U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
VOLU-SOL, INC.
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(Name of Small Business Issuer in its Charter)
Utah 87-0543981
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5095 West 2100 South, Salt Lake City, Utah 84120
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(Address of Principal Executive Offices) (Zip Code)
(801) 974-9474
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(Issuer's Telephone Number)
Securities to be registered pursuant to 12(b) of the Act: None
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Securities to be registered pursuant to 12(g) of the Act:
Common Stock $.0001 Par Value
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(Title of Class)
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TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business.......................................3
Item 2. Management's Discussion and Analysis or Plan of Operation.....11
Risk Factors..................................................13
Item 3. Description of Property.......................................18
Item 4. Security Ownership of Certain Beneficial
Owners and Management ........................................18
Item 5. Directors, Executive Officers, Promoters and
Control Persons...............................................20
Item 6. Executive Compensation........................................21
Item 7. Certain Relationships and Related Transactions................24
Item 8. Description of Securities.....................................24
PART II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters.................. 25
Item 2. Legal Proceedings............................................ 26
Item 3. Changes in and Disagreements with Accountants................ 26
Item 4. Recent Sales of Unregistered Securities...................... 26
Item 5. Indemnification of Directors and Officers.................... 26
PART F/S
Financial Statements......................................... 27
PART III
Item 1. Index to Exhibits............................................ 28
Item 2. Description of Exhibits...................................... 28
<PAGE>
PART I
Preliminary Note: Pursuant to General Instruction E of Form 10-SB, the
Registrant elects to use disclosure Alternative 3.
Item 1. Description of Business
The Company
Volu-Sol, Inc. (the "Company" or "Volu-Sol") was incorporated in Utah on
July 27, 1995, as a wholly owned subsidiary of Biomune Systems, Inc., a Nevada
corporation ("Biomune"). The Company was organized to engage in the business
of manufacturing and marketing medical diagnostic stains and solutions and
related equipment, which business operations were conducted prior to that time
as an unincorporated division of Biomune called the Volu-Sol Medical Division.
Biomune purchased the assets comprising the Volu-Sol Medical Division in
December 1991 from Logos Scientific, Inc. After the Company's incorporation,
Biomune transferred all of the assets of the Volu-Sol Medical Division to the
Company. Through fiscal 1995, Volu-Sol operated out of leased facilities in
Henderson, Nevada. On October 16, 1995, the Company relocated to West Valley
City, Utah (a suburb of Salt Lake City, Utah), where it continues to have its
manufacturing facility and corporate offices.
On or about December 31, 1997, approximately 2,111,216 shares of the
Company's $.0001 par value Common Stock, constituting all of the issued and
outstanding shares of the Company's Common Stock, are to be distributed pro
rata as a stock dividend to the holders of the Common Stock of Biomune as of
March 5, 1997 (the "Distribution"). In addition, the Company will reserve a
total of 323,118 shares of Common Stock for issuance upon conversion of the
Biomune Preferred Stock outstanding at March 5, 1997. As a consequence of the
Distribution, the Company will cease to be a subsidiary of Biomune and will
commence operations as of the effective date of the Distribution, as a
separate, independent company. The Company will continue the same operations
as it has conducted while it has been a subsidiary of Biomune.
Business Strategy
The Company's primary business strategy is to capitalize on the global
medical diagnostic industry by providing "building block" stains and reagents
which are not subject to regulatory overview or the risk and volatility
inherent in developing pharmaceuticals, and to grow through the selective
acquisition of medical distributors, and complementary devices and product
lines. The Company's strategy includes the following elements:
Acquire Complementary Businesses, New Products and Technologies. The Company
intends to evaluate potential acquisitions of distributors and complementary
products and businesses from time to time and to consummate transactions in
those situations where there is an appropriate economic and strategic fit.
Expand Distribution. The Company intends to increase its distribution base
through acquisition of distributors and through agreements with independent
distributors. The Company expects to increase sales through the addition of
more focused and committed sales personnel who work only for the Company,
thereby eliminating up to 35% in mark-up presently paid to independent
distributors. The payroll and related costs of in-house sales personnel will
offset to some degree the savings expected to be achieved from eliminating the
mark-up associated with the use of an outside sales force.
Develop Broader Product Lines. The Company offers over 70 products in four
major product lines in an effort to serve effectively a diverse and highly
decentralized industry. The Company believes that its many and diverse
products economically and reliably address the needs of medical diagnosticians
and laboratory technicians. Nevertheless, the Company has determined that it
can improve its revenue-generating capacity by adding to its existing product
line.
Offer Top Quality Products. The Company constantly strives to offer products
with the greatest purity and reliability possible through its quality control
system. It intends to continue to assure the quality of its product line.
Outsource Non-Stain Manufacturing. To minimize capital requirements
associated with the manufacture of products other than stains, solutions and
other chemicals, the Company intends to continue to take advantage of
strategic alliances with third-party manufacturers.
Esprit de Corps. The Company seeks to create a team spirit among its
employees, foster awareness of the Company's objectives and strategies at all
levels within the Company, and reward meritorious performance with
compensation and other incentives. The Company believes this creates loyalty
to the Company and pride in its products, which translates into greater
product quality and enhanced customer service.
Business Plan
The Company intends to continue to implement its Business Strategy by
completing a private placement of preferred stock (the "Offering"). The
Offering is intended to provide the Company with gross proceeds of up to
$2,400,000. The offering is to accredited investors as that term is defined
by Rule 501 of Regulation D, promulgated under the Securities Act. These
proceeds will be used to repay debt to Biomune (approximately $390,500 as of
the date of this Registration Statement), pay the expenses of the Offering and
the Distribution (including legal and accounting fees in each transaction,
estimated to be $75,000), and finance the Company's operations within the
framework of the Business Strategy. The primary focus will be on the
acquisition of distributors and additional products to expand the current
product line. As of September 30, 1997, the Company has received
subscriptions for $1,225,000 of Series A Preferred, for which cash of $325,000
has been received. Payments for the remaining subscriptions are due as
follows: $300,000 upon the effective date of this Registration Statement (the
"Effective Date"), $300,000 within 45 days of the Effective Date, and $300,000
within 90 days of the Effective Date.
During the time the Company operated as a division and subsidiary of
Biomune, its chief focus was to manufacture and sell products to a distinct
segment of a much larger market. As a separate entity, the Company will seek
to broaden its base in the medical supply industry through adding in-house
distribution capacity to its present business. Specifically, the Company will
look to acquire small medical distributors, having 3-5 representatives and
annual sales of between $2.0 and $3.5 million. The Company expects that such
acquisitions will expand the capacity for distributing the Company's products,
as well as add to the number of products being sold by or through the Company.
The Company has not had discussions or entered into negotiations with any
acquisition candidates. Sales through in-house representatives are expected
to reduce the cost of distribution by as much as 35% thereby increasing
profitability. The primary focus will continue to be the medical diagnostic
stain business. With its own distribution, the Company believes it can expand
sales much more quickly than if it continues relying upon large independent
distributors who may sell or represent many other products or manufacturers,
including some that are unrelated to the Company's product line.
Volu-Sol's Medical Diagnostic Industry Operations
The Company provides supplies to certain segments of the medical
diagnostics industry, which the Company believes to be a $6 to $8 billion
industry globally. An important aspect of the medical diagnostic industry is
the ability of medical professionals to diagnose pathologies and otherwise
assess conditions of body fluids and other tissue by microscopically analyzing
slides containing samples of the fluids or tissue. To enhance the ability of
medical practitioners and researchers to accurately assess samples and render
diagnoses based on those samples, microscope slides are prepared by smearing a
suspension containing the target biological sample on the slide. The slide is
then allowed to dry or is heated on a slide warmer to affix the sample to the
slide. The slide is then treated with one or more chemical stains or
reagents, according to the type of stain used and the types of conditions
being assessed. The effect of this staining process is to highlight or detect
certain properties of or abnormalities in the sample.
Stains are of two general types: (1) simple stains consisting of the
addition to the slide-mounted sample of one dye that serves to delineate
certain characteristics, but leaves all of the microscopic structures the same
hue; and (2) differential stains consisting of more than one dye added in
multiple steps, which has the effect of highlighting different structures or
properties of the sample with different colors. A host of different medical
diagnostic stains, solutions and chemical agents are used with different
tissue samples and to highlight or detect different tissue characteristics or
abnormalities. The Company estimates that the current global market for such
staining products is over $75 million annually.
Current Product Line
Stains, Solutions, Reagents, and Related Equipment. The Company
manufactures and markets a diversified line of simple and differential stains
and solutions as well as related equipment used by commercial and research
laboratories as well as medical clinics, hospitals, physician-operated
laboratories ("POLs") and veterinary clinics. Volu-Sol's staining product
line includes over 90 separate products that are marketed to the hematology,
microbiology, mycology and histology/cytology segments of the medical
diagnostics industry. The Company's stain solutions and related products are
sold separately in various quantities or as integrated kits configured to the
requirements of specified diagnostic devices produced by a variety of
manufacturers. In addition to sales of its own stains, solutions and other
chemical products, Volu-Sol has contracted with several original equipment
manufacturers ("OEMs") with respect to manufacturing and packaging medical
diagnostic stains for distribution by these OEMs.
The Definitive Slide Stainer Device. In addition to manufacturing and
selling stains, solutions buffers and other biochemical products and related
equipment, in fiscal 1997, the Company introduced and commenced the contract
manufacturing and marketing of the Definitive Slide Stainer Device (the
"Definitive"), an automated staining device that improves the efficiency and
accuracy of small to medium-scale slide staining laboratory operations. The
Definitive is capable of staining up to three slides simultaneously under
controlled conditions. The Definitive's chief advantages are its small size
(having a footprint of just 12 inches wide by 14 inches long), its
self-containment allowing it to be placed anywhere in the laboratory (as
opposed to other staining devices which require placement in close proximity
to drains and water supplies), its efficiency and reliability when compared to
the chief alternative--manually preparing slides, and its relatively low
cost. The Definitive achieves increased accuracy, reliability and consistency
through the use of a proprietary microchip which regulates with exact
precision the amount of reagent timing. That chip also automatically
activates an alarm on the Definitive when the stain pack needs to be
replaced. Although other automated staining devices are commercially
available that are capable of staining as many as 70 to 100 slides
simultaneously, such equipment is cost-prohibitive for smaller laboratories,
research institutions and hospitals. The Company believes that the Definitive
will fill an important market need for smaller laboratories, clinics and POLs,
whose only alternative is labor-intensive, inefficient and less-reliable
manual preparation of slides by laboratory technicians. The Company estimates
that there is a $250 million market for automated staining devices.
The Company manufactures and markets various custom-designed stainer
packs for use with the Definitive. The Company anticipates that as more units
are sold over time, the provision of stainer packs for the devices will create
a substantial opportunity to capitalize on a continuing stream of revenues.
The Definitive is covered by a 1-year manufacturer's warranty that is serviced
by Volu-Sol. Under that warranty arrangement, Volu-Sol will repair or replace
any defective unit without charge to the end-purchaser. The same warranty is
extended by the manufacturer to Volu-Sol. Consequently, the Company incurs no
expense on repairs or replacements made under warranty.
Manufacturing
The Company historically has manufactured the majority of the stains,
solutions, reagents, powders and other chemical compounds that make up its
product line, and intends to continue to do so for the foreseeable future.
Volu-Sol's chemical manufacturing process consists of the purchase by Volu-Sol
of certain raw materials, including bulk chemicals such as alcohol, ethanol,
methanol and various powders and stains. These chemicals are purchased from
different suppliers and are widely available. The ingredients are then mixed
in vats on Volu-Sol's premises in accordance with certain non-proprietary
formulas. The finished stains are then bottled and appropriately labeled and
sold through medical supply distributors and OEMs. Since it has been engaged
in the medical diagnostic stain industry, the Company has refined its
production capabilities such that it presently is able to manufacture its
products to exacting clinical standards. It also has developed a quality
control program that allows it to both maintain the reliability, integrity and
uniformity of its product line and to quickly and accurately identify and
resolve any potential problem by keeping detailed production records by lot.
With respect to the ancillary equipment sold by the Company in connection with
its stains, solutions, reagents, and other chemicals, such as glass slides,
manual staining equipment, and other related laboratory equipment and
supplies, such products are manufactured by third parties and can easily be
obtained from a number of suppliers.
With respect to the Definitive, the Company has entered into a worldwide
exclusive licensing agreement (the "License Agreement") with GG&B Engineering,
Inc. ("GG&B"), a Texas corporation with its principal place of business in
Wichita Falls, Texas. GG&B owns the technology underlying the proprietary
microchip that is packaged with the stain packs used with the Definitive.
Under the License Agreement, GG&B manufactures the Definitive on an as-needed
basis. GG&B also provides the proprietary microchip that is packaged with the
stain packs. Other than copyright protection as to the code incorporated in
the proprietary microchips, neither the Company nor GG&B claim any proprietary
interest in the technology incorporated into the Definitive. Under the
License Agreement, Volu-Sol is obligated to use its best efforts to promote
the sale and distribution of the Definitive, in return for which GG&B must
provide Volu-Sol with its requirements for the Definitive and microchips
during the term of the Agreement, with a minimum purchase requirement of 600
units per year. As of September 30, the Company has purchased a total of 228
units. If it fails to meet its purchase obligations, the Company's business
may be adversely affected. Upon a default by the Company, GG&B has the right,
under the License Agreement, to convert the license into a nonexclusive
license and grant to others the right to distribute the Definitive upon
written notice to Volu-Sol. The Company has advised the manufacturer that it
will not meet the minimum purchase requirements for this year. Consequently,
the manufacturer may convert the exclusive license and distributorship to a
nonexclusive license and distributorship, which may adversely affect the
Company's business and results of operations. The License Agreement was
signed on October 21, 1996. Unless it is terminated earlier in accordance
with its terms, the License Agreement is perpetual. The Company has no
experience in manufacturing hardware devices such as the Definitive and does
not have any manufacturing facilities for such products. Consequently, the
Company is presently dependent and will continue to depend on third parties
such as GG&B to manufacture products other than stains, solutions and other
related chemical products. In the event that the Company's relationship with
GG&B is disrupted or is no longer viable due to financial or other
difficulties of GG&B or the Company, or otherwise, or if the Company is unable
to obtain third-party manufacturing for any products it may add to its line in
the future, its operations and ability to generate revenue would be adversely
affected.
The manufacture of the Company's products is subject to the Food and Drug
Administration's current Good Manufacturing Practices ("cGMP") regulations.
These regulations require that the Company manufacture its products and
maintain its documents in a prescribed manner with respect to manufacturing,
testing and control activities. No assurance can be given that the Company's
third-party manufacturers will comply with cGMP regulations or other
regulatory requirements now or in the future. The Company's current dependence
upon third parties for the manufacture of its products may adversely affect
its profit margin, if any, on the sale of future products and the Company's
ability to deliver products on a timely and competitive basis. The Company is
inspected on a routine basis for compliance with applicable FDA laws and
regulations, in particular the extent to which it observes cGMP regulations in
connection with the manufacture of its chemical products. Further, the Company
is required to comply with various FDA requirements for labeling. If the FDA
believes the Company is not in compliance with the applicable laws or
regulations, it can institute proceedings to detain or seize the Company's
products, issue a recall, enjoin future violations and assess civil and
criminal penalties against the Company, its officers or its employees. The FDA
may proceed to ban, or request recall, repair, replacement or refund of the
cost of, any product manufactured or distributed by the Company.
Quality Control
The Company places great emphasis on providing quality products to its
customers. An integrated network of quality systems, including control
procedures that are implemented by technically trained professionals, result
in strict requirements for manufacturing and packaging materials. On a
statistical sampling basis, a quality assurance organization tests components
and finished goods at different stages in the manufacturing process to assure
that exacting standards are met. Customers may return defective merchandise
for credit or replacement. In recent years, such returns have been
insignificant.
Marketing and Sales
The Company markets and sells its products through a network of
regionally located medical diagnostic laboratory supply distributors. The
Company also employs in-house sales personnel who are involved in sales
through direct personal contact with potential customers and attending
industry and trade shows. The Company intends to expand its in-house
distribution capacity through acquisition of small medical product
distributors. The Company intends to increase its marketing and sales
efforts, capital permitting, by attending more trade shows, establishing
distributor relationships in Europe, South America and Asia, and placing
advertisements in periodic trade journals and publications.
Availability of Raw Materials
The principal raw materials for the stains, solutions and other chemical
products of the Company are "off-the-shelf" bulk chemicals that can be
purchased from any of a number of chemical companies. The Company believes
that it maintains adequate supplies of raw materials on hand to allow it to
continue to manufacture products and meet customer demand, and that those
materials that it does not produce internally are readily available from
multiple sources.
Competition
The Company believes that Volu-Sol's products have a good reputation in
the marketplace and are competitively priced. However, the medical diagnostic
industry in general and the medical diagnostic stain industry in particular
are, or potentially could be, very competitive. Several large chemical,
medical and laboratory supply companies could dominate the market, many if not
all of which have vastly greater manufacturing capabilities, financial
resources, scientific expertise, research resources and much more pervasive,
mature and experienced marketing operations. Accordingly, Volu-Sol is subject
to intense competition and is subject to the pricing and distribution policies
of these large competitors. Currently, Volu-Sol's sales amount to less than
1% of total industry sales. There can be no assurance that, in light of the
level of competition in the industry in which the Company operates, it will be
able to achieve or sustain profitable operations.
Patents and Proprietary Rights
The Company does not own any patents and does not believe that patent
protection is available for any of its products or processes. To the extent
that the Definitive and the stain packs that are marketed for use with that
device incorporate proprietary technologies, the Company licenses such
technologies from GG&B under the License Agreement. The Company claims the
name "Volu-Sol" as a trademark. The Company also believes that certain aspects
of its manufacturing, production and marketing operations are proprietary and
has generally sought to protect its interests by treating its know how as
trade secrets and by requiring all employees to execute confidentiality
agreements with the Company. The Company believes that its processes can only
be understood from direct observation and are not ascertainable by examination
of the end product. However, there can be no assurance that others will not
independently develop the same or similar information, obtain unauthorized
access to the Company's proprietary information or misuse information to which
the Company has granted access.
Government Regulation
Following are brief summaries of some of the Federal laws and regulations
which may have an impact on the Company's business. These summaries are only
illustrative of the extensive regulatory requirements of the Federal, state
and local governments and are not intended to provide the specific details of
each law or regulation.
The Clean Air Act, as amended, and the regulations promulgated thereunder,
regulates the emission of harmful pollutants to the air outside of the work
environment. Federal or state regulatory agencies may require companies to
acquire permits, perform monitoring and install control equipment for certain
pollutants.
The Clean Water Act, as amended, and the regulations promulgated thereunder,
regulates the discharge of harmful pollutants into the waters of the United
States. Federal or state regulatory agencies may require companies to acquire
permits, perform monitoring and to treat waste water before discharge to the
waters of the United States or a Publicly Owned Treatment Works (POTW).
The Occupational Safety and Health Act of 1970, including the Hazard
Communication Standard ("Right to Know"), and the regulations promulgated
thereunder, requires the labeling of hazardous substance containers, the
supplying of Material Safety Data Sheets ("MSDS") on hazardous products to
customers and hazardous substances the employee may be exposed to in the
workplace, the training of the employees in the handling of hazardous
substances and the use of the MSDS, along with other health and safety
programs.
The Resource Conservation and Recovery Act of 1976, as amended, and the
regulations promulgated thereunder, requires certain procedures regarding the
treatment, storage and disposal of hazardous waste.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 and the Superfund Amendments and Reauthorization Act of 1986, and the
regulations promulgated thereunder, require notification of certain chemical
spills and notification to state and local emergency response groups of the
availability of MSDS and the quantities of hazardous materials in the
Company's possession.
The Toxic Substances Control Act of 1976, requires reporting, testing and
pre-manufacture notification procedures for certain chemicals. Exemptions are
provided from some of these requirements with respect to chemicals
manufactured in small quantities solely for research and development use.
The Department of Transportation has promulgated regulations pursuant to the
Hazardous Materials Transportation Act, referred to as the Hazardous Material
Regulations, which set forth the requirements for hazard labeling,
classification and packaging of chemicals, shipment modes and other goods
destined for shipment in interstate commerce.
Without limiting the generality of the foregoing, a summary of how
certain specific governmental regulations affect the Company's operations is
as follows. The Company engages principally in the business of selling
products which are not foods or food additives, drugs or cosmetics within the
meaning of the Federal Food, Drug and Cosmetic Act, as amended (the "FDC
Act"). Nevertheless, the chemicals used to produce the medical diagnostic
stains manufactured and sold by Volu-Sol have a methanol base and generally
are classified as hazardous materials the use of which subjects the Company to
one or more of the regulatory schemes described above. Additionally, the
manufacturing and shipping operations of Volu-Sol are heavily regulated by
federal, state and local environmental, health and safety authorities.
Volu-Sol is subject to the FDA's cGMP standards and applicable Occupational
Safety and Health Administration ("OSHA") regulations. Representatives of the
FDA periodically conduct inspections at Volu-Sol's facilities regarding the
cleanliness and safety standards followed in the manufacturing process.
Moreover, representatives of OSHA periodically conduct inspections of
Volu-Sol's facilities for compliance with applicable safety and health
regulations. The Company believes that Volu-Sol is in compliance in all
material respects with applicable environmental, health and safety laws, rules
and regulations. There can be no assurance, however, that the Company will not
in the future be found in violation of some or all of these regulations, which
could materially and adversely affect the Company and its operations.
Research and Development
The Company has not invested material amounts in research and development
because of the extent of the product line acquired when Biomune purchased the
assets comprising the Volu-Sol business. The Company does not presently
anticipate investing materially different amounts in research and development
activities for the foreseeable future.
Dependence on Major Customers
Barrett Healthcare Corporation ("Barrett"), a former distributor of the
Company's products, accounted for more than 10% of Volu-Sol's total revenues
in fiscal years 1994 and 1995. During fiscal years 1994 and 1995 sales to
Barrett accounted for approximately 15% and 17%, respectively, of Volu-Sol's
(and prior to July 27, 1995, the Volu-Sol Medical Division's) total revenues.
Barrett ceased operations in March 1996. Prior to ceasing operations, Barrett
accounted for approximately 12% of Volu-Sol's sales through March 1996. Except
for Barrett, no other medical supply distributor or company has accounted for
more that 10% of Volu-Sol's revenues. After Barrett, Hardy Diagnostics
Corporation historically has been the next largest medical supply distributor
for Volu-Sol's products, representing less than 10% of Volu-Sol's revenues.
Almost 80% of Volu-Sol's sales are accomplished through medical supply
distributors who carry a large range of products for medical laboratories.
Employees
The Company has 9 full time employees. The Company will, as needed, hire
additional employees or sub-contract the balance of its personnel requirements
through independent contractors. The Company's manufacturing operations do
not require specially-skilled employees and the Company believes that it will
be able to satisfy its labor requirements for the foreseeable future. None of
the Company's employees are represented by a collective bargaining
arrangement, and the Company believes its relationship with its employees is
good.
Item 2. Management's Discussion and Analysis or Plan of Operation
The following Management's Discussion and Analysis or Plan of Operation
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth under the heading "Risk Factors," set forth above.
In an effort to increase Volu-Sol's revenues, in fiscal 1994, the Company
reorganized Volu-Sol's (then the Volu-Sol Medical Division's) management and
emphasized increasing its revenues. During fiscal 1995, Volu-Sol experienced
an approximately 25% increase in its revenues resulting in part from this
reorganization and in part from the Company's efforts to increase Volu-Sol's
revenues. During the months of June, July and August, 1997, the Company
generated approximately $39,000 per month in revenues. In order to provide
greater production capacity and efficiencies and enhanced customer service
with a view to further increasing Volu-Sol's revenues, in October 1996, the
Company relocated Volu-Sol's production facilities to the Salt Lake City, Utah
metropolitan area, closer to its former parent's (Biomune Systems, Inc.'s)
current principal place of business.
Results of Operations
Nine Months Ended June 30, 1997 Compared to Nine Months Ended June 30, 1996
During the nine months ended June 30, 1997, the Company generated revenues
totaling $368,731 compared to $338,016 for the same period in 1996. This
increase in revenues is attributable to the sale of the Definitive, which
accounted for additional revenues of approximately $60,000 during the nine
months ended June 30, 1997, offset in part by a decrease in revenues from the
sale of stains and reagents. The decline in sales of stains and reagents is
mainly attributable to the loss of the Company's largest customer during the
fourth quarter of fiscal 1996 and the Company not having sufficient resources
to adequately market its stain and reagent products. Subsequent to June 30,
1997, the Company experienced technical complications with the design of the
Definitive, which have now been corrected. However, due to these technical
issues, sales since June 30, 1997, have been negligible.
Cost of goods sold for the nine months ended June 30, 1997 totaled $301,870
compared to $280,939 for the same period in 1996. The overall gross margin for
the nine months ended June 30, 1997 was 18.1 percent of revenues compared to
16.9 percent of revenues for the same period in fiscal year 1996. The
increase in the gross margin is attributable to the sale of the Definitive,
which contributed a margin of approximately 32 percent during the nine months
ended June 30, 1997. The gross margin for the nine months ended June 30,
1997, excluding the impact of the Definitive, was approximately 15.3 percent.
The decrease in the gross margin on sales of stains and reagents is
attributable to increases in raw materials costs and increases in labor costs
as a result of adding additional manufacturing overhead labor.
Selling, general and administrative expenses totaled $542,524 for the nine
months ended June 30, 1997, compared to $828,522 for the nine months ended
June 30, 1996, an overall decrease of $285,998. This decrease is due to: (1)
decreases in the level of marketing and advertising expenditures due to
insufficient cash flows to fund such activities, and (2) significant
relocation costs which were incurred in 1996 associated with the Company's
move from Henderson, Nevada to Salt Lake City, Utah. In addition, selling,
general and administrative expenses for the nine months ended June 30, 1997
included amounts allocated from Biomune for payroll-related and professional
services of approximately $40,000, compared to allocations of approximately
$124,000 for the same period in 1996. This decrease related to an allocation
of approximately $90,000 during the nine months ended June 30, 1996 related to
the granting of Biomune options to a former Volu-Sol consultant. After the
Distribution, payroll costs with respect to officers and key employees is not
expected to be significantly different (not greater than 10 percent) than the
amounts allocated from Biomune. Recurring financing costs and other operating
costs as a result of operating on a stand alone basis are not expected to be
significantly different from those allocated.
The Company incurred a net loss of $475,663 for the nine months ended June 30,
1997 compared to a net loss of $804,236 for the nine months ended June 30,
1996. This decrease in net loss is primarily due to decreased selling,
general and administrative expenditures and to the loss on disposal of assets
experienced during the nine months ended June 30, 1996 as a result of
relocating to Salt Lake City, Utah.
It is anticipated that the net loss applicable to common shareholders will
increase in the future in connection with dividends and the impact of the
beneficial conversion feature associated with the Company's private placement
of its Series A Preferred Stock. Assuming the sale of Series A Preferred
Stock is limited to $1,225,000 (for which there are subscriptions receivable
or cash receipts as of September 30, 1997), the net loss applicable to common
shareholders would increase by approximately $306,000 for the one-time charge
related to the beneficial conversion feature and by approximately $122,500 per
year for recurring dividends at 10 percent. Sales of Series A Preferred Stock
could be as high as $2,400,000, in which case the dividends and the impact of
the beneficial conversion feature would increase accordingly.
Fiscal Year 1996 Compared to Fiscal Year 1995
For the fiscal year ended September 30, 1996, the Company generated revenues
totaling $434,691 compared to $458,981 for the fiscal year ended September
30, 1995. The decrease in revenues resulted from management's decision to
discontinue selling products to the Company's largest customer. This decision
was a result of that customer's deteriorating financial condition and was made
during the fourth quarter of fiscal year 1996. Sales to that customer
represented approximately 12 and 17 percent of the Company's total revenues
during the fiscal years ended September 30, 1996 and 1995, respectively.
The Company continued its concentrated marketing effort that began in fiscal
year 1995; however, the Company changed its marketing focus from attempting to
obtain large OEM contracts to a focus of attempting to increase its domestic
image and domestic distribution base. Total expenditures on this concentrated
marketing effort were relatively consistent with fiscal year 1995. Assuming
the Company has the financial wherewithal, it will continue this focus in the
future and will also expand its focus towards developing an international
distribution base.
Cost of goods sold for the year ended September 30, 1996 totaled $357,471
compared to $369,373 for the fiscal year ended September 30, 1995. The gross
margin for the year ended September 30, 1996 was 17.8 percent of revenues
compared to 19.5 percent of revenues for the fiscal year ended September 30,
1995. This decrease in the gross margin percentage results from an increase
in cost of goods sold of approximately $7,500 which is mainly due to slight
increases in production labor and overhead costs as a result of relocating
operations to Salt Lake City, Utah.
Selling, general and administrative expenses totaled $1,446,651 for the fiscal
year ended September 30, 1996, compared to $707,393 for the fiscal year ended
September 30, 1995, an overall increase of $739,258. This significant
increase in selling, general and administrative expenses is mainly due to: (1)
expenditures of approximately $250,000 resulting from the relocation from
Henderson, Nevada to Salt Lake City, Utah; (2) the continued concentrated
marketing efforts that began in fiscal year 1995 resulting in additional
payroll expenditures of approximately $80,000; (3) compensation of $100,000
related to the reduction in a note receivable owed by Jim Dalton, a consultant
to the Company, in exchange for his relinquishment of his right to receive 50
percent of the future net profits; (4) the write off of receivables totaling
approximately $50,000 due to the determination that the likelihood of payment
by the Company's largest customer was remote; and (5) a write off of
approximately $245,000 related to the impairment of intangible assets
consisting of medical diagnostic technologies acquired in 1991. The
determination that the intangible assets were impaired was based on continuing
operating losses, projected sales of products using the technology at roughly
the same levels as in prior years and the framework set out in Statement of
Financial Accounting Standards No. 121, issued in March 1995 (future
undiscounted cash flows not expected to exceed the carrying value of the
intangible assets).
Selling, general and administrative expenses for the year ended September 30,
1996 included amounts allocated from Biomune for payroll-related and
professional services of approximately $165,000, compared to allocations of
approximately $189,000 for the year ended September 30, 1995.
The Company incurred a net loss of $1,402,222 for the fiscal year ended
September 30, 1996, compared to a net loss of $617,785 during the fiscal year
ended September 30, 1995. This increase in net loss is due to a combination
of the decreased margin and the increased selling, general and administrative
expenditures as described above.
Fiscal Year 1995 Compared to Fiscal Year 1994
For the fiscal year ended September 30, 1995, the Company generated revenues
totaling $458,981 compared to $365,189 for the fiscal year ended September 30,
1994. This increase in revenues resulted from a concentrated marketing effort
that included advertising in trade journals and telemarketing. These
marketing efforts were designed to assist the Company to obtain large OEM
contracts. Although the Company was unsuccessful in obtaining OEM contracts,
it did receive an incidental increase in revenues through its efforts.
Cost of goods sold for the year ended September 30, 1995 totaled $369,373
compared to $250,121 for the fiscal year ended September 30, 1994. The
overall gross margin for the year ended September 30, 1995 was 19.5 percent of
revenues compared to 31.5 percent of revenues for the fiscal year ended
September 30, 1994. This significant decrease resulted from an increase in
production labor costs as a result of hiring a full-time production manager
and the Company's decision to increase the safety of its manufacturing
employees through the use of more stringent manufacturing processes and
procedures to increase quality control measures.
Selling, general and administrative expenses totaled $707,393 for the fiscal
year ended September 30, 1995, compared to $445,434 for the fiscal year ended
September 30, 1994. This significant increase in selling, general and
administrative expenses was due to: (1) approximately $90,000 in expenditures
related to a concentrated marketing effort that included advertising in trade
journals and telemarketing; (2) additional rent expenditures associated with
an extended month to month lease as well as related legal charges; (3) costs
of $20,000 related to damages experienced in a fire; and (4) increased payroll
and consulting costs related to redesigning the manufacturing process and
increasing the sales efforts. In addition, selling, general and
administrative expenses for the year ended September 30, 1995 included amounts
allocated from Biomune for payroll-related and professional services of
approximately $189,000, compared to allocations of approximately $53,000 for
the year ended September 30, 1994. The increase in amounts allocated resulted
from expenses associated with the grant of Biomune options to a Volu-Sol
Consultant.
The Company incurred a net loss of $617,785 for fiscal year ended September
30, 1995, compared to a net loss of $318,150 for the fiscal year ended
September 30, 1994. This increase in net loss is due to a combination of the
decreased margin and the increased selling, general and administrative
exenses, as described above.
Liquidity and Capital Resources
The Company currently is unable to finance its operations solely from its cash
flows from operating activities. From October 1, 1993 through September 1,
1997, Biomune financed the Company's operations through a series of loans and
other capital contributions totaling approximately $2,750,000. Of this
amount, $332,500 represents loans which amount bear interest at the rate of
10% per year and which are payable on demand. After the Distribution, the
Company does not anticipate receiving additional amounts from Biomune, from
loans or otherwise. The Company has agreed to sell up to 12,000 shares of its
Series A Preferred, for a total of up to $2,400,000. The Series A Preferred
will be convertible to Common Stock of the Company commencing January 1,
1998. The "conversion price" which is the basis for such conversion is the
lesser of (i) 80% of the average closing bid price of the Company's Common
Stock for the three trading days immediately preceding the date of conversion
or (ii) $1.25 per share. As of September 30, 1997, the Company had received
subscriptions for $1,225,000 of Series A Preferred, for which cash of $325,000
had been received. Payments with respect to the remaining subscriptions are
due as follows: $300,000 upon the effective date of the Form 10-SB (on or
about December 1, 1997), $300,000 within 45 days of the effective date of the
Form 10-SB and $300,000 within 90 days of the effective date of the Form
10-SB. The Company intends to keep the private placement open through
December 31, 1997 and may raise up to an additional $1,175,000.
The Company intends to use the proceeds from such Offering to repay its
indebtedness to Biomune (approximately $390,500 as of November 21, 1997), pay
the expenses of the Offering and the Distribution (including legal and
accounting fees incurred in each transaction estimated to be approximately
$75,000), acquire yet-to-be identified medical product distributors or product
rights, and supplement working capital. The Company believes that cash
generated by operations, together with the proceeds of the Offering will be
sufficient to meet its capital requirements for a minimum of 12 months.
As of June 30, 1997, the Company had cash and cash equivalents of $110,605 and
a working capital deficit of $71,448 as compared to cash of $12,167 and
working capital of $94,380 as of September 30, 1996.
During the nine months ended June 30, 1997, the Company's operating activities
used cash of $424,486, much of which was provided primarily by loans and
capital contributions from Biomune. Similarly, during fiscal year 1996, the
Company's operating activities required cash in the amount of $987,680, which
was provided by capital contributions from Biomune. During fiscal year 1995,
the Company's operating activities required cash in the amount of $552,261,
which was provided primarily by capital contributions from Biomune.
The Company is obligated under a manufacturing agreement with the supplier of
the Definitive to purchase 600 automated slide stainers ("stainers") per
calendar year. In the event the Company purchases fewer than 600 stainers,
the manufacturer has the option to convert the Company's exclusive worldwide
license and distributorship to a non-exclusive license and distributorship.
As of September 30, 1997, the Company had purchased 228 stainers, of which 170
are in inventory. Subsequent to September 30, 1997, the Company informed the
manufacturer of the Definitive that the Company would not meet the annual
purchase commitment. It appears that the Company's exclusive worldwide
license and distributorship will be converted to a non-exclusive license and
distributorship, which could have a negative impact on the number of units
sold by the Company.
The Company presently has no credit facility with any commercial lending
institution. In the past, the Company has borrowed and received capital from
time to time from Biomune, but the Company has no formal financing
arrangement, agreement or understanding with Biomune or any other party to
provide debt financing in the future.
The Company has agreed to sell its Series A Preferred shares to raise funds to
finance operations, market the Definitive and acquire or develop in-house
distribution capacity and new products and devices. There can be no assurance
that additional financing will not be needed in the future.
Risk Factors
This Registration Statement contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Registration Statement.
Absence of Profitable Operations
Between the time Biomune acquired the assets used in conducting its
medical diagnostic supply business and July 1995 when the Company was
incorporated and acquired those assets from Biomune, Biomune's medical
diagnostic division did not have profitable operations. Moreover, from the
Company's incorporation to date, the Company has not achieved profitable
operations and continues to operate at a loss. The Company's present business
strategy is to improve its cash flow by adding to its existing product line
and expanding its sales and marketing efforts, including the addition of
in-house sales personnel. These expanded sales and marketing efforts are
expected to be funded through sales of the Company's securities and/or debt,
including the Series A Preferred financing which will close in advance of or
concurrent with the Distribution. While management believes the cash
generated by operations together with the proceeds from the sale of shares of
its Series A Preferred will satisfy the Company's ordinary cash requirements
for at least 12 months, there can be no assurance that the Company will ever
be able to achieve profitable operations or that it will not require
additional financing to fulfill its business plan. See "Management's
Discussion and Analysis or Plan of Operation."
"Going Concern" Issues
The financial statements of the Company have been prepared on the
assumption that the Company will continue as a going concern. The Company's
independent public accountants have issued their report dated August 15, 1997
that includes an explanatory paragraph stating that the Company's recurring
losses and accumulated deficit raise substantial doubt about the Company's
ability to continue as a going concern. The Company's product line is limited
and it has been necessary to rely upon loans and capital contributions from
Biomune to sustain operations. The Company intends to sell up to $2.4 million
of its Series A Preferred to unrelated accredited investors. To date,
subscriptions for $1,225,000 of Series A Preferred have been received, for
which cash of $325,000 has been received. Payments for the remaining
subscriptions are due as follows: $300,000 upon the effective date, $300,000
within 45 days of the Effective Date, and $300,000 within 90 days of the
Effective Date. Management believes the proceeds from such offering will
provide sufficient capital when combined with revenues from operations to meet
the Company's operating cash needs for a minimum of 12 months. Additional
financing may be required if the Company is to continue as a going concern. If
such additional funding is needed and cannot be obtained, the Company may be
required to scale back or discontinue its operations.
Uncertainty of Future Financial Results
Profitability depends upon many factors, including the success of the
Company's marketing program, the Company's ability to identify and obtain the
rights to additional products to add to its existing product line, expansion
of its distribution and customer base, maintenance or reduction of expense
levels and the success of the Company's business activities. The Company
(since its incorporation in July 1995) has an accumulated deficit as of June
30, 1997 of $1,980,849. The Company anticipates that it will continue to
incur operating losses in the future or until such time as it is able to
successfully market the Definitive or other devices that it may yet add to its
product line. The Company's ability to achieve profitable operations will
also depend on its ability to develop and maintain an adequate marketing and
distribution system. There can be no assurance that the Company will be able
to develop and maintain adequate marketing and distribution resources. If
adequate funds are not available, the Company may be required to materially
curtail or cease its operations. See "Management's Discussion and Analysis or
Plan of Operation."
Lack of Proprietary Technologies
The Company uses certain trademarks and tradenames with certain of its
products. Nevertheless, the Company's core products, medical diagnostic
stains and solutions and other biochemical products, as well as the
Definitive, are not based on technology proprietary to the Company. Indeed,
the majority of the Company's present product line is based on technology that
is in the public domain and therefore there are effectively no entry barriers
for potential competitors to the Company. The Company has entered into an
exclusive license agreement with the third-party entity that owns the
intellectual property rights associated with the Definitive and manufactures
the Definitive for the Company. There can be no assurance that such
third-party entity will be able in the future to adequately protect its
proprietary rights upon which the Definitive is based or that such third party
will continue to manufacture the Definitive on terms favorable to the
Company. If the third party fails to meet its obligations to manufacture a
sufficient number of units for any reason, the Company would be forced to
locate a new manufacturer for the Definitive which may disrupt and adversely
affect the Company's operations.
Intense Competition
The medical diagnostic supply and biochemical industries, including those
segments devoted to manufacturing and distributing laboratory equipment, stain
solutions and chemical reagents are characterized by intense competition. The
Company faces, and will continue to face, competition in the stain solution,
reagent and related equipment fields. Many, if not most, of the Company's
competitors and potential competitors are much larger and consequently have
greater access to capital as well as mature and highly sophisticated
distribution channels. Some of the Company's larger competitors are able to
manufacture chemical products on a much larger scale and therefore presumably
would be able to take advantage of economies of scale not presently enjoyed by
the Company. Moreover, many of the Company's competitors have far greater
name recognition and experience in the medical diagnostic supply industry.
There can be no assurance that competition from other companies will not
render the Company's products noncompetitive.
Uncertainties Related to Ability to License Proprietary Technology
The Company historically has not been involved in research and
development of new technologies. Consequently, the Company's success in
adding to its existing product line will depend on its ability to acquire or
otherwise license competitive technologies and products and to operate without
infringing the proprietary rights of others, both in the United States and
internationally. No assurance can be given that any licenses required from
third parties will be made available on terms acceptable to the Company, or at
all. If the Company does not obtain such licenses, it could encounter delays
in product introductions while it attempts to adopt alternate measures, or
could find that the manufacture or sale of products requiring such licenses is
not possible. Litigation may be necessary to defend against claims of
infringement, to protect trade secrets or know-how owned by the Company, or to
determine the scope and validity of the proprietary rights of others. Such
litigation could have an adverse and material impact on the Company and its
operations.
Inability to Adequately Protect Proprietary Information
The Company relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its employees and consultants. There can be no
assurance that such agreements will not be breached or that they will be
enforceable by the Company, or that the Company's trade secrets and know-how
will not otherwise be compromised.
Uncertainty of Ability to Attract and Retain Key Management, Employees
and Consultants
The Company is highly dependent on its executive officers and certain of
its scientific, technical and operations employees. The loss of services of
any of these personnel could impede the achievement of the Company's
objectives. There can be no assurance that the Company will be able to attract
and retain qualified executive personnel on acceptable terms.
Reliance on Third-Party Manufacturing
The Company's manufacturing experience and capabilities are limited to
the manufacture of staining solution, reagent and certain related chemical
compounds. With respect to the manufacturing of devices and equipment related
to the staining solution products, including without limitation the
Definitive, the Company has in the past used, and intends to continue to use,
third-party manufacturing resources. Consequently, the Company is dependent
on contract manufacturers for the production of existing products and will
depend on third-party manufacturing resources to manufacture equipment and
devices it may add to its product line in the future. In the event that the
Company is unable to obtain or retain third-party manufacturing, it will not
be able to continue its operations as they relate to the sale of equipment and
devices. The Company's current dependence upon a third party for the
manufacture of the Definitive may adversely affect its profit margins and the
Company's ability to deliver products on a timely and competitive basis.
Environmental Risks
The chemical manufacturing processes of the Company involve the
controlled use of hazardous materials. The Company is subject to federal,
state and local laws and regulations governing the use, manufacture, storage,
handling and disposal of such materials and certain waste products. Although
the Company believes that its activities currently comply with the standards
prescribed by such laws and regulations, the risk of accidental contamination
or injury from these materials cannot be eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company. In addition, there
can be no assurance that the Company will not be required to incur significant
costs to comply with environmental laws and regulations in the future.
Sufficiency of Marketing and Sales Capabilities
The Company sells its products to approximately 75 independent
distributors who are free to resell the products. In order to achieve
profitable operations, the Company must maintain its current base of sales
staff and must expand that base in the future. There can be no assurance that
the Company will be able to enter into arrangements with qualified sales staff
if and when such additional staff are required. The Company's sales staff
will compete with other companies that currently have experienced and well
funded marketing and sales operations. To the extent that the Company enters
into co-promotion or other marketing and sales arrangements with other
companies, any revenues to be received by the Company will be dependent on the
efforts of others, and there can be no assurance that such efforts will be
successful.
Potential Product Liability Exposure and Limited Insurance Coverage
The use of any of the Company's existing or potential products in
laboratory or clinical settings may expose the Company to liability claims.
These claims could be made directly by persons who assert that inaccuracies or
deficiencies in their test results were caused by defects in the Company's
products. Alternatively, the Company could be exposed to liability indirectly
by being named as a third-party defendant in actions brought against companies
or persons who have purchased the Company's products. The Company has
obtained limited product liability insurance coverage in the amount of $1
million per occurrence and $2 million in the aggregate. The Company intends to
expand its insurance coverage on an as-needed basis as its sales revenue
increases. However, insurance coverage is becoming increasingly expensive,
and no assurance can be given that the Company will be able to maintain
insurance coverage at a reasonable cost or in sufficient amounts to protect
the Company against losses due to liability. There can also be no assurance
that the Company will be able to obtain commercially reasonable product
liability insurance for any products added to its product line in the future.
A successful product liability claim or series of claims brought against the
Company could have a material adverse effect on its business, financial
condition and results of operations.
Uncertainty Related to Health Care Reform Measures and Third-Party
Reimbursement
Political, economic and regulatory influences are likely to lead to
fundamental change in the health care industry in the United States. Numerous
proposals for comprehensive reform of the nation's health care system have
been introduced in Congress over the past years. In addition, certain states
are considering various health care reform proposals. The Company anticipates
that Congress and state legislatures will continue to review and assess
alternative health care delivery systems and payment methodologies, and that
public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any,
reforms will be adopted, when they may be adopted, or what impact they may
have on the Company. The Company's ability to earn sufficient returns on its
products may also depend in part on the extent to which reimbursement for the
costs of such products will be available from government health administration
authorities, private health insurers and other organizations. Third-party
payors are increasingly challenging the price and cost effectiveness of
medical products and services, including medical diagnostic procedures. There
can be no assurance that adequate reimbursement will be available or
sufficient to allow the Company to sell its products on a competitive basis.
Certain Tax Considerations
Biomune has not sought or received and does not intend to seek a ruling
from the IRS to the effect, among other things, that the Distribution will
qualify as a tax free distribution under Section 355 of the Code. The Company
believes that the Distribution does qualify for tax free treatment under the
Code. However, if the Distribution were not to qualify under Section 355 of
the Code, then in general, a corporate tax would be payable by the
consolidated group of which Biomune is the common parent based upon the
difference between (i) the fair market value of Company Common Stock and (ii)
the adjusted basis of Volu-Sol Common Stock. The corporate level tax would be
payable one-half by Biomune and one-half by the Company. In addition, under
the consolidated return regulations, each member of the consolidated group
(including the Company) is severally liable for such tax liability.
Furthermore, if the Distribution were not to qualify under Section 355 of the
Code, then each holder of Biomune Common Stock who receives shares of Volu-Sol
Common Stock in the Distribution would be treated as if such shareholder
received a taxable distribution in an amount equal to the fair market value of
Volu-Sol Common Stock received, which would result in (i) a dividend to the
extent paid out of Biomune's current and accumulated earnings and profits;
then (ii) a reduction in such shareholder's basis in Biomune Common Stock to
the extent the amount received exceeds the amount referenced in clause (i);
and then (iii) gain from the exchange of Biomune Common Stock to the extent
the amount received exceeds the sum of the amounts referenced in clauses (i)
and (ii).
Fraudulent Transfer Considerations; Legal Dividend Requirements
It is a condition to the consummation of the Distribution that the
Biomune Board shall have determined the permissibility of the Distribution
under Nevada corporation law. In February 1997, the Biomune Board made such a
determination. There is no certainty, however, that a court would find the
decision of the Biomune Board to be binding on creditors of the Company and
Biomune or that a court would reach the same conclusions as the Biomune Board
in determining whether the Company or Biomune was insolvent at the time of, or
after giving effect to, the Distribution. If a court in a lawsuit by an
unpaid creditor or representative of creditors, such as a trustee in
bankruptcy, were to find that at the time Biomune effected the Distribution,
the Company or Biomune, as the case may be, (i)was insolvent; (ii) was
rendered insolvent by reason of the Distribution; (iii) was engaged in a
business or transaction for which the Company's or Biomune's remaining assets,
as the case may be, constituted unreasonably small capital; or (iv) intended
to incur, or believed it would incur, debts beyond its ability to pay as such
debts matured, such court may be asked to void the Distribution (in whole or
in part) as a fraudulent conveyance and require that the shareholders return
the special dividend (in whole or in part) to Biomune or require the Company
to fund certain liabilities for the benefit of creditors. The measure of
insolvency for purposes of the foregoing will vary depending upon the
jurisdiction whose law is being applied. Generally, however, the Company or
Biomune, as the case may be, would be considered insolvent if the fair value
of their respective assets were less than the amount of their respective
liabilities or if they incurred debt beyond their ability to repay such debt
as it matures. The Biomune Board and management believe that, in accordance
with their own examination of the financial statements of Biomune and the
Company and expected capital infusions concurrent with or in advance of the
Distribution, the Company will be solvent at the time of the Distribution (in
accordance with the foregoing definitions), will be able to repay or refinance
its debts as they mature following the Distribution and will have sufficient
capital to carry on its business.
Dilution
A significant number of shares of the Company's Common Stock are authorized
but not issued. In addition, there are a substantial number of shares of
Common Stock of the company reserved for issuance upon the exercise of certain
options, warrants and preferred stock conversion rights. If and to the extent
such options, warrants or rights are exercised, or if the Board of Directors
determines to issue authorized but previously unissued shares of Common Stock
in connection with acquisitions or other transactions, such issuances could
substantially dilute the voting power of the existing shareholders of the
Company, including all shareholders receiving their shares of the Company's
Common Stock as part of the Distribution. Furthermore, the possibility of
such issuances may adversely affect the market for the Company's Common Stock,
should such a market ever develop.
Item 3. Description of Property
The Company leases approximately 11,500 square feet of laboratory
facilities at 5095 West 2100 South, West Valley City, Utah. The leased
premises serve as the Company's manufacturing, warehouse and shipping
facilities as well as its corporate headquarters and offices. Base monthly
rent payments are $4,620 until November 1997, after which the monthly base
rent amount will be adjusted according to changes in the Consumer Price Index.
The leased premises originally were leased by Biomune, but Biomune has
assigned its rights under the lease to the Company. The lessor of the
Company's facility is an unaffiliated third party. The lease was the product
of arms-length negotiations. The lease extends through November 2000. The
Company believes that its facilities will be adequate to meet its needs at
least through fiscal year 1998.
Item 4. Security Ownership of Certain Beneficial Owners and Management
Presently, Volu-Sol is a wholly owned subsidiary of Biomune. In the
Distribution, each holder of Biomune Common Stock at March 5, 1997 will
receive one share of Volu-Sol Common Stock for every ten shares of Biomune
Common Stock held at that date. In addition, the Company will reserve a total
of 323,118 shares of Common Stock for issuance in connection with the
conversion of the Biomune Preferred Stock outstanding at March 5, 1997. The
Company also will reserve a total of 709,602 shares of Common Stock for
issuance upon exercise of the Add-on Volu-Sol Options and 247,059 shares of
Common Stock for issuance upon exercise of certain warrants to acquire Biomune
Common Stock.
The following table sets forth certain information on a pro forma basis
regarding beneficial ownership of the Company's Common Stock after giving
effect to the Distribution of 2,111,216 shares of Common Stock (i) by each
person (or group of affiliated persons) who is expected by the Company to own
beneficially more than 5 percent of the outstanding shares of Common Stock,
(ii) by each director and Named Executive Officer of the Company, and (iii) by
all of the directors and executive officers of the Company as a group. As of
March 5, 1997, Biomune had 21,112,156 shares of Common Stock issued and
outstanding. The chart below does not give effect to the possible conversion
of the Biomune Preferred Stock or the Company's Series A Preferred.
Name and Address Shares of Common Stock
of Beneficial Owner (1) Beneficially Owned (2) Percentage of Class
______________________________ ____________________ ___________________
David G. Derrick (3) 169,850 7.60%
2401 S. Foothill Dr.
Salt Lake City, Utah 84109
Leviticus Trust (4) 210,755 9.98%
1233 Beech Street, #315
Atlantic Beach, NY 11509
Michael G. Acton (5) 23,544 1.10%
(Director and Executive Officer)
James R. Derrick - -
(Director)
Jack W. Job - -
(Director)
All executive officers and
directors as a group (3 persons) 23,544 1.10%
______________________________
(1) Unless otherwise indicated, such person's address is the same as the
Company's address.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Memorandum upon
the exercise of options or warrants. Each beneficial owner's percentage of
ownership is determined by assuming that options or warrants held by such
person (but not those held by any other person) and exercisable within 60 days
from the date of this Memorandum have been fully exercised. Unless otherwise
noted, the Company believes the persons named in this table will possess sole
voting and investment power with respect to all shares of Common Stock shown
as being beneficially owned. Percentages are calculated based on 2,111,216
shares of Common Stock outstanding immediately following the Distribution (as
adjusted for shares deemed to be beneficially owned by such shareholder).
(3) David Derrick will own 45,850 shares of Common Stock directly and will
receive options to purchase 124,000 shares of Common Stock. Mr. Derrick is
the CEO and Chairman of Biomune and the brother of the Company's President,
James R. Derrick.
(4) The Leviticus Trust will own approximately 210,755 shares of Common
Stock directly. The Leviticus Trust is an irrevocable trust established for
the benefit of its sole beneficiary, Genesis Investment Corporation. The
trustee of the Leviticus Trust is Diana Rothstein, an individual residing in
New York. The trustee has the power to vote and to dispose of the shares held
by the Leviticus Trust, consistent with the terms and subject to the
conditions of the Trust Declaration establishing the trust.
(5) Mr. Acton will own approximately 44 shares of Common Stock directly and
will hold options to purchase 23,500 shares of Common Stock.
Except for the matters described herein, there are no arrangements known to
the Company, the operation of which may, at a subsequent date, result in a
change of ownership or control of the Company.
Item 5. Directors, Executive Officers, Promoters and Control Persons
Executive Officers, Key Employees and Directors
The executive officers and directors of the Company are as follows:
Name Age Position
- ------------------ --------------- -------------------------
Michael G. Acton 34 Chairman, Chief Executive
Officer and Chief Financial
Officer
James R. Derrick 53 President, Director
Jack W. Job 35 Director
Michael G. Acton, CPA. Mr. Acton has been Chairman, Chief Financial Officer,
and Chief Executive Officer of Volu-Sol since February 1997. He has also been
Chief Financial Officer and Controller of Biomune since October 1994. From
June 1989 through October 1994, Mr. Acton was employed by Arthur Andersen LLP
in Salt Lake City, Utah, where he performed various tax, audit and business
advisory services. Mr. Acton received a Bachelor of Science degree in
Accounting in 1988 and a Master of Professional Accountancy degree in 1989,
both from the University of Utah. He is a Certified Public Accountant in the
State of Utah. Biomune has a class of securities registered under the
Securities Exchange Act of 1934 and, until the consummation of the
Distribution was the parent of the Company.
James R. Derrick. Mr. Derrick has been the Company's President since February
1997, and a director since May 1997. Between July 1994 and February 1997, he
was employed as a business and engineering consultant by Derrick Consultants.
From October 1979 to July 1994, Mr. Derrick was the chief executive officer of
Crib Retaining Walls, Inc., a manufacturing and construction firm based in
North Salt Lake, Utah. Mr. Derrick received a Bachelor of Science degree in
Industrial Engineering from the University of Utah in 1971.
Jack W. Job. Mr. Job has been a director of the Company since May 1997. He
presently is the Chief Financial Officer of Utah Technology Finance
Corporation located in Salt Lake City, Utah. Prior to his present position
with UTFC, from May 1990 to May 1995, Mr. Job was employed by Arthur Andersen
LLP in its Salt Lake City office as a senior accountant performing tax and
audit functions. He is a Certified Public Accountant and a member of the Utah
Association of Certified Public Accountants and the American Institute of
Certified Public Accountants. Mr. Job received a bachelor of science degree
and masters of accountancy degree (Magna Cum Laude) from Brigham Young
University.
In addition to the foregoing executive officers and directors, the
Company expects the following employee to make significant contributions to
the Company:
Dawn Perdue. Ms. Perdue, age 36, is Director of Operations and acts as the
Company's Compliance Officer for regulatory affairs. She came to the Company
in October 1995 with more than 12 years experience in science and management
positions in clinical and industrial operations. Prior to joining the
Company, Ms. Perdue was Manager of Research and Development of Genzyme
Corporation, a leading biotechnical company. She graduated in biology from
Western New England College (Massachusetts) and has a Certificate of Special
Studies in Administration from Harvard University.
None of the Company's executive officers or directors are related to any other
executive officer or director of the Company.
Item 6. Executive Compensation
EXECUTIVE COMPENSATION
Since March 1997, the Company has paid Mr. Acton, its Chief Executive
Officer, Chief Financial Officer, and Chairman, a consulting fee of $6,000 per
month. No executive officer or employee of the Company is paid more than
$100,000 per year in salary and benefits. Mr. Acton provides his services on
a part-time basis. Following the Distribution, he will continue to provide
such services on the same basis. He also serves as Chief Financial Officer of
Biomune. The Company's President, James R. Derrick, receives an annual salary
of $60,000.
DIRECTOR COMPENSATION
Members of the Board of Directors who are not employees of the Company
are paid $500 for each meeting of the Board of Directors attended. Following
the Distribution, this fee is to be paid $250 in cash and $250 in shares of
the Company's Common Stock.
EMPLOYMENT AGREEMENTS
Aside from the payments described above to Mr. Acton and to Mr. Derrick,
there are no consulting or employment contracts with management at this time.
STOCK PLANS
The 1997 Volu-Sol, Inc. Transition Plan
The Company has adopted the 1997 Volu-Sol, Inc. Transition Plan (the
"Transition Plan") to govern the issuance and exercise of certain options to
purchase the Company's Common Stock. Certain officers, directors and
employees of Biomune have been granted options to purchase shares of Biomune
Common Stock (the "Biomune Options"). The Biomune Options have been granted
pursuant to various stock plans of the Company (the "Biomune Plans"). The
Biomune Plans give the committee of the Biomune Board that administers the
plans (the "Biomune Plan Committee") the authority to make equitable
adjustments to outstanding Biomune Options in the event of certain
transactions, of which the Distribution is one.
The Biomune Plan Committee and the Biomune Board have determined that,
immediately prior to the Distribution, each Biomune Option will be divided
into two separately exercisable options: (i) an option to purchase Volu-Sol
Common Stock (the "Add-on Volu-Sol Option") in an amount that would have been
issued in the Distribution in respect of the shares of Biomune Common Stock
subject to the applicable Biomune Option, if such Biomune Option had been
exercised in full immediately prior to the Distribution Record Date, and
containing substantially equivalent terms as the existing Biomune Option, and
(ii) an option to purchase Biomune Common Stock (an "Adjusted Biomune
Option"), exercisable for the same number of shares of Biomune Common Stock as
the corresponding Biomune Option had been. The per share exercise price of
the Biomune Option will remain the same in the Adjusted Biomune Option, and
all other terms of such Biomune Option will remain the same in all material
respects. The Add-on Volu-Sol Option will carry an option exercise price per
share equal to the price per share of the exercise price under the Biomune
Option.
As a result of the foregoing, certain persons who remain Biomune
employees or non-employee directors after the Distribution will hold both
Adjusted Biomune Options and separate Add-on Volu-Sol Options. The
obligations with respect to the Adjusted Biomune Options and Add-on Volu-Sol
Options held by Biomune employees and non-employee directors following the
distribution will be obligations solely of Biomune. The Company will reserve
a total of 709,602 shares of Common Stock for issuance upon exercise of the
Add-on Volu-Sol Options.
The Transition Plan will be administered by the Board of Directors or a
Committee of the Board of Directors appointed by the Board.
Other Stock Purchase Rights
Biomune has granted rights to purchase Biomune Common Stock in the form
of warrants (the "Biomune Warrants"). Under the agreements governing the grant
and exercise of the Biomune Warrants, Biomune has agreed to issue to the
holders of such rights securities otherwise issuable with respect to the
Biomune Common Shares underlying the Biomune Warrants if and to the extent the
Biomune Warrants are exercised. Consequently, if the holders of the Biomune
Warrants exercise their rights thereunder, Biomune must issue to those holders
one share of Volu-Sol Common Stock for each ten shares of Biomune Common Stock
issued in connection with such exercise. Volu-Sol has agreed to sell to
Biomune the shares of Volu-Sol Common Stock needed to meet this obligation of
Biomune. The purchase price of such shares of Volu-Sol Common Stock will be a
sum equal to 10% of the consideration received by Biomune in exercise of the
Biomune Warrants. The Company will reserve 247,059 shares of Common Stock for
issuance upon exercise of the Biomune Warrants. If all of such Biomune
Warrants are exercised, the Company will receive $588,000 from Biomune as
consideration for the Volu-Sol Common Stock sold to Biomune as described
above.
The 1997 Volu-Sol, Inc. Stock Incentive Plan
The Company has adopted the 1997 Volu-Sol, Inc. Stock Incentive Plan
("1997 Plan"). The 1997 Plan was approved by action of Biomune, the sole
shareholder of the Company, in August 1997. Under the 1997 Plan, the Company
may issue stock options, stock appreciation rights ("SARs"), restricted stock
awards, and other incentives to employees, officers and directors of the
Company. The principal features of the 1997 Plan are summarized below, but the
following Summary is qualified in its entirety by the written plan.
The 1997 Plan provides for the award of incentive stock options to key
employees and directors of the Company and the award of nonqualified stock
options, stock appreciation rights, bonus rights, and other incentive grants
to employees and certain non-employees who have important relationships with
the Company or its subsidiaries. 5,000,000 shares are available for issuance
pursuant to awards granted under the 1997 Plan. To date no awards of any kind
have been made under the 1997 Plan. The Board of Directors presently acts as
the committee that administers the 1997 Plan (the "Plan Committee").
Stock Option Grants. The Plan Committee may grant Incentive Stock
Options ("ISOs") and Non-Statutory Stock Options ("NSOs") under the 1997 Plan.
With respect to each option grant, the Plan Committee will determine the
number of shares subject to the option, the option price, the period of the
option, the time or times at which the option may be exercised (including
whether the option will be subject to any vesting requirements and whether
there will be any conditions precedent to exercise of the option), and the
other terms and conditions of the option.
Stock Appreciation Rights ("SARs") may be granted under the 1997 Plan.
Each SAR entitles the holder, upon exercise, to receive from the Company an
amount equal to the excess of the fair market value on the date of exercise of
one share of Common Stock of the Company over its fair market value on the
date of grant (or, in the case of a SAR granted in connection with an option,
the excess of the fair market value of one share of Common Stock of the
Company over the option price per share under the option to which the SAR
relates), multiplied by the number of shares covered by the SAR, may be made
in Common Stock, in cash, or in any combination of Common Stock and cash. No
SARs have been granted under the 1997 Plan.
Restricted Stock. The Plan Committee may issue shares of Common Stock
under the 1997 Plan subject to the terms, conditions, and restrictions
determined thereby. Upon the issuance of restricted stock the number of
shares reserved for issuance under the 1997 Plan will be reduced by the number
of shares issued. No restricted shares have been granted under the 1997 Plan.
Cash Bonus Rights. The Plan Committee may grant cash bonus rights under
the 1997 Plan in connection with (i) options granted or previously granted,
(ii) SARs granted or previously granted, (iii) stock bonuses awarded or
previously awarded and (iv) shares issued under the 1997 Plan. No bonus
rights have been granted under the 1997 Plan.
Changes in Capital Structure. The 1997 Plan provides that if the
outstanding Common Stock of the Company is increased or decreased or changed
into or exchanged for a different number or kind of shares or other securities
of the Company or of another corporation by reason of any recapitalization,
stock split or certain other transactions, appropriate adjustment will be made
by the Plan Committee in the number and kind of shares available for grants
under the 1997 Plan. In addition, the 1997 Plan Committee will make
appropriate adjustments in the number and kind of shares as to which
outstanding options will be exercisable. In the event of a merger,
consolidation or other fundamental corporate transformation, the Board may, in
its sole discretion, permit outstanding options to remain in effect in
accordance with their terms; to be converted into options to purchase stock in
the surviving or acquiring corporation in the transaction; or to be exercised,
to the extent then exercisable, during a period prior to the consummation of
the transaction established by the Plan Committee or as may otherwise be
provided in the 1997 Plan.
Item 7. Certain Relationships and Related Transactions
The Company has agreed to indemnify each of its directors and officers to
the fullest extent permitted by the Revised Utah Business Corporation Act. See
Item 5 of Part II.
The Company has supplemented its cash flow from operations by borrowings
from its parent, Biomune. As of the date of this Registration Statement, the
Company owes Biomune a total of $390,500. These amounts are due on demand and
bear interest at the rate of ten percent per annum.
Item 8. Description of Securities
Common Stock
The Company is authorized to issue 50,000,000 shares of Common Stock,
$0.0001 par value per share. As of March 5, 1997, there were 21,112,156 shares
of Common Stock of Biomune outstanding held of record by approximately 1,070
shareholders. Accordingly, immediately after the Distribution, the Company
will have approximately 1,070 shareholders of record and approximately
2,111,216 shares outstanding. The Company also will reserve 323,118 shares of
Common Stock for issuance upon conversion of the Biomune Preferred Stock
outstanding at March 5, 1997. The Company has agreed with Biomune to sell
247,059 shares of its Common Stock to Biomune to permit Biomune to meet its
obligations to deliver Common Stock of the Company upon exercise of certain
warrants and options (other than options issued under employee stock option
plans). The purchase price of such shares of Common Stock will be a sum equal
to 10% of the consideration received by Biomune in connection with the
exercise of the right to acquire Biomune Common Stock.
Holders of the Company's Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the shareholders,
and do not have cumulative voting rights. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of Common Stock are
entitled to receive ratably the dividends, if any, that may be declared from
time to time by the Board of Directors out of funds legally available for such
dividends. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock would be entitled to share ratably in all
assets remaining after payment of liabilities and the satisfaction of any
liquidation preferences granted the holders of any outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive rights and no
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All the outstanding
shares of Common Stock are, and the Common Stock to be distributed by Biomune
hereby, when issued, will be validly issued, fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of undesignated
Preferred Stock, $0.0001 par value per share. Pursuant to the Company's
Articles of Incorporation, the Company's board of directors has the authority
to amend the Company's Articles of Incorporation, without further shareholder
approval, to designate and determine, in whole or in part, the preferences,
limitations and relative rights of the Preferred Stock before any issuance of
the Preferred Stock and to create one or more series of Preferred Stock and
fix the number of shares of each such series and determine the preferences,
limitations and relative rights of each series of Preferred Stock, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, and liquidation preferences. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the shareholders
and may adversely affect the voting and other rights of the holders of Common
Stock. The Company has authorized the issuance of 20,000 shares of Series A
Preferred and intends to issue up to 12,000 shares of such preferred stock for
gross proceeds of up to $2.4 million concurrent with or prior to the
Distribution. The Company and Biomune have agreed that if the Securities and
Exchange Commission has not declared the Company's Registration Statement on
Form 10-SB effective within 180 days of its filing, then the holders of the
Series A Preferred may exchange such shares as they then hold to Biomune
Common Stock. As of September 30, 1997, the Company has received
subscriptions for $1,225,000 of Series A Preferred, for which cash of
$325,000 has been received. Payments for the remaining subscriptions are due
as follows: $300,000 upon the effective date of the Registration Statement
(expected to be December 1, 1997), $300,000 within 45 days of the Effective
Date, and $300,000 within 90 days of the Effective Date. See, "Description of
the Business." The Company intends to keep the private placement open
through December 31, 1997 and may raise up to an additional $1,175,000.
The Company intends to use the proceeds from such Offering to repay its
indebtedness to Biomune (approximately $390,500 as of November 21, 1997), pay
the expenses of the Offering and the Distribution (including legal and
accounting fees incurred in each transaction estimated to be approximately
$75,000), acquire yet-to-be identified medical product distributors or product
rights, and supplement working capital. The Company believes that cash
generated by operations, together with the proceeds of the Offering will be
sufficient to meet its capital requirements for a minimum of 12 months.
Anti-Takeover Provisions
Certain provisions of Volu-Sol's Articles of Incorporation and Bylaws, as
each will be in effect as of the date of Distribution, and of applicable Utah
State Corporation Law, have the effect of making more difficult an acquisition
of control of Volu-Sol in a transaction not approved by Volu-Sol's Board of
Directors.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters
Market Information
Prior to the Distribution, all of the Company's Common Stock was owned by
Biomune and consequently there has been no public trading market for the
Company's securities. Although the Company anticipates that a public market
for over-the-counter trading of the Company's securities may develop after the
Distribution is completed, there can be no assurance that such a market will
develop or that it will be sustained. At such time, if any, as the Company
satisfies applicable entry or listing criteria, the Company may seek to
include or list its Common Stock on the NASDAQ Stock Market or a securities
exchange. There is presently no market for the Company's Common Stock and
there is no assurance that a market will ever develop. There can be no
assurance that the Company will ever be able to satisfy such criteria or that
its application for inclusion or listing on the NASDAQ Stock Market or
securities exchange will be accepted. After the Distribution, all of the
Company's issued stock will be unrestricted and freely salable, except to the
extent such Common Stock is owned by affiliates of the Company.
Holders
Immediately following the Distribution, the Company anticipates that
there will be approximately, 1,070 record holders of the Company's Common
Stock.
Dividends
Since its incorporation, the Company has not declared any dividend on any
of its Common Stock. The Company does not anticipate declaring a dividend on
any of its Common Stock for the foreseeable future. The Series A Preferred
shares will be entitled to a 10% dividend annually which may be paid in cash
or additional shares of Preferred Stock at the option of the Company.
Dilution
The Company has a large number of shares of Common Stock authorized in
comparison to the number of shares issued and outstanding. The Board of
Directors determines when and under what conditions and at what prices to
issue the stock of the Company. In addition, a significant number of shares
of Common Stock of the Company are reserved for issuance upon exercise of
purchase or conversion rights. The issuance of such shares, whether in
connection with new equity offerings, acquisitions, or the exercise of option
or conversion rights will result in dilution of the equity and voting
interests of existing shareholders, including those receiving their shares in
the Distribution. See "Risk Factors - Dilution."
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock will be
American Stock Transfer & Trust Company, 40 Wall Street, New York City, New
York 10005.
Item 2. Legal Proceedings
The Company currently is not a party to, and none of its property is
subject to, any pending or threatened legal proceedings which, in the opinion
of management, are likely to have a material adverse impact on the financial
condition, results of operations or cash flows of the Company.
Item 4. Recent Sales of Unregistered Securities
The following information sets forth certain information for all
securities the Company sold during the past three years without registration
under the Securities Act of 1933 (the "Securities Act").
On July 27, 1995, in connection with the incorporation of the Company as
a wholly owned subsidiary of Biomune, 10,000 shares of the Company's Common
Stock, consisting of all of the issued and outstanding shares of Common Stock
prior to the Distribution, were issued to Biomune. Such issuance was
accomplished without registration under the Securities Act in reliance on the
exemption afforded by Section 4(2) of the Securities Act. Prior to the
Distribution, such securities will be subject to a forward split of
approximately 211 for 1 to permit the issuance of a sufficient number of
shares to the shareholders of record of Biomune as of March 5, 1997. In
addition, the Company will reserve a total of 323,118 shares of Common Stock
for issuance upon conversion of the Biomune Preferred Stock outstanding at
March 5, 1997, as well as 709,602 shares for issuance upon the exercise of the
Add-on Volu-Sol Options and 247,059 shares for issuance upon exercise of the
Biomune Warrants.
The Company has also agreed to issue up to 12,000 shares of its Series A
Preferred to accredited investors as described elsewhere herein. Such offer
and sale is to be made in accordance with exemptions under Section 4(2) and
3(b) of the Securities Act, including Rule 506 of Regulation D. As of
September 30, 1997, the Company has received subscriptions for a total of
$1,225,000. Of this amount, cash of $325,000 has been paid to the Company.
Payments for the remaining subscriptions are to be received as follows:
$300,000 upon the effective date, $300,000 within 45 days of the Effective
Date, and $300,000 within 90 days of the Effective Date. Shares will be
issued as payment is received. The Company and Biomune have agreed that if
the Commission has not declared the Company's Registration Statement on Form
10-SB effective within 180 days of its filing, then the holders of the Series
A Preferred may exchange such shares as they then hold to Biomune Common
Stock.
Item 5. Indemnification of Directors and Officers
The Company's articles of incorporation and Article VIII of the Company's
Bylaws provides for indemnification of the officers and directors to the
fullest extent permitted by the provisions of the Utah Revised Business
Corporation Act (the "Utah Act").
Under Section 16-10a-902 of the Utah Act, a corporation may indemnify a
past or present director against liability incurred in a proceeding if (1) the
director conducted himself in good faith, (2) the director reasonably believed
that his conduct was in, or not opposed to, the corporation's best interest,
and (3) in the case of any criminal proceeding, the director had no reasonable
cause to believe his conduct was unlawful; provided, however, that a
corporation may not indemnify a director (i) in connection with a proceeding
by or in the right of the corporation in which the director is adjudged liable
to the corporation, or (ii) in connection with any other proceeding charging
improper personal benefit to him in which he is adjudged liable on the basis
that personal benefit was improperly received by him.
In addition, pursuant to Section 16-10a-903 of the Utah Act, unless
limited by the articles of incorporation, a corporation shall indemnify a
director who is wholly successful, on the merits or otherwise, in the defense
of any proceeding to which he is party because he is or was a director against
reasonable expenses incurred by him in connection with the proceeding.
Under 16-10a-905 of the Utah Act, an officer is entitled to the benefit
of the same indemnification provisions as apply to directors, but in addition
a corporation may indemnify and advance expenses to an officer who is not a
director to the extent, consistent with public policy, provided by the
corporation's articles of incorporation, the corporation's bylaws, general or
specific action of the board of directors, or contract. Unless the
corporation's articles of incorporation provide otherwise, Section 16-10a-905
of the Utah Act permits a court in certain circumstances to order the payment
of indemnification to a director, whether or not he met the applicable
standard of conduct, if the director is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances.
PART F/S
The following financial statements are filed as part of this Registration
Statement on Form 10-SB:
Report of Independent Public Accountants
Balance Sheets as of September 30, 1995 and 1996, and June 30, 1997
(unaudited)
Statements of Operations for the years ended September 30, 1994, 1995 and
1996, and for the Nine Months ended June 30, 1996 and 1997 (unaudited)
Statements of Stockholders' Equity/Parent's Investment for the years ended
September 30, 1994, 1995 and 1996, and for the Nine Months ended June 30, 1997
(unaudited)
Statements of Cash Flows for the years ended September 30, 1994, 1995 and
1996, and for the Nine Months ended June 30, 1996 and 1997 (unaudited)
<PAGE>
VOLU-SOL, INC. (INCLUDING ITS PREDECESSOR)
FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1995 AND 1996 AND
JUNE 30, 1997 (UNAUDITED) AND
FOR EACH OF THE THREE YEARS IN
THE PERIOD ENDED SEPTEMBER 30, 1996
AND THE NINE MONTHS ENDED
JUNE 30, 1996 AND 1997 (UNAUDITED)
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Volu-Sol, Inc.:
We have audited the accompanying balance sheets of Volu-Sol, Inc. (the
"Company"), a Utah corporation and wholly owned subsidiary of Biomune Systems,
Inc., as of September 30, 1995 and 1996, and the related statements of
operations, stockholder's equity/parent's investment and cash flows (including
Volu-Sol, Inc.'s predecessor) for each of the three years in the period ended
September 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. 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.
As discussed in Note 1 to the financial statements, the accompanying financial
statements present the carved-out portion of Biomune Systems, Inc.'s net
assets and results of operations related to its medical stain manufacturing
and sales operations prior to July 27, 1995 and its wholly owned subsidiary,
Volu-Sol, Inc., from July 27, 1995 through September 30, 1996, and may not
necessarily be indicative of the financial condition or the results of
operations that would have existed if the medical stain operations or the
subsidiary had been operated as an unaffiliated company. Certain expenses are
the result of allocations of total expenses incurred by Biomune Systems, Inc.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Volu-Sol, Inc. as of
September 30, 1995 and 1996, and the results of its operations and its cash
flows (including those of its predecessor) for each of the three years in the
period ended September 30, 1996 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and as of June 30, 1997 has an unaudited accumulated deficit
totaling $1,980,849. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
August 15, 1997 (except with respect
to the matters discussed in the first
paragraph of Note 4 and Note 10,
as to which the date is September 29, 1997)
<PAGE>
VOLU-SOL, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
-------------------------------- June 30,
1995 1996 1997
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 4,753 $ 12,167 $ 110,605
Accounts receivable, less allowance for
doubtful accounts of $10,000, $13,000
and $13,000, respectively 95,402 74,784 67,293
Inventories 100,324 112,726 190,986
-------------- -------------- --------------
Total current assets 200,479 199,677 368,884
-------------- -------------- --------------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 85,207 221,063 221,165
Furniture and fixtures 72,561 30,924 30,924
Machinery and equipment 64,408 166,052 167,650
-------------- -------------- --------------
222,176 418,039 419,739
Less accumulated depreciation and amortization (170,842) (83,167) (134,528)
-------------- -------------- --------------
Net property and equipment 51,334 334,872 285,211
-------------- -------------- --------------
INTANGIBLE AND OTHER ASSETS, net 297,263 6,249 6,199
-------------- -------------- --------------
Total assets $ 549,076 $ 540,798 $ 660,294
============== ============== ==============
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CURRENT LIABILITIES:
Related-party notes payable $ - $ - $ 264,500
Accounts payable 64,140 55,090 129,768
Accrued liabilities 16,176 50,207 46,064
-------------- -------------- --------------
Total current liabilities 80,316 105,297 440,332
-------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 5, 9 and 10)
STOCKHOLDER'S EQUITY:
Preferred stock, $.0001 par value; 10,000,000
shares authorized, none issued - - -
Common stock, $.0001 par value; 50,000,000
shares authorized, 10,000 shares outstanding 1 1 1
Additional paid-in capital 571,723 1,940,686 2,200,810
Accumulated deficit (102,964) (1,505,186) (1,980,849)
-------------- -------------- --------------
Total stockholder's equity 468,760 435,501 219,962
-------------- -------------- --------------
Total liabilities and stockholder's equity $ 549,076 $ 540,798 $ 660,294
============== ============== ==============
</TABLE>
The accompanying notes to financial statements are
an integral part of these balance sheets.
<PAGE>
VOLU-SOL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended September 30, June 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
SALES $ 365,189 $ 458,981 $ 434,691 $ 338,016 $ 368,731
COST OF GOODS SOLD 250,121 369,373 357,471 280,939 301,870
------------- ------------- ------------- ------------- -------------
Gross margin 115,068 89,608 77,220 57,077 66,861
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 445,434 707,393 1,446,651 828,522 542,524
------------- ------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (330,366) (617,785) (1,369,431) (771,445) (475,663)
OTHER INCOME (EXPENSE) 12,216 - (32,791) (32,791) -
------------- ------------- ------------- ------------- -------------
NET LOSS $ (318,150) $ (617,785) $ (1,402,222) $ (804,236) $ (475,663)
============= ============= ============= ============= =============
NET LOSS PER COMMON
SHARE (Note 2) $ (140.22) $ (80.42) $ (47.57)
============= ============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (Note 2) 10,000 10,000 10,000
============= ============= =============
PRO FORMA NET LOSS PER
COMMON SHARE (Note 2) $ (.66) $ (.38) $ (.23)
============= ============= =============
PRO FORMA WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING
(Note 2) 2,111,216 2,111,216 2,111,216
============= ============= =============
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
<PAGE>
VOLU-SOL, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY/PARENT'S INVESTMENT
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
AND THE NINE MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
Parent's ------------------- Paid-in Accumulated Total
Investment Shares Amount Capital Deficit Equity
----------- --------- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 $ 622,063 - $ - $ - $ - $ 622,063
Contributions from Parent 234,987 - - - - 234,987
Net loss (318,150) - - - - (318,150)
----------- --------- -------- ------------ ------------- -------------
Balance at September 30, 1994 538,900 - - - - 538,900
Contributions from Parent 547,645 - - - - 547,645
Net loss through July 26, 1995 (514,821) - - - - (514,821)
Incorporation on July 27, 1995 (571,724) 10,000 1 571,723 - -
Net loss from date of
incorporation through
September 30, 1995 - - - - (102,964) (102,964)
----------- --------- -------- ------------ ------------- -------------
Balance at September 30, 1995 - 10,000 1 571,723 (102,964) 468,760
Contributions from Parent - - - 1,368,963 - 1,368,963
Net loss - - - - (1,402,222) (1,402,222)
----------- --------- -------- ------------ ------------- -------------
Balance at September 30, 1996 - 10,000 1 1,940,686 (1,505,186) 435,501
Contributions from Parent
(unaudited) - - - 260,124 - 260,124
Net loss (unaudited) - - - - (475,663) (475,663)
----------- --------- -------- ------------ ------------- -------------
Balance at June 30, 1997 (unaudited) $ - 10,000 $ 1 $ 2,200,810 $(1,980,849) $ 219,962
=========== ========= ======== ============ ============= =============
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements
<PAGE>
VOLU-SOL, INC.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended September 30, June 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (318,150) $ (617,785) $(1,402,222) $ (804,236) $ (475,663)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation 48,551 48,547 57,540 35,703 51,361
Amortization of intangibles 46,636 46,636 46,636 34,769 -
Write down of intangible asset - - 244,836 - -
Loss on disposal of fixed assets - - 32,791 32,791 -
Change in assets and liabilities-
(Increase) decrease in
accounts receivable 23,233 (47,478) 20,618 (16,875) 7,491
(Increase) decrease in
inventories 17,403 (36,940) (12,402) 8,662 (78,260)
(Increase) decrease in
other assets - (3,000) (458) (558) 50
Increase (decrease) in
accounts payable (15,960) 47,298 (9,050) (4,250) 74,678
Increase (decrease) in
accrued liabilities (18,170) 10,461 34,031 7,057 (4,143)
------------ ------------ ------------ ------------ ------------
Net cash used in
operating activities (216,457) (552,261) (987,680) (706,937) (424,486)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,439) (17,361) (373,869) (377,911) (1,700)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net investment from parent 234,987 547,645 1,368,963 1,107,758 260,124
Proceeds from issuance of notes
payable to Parent - - - - 264,500
------------ ------------ ------------ ------------ ------------
Net cash provided by
financing activities 234,987 547,645 1,368,963 1,107,758 524,624
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 14,091 (21,977) 7,414 22,910 98,438
CASH AT BEGINNING OF PERIOD 12,639 26,730 4,753 4,753 12,167
------------ ------------ ------------ ------------ ------------
CASH AT END OF PERIOD $ 26,730 $ 4,753 $ 12,167 $ 27,663 $ 110,605
============ ============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
<PAGE>
VOLU-SOL, INC.
NOTES TO FINANCIAL STATEMENTS
(Including notes related to unaudited periods)
(1) Nature of Operations and Organization
Volu-Sol, Inc. (the "Company"),a wholly owned subsidiary of Biomune Systems,
Inc. ("Biomune"), was incorporated on July 27, 1995 in the state of Utah.
Biomune contributed certain assets and operations to the Company that had been
previously acquired by Biomune in December 1991. Prior to its incorporation,
the Company had been operated as a division of Biomune. The accompanying
financial statements present the carved-out portion of Biomune's net assets
and results of operations related to its medical stain manufacturing and sales
operations (operated as a division through July 26, 1995 and as a subsidiary
thereafter). Certain expenses presented in the financial statements are the
result of allocations of total expenses incurred by Biomune. These reported
results may not be indicative of the financial condition and results of
operations that would have existed if the medical stain manufacturing and
sales business would have been operated as an unaffiliated company.
The Company engages in the manufacturing, marketing and distribution of
medical diagnostic stains and the marketing and distribution of a related
medical instrument.
On February 25, 1997, the board of directors of Biomune approved the
distribution of the Company to the Biomune common stockholders of record as of
March 5, 1997 (the "Distribution"). This approval is subject to the
completion of certain definitive agreements. Stockholders of record as of
March 5, 1997 are expected to receive one share of Volu-Sol, Inc. common stock
for every ten shares of Biomune common stock owned. Immediately upon
completion of the Distribution, there are expected to be 2,111,216 shares of
Volu-Sol, Inc. common stock outstanding.
The Company has experienced net losses of $318,150, $617,785 and $1,402,222
and negative cash flows from operating activities of $216,457, $552,261 and
$987,680 for the years ended September 30, 1994, 1995 and 1996, respectively.
For the nine months ended June 30, 1996 and 1997, the Company experienced net
losses of $804,236 and $475,663, respectively and negative cash flows from
operating activities of $706,937 and $424,486, respectively. Historically,
the Company has depended upon funding from Biomune to fund its operations and
such funding will not be available after the Distribution. The Company's
continued existence is dependent upon its ability to increase revenues to a
self-sustaining level and to obtain debt or equity funding to meet its short-
term and long-term liquidity needs. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Management's plans with respect to this uncertainty include obtaining debt or
equity funding to finance the Company's operations. The Company is in the
process of completing a private placement of Series A 10% Convertible, Non-
Voting Preferred Stock (the "Offering"). The Offering is intended to provide
the Company with gross proceeds of up to $2,400,000. Subsequent to year-end,
the Company has received subscriptions to purchase $1,225,000 of preferred
stock, for which cash of $325,000 has been collected (see Note 10). The
Company has recently introduced a new hematology staining instrument (the
"Definitive") that contains a microchip (proprietary to a third party) that
regulates precise stain amounts. Management believes that this new product
will enhance future revenues of the Company. Management plans to acquire
other related instruments to further enhance its product offerings. The
Company is subject to special risk factors. These risk factors include:
(a) The Company did not achieve profitable operations while it was operated
as a division of Biomune, nor has the Company achieved profitable
operations since the date of its incorporation. The Company's present
business strategy is to improve its cash flows by adding to its existing
product line and expanding its sales and marketing efforts. There can
be no assurance that the Company will be able to achieve profitable
operations.
(b) The Company anticipates that it will continue to incur operating losses
in the future until such time as it is able to successfully market the
Definitive or other devices that it has yet to add to its product line.
There can be no assurance that the Company will be able to achieve
profitable operations with its existing product line or that the Company
will be able to supplement its existing product line with additional
products that will allow it to achieve profitable operations. The
Company's ability to achieve profitable operations will also depend on
its ability to develop and maintain an adequate marketing and
distribution system. There can be no assurance that the Company will
be able to develop and maintain adequate distribution resources.
(c) The Company will require substantial additional funding in order to
acquire or license additional technologies and products to add to its
existing product line, for operational expenses, and for establishing
and maintaining manufacturing and marketing capabilities in the future.
There can be no assurance that the Company's cash reserves and other
liquid assets, including the proceeds of any future third-party
financings will be adequate to satisfy its capital and operating
requirements.
(d) The Company uses certain trademarks and tradenames for certain of its
products. Nevertheless, the Company's core products, medical diagnostic
stains and solutions and other biochemical products, as well as the
Definitive, are not based on technology proprietary to the Company. The
majority of the Company's present product line is based on technology
that is in the public domain and therefore there are effectively no
entry barriers to potential competitors of the Company. The Company has
entered into a license agreement with the third-party entity that owns
the intellectual property rights associated with the Definitive and
manufactures the Definitive for the Company. There can be no assurance
that such third party will be able to adequately protect its proprietary
rights or to continue to manufacture the Definitive on terms favorable
to the Company.
(e) The medical diagnostic supply and biochemical industries are
characterized by intense competition. Many, if not most, of the
Company's competitors and potential competitors are much larger and
consequently have greater access to capital as well as mature and highly
sophisticated distribution channels. Many of the Company's larger
competitors are able to manufacture chemical products on a much larger
scale and therefore presumably would be able to take advantage of
economies of scale not presently enjoyed by the Company. There can be
no assurance that competition from other companies will not render the
Company's products noncompetitive.
(f) The Company historically has not been involved in significant research
and development of new technologies. Consequently, the Company's
success in adding to its existing product line will depend on its ability
to acquire or otherwise license competitive technologies and products and
to operate without infringing the proprietary rights of others. No
assurance can be given that any licenses required from third parties will
be made available on terms acceptable to the Company, or at all.
(g) The Company is highly dependent on certain of its scientific, technical
and operations employees. The loss of services of any of these
personnel could impede the achievement of the Company's objectives.
There can be no assurance that the Company will be able to attract and
retain qualified personnel on acceptable terms.
(h) The use of any of the Company's existing or potential products in
laboratory or clinical settings may expose the Company to liability
claims. These claims could be made directly by persons who assert that
inaccuracies or deficiencies in their test results were caused by
defects in the Company's products. The Company has obtained limited
product liability insurance coverage. However, there can be no
assurance that the Company will be able to obtain commercially
reasonable product liability insurance for any products added to its
product line in the future. A successful product liability claim or
series of claims brought against the Company could have a material
adverse effect on its business, financial condition and results of
operations.
(i) Political, economic and regulatory influences are likely to lead to
fundamental change in the health care industry in the United States.
Third-party payors are increasingly challenging the price and cost
effectiveness of medical products and services, including medical
diagnostic procedures. There can be no assurance that adequate
reimbursement will be available or sufficient to allow the Company to
sell its products on a competitive basis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Period Presentation
The accompanying balance sheet at June 30, 1997, the statements of operations
and cash flows for the nine months ended June 30, 1996 and 1997 and the
statement of stockholder's equity for the nine months ended June 30, 1997 are
unaudited. In the opinion of management, these statements have been prepared
on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair statement of the results of the interim periods. The data disclosed
in the notes to financial statements for these periods are also unaudited.
Results for the unaudited nine-month period ended June 30, 1997 are not
necessarily indicative of the results to be expected for the Company's full
fiscal year.
Revenue Recognition
Revenues from the sale of the Company's products are recognized when the
products are shipped to the customer.
Allocation of Parent Company General and Administrative Expenses
Expenses specifically identifiable to the Company and paid by Biomune have
been presented as those of the Company. A portion of expenses which are not
specifically identifiable, consisting primarily of payroll-related and
professional expenses, have been allocated to the Company based on estimates
of personnel and third party involvement related to the respective activities
as estimated by management. These allocations are considered reasonable by
management and totaled approximately $53,000, $189,000, $165,000, $124,000 and
$40,000 for the years ended September 30, 1994, 1995 and 1996 and for the nine
months ended June 30, 1996 and 1997, respectively.
The Company, as both a division and a subsidiary, was operated relatively
autonomously from Biomune. As a result, management does not anticipate that
actual stand alone expenditures will be significantly different from those
allocated.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996 1997
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Raw materials, packaging and
Supplies $ 78,731 $ 62,545 $ 61,789
Instruments, biological stains
and reagents 21,593 50,181 129,197
------------ ------------ ------------
$ 100,324 $ 112,726 $ 190,986
============ ============ ============
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over their estimated useful lives of 2 to 10 years.
Maintenance, repairs, minor renewals and betterments are expensed as incurred.
Major renewals and betterments are capitalized. The cost of property and
equipment sold or otherwise disposed of and the related accumulated
depreciation are relieved from the accounts, and any resulting gains or losses
are included in the determination of net loss.
Intangible Asset
The Company's intangible asset consists of medical diagnostic technologies
acquired by Biomune in its acquisition of the Company's predecessor's net
assets in 1991. During fiscal 1996, the Company determined that facts and
circumstances warranted the write off of the remaining net book value of
approximately $245,000. The determination that this asset was impaired was
based on continuing operating losses and the framework set out in Statement of
Financial Accounting Standards No. 121.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences
of all temporary differences between the tax bases of assets and liabilities
and their reported amounts in the financial statements that will result in
taxable or deductible amounts in future years when the reported amounts of the
assets and liabilities are recovered or settled. These deferred tax assets or
liabilities are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit
risk consist primarily of trade receivables. In the normal course of
business, the Company provides unsecured credit to its customers. In
connection with providing unsecured credit, the Company performs ongoing
credit evaluations of its customers and maintains allowances for estimated
losses.
Net Loss Per Common Share and Stock Split
The Company computes net loss per common share based on the weighted average
number of common shares outstanding during the period. Net loss per common
share information has not been presented for periods prior to the Company's
incorporation (July 27, 1995). In connection with Biomune's proposed
Distribution of the Company, approximately 2,111,216 shares of the Company's
$0.0001 par value Common Stock, constituting all of the issued and outstanding
shares of the Company's Common Stock, are to be distributed pro rata as a
stock dividend to the holders of the Common Stock of Biomune as of March 5,
1997. As a consequence of the Distribution, the Company will cease to be a
subsidiary of Biomune. Prior to the Distribution, the Company will complete a
forward common stock split of approximately 211 for 1 to permit the issuance
of a sufficient number of shares to the stockholders of record of Biomune as
of March 5, 1997. All pro forma share and per share information in the
accompanying statements of operations have been based on the outstanding
number of shares expected upon completion of the proposed Distribution.
Warrants and options outstanding have not been included in the computations
since any assumption of conversion would have an antidilutive effect, thereby
reducing the net loss per common share.
Use of Estimates in the Preparation of Financial Statements
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.
(3) INCOME TAXES
The Company files a consolidated tax return with its parent, Biomune. No tax
sharing agreement exists between the Company and Biomune. Upon the completion
of the distribution, all net operating loss carryforwards and credit
carryforwards will remain with Biomune and will not be available to be
utilized by the Company.
As of June 30, 1997, the Company has a net deferred tax asset of approximately
$40,000 resulting from reserves and depreciation recorded for financial
reporting purposes but not currently deductible for income tax reporting
purposes. In accordance with SFAS No. 109, a valuation allowance is provided
when it is more likely than not that all or some portion of the deferred
income tax asset will not be realized. Accordingly, the Company has
established a valuation allowance for the entire deferred income tax asset.
(4) STOCKHOLDER'S EQUITY AND PARENT COMPANY CAPITAL CONTRIBUTIONS
The Company is authorized to issue 50,000,000 shares of Common Stock, $0.0001
par value per share, and 10,000,000 shares of Preferred Stock, $0.0001 par
value per share. Pursuant to the Company's Articles of Incorporation, the
Company's board of directors has the authority to amend the Company's Articles
of Incorporation, without further stockholder approval, to designate and
determine, in whole or in part, the preferences, limitations and relative
rights of the Preferred Stock before any issuance of the Preferred Stock and
to create one or more series of Preferred Stock. Subsequent to year-end, the
Company has authorized the issuance of 20,000 shares of Series A 10%
Convertible Non-Voting Preferred Stock and issued 1,625 shares for gross
proceeds of $325,000 (See Note 10).
From Volu-Sol's acquisition in 1991 through March 5, 1997, Biomune made
capital contributions, including expenses allocated or paid on behalf of Volu-
Sol, to the Company in order to fund the Company's cash flow needs.
Subsequent to March 5, 1997, any additional cash advances made by Biomune to
the Company were in the form of demand loans and as of June 30, 1997 totaled
$264,500 (see Note 6).
(5) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases facilities under a noncancelable operating lease that
expires in November 2000. Lease expense for the years ended September 30,
1994, 1995 and 1996 was approximately $55,000, $69,000 and $69,000,
respectively. Lease expense for the nine months ended June 30, 1996 and 1997
was approximately $41,000. Future minimum lease commitments are as follows:
Fiscal Year Amount
----------- --------
1997 $ 55,400
1998 55,400
1999 55,400
2000 55,400
2001 9,240
--------
$230,840
========
Purchase Commitments
The Company is obligated under a manufacturing agreement with the supplier of
the Definitive to purchase 600 automated slide stainers ("stainers") per
calendar year. In the event the Company purchases fewer than 600 stainers,
the manufacturer has the option to convert the Company's exclusive worldwide
license and distributorship to a non-exclusive license and distributorship.
Subsequent to year-end, the Company informed the manufacturer of the
manufacturer of the Definitive that the Company would not meet the annual
purchase commitment. It appears that the Company's exclusive worldwide
license and distributorship will be converted to a non-exclusive license and
distributorship.
The Company has agreed to pay the supplier of the Definitive a royalty of
three percent of the net sales price for all component parts sold by the
Company, exclusive of stainer sales.
(6) RELATED-PARTY TRANSACTIONS
From March 5, 1997 through June 30, 1997, the Company obtained loans from
Biomune totaling $264,500 which remain outstanding. These loans bear an
annual interest rate of ten percent and are due on demand.
Subsequent to June 30, 1997, Biomune made additional loans totaling $68,000
that bear interest at an annual rate of ten percent and are due on demand.
(7) SIGNIFICANT CUSTOMER
During the years ended September 30, 1994, 1995 and 1996, sales to Barret
Healthcare Corporation ("Barret") accounted for approximately 15 percent, 17
percent and 12 percent, respectively, of the Company's total revenues. No
other single customer accounted for more than 10 percent of the Company's
total revenues. During the year ended September 30, 1996, the Company
discontinued selling products to Barret and wrote off outstanding accounts
receivable balances of approximately $55,000.
(8) STOCK INCENTIVE AND OPTION PLANS
The Company has adopted the 1997 Volu-Sol, Inc. Stock Incentive Plan ("1997
Plan"). The 1997 Plan was approved by action of Biomune, the sole stockholder
of the Company, in August 1997. Under the 1997 Plan, the Company may issue
stock options, stock appreciation rights, restricted stock awards, and other
incentives to employees, officers and directors of the Company. Five million
shares are available for grant under the 1997 Plan, but to date no grants have
been made.
(9) EVENTS CONCURRENT WITH THE DISTRIBUTION
Add-on Volu-Sol Options
The Board of Directors of Biomune has determined that, immediately prior to
the Distribution, each Biomune stock option ("Biomune Option") will be divided
into two separately exercisable options: an option to purchase Biomune Common
Stock and an option to purchase Volu-Sol Common Stock (the latter being the
"Add-on Volu-Sol Option"). The Add-on Volu-Sol Options would grant the holder
the right to purchase the Company's Common Stock in an amount that would have
been issued in the Distribution in respect of the shares of Biomune Common
Stock subject to the applicable Biomune Option, if such Biomune Option had
been exercised in full immediately prior to the Distribution, and containing
substantially equivalent terms as the existing Biomune Option. The Add-on
Volu-Sol Options will carry an option exercise price per share equal to the
price per share of the exercise price under the Biomune Option.
As a result of the foregoing, certain persons who remain Biomune employees or
non-employee directors after the Distribution will hold both Biomune Options
and separate Add-on Volu-Sol Options. The obligations with respect to the
Biomune Options and Add-on Volu-Sol Options held by Biomune employees and
non-employee directors following the Distribution will be obligations solely
of Biomune.
As of March 5, 1997, there were 7,096,017 Biomune Options outstanding at
exercise prices ranging from $1.16 to $4.00 with a weighted-average exercise
price of $1.80. As a result, concurrent with the Distribution, there will be
in existence options to purchase 709,602 shares of Volu-Sol Common Stock at
exercise prices ranging from $1.16 to $4.00 with a weighted average exercise
price of $1.80. The Company has reserved 709,602 shares of its Common Stock
for issuance upon the exercise of these options.
Volu-Sol Warrants
Biomune has granted rights to purchase Biomune Common Stock in the form of
warrants (the "Biomune Warrants"). Under the agreements governing the grant
and exercise of the Biomune Warrants, Biomune has agreed to issue to the
holders of such rights, securities otherwise issuable with respect to the
Biomune Common Shares underlying the Biomune Warrants if and to the extent the
Biomune Warrants are exercised. Consequently, if the holders of the Biomune
Warrants exercise their rights thereunder, Biomune must issue to those holders
one share of Volu-Sol Common Stock for each ten shares of Biomune Common Stock
issued in connection with such exercise. Volu-Sol has agreed to sell to
Biomune the shares of Volu-Sol Common Stock needed to meet this obligation of
Biomune. The sales price of such shares of Volu-Sol Common Stock will be a
sum equal to 10 percent of the consideration received by Biomune in exercise
of the Biomune Warrants.
Concurrent with the Distribution, there will be in existence warrants to
purchase 247,059 shares of Volu-Sol Common Stock at exercise prices ranging
from $2.13 to $3.00 with a weighted average exercise price of $2.38. The
Company has reserved 247,059 shares of its Common Stock for issuance upon
exercise of these warrants.
Conversion of Biomune Preferred Stock
Upon conversion of the outstanding shares of Biomune's Preferred Stock, the
preferred shareholders will receive one share of the Company's Common Stock
for every ten shares of Biomune Common Stock received in the conversion.
The Company has reserved a total of 323,118 shares of Common Stock for
issuance in connection with the conversion of the Biomune Series A, B and C
Preferred Stock outstanding at March 5, 1997.
(10) SUBSEQUENT EVENT
On September 8, 1997, the Company amended its articles of incorporation to
create a series of preferred stock, the Series A 10% Convertible Non-Voting
Preferred Stock (the "Series A Preferred"). The Company is attempting to sell
up to 12,000 shares of the Series A Preferred in a private placement for total
gross proceeds of up to $2,400,000. As of September 29, 1997, subscriptions
for $1,225,000 have been received by the Company for which cash of $325,000
has been collected. Payments with respect to the remaining subscriptions are
due as follows: $300,000 upon the effective date of the Company's Form 10-SB,
$300,000 within 45 days of the effective date of the Company's Form 10-SB and
$300,000 within 90 days of the effective date of the Company's Form 10-SB.
The Series A Preferred will be convertible into common stock commencing
January 1, 1998. The "conversion price", which is the basis for such
conversion, is the lesser of (i) 80 percent of the average closing bid price
of the Company's Common Stock for the three trading days immediately preceding
the date of conversion or (ii) $1.25 per share.
<PAGE>
PART III
Item 1. Index to Exhibits
The following list describes the exhibits filed as part of this
registration statement on Form 10-SB:
Exhibit
No. Description of Document
- ------- ---------------------------------------------------
3(i) Articles of Incorporation of the Company, as amended. *
3(ii) Bylaws of the Company. *
4.1 Form of Common Stock Certificate *
4.2 Form of Series A, 10% Convertible Non-Voting
Preferred Stock Certificate *
10.1 Distribution and Separation Agreement dated
September 10, 1997 *
10.2 Volu-Sol, Inc. 1997 Stock Incentive Plan *
10.3 1997 Transition Plan *
10.4 Subscription Agreement ($1.2 million) *
27 Financial Data Schedule *
* Previously filed.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement amendment to be signed on
its behalf by the undersigned, thereunto duly authorized.
VOLU-SOL, INC.
Date: November 21, 1997 By:/s/ Michael G. Acton
---------------------------
Michael G. Acton
Chief Executive Officer and
Chief Financial Officer
