided the
closing bid price of the common stock has been at least $8.00 for 20 consecutive
trading days.
<PAGE>
10. Stock Option Plan:
During December 1996, 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.
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. During fiscal 1997, the
Company granted 695,000 stock options to consultants. In connection with these
grants, the Company has recorded a compensation charge of approximately $256,600
which was based on the fair value of the options at the time of grant.
<PAGE>
A summary of the Company's stock options is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 60,042 $ 3.50 55,672 $ 3.50
Granted 4,500,000 2.00 to 3.50 20,513 3.50
Exercised (4,370) 3.50 (16,143) 3.50
Canceled or lapsed (205,000) 3.50
--------- -------------- --------- --------
Options outstanding, end of year 4,350,672 $ 2.00 to 3.50 60,042 $ 3.50
========= ============== ========= ========
Options exercisable, end of year 225,672 60,042
========= =========
Options available for grant, end of year 393,706 4,633,034
========= =========
Weighted-average fair value of options granted
during the year $3.15 $3.50
========= =========
</TABLE>
The Company has applied the disclosure-only provision SFAS 123. Had compensation
cost been determined based on the fair value at the grant date consistent with
the provisions of SFAS 123, the Company's net income and earnings per share
would have been as follows for the years ended November 30, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net loss as reported $ (1,172,453)
==============
Net loss - pro forma $ (1,716,118) $ (1,440,771)
============== ============
Loss per share - basic, as reported $ (.52)
==============
Loss per share - basic, pro forma $ (.76) $ (1.36)
============== ============
Loss per share - diluted, as reported $ (.52)
==============
Loss per share - diluted, pro forma $ (.76) $ (1.36)
============== ============
</TABLE>
The weighted average fair value of each option has been estimated on the date of
grant using the Black Scholes options pricing model with the following weighted
average assumptions used for grants in 1997 and 1996, respectively; no dividend
yield; expected volatility of 80% to 100%, risk-free interest rate (ranging from
5% - 7%); and expected lives of approximately 1 to 9 years. Weighted averages
are used because of varying assumed exercise dates.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Shares Contractual Shares Exercisable
Range of Exercise Prices Outstanding Life Exercisable Price
------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
$2.00 170,000 7.06 170,000 $2.00
$3.50 4,180,672 9.22 55,672 $3.50
--------- ---- ------- -----
$2.00 to $3.50 4,350,672 9.14 225,672 $3.44
========= ==== ======= =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,209,481
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 719,516
<CURRENT-ASSETS> 2,073,346
<PP&E> 1,544,166
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,673,512
<CURRENT-LIABILITIES> 343,489
<BONDS> 0
0
2
<COMMON> 2,982
<OTHER-SE> 5,266,163
<TOTAL-LIABILITY-AND-EQUITY> 3,673,512
<SALES> 744,751
<TOTAL-REVENUES> 744,751
<CGS> 499,216
<TOTAL-COSTS> 499,216
<OTHER-EXPENSES> 2,350,290
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 751,486
<INCOME-PRETAX> (1,172,453)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,172,453)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,172,453)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
