SIMS MOSS KLINE & DAVIS LLP
400 Northpark Town Center Suite 310
1000 Abernathy Road, N.E.
Atlanta, Georgia 30328
Telephone: (770) 481-7200
Facsimile: (770) 481-7210
September 30, 1998
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Bioshield Technologies, Inc.
File No. 333-57767
424 (b)
Dear Sir or Madam:
We transmit herewith the final prospectus of Bioshield Technologies, Inc as
required by Section 424(b) of the Securities Act.
Very truly yours,
SIMS MOSS KLINE & DAVIS LLP
By: /s/ Raymond L. Moss
Raymond L. Moss
<PAGE>
PROSPECTUS
BioShield Technologies, Inc.
650,000 Units
Consisting of 1,300,000 Shares of Common Stock and
1,300,000 Redeemable Common Stock Purchase Warrants
BioShield Technologies, Inc. (the "Company") is hereby offering 650,000 Units,
each unit (the "Unit") consisting of two shares (the "Shares") of Common Stock,
no par value (the "Common Stock"), and two Redeemable Common Stock Purchase
Warrants (the "Warrants") . The Units, the Shares and the Warrants offered
hereby are referred to collectively as the "Securities." The Shares and Warrants
included in the Units may not be separately traded until six months after the
date of this Prospectus, unless earlier separated upon ten days' prior written
notice from Tejas Securities Group, Inc. to the Company. Each Warrant entitles
the holder thereof to purchase one share of Common Stock at an exercise price
per share of 60% of the Initial Public Offering price per share, commencing at
any time after the Common Stock and Warrants become separately tradable and
until five years from the date of this Prospectus. Commencing on March 29, 1999,
the Warrants are subject to redemption by the Company at $0.05 per Warrant at
any time on thirty days, prior written notice, provided that the closing price
for the Common Stock has equalled or exceeded $ 10.00 for ten consecutive
trading days. The Warrant exercise price is subject to adjustment under certain
circumstances. See "Description of Securities."
Prior to this offering, there has been no public market for the Securities,
and there can be no asssurance that an active market will develop.
The initial public offering price of the Units is $10.00 per Unit. See
"Underwriting" for information relating to the factors considered in determining
the initial public offering price. The Units , Common Stock and Warrants are
traded on the NASDAQ Small Cap Market ("NASDAQ") under the symbols "BSTIU" ,
"BSTI" and "BSTIW", respectively.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 6 HEREOF CONCERNING THE COMPANY AND THIS OFFERING.
PROSPECTIVE INVESTORS SHOULD ALSO CONSIDER THE FACT THAT THEIR INVESTMENT WILL
RESULT IN IMMEDIATE SUBSTANTIAL DILUTION. SEE "DILUTION." THESE SECURITIES HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
Per Unit............ $10.00 $1.00 $9.00
Total (2)(3) $6,500,000 $650,000 $5,850,000
1) In addition, the Company has agreed to pay Tejas SecuritiesGroup,Inc.,
Redstone Securities, Inc., and Seaboard Securities, Inc. (collectively, the
"Representatives"), a 2.00% nonaccountable expense allowance and to sell to the
Underwriter warrants exerciseable for four years commencing one year from the
date of this Prospectus to purchase 65,000 Units at 150% of the public offering
price (the "Underwriters Warrants"). The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933 , as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of approximately $415,000 payable by the
Company, including the Representative's 2.00% nonaccountable expense allowance.
The Selling Shareholders will pay a pro-rata portion of the selling expenses if
the over-allotment option is exercised. See "Underwriting."
(3) The Company has granted to the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 97,500 Units,
consisting of 195,000 shares of Common Stock owned by Timothy C. Moses and
Jacques Elfersy, the founders and Senior Management of the Company (the "Selling
Shareholders") and 195,000 Warrants on the same terms set forth above, solely
for the purpose of covering over-allotments, if any. If the Underwriters'
over-allotment option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions, Proceeds to the Company, and Proceeds to
Selling Shareholders will be $7,475,000 ,$747,500, $5,850,000 and $877,500 ,
respectively. See "Underwriting."
The Securities are being offered, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters on a "firm commitment basis" and
subject to approval of certain legal matters by counsel and subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify the offering without notice and to reject any order, in whole or in part.
It is expected that delivery of Common Stock and Warrant certificates will be
made against payment therefor at the offices of Tejas Securities Group, Inc. in
Dallas, Texas
on or about October 2, 1998.
Tejas Securities Group, Inc.
Redstone Securities, Inc.
Seaboard Securities, Inc.
The date of this Prospectus is September 29, 1998
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (including any amendments
thereto, the "Registration Statement") under the Securities Act with respect to
the Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Securities, reference is made to the Registration Statement and the exhibits and
schedules thereto. Statements made in this Prospectus regarding the contents of
any contract or document filed as an exhibit to the Registration Statement are
not necessarily complete and, in each instance, reference is hereby made to the
copy of such contract or document so filed. Each such statement is qualified in
its entirety by such reference. The Registration Statement and the exhibits and
the schedules thereto filed with the Commission may be inspected, without
charge, at the Commission's public reference facilities located at Room 1024,
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, and at the public
reference facilities in the Commission's regional offices located at:
Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago,
Illinois 60661; and Suite 1300, Seven World Trade Center, New York, New York
10048. Copies of such materials also may be obtained at prescribed rates by
writing to the Commission, Public Reference Section, 450 Fifth Street, NW,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission at http://www.sec.gov.
As a result of this offering, the Company will become subject to the
reporting requirements of the Exchange Act, and in accordance therewith will
file periodic reports, proxy statements and other information with the
Commission. The Company will furnish its shareholders with annual reports
containing audited consolidated financial statements certified by independent
public accountants following the end of each fiscal year, proxy statements and
quarterly reports containing unaudited consolidated financial information for
the first three quarters of each fiscal year following the end of such fiscal
quarter.
The Company has applied for listing of the Securities on The Nasdaq
SmallCap Market. There can be no assurance that the Company's Securities will be
accepted for listing. Reports, proxy statements and other information concerning
the Company will be available for inspection at the principal office of The
Nasdaq Stock Market, Inc. at 1735 K Street, Washington, DC 20006-1500.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVERALLOTMENT, ENTERING STABILIZATION BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE SECURITIES ON NASDAQ IN
CONNECTION WITH THE COMMON STOCK AND WARRANTS ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
UNTIL October 24, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-----------------------
2
<PAGE>
PROSPECTUS SUMMARY
------- ---------------
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (included notes thereto)
appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information herein is presented on the basis that the over-allotment option and
underwriters' warrants are not exercised. The securities offered hereby involve
a high degree of risk. Investors should carefully consider the information set
forth under "Risk Factors."
The Company
BioShield Technologies, Inc. (the "Company") is a development stage
company engaged in the development, marketing, and sale of surface modifying
antimicrobials and biostatic products, primarily through third party licensing
arrangements. The Company's primary focus is to exploit its proprietary
technology to become the leader in topical antimicrobials and biocides for
consumer, industrial and institutional markets, environmental services, and
medical device markets. BioShield products are an easily applied reactive
coating technology that modifies surfaces of all types, by creating an invisible
covalent bond between surfaces and a variety of chemical agents. The italicized
terms used in this Prospectus are defined in the Glossary beginning on page 50.
The Company focuses on providing value added and unique antimicrobial solutions
to a variety of industries and product categories. Examples of products in the
market or under development that utilize the BioShield technology include
surface-borne and air-borne products which remove or eliminate certain allergens
from the air which may cause respiratory discomfort or asthma, nine (9) consumer
products exhibiting residual antimicrobial efficacy, a powder form of
add-mixture for the control of specialty microorganisms. The Company is in the
early stages of developing a bio-barrier treatment for acute wound care and a
product that seeks to control food borne contaminants.
The Company's technology is currently available in four (4) different
delivery and enhanced performance systems, and current research on three (3)
other delivery systems are underway. All of the newly developed antimicrobials
are based on the ability of the Company to modify its molecular structure to
suit the required needs of a particular product category or performance
characteristics, such as slow release of antibiotics or drugs. The Company's
core products are essentially non-toxic for their intended uses. The Company
believes that no other known antimicrobial products combine the abilities to
covalently bond on a long-term basis, are generally as safe, effective, variable
and environmentally friendly or have the capability for so many applications.
----------------
The Company is commercializing its antimicrobial technology through licensing
arrangements, marketing distributors which incorporate or repackage under
private labeling agreements, joint development arrangements and in direct sales
to retailers. The Company's strategy is to build and develop new and existing
retail distribution channels for its products using its technologies as a means
to partially fund the commercialization of higher margin industrial and medical
applications.
The Company has also filed certain applications for patents with the United
States Patent and Trademark Office with respect to its proprietary technology.
Specifically, the Company has discovered and claimed a variety of new
compositions and methods of making and using its proprietary antimicrobial
products. The mode of action of the core microbial technology is to disrupt the
microbial cell membrane. By contrast, other antimicrobials rely on absorption of
the antimicrobial by the organisms, which in turn disrupts the metabolic
systems. These characteristics of the Company's products combine to make the
products ideal for use in a wide range of medical, household, commercial, and
industrial applications.
The largest near-term opportunity exists in the mass-market retail
outlets including supermarkets, mass volume retailers, drug stores, and home
improvement superstores. In June 1997, the Company entered into distribution
agreements for certain of its retail products through national supermarket
chains such as Kroger, Winn Dixie, A&P, Cub Foods, Drug Emporium, and
Supervalue. Sales through these customers began in January 1998 and continue
through the date hereof. The Company has previously sold to and also has a
distribution agreement with QVC, Inc. to sell its retail products via "Direct
Response T.V." QVC, Inc. began featuring the Company's products on television in
April 1998 and sales earned the Company awards as "Best of Show in Georgia" in
1997. The Company has also entered into agreements for commercial and industrial
applications of the Company's technology. An agreement with Healthsafe
Environmental, Inc. together with the agreement with QVC, Inc., has accounted
for the bulk of the Company's revenues to date. The Company has executed certain
exclusive rights to Concrete Microtech, Inc. ("CMT") to use technologies of the
Company within the concrete pipe industry as an additive for sewer pipe. See
"Business Agreements."
The Company was incorporated in June 1995 in the State of Georgia. The
executive offices of the Company are located at 4405 International Boulevard,
Suite 109, Norcross, Georgia 30093, and its telephone number is (770) 925-3432
and its Internet address is BioShield [email protected].
3
<PAGE>
The Offering
Securities offered hereby............................ 650,000 Units,
each Unit consisting
of two shares of
Common Stock and
two Warrants, each
Warrant entitling
the holder to
purchase one share
of Common Stock at
a price per share
of $6.00 until
September 29,
2003. See
"Description of
Securities."
Description of the Warrants.......................... The Warrants are
not immediately
exercisable and are
not transferable
separately from the
Shares until March
29, 1999. The
Warrants are redeemable
by the Company
at $0.05 per
Warrant under
certain conditions.
See"Description of Securities."
Common Stock to be outstanding
after the Offering (1)(2)(3)(4)(5)................... 6,144,125 Shares
Warrants to be outstanding
after the Offering (1)(2)(3)(4)...................... 1,300,000
Use of Proceeds...................................... The Company intends to use
the net proceeds of this Offering to payoff existing noteholder indebtedness,
EPA testing, FDA updates, research and development, marketing, and working
capital and general corporate purposes. See "Use of Proceeds."
Risk Factors......................................... The Securities offered
hereby are speculative and involve a high degree of risk and immediate
substantial dilution and should not be purchased by investors who cannot afford
the loss of their entire investment. See "Risk Factors" and "Dilution."
Proposed Nasdaq Symbols
Units................................................ "BSTIU"
Common Stock......................................... "BSTI"
Warrants............................................. "BSTIW"
(1) Does not include an aggregate of 1,400,000 shares of Common Stock
reserved for issuance, upon the exercise
of stock options to be outstanding under the Company's 1997 Stock Incentive
Plan, of which 30,000 options have been issued and 30,000 of such options are
currently exercisable, and the Company's 1996 Directors Stock Option Plan (the
"Directors Plan"), of which 240,000 options have been issued and 120,000 of
which options are currently exercisable. See "Management -- Employment
Agreements," "Stock Option Plans," "Principal and Selling Shareholders,"
"Certain Transactions" and "Underwriting."
(2) Does not include an aggregate of up to 1,495,000 shares issuable upon
exercise of (i) the Warrants and (ii) the over-allotment option.
(3) Does not include up to 65,000 Units underlying the Underwriters' Warrants
consisting of 130,000 shares, of Common Stock and 65,000 Warrants.
(4) Does not include an aggregate of 199,167 shares of Common Stock reserved for
issuance upon exercise of outstanding warrants at a weighted average price of
$0.50 per share, 90 warrants to purchase a total of 450,000 shares of Common
Stock at an exercise price per share equal to the initial public offering price,
one (1) warrant to purchase 40,000 shares of Common Stock at an exercise price
per share equal to 110% of the initial public offering price, options to
purchase 30,000 shares issued to employees pursuant to the Company's 1997 Stock
Incentive Plan at a price of $1.00 per share, and options to purchase 240,000
shares issued under the Director Plan of which 120,000 are exercisable at $2.00
per share and 120,000 are exercisable at $5.00 per share. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
(5) Includes subsequent exercise of warrants for the purchase of
449,085 shares.
4
<PAGE>
Selected Financial Information
The following selected financial data has been derived from the audited
balance sheets of the Company as of June 30, 1997 and 1998, audited income
statements for the fiscal periods ended June 30, 1998, 1997 and 1996. This
selected financial data should be read in conjunction with the financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus. See "Financial Statements."
<TABLE>
<CAPTION>
Fiscal Periods Ended June 30,
<S> <C> <C> <C>
1996 1997 1998
---------- -------- ---------
Operating Data:
Net sales $ 0 $775,315 $462,471
Cost of sales 0 315,822 154,658
---------- -------- ----------
Gross profit 0 459,493 307,813
Operating expenses 386,217 987,353 1,764,909
---------- -------- ---------
Operating loss (386,217) (527,860) (1,457,096)
Net loss (356,316) (514,459) (1,471,929)
Basic net loss per common share $ (0.09) $ (0.12) $ (0.33)
</TABLE>
<TABLE>
<CAPTION>
June 30,
1997 1998 1998
---------- ----------- -------
As Adjusted (1)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) $ 114,665 $(1,026,275) $4,408,725
Current assets 590,477 272,001 4,814,868
Current liabilities 475,812 1,298,276 406,143
Total assets 692,938 437,623 4,980,490
Total liabilities 475,812 1,298,276 406,143
Accumulated deficit (870,775) (2,342,704) (2,342,704)
Shareholder's equity (deficit) 217,126 (860,653) 4,574,347
Common shares outstanding 4,364,421 4,395,040 5,695,040
</TABLE>
(1) Adjusted to reflect the sale of the Units offered by this prospectus at an
offering price of $ 10.00 per Unit and application of the net proceeds of
$5,435,000. These amounts do not reflect a capital contribution of $325,000 and
the exercise of warrants for the purchase of 449,085 shares at an exercise price
of $0.50 per share. Both transactions occurred subsequent to June 30, 1998.
5
<PAGE>
RISK FACTORS
An investment in the Securities offered hereby involves a high degree
of risk. Prospective investors should consider the following factors in addition
to other information set forth in the prospectus before purchasing the
securities offered hereby.
Development Stage Company; Uncertainty of Product Development; Limited Operating
History; Substantial Accumulated Earnings Deficit; Negative Working Capital;
Negative Net Worth; Negative Net Tangible Book Value.
The Company was organized in June 1995 and is a development stage
company. The Company's long-term viability, profitability and growth will depend
upon successful commercialization of products resulting from its research and
product development activities. The Company may not be able to sell significant
quantities of any product, outside of retail distribution channels, until such
time, if ever, as it receives regulatory approval to commercially market the
products in the industrial and medical markets. Many of the Company's products
will require laboratory and clinical testing and investment prior to obtaining
such approvals for any product with the EPA and the FDA and prior to full
commercialization. No assurances can be given that any such approvals will be
obtained. The Company does not expect to receive any registrations from the EPA
for any product for at least 9-12 months and with respect to the FDA for at
least three years. No FDA applications or registrations have been filed to date.
Moreover, with respect to the FDA, adverse or inconclusive results in clinical
trials could significantly delay or ultimately preclude any such approvals and,
even if obtained, there can be no assurance that any product approval will lead
to the successful commercialization of such product. Further, as a development
stage company, the Company has a limited relevant operating history upon which
an evaluation of its prospects can be made. Such prospects must be considered in
light of the risks, expenses and difficulties frequently encountered in
establishing a new business in the evolving, heavily regulated healthcare, drug,
and medical device industry, which is characterized by an increasing number of
market entrants, intense competition and a high failure rate. In addition,
significant challenges are often encountered in shifting from development to
commercialization of new products. See "Business." As of June 30, 1998, the
Company had a substantial accumulated earnings deficit of ($2,342,704), a
negative working capital of ($1,026,275), a negative net worth of ($860,653) and
a negative net tangible book value of ($860,653).
History of Significant Losses; Anticipated Future Losses;
Limited Product Revenues.
To date, although the Company has recorded contract revenues, the
Company has generated only limited revenues from product sales and consulting of
$1,277,694 since 1995. Moreover, the Company has incurred significant losses,
including losses of $356,316, $514,459, and $1,471,929 for the years ended June
30, 1996, 1997, and 1998, respectively. For the years ended June 30,1996, and
1997, and 1998, the Company recorded product sale revenues of $0, $775,315, and
$462,471. Inasmuch as the Company will continue to have a high level of research
and development and general and administrative expenses and will not have
matching contract revenues as such expenditures are incurred, the Company
anticipates that, commencing in the last calendar quarter of 1998, losses will
increase significantly and losses will continue until such time, if ever, as the
Company is able to generate sufficient revenues to support its operations. The
Company believes that its ability to generate sufficient revenues, aside from
the retail market, may depend on the success of the Company obtaining regulatory
registrations for the commercial sale of products, including approval of any
manufacturing facilities established or maintained by the Company or its
suppliers that produce such products. There can be no assurance that any of such
events will occur, that the Company will attain revenues from commercialization
of its products or that the Company will ever achieve profitable operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and Financial Statements.
Business Concentration.
The Company is dependent upon a small base of customers for the
majority of its net sales. Sales to two customers totaled approximately $151,000
or 33% of total sales for the period ended June 30, 1998. Sales to two customers
totaled $555,000 the fiscal year ended June 30, 1997, or 71.6% of net sales. The
Company expects that it will be less dependent upon few customers as its
customer base grows in the future. However, there can be no assurance that it
will increase its customer base, or that it will not continue to be dependent
upon a small base of customers. The loss of a significant customer or any
reduction in orders by any significant customers may have a material adverse
effect on the Company's business, financial condition and results of operations.
6
<PAGE>
Ability to Continue as a Going Concern; Significant Capital Requirements;
Dependence on Proceeds of This Offering; Need for Additional Capital.
Note J of the Company's Financial Statements included herein state that
the Company's continued existence as a going concern is ultimately dependent
upon the success of the future operations and its ability to obtain additional
financing. The Company's capital requirements have been and will continue to be
significant. To fund its capital requirements to date, the Company has been
dependent primarily on (i) sales revenues generated primarily from the sale of
products through QVC and HealthSafe (ii) the net cash proceeds of private
placements of the Company's Common Stock, aggregating approximately $1,153,001.
The Company is dependent upon the proceeds of this Offering to fund its research
and development, marketing, as well as other working capital requirements. The
Company anticipates, based on its currently proposed plans and assumptions
relating to its operations (including assumptions regarding the progress of its
research and development), that the net proceeds of this Offering, combined with
projected revenues, will only be sufficient to satisfy the Company's estimated
cash requirements for approximately twelve (12) months following the
consummation of this Offering. The Company expects to incur substantial costs
over approximately the next three years to complete its primary development of
products for the medical and industrial markets. Such amounts are expected to be
substantially in excess of the net proceeds of this Offering and the existing
capital of the Company. Therefore, unless the Company generates significant
revenues during such period, the Company will need additional financing to fully
fund such development. The Company has no current arrangements with respect to,
or sources of, additional financing and it is not anticipated that any of the
officers, directors or shareholders of the Company will provide any portion of
the Company's future financing requirements. There can be no assurance that,
when needed, additional financing will be available to the Company on
commercially reasonable terms, or at all. In the event that the Company's plans
change, its assumptions change or prove inaccurate, or if the net proceeds of
this Offering, together with other capital resources, otherwise prove to be
insufficient to fund operations, the Company could be required to seek
additional financing sooner than currently anticipated. Any inability to obtain
additional financing when needed would have a material adverse effect on the
Company, including possibly requiring the Company to significantly curtail or
possibly cease its operations. In addition, any additional equity financing may
involve substantial dilution to the Company's then existing shareholders. See
"Use of Proceeds," "Dilution," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and "Certain
Transactions."
Limited Sales and Marketing Experience; Reliance on Distributors
and Corporate Partners.
At present, the Company has limited sales and marketing capability. The
Company intends to sell its products both in the United States and
internationally through distributors and corporate partners. There can be no
assurance that the Company will be able to recruit and train adequate sales and
marketing personnel to successfully commercialize their products. The inability
to retain suitable distributors and corporate partners could also have a
material adverse effect on the Company's business financial condition and
results of operations.
Limited Manufacturing Capability and Experience.
To be successfully commercialized, the Company's products must be
manufactured in large quantities in compliance with regulatory requirements and
at an acceptable cost. The Company does not intend to build manufacturing
facilities for such purpose. Rather, it currently intends to subcontract with
independent third parties to obtain all of its requirements except for the
manufacture of the Company's active concentrates which are manufactured by the
Company at its Lithonia, Georgia, manufacturing plant. The Company presently
contracts its additional manufacturing and packaging through Griffin Packaging,
Inc. located in Conyers, Georgia. Such manufacturing arrangement may be
terminated by the Company at any time. The availability of such alternate
sources of supply, on terms satisfactory to the Company, is not assured. The
Company's failure to obtain adequate supplies of its raw materials at a
competitive cost or in a timely manner could have a material adverse effect on
the Company. See "Business."
Government Regulation; FDA.
The development, manufacture, testing and marketing of all of the
Company's products are subject to extensive regulation by numerous authorities
in the United States and other countries. In the United States, before new
antimicrobial products for humans are permitted to be marketed commercially,
they must undergo extensive preclinical and clinical testing to satisfy the FDA
that they are safe and efficacious in each clinical indication (the specific
condition intended to be treated) for which approval is sought. The FDA has
recently increased its scrutiny and regulation of antimicrobial and antiviral
agents, and accordingly, no assurance can be given that the FDA will act
favorably or quickly review any such application by the Company or otherwise
find any submission by the Company to be adequate. Additionally, approval by
analogous regulatory authorities in other countries must be obtained prior to
commencing marketing of healthcare, drug products and medical devices in those
countries. The approval process varies from country to country and approval of a
drug for sale in one country does not ensure approval in other countries. Delays
in obtaining regulatory approvals may adversely affect the development, testing
or marketing of the Company's products and the ability of the Company to
generate revenues from the sale or licensing of such products. There can be no
assurance that regulatory approvals will be obtained by the Company in the
United States or any other country to sell its products for such purposes.
Manufacturers of therapeutic products sold in the United States are
required to satisfy the FDA that their manufacturing facilities and processes
adhere to the agency's Good Manufacturing Practices ("GMP") regulations and to
engage in extensive record keeping and reporting. Even if regulatory approval
for a product is granted, the facilities in which the product is manufactured
will be subject to periodic review and inspections by the FDA or the analogous
regulatory authorities of other countries for compliance with GMP or similar
foreign regulatory standards. Compliance with such regulations requires
substantial time and attention, and is costly. In addition, each domestic
manufacturing establishment must be registered with and approved by the FDA. For
biologics, except certain well-characterized ones, this requires the filing of
an establishment license application for the facilities at which the product
will be produced. Failure to comply with the applicable regulatory requirements
by either the Company or its strategic partners could, among other things,
result in criminal prosecution and fines, product recalls, product seizures and
operating restrictions. The Company has not yet sought FDA approval for the
commercial sale of any of its products or for the manufacturing processes or
facilities of any of its strategic partners. Moreover, even if approval is
granted, such approval may impose limitations on the indicated uses for which a
product may be marketed.
Inasmuch as the Company may manufacture products in the United States
and seek to market or license other domestic manufacturers to market products
throughout the world, the Company may become subject to United States laws and
regulations applicable to exporting drugs, including biologics. The Federal
Food, Drug, and Cosmetic Act stipulates that, prior to FDA approval for
commercial sale, a drug manufactured in the United States may be exported to any
country in the world, without prior FDA authorization, only if it has received
marketing authorization in at least one of the 25 countries listed in Section
802 of that act. Other requirements include that (i) the product is manufactured
in substantial compliance with the FDA's GMP regulations, (ii) the FDA is
notified of the exportation, and (iii) the FDA has not determined that the
probability of reimportation presents an imminent hazard to the public health
and safety of the United States. Drugs for investigational use in any of the 25
countries may be exported without notification to the FDA. Drugs for
investigational use in other countries may not be exported without FDA
authorization. Thus, the ability of the Company or its licensees to export
products manufactured in the United States prior to receiving commercial
approval in the United States will be subject to certain restrictions.
Therefore, there can be no assurance that the Company or its licensees would be
able to export for investigational use or commercial sale in any countries,
products manufactured in the United States which have not received FDA approval.
Government Regulation; EPA.
The Company is also subject to the regulations of the United States
Environmental Protection Agency as well as other federal, state and local laws
and regulations governing pesticides and antimicrobial products. Compliance with
these laws and regulations is time-consuming, expensive and failure to receive
timely approval or approval at all could have a material adverse effect on the
Company. In May of 1997, the Company made applications to the EPA for
registration of BioShield AM500 and AM500I and intends to submit an application
to the EPA for registration of BioShield AM36.OI and AM3651P to enable it to
make certain claims regarding the antimicrobial properties of certain of its
products. No assurance can be given that the EPA will approve any or all of such
claims. The adoption by federal, state or local governments of significant new
laws or regulations or a change in the interpretation of existing laws or
regulations relating to environmental or other regulatory matters could increase
the cost of producing the products manufactured by the Company or its strategic
partners or otherwise adversely affect the demand for the Company's products.
Adverse governmental regulation which might arise from future legislative or
administrative action cannot be predicted. See "Business-Government Regulation."
Risks Related to Obtaining, Maintaining and Defending Patents and Proprietary
Technology. The Company's success will depend in part on its ability to obtain
or license U.S. and foreign patents, protect trade secrets for its technology,
and operate without infringing on the proprietary rights of others. There can be
no assurance, however, that either the Company's or its licensors' existing
patent applications will mature into issued patents or, if issued, that such
patents will be adequate to protect the Company's products or processes. In
addition, there can be no assurance that the Company will be able to obtain any
necessary or desired additional licenses to patents or technologies of others or
that the Company will be able to develop its own additional patentable
technologies.
7
<PAGE>
The Company entered into a Research Agreement with Emory University on
December 22, 1995. As a result of work performed pursuant to this Research
Agreement, Emory University has filed at least two patent applications, one
composition patent independently and the other an end-use patent jointly with
the Company. Emory's independent composition patent application (the "Emory
Application") discloses and claims technologies developed in conjunction with
the Company that are different from, but similar to, only one of the three
technologies developed solely by the Company and on which the Company is
actively pursuing its own patents. If patents ultimately issue out of the Emory
Application, Emory may in the future seek to assert to the Company that the
manufacture, sale, and use of certain antimicrobial products may infringe
certain claims of their Emory Application patent and/or foreign counterparts
thereof. The Company believes that its current products would not infringe any
claims that might issue from the Emory Application. However, any determination
in the future that one or more Company products infringe in the Emory
Application patent could have a material adverse effect on the business and
operations of the Company.
The Company believes that the patent position generally involves
complex legal and factual questions. There can be no assurance that any future
patent applications or any patents ultimately issued to the Company will provide
it with competitive advantages or that the Company's use of its technology will
not be infringing upon the patents or proprietary rights of others, or that the
patents or proprietary rights of others will not have an adverse effect on the
ability of the Company to do business. Furthermore, there can be no assurance
that others will not independently develop similar technology or that others
will not design technology to circumvent the Company's existing or future
patents or proprietary rights. In the event that the Company's technology were
deemed to be infringing upon the rights of others, the Company could be subject
to damages or enjoined from using such technology or the Company could be
required to obtain licenses to utilize such technology. No assurance can be
given that any such licenses would be made available on terms acceptable to the
Company, or at all. If the Company were unable to obtain such licenses, it could
encounter significant delays in introducing products to the market while it
attempts to design around the patents or rights infringed upon, or the Company's
development, manufacture and sale of products requiring such licenses could be
foreclosed. In addition, the Company could experience a loss of revenues and may
incur substantial costs in defending itself and indemnifying its strategic
partners in patent infringement or other actions based on proprietary rights
violations brought against it or its strategic partners. The Company could also
incur substantial costs in the event it finds it necessary to assert claims
against third parties to prevent the infringement of its patents and proprietary
rights by others.
The Company relies on proprietary know-how and confidential information
and employs various methods, such as entering into confidentiality and
noncompete agreements with its current employees and with third parties to whom
it has divulged proprietary information, to protect the processes, concepts,
ideas and documentation associated with its technologies. Such methods may
afford incomplete protection and there can be no assurance that the Company will
be able to protect adequately its trade secrets or that other companies will not
acquire information that the Company considers proprietary. The Company will be
materially adversely affected if it cannot maintain its proprietary
technologies. See "Business--Patents and Proprietary Rights."
Competition.
The markets for the Company's products are competitive. Competition
from companies that produce antimicrobials for commercial use is intense and
expected to increase. There can be no assurance that other companies with the
expertise or resources that would encourage them to attempt to develop or market
competing products will not develop new products directly competitive with the
Company's products. The Company is aware of several other companies that
manufacture products that compete directly with its products. Certain of these
companies have well-established reputations for success in the development, sale
and service of conventional antimicrobials and have substantially greater
financial, technical, personnel and other resources than the Company. The
Company competes on the basis of technological suitability, quality, performance
characteristics and price of its products, its ability to meet customer
specifications, and the quality of technical assistance and service furnished to
these customers. There can be no assurance that the Company will be able to
compete successfully, that competitors will not develop technologies or products
that render the Company's products obsolete or less marketable or that the
The Company will be able to successfully enhance its existing products or
develop or acquire new products. See "Business--Competition."
8
<PAGE>
Technological Change.
The antimicrobial industry is subject to rapid and significant
technological change, and the ability of the Company to compete is dependent in
large part on its continual ability to enhance and improve its products and
technologies. In order to do so, the Company must effectively utilize and expand
its research and development capabilities, and, once developed, expeditiously
convert new technology into products and processes that can be commercialized.
The Company's competitors may succeed in developing technologies, products and
processes that render the Company's processes and products obsolete. Certain
entities, such as Emory University, have filed applications for or have been
issued patents and may obtain additional patents and proprietary rights relating
to products or processes competitive with or otherwise related to those of the
Company. The scope and viability of these patents, the extent to which the
Company may be required to obtain licenses under these patents or under other
proprietary rights and the cost and availability of licenses are unknown, but
these factors may limit the Company's ability to market its products. See
"Business-Competition."
Product Liability Exposure; Uncertainty of Availability of Insurance.
The Company's business exposes it to potential product liability risks
that are inherent in the testing, manufacturing, marketing and sale of
therapeutic products. While the Company will take precautions it deems
appropriate, there can be no assurance that it will be able to avoid significant
product liability exposure. The Company has obtained general liability
insurance, which includes aggregate product coverage of 200%. There can be no
assurance that it will be able to obtain coverage on acceptable terms or that
any insurance policy will provide adequate protection against potential claims.
A successful claim brought against the Company in excess of any insurance
coverage could have a material adverse effect upon the Company.
Uncertainty of Market Acceptance.
To date, the Company has generated limited revenues from sales of its
products. The Company has not yet commenced significant marketing activities
relating to product commercialization and has limited marketing experience and
limited financial, personnel, and other resources to independently undertake
extensive marketing activities. As is typically the case, demand and market
acceptance for newly introduced, innovative products is subject to a high level
of uncertainty. Achieving market acceptance for the Company's products will
require substantial marketing efforts and expenditure of significant funds to
inform customers of the distinctive characteristics and benefits of using the
Company's products. There can be no assurance that the Company's efforts will
result in successful product commercialization or initial or continued market
acceptance for its products.
Dependence on Key Personnel; No Chief Financial Officer.
The success of the Company will be largely dependent on the abilities and
continued personal efforts of Timothy C. Moses, one of the Company's founders,
Co-Chairman of the Board, President, and Chief Executive Officer; Jacques
Elfersy, founder, Co-Chariman of the Board, Senior Vice President, Secretary,
Treasurer, and Director; Dr. Joachim Berkner, Director of Research and
Development, Organic Chemistry, of the Company. Messrs. Moses and Elfersy are
employed by the Company under an employment agreement expiring January 1, 2003.
The loss of the services of any of Mr. Moses, Mr. Elfersy, or Dr. Berkner would
have a material adverse effect on the Company. The Company is a beneficiary of
key man life insurance policies, each in the amount of $1,000,000, on each of
Mr. Moses and Mr. Elfersy. It does not currently own policies covering any other
officer or employee. The Company does not have and is seeking the services of an
experienced Chief Financial Officer. There can be no assurance that the Company
will be able to attract such a person. The inability to retain a qualified Chief
Financial Officer may have a material adverse effect on the Company's future
business operations. See "Management."
Broad Discretion by Management in Application of Proceeds.
Although the Company currently intends to use approximately $432,950
(8.0%) for regulatory consultants; 818,500 (15.1%) for retail and advertising
campaign; $205,000 (3.8%) for leasehold improvements and laboratory equipment;
$892,133 (16.4 %) to repay certain promissory notes and accrued and unpaid
salaries to Timothy C. Moses and Jacques Elfersy for the years 1995-1998;
$736,635 (13.5%) of the net proceeds of this Offering to fund EPA testing;
approximately $244,549 (4.5%) of the net proceeds to fund FDA update of master
file; $785,745 (14.4%) of the net proceeds of this Offering to fund marketing;
and approximately $712,080 (13.1%)of the net proceeds to fund research and
development, it will have broad discretion in the use of such funds as
circumstances warrant. In addition, approximately $607,408 (11.2%) of the
estimated net proceeds from this Offering has been allocated to working capital
and general corporate purposes. Accordingly, the Company's management will have
broad discretion as to the application of such proceeds. See "Use of Proceeds."
9
<PAGE>
Application of Proceeds to Benefit Messrs. Moses and Elfersy.
The Company intends to use $387,133 of the proceeds of this Offering to
(i) repay accrued and unpaid salary of Messrs. Moses and Elfersy from June 1995
through June 30, 1998, in the amount of $307,133 and (ii) to repay a loan to the
Company in the amount of $80,000 in 1998 by Judith B. Turner, the mother-in-law
of Mr. Moses. See "Certain Transactions." In the event that the over-allotment
option is exercised by the Underwriters, Messrs. Moses and Elfersy will be
permitted to sell up to 195,000 shares of common stock and receive gross
proceeds of up to $975,000 (prior to payment of their pro-rata share of selling
expenses). See "Principal and Selling Shareholders."
Continuing Control by Existing Shareholders.
Upon the consummation of this Offering, assuming the exercise in full
of the over-allotment option granted by Messrs. Moses and Elfersy to the
Underwriters, Mr. Moses, Co-Chairman, President, and Chief Executive Officer of
the Company, and Mr. Elfersy, Co-Chairman of the Board, Senior Vice President,
Treasurer, Secretary and Director, will beneficially own approximately 20.5%,
and 22.9.9%, respectively, of the shares of Common Stock outstanding. In the
event that Mr. Moses and Mr. Elfersy were to act in concert, they may be in a
position generally to control the affairs of the Company. These two shareholders
may be able to control the outcome of shareholder votes, including votes
concerning the election of directors, the adoption of amendments to the
Company's Restated Certificate of Incorporation or Bylaws and the approval of
certain mergers and other significant corporate transactions, including a sale
of substantially all of the Company's assets. Such control by existing
shareholders could also have the effect of delaying, deferring or preventing a
change in control of the Company. Moreover, purchasers of the shares offered
hereby will be minority shareholders and, although entitled to vote on matters
submitted to a vote of shareholders, they will not control the outcome of such a
vote. See "Risk Factors--Anti-Takeover Provisions," "Principal and Selling
Shareholders," and "Description of Common Stock."
Ongoing Influence of Underwriters
Upon consummation of the Offering, the Company has agreed that for a
period of five years from the closing of the sale of the Units offered hereby,
it will nominate for election as a director a person designated by the
Underwriters, and during such time as the Underwriters have not exercised such
right, the Underwriters have the right to designate an observer, who shall be
entitled to attend all meetings of the Board and receive all correspondence and
communications sent by the Company to the member of the Board. Accordingly, the
Underwriters may have ongoing influence on the Company following the Offering.
Indemnification of Directors and Officers.
The Company's Bylaws provide for the Company to indemnify each director
and officer of the Company against liabilities imposed upon him (including
reasonable amounts paid in settlement) and expenses incurred by him in
connection with any claim made against him or any action, suit or proceeding to
which he may be a party by reason of his being or having been a director or
officer of the Company and prove that the Company will, in general, indemnify
such persons to the maximum extent permitted by the Company's Bylaws and the
laws of the State of Georgia against any expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement incurred in connection with any
actual or threatened action or proceeding to which such director or officer is
made or threatened to be made a party by reason of the fact that such person is
or was a director or officer of the Company. The foregoing provisions may reduce
the likelihood of derivative litigation against directors and may discourage or
deter shareholders or management from suing directors for breaches of their duty
of care, even though such an action, if successful, might otherwise benefit the
Company and its shareholders. See "Management --Indemnification of Directors and
Officers."
No Assurance of Public Market; Arbitrary Determination of Offering Price;
Possible Volatility of Market Price of Common Stock.
Prior to this Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price has been
determined by negotiation between the Company and the Underwriter and is not
necessarily related to the Company's asset value, net worth or other criteria of
value. Among the factors considered in determining the offering price were the
Company's financial condition and prospects, management, market prices of
similar securities of comparable publicly-traded companies, certain financial
and operating information of companies engaged in activities similar to those of
the Company and the general condition of the securities market. There can be no
assurance that a regular trading market will develop after this Offering or
that, if developed, it will be sustained. The market prices for securities of
biotechnology companies have been volatile. Announcements of technological
innovations or new products by the Company or its competitors, developments
concerning proprietary rights (including patents and litigation matters),
publicity regarding actual or potential clinical testing relating to products
under development by the Company or others, regulatory developments in both the
United States and foreign countries, public concern as to the safety of
biotechnology products and economic and other external factors, as well as
period-to-period fluctuations in financial results, may have a significant
impact on the market price of the Common Stock. Additionally, in recent years,
the stock market has experienced a high level of price and volume volatility and
market prices for the stock of many companies, particularly the common stock of
small and emerging growth companies that trade in the over-the-counter market,
have experienced wide price fluctuations not necessarily related to the
operating performance of such companies. See "Underwriting."
Immediate and Substantial Dilution.
This offering involves an immediate and substantial dilution of $4.20
(84%) between the pro forma net tangible book value per share of Common Stock
after the Offering and the proposed initial public offering price of $5.00 per
share. See "Dilution."
Benefits of Offering to Existing Shareholders.
Upon the consummation of this Offering, the existing shareholders of
the Company will receive substantial benefits, including the creation of a
public trading market for their securities and the corresponding facilitation of
sales by such shareholders of their shares of Common Stock in the secondary
market, as well as an immediate increase in net tangible book value of $1.00 per
share to such shareholders based upon the pro forma net tangible book value per
share after this Offering and the initial public offering price per share of the
Common Stock offered hereby. The existing shareholders of the Company have
acquired their respective equity interests at costs substantially below the
offering price. Accordingly, to the extent that the Company incurs losses, the
investors purchasing shares in this Offering will bear a disproportionate risk
of such losses. If, at the time the existing shareholders are able to sell their
shares of Common Stock in the public market, the market price per unit remains
at the proposed $10.00 initial public offering price (of which there can be no
assurance) or $5.00 per share of common stock giving no value to the warrant
each shareholder would realize a gain of $4.66 per share on the sale of their
existing shares. See "Use of Proceeds" and "Dilution."
Shares Eligible for Future Sale.
Upon completion of this Offering, the Company's current shareholders
will own 4,844,125 shares of Common Stock, which will represent 78.8% of the
then issued and outstanding shares of Common Stock (75.7% if the over-allotment
option is exercised in full). 4,270,045 of such restricted securities have been
held for more than one year and will be eligible for resale under Rule 144 under
the Securities Act of 1933, as amended (the "Securities Act"), subject to volume
limitations, beginning ninety (90) days after the date of this Prospectus, and
subject to a twelve (12) month lock-up agreement which may be released at the
discretion of the Underwriters (excluding those shares of Common Stock offered
pursuant to the Offering). Sales of significant amounts of Common Stock by
current shareholders in the public market after this Offering could adversely
affect the market price of the Common Stock. See "Shares Eligible for Future
Sale," "Principal and Selling Shareholders," "Management's Discussion and
Analysis of Financial Condition and Operating Results," and "Liquidity and
Capital Resources."
Effect of Outstanding Warrants and Underwriters' Warrants.
Until the date five (5) years following the date of this Prospectus,
the holders of the Warrants and Underwriters' Warrants are given an opportunity
to profit from a rise in the market price of the Common Stock, with a resulting
dilution in the interests of the other shareholders. The shares of Common Stock
underlying the Warrants issued in the February and March 1998 private placement
(the "1998 Warrants") and Underwriters' Warrants have certain registration
rights and anti-dilution provisions. Further, the terms on which the Company
might obtain additional financing during that period may be adversely affected
by the existence of the Warrants and Underwriters' Warrants. The holders of the
Warrants and Underwriters' Warrants may exercise the Warrants and Underwriters'
Warrants at a time when the Company might be able to obtain additional capital
through a new offering of securities on terms more favorable than those provided
herein. The Company has agreed that, under certain circumstances, it will
register under federal and state securities laws the Common Stock underlying the
1998 Warrants, Underwriters' Warrants, and/or the securities issuable
thereunder. However, the 1998 Warrants are subject to a one-year lock-up from
the first trading day of this Offering, which prevents a holder of the 1998
Warrants from exercising such warrants or otherwise transferring, conveying, or
assigning such warrants for such one-year period. Exercise of these registration
rights could involve substantial expense to the Company at a time when it could
not afford such expenditures and may adversely affect the terms upon which the
Company may obtain financing. See "Description of Securities" and
"Underwriting."
10
<PAGE>
Substantial Shares of Common Stock Reserved.
The Company has reserved 400,000 shares of Common Stock for issuance to
key employees, officers, directors and consultants pursuant to the Company's
1997 Stock Incentive Plan (the "Incentive Plan") and 1,000,000 shares of Common
Stock for issuance to directors pursuant to the 1996 Directors' Stock Option
Plan (the "Directors Plan"). To date, 30,000 options have been granted under the
Incentive Plan, of which 30,000 are immediately exercisable and 240,000 options
have been granted under the Director Plan, of which 120,000 are immediately
exercisable. The existence of these options and any other options or warrants
may prove to be a hindrance to future equity financing by the Company. Further,
the holders of such options may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. See "Management -- Stock Option Plan."
Authorization of Preferred Stock.
The Company's Articles of Incorporation authorize the issuance of
"blank check" preferred stock with such designations, rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without shareholder approval, to issue
additional preferred stock with dividend, liquidation, conversion, voting, or
other rights which could adversely affect the voting power or other rights of
the holders of the Common Stock. In the event of issuance, the preferred stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying, or preventing a change in control of the Company. Although the Company
has no present intention to issue any shares of its authorized preferred stock,
there can be no assurance that the Company will not do so in the future. The
Company will not offer preferred stock to promoters except on the same terms as
it is offered to all other existing shareholders or to new shareholders.
Anti-Takeover Provisions.
The Articles of Incorporation and Bylaws of the Company contain
numerous anti-takeover provisions intended to encourage any potential acquiror
of the Company to deal directly with the Company's Board of Directors. Among the
features of the Company's Articles of Incorporation and Bylaws that could have
anti-takeover effects are: a classified Board of Directors with Board members
serving staggered three-year terms; prohibition of majority shareholder actions
by written consent; restricting the power to call special meetings of
shareholders to the Chairman of the Board of Directors, President, Board of
Directors or the holders of two-thirds of the outstanding shares of the
Company's capital stock entitled to vote generally in the election of directors
("Voting Stock") not held by an "Interested Shareholder" (generally, a
shareholder that, together with its affiliates, associates and any persons
acting in concert with them, acquires beneficial ownership of fifteen percent or
more of the outstanding shares of the Voting Stock after July 15, 1997);
requiring advance notice of shareholder nominees to stand for election to the
Board of Directors or of shareholder introduced business to be considered at a
shareholders meeting; adoption of the requirements of Part 3 of Article 11 of
the Georgia Business Corporation Code (the "Corporation Code") regarding
business combinations; express authorization of the Board of Directors to
consider the effects of a proposed acquisition on the Company employees,
customers and suppliers and the communities where the Company operates;
requiring cause and a greater than majority vote of shareholders to approve
removal of directors and amendments to the Company's Articles of Incorporation
or Bylaws and providing for a greater than majority vote of shareholders in
certain circumstances relating to an acquisition of the Company unless the
amendment or acquisition have been approved by the Board of Directors. These
anti-takeover provisions could also allow the Board of Directors to impede or
prevent an acquisition of the Company even if shareholders support the
acquisition, and could also serve to entrench incumbent management.
In connection with the qualifications of the sale of the Units in the
State of California, the Company has agreed to submit to the Company's
shareholders, at its next annual meeting, a proposal to amend the Company's
Articles and Bylaws to (i) provide that holders of ten percent (10%) or more of
the outstanding shares of the Company's capital stock can call a special
shareholders meeting and (ii) eliminate the "Fair Price" requirements enacted by
the Company pursuant to O.C.G.A. ss.ss.14-2-1110 - 1133, which are designed to
encourage any person before acquiring fifteen percent (15%) or more of the
Company's outstanding common stock to seek approval of the Company's Board of
Directors for the terms of any contemplated business combination. The effect of
these existing provisions is to prohibit, among other things, a business
combination with an interested shareholder for five (5) years, subject to
certain exceptions, which include obtaining Board of Directors' approval of the
proposed transaction and in certain cases shareholder approval. Messrs. Moses
and Elfersy have agreed to vote their shares in favor of the proposals at the
next annual shareholders meeting. Approval of these proposals will require a
majority vote of the Company's shareholders. In the event that these proposals
are adopted, the Company may be more vulnerable to, among other things, a
hostile takeover or other business combination or transaction that is not
approved by the Company's Board of Directors.
11
<PAGE>
No Dividends.
To date, the Company has not paid any cash dividends on its Common
Stock and it does not expect to declare or pay dividends on the Common Stock in
the foreseeable future. In addition, future agreements or credit facilities may
restrict dividend payments. See "Dividend Policy" and "Description of Common
Stock."
Possible Delisting of Securities from The Nasdaq Stock Market; Risks of
Low-Priced Stocks.
While the Company's Common Stock and Warrants are expected to meet the
current initial listing requirements for inclusion in The Nasdaq SmallCap
Market, there can be no assurance that such securities will meet the continued
listing requirements. Under current criteria for continued inclusion on the The
Nasdaq SmallCap Market, (i) the Company will have to maintain at least
$2,000,000 in net tangible assets or $35,000,000 market capitalization or
achieve net income of $500,000 for two of the last three years, (ii) the minimum
bid price of the Common Stock will have to be $1.00 per share, (iii) there must
be at least 500,000 shares in the public float valued at $1,000,000 or more,
(iv) the Common Stock must have at least two active market makers, and (v) the
Common Stock must be held by at least 300 holders.
If the Company is unable to satisfy The Nasdaq SmallCap Market's
maintenance requirements, its securities may be delisted from The Nasdaq
SmallCap Market. In such event, trading, if any, in the Common Stock and
Warrants would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or the NASD's OTC Bulletin Board. Consequently, the
liquidity of the company's securities could be impaired, not only in the number
of securities which could be bought and sold, but also through delays in the
timing of transactions, reduction in security analysts' and the news media's
coverage of the Company, and lower prices for the Company's securities than
might otherwise be attained.
In addition, if the Common Stock were to become delisted from trading
on The Nasdaq Stock Market and the trading price of the Common Stock were to
fall below $5.00 per share, trading in the Common Stock would also be subject to
the requirements of certain rules promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as "penny
stock" (generally, any non-Nasdaq equity security that has a market price of
less than $5.00 per share, subject to certain exceptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
defined as an investor with a net worth in excess of $1,000,000 or annual income
exceeding $200,000, $300,000 together with a spouse). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The broker-dealer also must disclose the commissions
payable to the broker-dealer, current bid and offer quotations for the penny
stock and, if the broker-dealer is the sole market-maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the market.
Such information must be provided to the customer orally or in writing prior to
effecting the transaction and in writing before or with the customer
confirmation. Monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. The additional burdens imposed upon
broker-dealers by such requirements may discourage them from effecting
transactions in the Common Stock, which could severely limit the liquidity of
the Common Stock and the ability of purchasers in this Offering to sell the
Common Stock in the secondary market.
Blue Sky Registration.
The Company's securities have not been approved for sale in all of the
fifty states. Accordingly, the Company has not obtained or may otherwise be able
to maintain current registrations for its securities in all states in which
security holders may reside from time to time during the term of the warrants.
As a result, the foregoing limitations could preclude a stockholder`s sale of
Common Stock or a warrant holder's ability to exercise and/or sell the warrants
in those states where approval for sale has not been obtained.
12
<PAGE>
USE OF PROCEEDS
The net proceeds of this Offering to the Company, with an assumed
initial public offering price of $10.00 per Unit, will be $5,435,000 after
deducting $415,000 of expenses relating to the Offering. The Company intends to
use the net proceeds as follows:
<TABLE>
<CAPTION>
Amount %
<S> <C> <C>
Debt and Liabilities Retirement (1) 892,133 16.4%
EPA testing 736,635 13.5%
FDA Update for Master File 244,549 4.5%
Marketing (2) 785,745 14.4%
Leasehold Improvements & Lab Equipment 205,000 3.8%
Advertising Campaign (Retail) 818,500 15.1%
Regulatory Consulting 432,950 8.0%
Research and Development (3) 712,080 13.1%
Working Capital and general corporate purposes (4) 607,408 11.2%
------- -----
Total $5,435,000 (5) 100.0%
</TABLE>
- -----------
(1) Represents repayment of $450,000 in principal amount of three year
non-negotiable promissory notes issued in February and March of 1998, together
with accrued and unpaid interest at a rate of 10% per annum for the first year;
payment in arrears of deferred salary of $307,133 to Timothy C. Moses and
Jacques Elfersy of the Company for the years 1995-1998; $55,000 for a promissory
note to Mr. Stephen Dale, due November 13, 1998, together with accrued and
unpaid interest at a rate of 10% per annum, and repayment of three promissory
notes, in the aggregate principal amount of $80,000, payable to Mrs. Judy
Turner, the mother-in-law of Timothy C. Moses, Chief Executive Officer of the
Company, together with accrued and unpaid interest at a rate of 8% per annum.
(2) Represents a portion of cost associated with initial introductory media and
advertising by market segment, estimated at an average of $750,000 per market
segment with five total markets for the U.S. The initial focus shall be on two
product lines into five market segments (food, non-food, mass merchandisers,
do-it-yourselfers, and specialty).
(3) Represents a portion of the costs associated with research and development,
including the cost of conducting studies to determine the safety and efficacy of
synthetic skins and wound care products and further testing of 36.OI and 3651P.
The Company estimates that the amounts required to complete the primary
development projects will be substantially in excess of the portion of the
proceeds allocated to research and development. See "Business -- Research and
Development."
(4) A majority of the proceeds allocated to working capital is expected to be
utilized to pay (i) the salaries of additional management and support staff as
well as Company's three principal executive officers, Timothy C. Moses, Jacques
Elfersy and Jeffrey A. Parker, which salaries are anticipated to aggregate
approximately $400,000 for the twelve (12) months following the consummation of
this Offering and (ii) the expansion of the Company's laboratory, research
facilities and related personnel. See "Management" and "Certain Transactions."
(5) The Company presently anticipates using the net proceeds of the Offering in
the following priority: Debt and liabilities retirement, EPA testing,
advertising campaign, marketing, leasehold improvements, research and
development, FDA update, working capital, and regulatory consulting.
Pending application of the net proceeds of this Offering, the Company
may invest the net proceeds from this Offering in interest-bearing savings
accounts, United States Government obligations, certificates of deposit or
short-term interest-bearing securities.
13
<PAGE>
DIVIDEND POLICY
The Company does not anticipate paying dividends on the Common Stock at
any time in the foreseeable future. The Company's Board of Directors plans to
retain earnings for the development and expansion of the Company's business. The
Board of Directors also plans to regularly review the Company's dividend policy.
The Company's ability to pay dividends will be dependent, in large measure, on
its ability to receive dividends and management fees from its life insurance
subsidiaries. The ability of these corporations to pay dividends and management
fees, in turn, is limited pursuant to applicable insurance laws. Any future
determination as to the payment of dividends will be at the discretion of the
Board of Directors of the Company and will depend on a number of factors,
including future earnings, capital requirements, financial condition and such
other factors as the Board of Directors may deem relevant.
14
<PAGE>
DILUTION
As of June 30, 1998, the net tangible book value of the Company was
$(860,653) or $(0.20) per share of Common Stock. The net tangible book value of
the Company is the aggregate amount of its tangible assets less its total
liabilities. The net tangible book value per share represents the total tangible
assets of the Company, less total liabilities of the Company, divided by the
number of shares of Common Stock outstanding. After giving effect to the sale of
650,000 Units (shares of Common Stock and Warrants) at an assumed offering price
of $10.00 per Unit or $5.00 per share of Common Stock (no value assigned to the
Warrants) and the application of the estimated net proceeds therefrom, the pro
forma net tangible book value per share would increase from $(0.20) to $0.80.
This represents an immediate increase in net tangible book value of $1.00 per
share to current shareholders and an immediate dilution of $4.20 (84%) per share
to new investors or, as illustrated in the following table:
<TABLE>
<CAPTION>
Amount Percent
<S> <C> <C> <C>
Public offering price per share $5.00 100%
----
Deficit in net tangible
book value per Share before this Offering $(0.20) (4%)
Increase per share attributable
to new investors 1.00 20%
----
Adjusted net tangible book value
per share after this Offering $0.80 16%
-----
Dilution per share to new investors $4.20 84%
===== ===
</TABLE>
The following table sets forth as of June 30, 1998, (i) the number of
shares of Common Stock purchased from the Company, the total consideration paid
to the Company and the average price per share paid by the current shareholders,
and (ii) the number of shares of Common Stock included in the Units to be
purchased from the Company and total consideration to be paid by new investors
(before deducting underwriting discounts and other estimated expenses) at an
assumed offering price of $10.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Avg. Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C>
Current shareholders 4,395,040(2) 77.2% $ 1,482,051 18.6% $0.34
New investors 1,300,000(2) 22.8% 6,500,00(2) 81.4% 5.00(3)
--------- ------ -------- --------
Total 5,695,040(1) 100.0% $7,982,051(2) 100.0%
========= ====== ========== ======
</TABLE>
- --------
(1) Does not include an aggregate of 2,649,167 shares of Common Stock issuable
upon the exercise of: (i) the Warrants, (ii) the Underwriters' Units, (iii) the
over-allotment option, (iv) employee and director stock options, and (v) 90
warrants issued to investors in a private placement to purchase 450,000 shares
of Common Stock at an exercise price equal to the initial public offering price
or $5.00 per share, (vi) one (1) warrant to purchase 40,000 shares of Common
Stock at an exercise price of $5.50 per share or 110% of the initial public
offering, and (vii) 199,167 shares of Common Stock reserved for issuance upon
the exercise of outstanding warrants at a weighted average price of $.0.50 per
share. Also does not include warrants for the purchase of 449,085 shares which
were exercised subsequent to June 30, 1998. To the extent that these options and
warrants are exercised, there will, in certain cases, be further share dilution
to new investors.
(2) Upon exercise of the over-allotment option, the number of shares held by new
investors would increase to 1,495,000 or 26.2% of the total number of shares to
be outstanding after the Offering and the total consideration paid by new
investors would increase to $ 7,475,000. See "Principal and Selling
Shareholders."
(3) This amount assumes the attribution of the Unit purchase price solely to the
Common Stock included in each Unit. See "Use of Proceeds."
15
<PAGE>
SHORT-TERM DEBT AND CAPITALIZATION
The following table sets forth the short-term debt and capitalization
of the Company as of June 30, 1998, and as adjusted to give effect to sale of
650,000 Units offered hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
June 30, 1998
As Adjusted
<S> <C> <C>
Short-term debt:
Notes payable $ 655,000 $ 0
----------- ----------------
$ 655,000 $ 0
Shareholder's equity:
Common Stock, no par value,
50,000,000 shares authorized,
4,395,040 shares issued and outstanding,
5,695,040 as adjusted (1) (2) (3) (4) (5) $ 1,153,001 $ 1,153,001
Additional paid in capital 329,050 5,764,050
Deficit accumulated
during the Development stage (2,342,704) (2,342,704)
---------- ----------
Total shareholder's equity (deficit) (860,653) 4,574,347
----------- -----------
Total short-term debt and capitalization (deficit) $ (205,653) $ 4,574,347
=========== ===========
- -----------
</TABLE>
(1) Does not include an aggregate of 1,400,000 shares of Common Stock reserved
for issuance upon the exercise of stock options to be outstanding under the
Company's 1997 Stock Incentive Plan, of which 30,000 options have been issued
and 30,000 of which options are currently exercisable, and the Company's 1996
Directors Stock Option Plan (the "Director Plan"), of which 240,000 options have
been issued and 120,000 of which are currently exercisable. See "Management --
Employment Agreements," Stock Option Plans," "Principal and Selling
Shareholders," "Certain
Transactions" and "Underwriting."
Does not include an aggregate of up to1,430,000 shares issuable upon exercise of
the Warrants and the Underwriters Warrants.
Does not include up to 195,000 Warrants issuable upon exercise of the
over-allotment option or the 65,000 Warrants underlying the Underwriters'
Warrants.
Does not include an aggregate of 199,167 shares of Common Stock reserved for
issuance upon exercise of outstanding warrants at a weighted average price of
$0.50 per share, option to purchase 30,000 shares issued to employees pursuant
to the Company's 1997 Stock Incentive Plan at a price of $1.00 per share, 90
warrants to purchase 450,000 shares of Common Stock at an exercise price equal
to the initial public offering price, one (1) warrant to purchase 40,000 shares
of Common Stock at an exercise price of 110% of the initial public offering
price per share, and option to purchase 240,000 shares issued under the Director
Plan of which 120,000 are exercisable at $2.00 per share and 120,000 are
exercisable at $5.00 per share.. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Does not include a capital contribution of $325,000 made by principal
stockholders and the exercise of warrants for the purchase of 449,085 shares at
an exercise price of $0.50 per share totaling $224,542.50, which occurred
subsequent to June 30, 1998.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General.
Since June 1995, the Company, a development stage company, has been engaged
almost exclusively in research and development, regulatory approvals, patent
filings and activities focused on developing its antimicrobial products.
Results of Operations.
Comparison of the year ended June 30, 1997 compared to June 30, 1998 and June
30, 1996 compared to June 30, 1997. The Company's net sales were
$462,471 compared to $775,315 during the period ending June 30, 1998,
and June
30, 1997, respectively. There were no sales made in 1996. The Company began
minimal sales activity in March 1997, generating a significant portion of all
revenues for its period ending June 30, 1997, with a significant one-month
increase of June 1997, primarily due to an initial order from one customer. The
growth in sales was attributable to the beginning commercialization of the
Company's technology.
Gross Profit for the period ending June 30, 1998, was $307,813 compared
to $459,493 for the same period ending in 1997. There was no gross profit in
fiscal year ended June 1996 due to the absence of sales. Total operating
expenses increased to $1,764,909 for the period ended June 30, 1998, compared to
$987,353 for the period ended June 30, 1997, primarily due to a significant
increase in regulatory applications, testing, and patent filings, representing
$987,353 in 1997 compared to $386,217 in 1996. Marketing and selling expenses
increased 3,705% to $213,387 in 1997 from $5,608 in 1996, reflecting growth in
the Company's market studies and preparation for product launch. In addition,
marketing and selling expenses during the period ended June 30, 1998, of
$472,945 compared to $213,387 during the period ended June 30, 1997, increased
due to the launch in Georgia of two retail consumer products. General and
administrative expenses increased from June 30, 1998, of $1,134,712 compared to
$700,184 for June 30, 1997, as a direct result of the Company filing additional
patent applications, costs associated with the initial public offering, and
Regulatory applications. In addition, general and administrative expenses during
the fiscal year ended June 30, 1997, increased to $700,184 from $195,515 in 1996
to support growth of research and development and a build up of support
personnel.
Operating loss was $1,457,096 compared to $527,860 for the periods
ending June 30, 1998, and June 30, 1997, respectively, versus $386,217 in year
ended June 30, 1996. The larger operating loss for each of the more recent
periods was due to the increase in operating expenses as the Company built up
its infrastructure to support future growth, patent application and regulatory
testing and applications. Other income was $13,401 in 1997 and $29,901 in 1996
and ($14,833) for the period ended June 30, 1998. The 1997 income was derived
from consulting services by the senior officers of the Company, and the 1998 net
expense resulted from interest. Interest expense for 1998 was the result of
short-term interest from the sale of a private placement of the Company. See
"Liquidity and Capital Resources."
The Company incurred a net loss of $1,471,929 for the period of June
30, 1998 compared to $514,459 for the period ended June 30, 1997 and $356,316
for the period ended June 30, 1996. The increase in net loss was due to the
increase in operating expenses as explained above. The Company expects such
losses to continue for the foreseeable future and until such time as the Company
is able to attain sales levels sufficient to support operations.
Liquidity and Capital Resources.
The Company has funded its activities to date through loans from
principal stockholders, debt and private placement offerings. Cash at June 30,
1997, was $398,921 versus $25,066 for the fiscal year ended June 30, 1996,
compared to June 30, 1998, of $1,636. The increase in cash for fiscal 1997 was
due to cash infusions during the year 1997 from private placements, and the
percentage in cash for the year ended June 30, 1998, is significantly lower due
to increased expenses associated with testing, patents, and legal.
Cash used in operating activities was ($430,554) for the fiscal year
ended June 30, 1997 compared to ($90,434) for the year ended June 30, 1996, and
($1,213,305) for the period ended June 30, 1998. The increase in cash used in
operations was primarily due to the increase in net loss and changes in current
assets and current liabilities, and additional patent, testing, and legal costs.
17
<PAGE>
In February 1998, the Company raised $450,000 from the sale of 90 Units
in a private offering. Each Unit consists of (i) a $5,000 Non-Negotiable
Interest Bearing Promissory Note due and payable on the earlier of the closing
of an initial public offering or three years from the date of issuance (the
"Maturity Date"), and (ii) a warrant to purchase up to 5,000 shares of Common
Stock at the initial public offering price.
In July 1997, the Company received $187,500 in proceeds from the sale
of 30,619 shares in a private placement offering. During the first two calendar
quarters of 1998, Mrs. Judy Turner, the mother-in-law of Timothy C. Moses (CEO
of the Company), loaned the Company a total of $80,000 payable at the earlier of
one year or an initial public offering at an interest rate of 8% per annum. The
Company also received $125,000 in proceeds from a note payable to an individual
at an interest rate of 10%. The note matures the earlier of a successful initial
public offering or six months.
In June 1998, a principal stockholder made a capital contribution of
$50,000 for no further consideration. Subsequent to June 30, 1998, two principal
stockholders made a capital contribution totaling $325,000 for no further
consideration. .
In November 1996, the Company sold an aggregate of 149,723 common
shares and two warrants attached at a strike price of $1.50 (50% convertible in
two years and the remaining 50% in three years) for cash proceeds of $275,001.
In April 1997, the Company sold an aggregate of 245,000 common shares and two
warrants at a strike price of $2.00 (50% convertible in two years and the
remaining 50% in three years), generating cash proceeds of $600,000. In December
1997, the Company initiated a 2.45 for 3.00 reverse stock split and a reverse
split of 1.00 for 2.00 on the warrants and a reduction of the exercise price to
$0.50 per share.
Prior to June 30, 1996, the Company sold an aggregate of 62,612 common
shares in a private placement for net cash proceeds of $115,000 to four
shareholders.
During the three periods ended June 30, 1998, the Company has invested an
aggregate of $122,072 of cash in capital expenditures.
The Company expects that its cash needs will continue to increase
substantially in future periods for expansion of its markets, marketing
expenses, research and development as well as an increase in regulatory testing
requirements by the EPA and FDA. Accordingly, the Company will need to raise
substantial additional funds to continue development and commercialization of
its products. The Company's future cash requirements will depend on many
factors, including the successful completion of the proposed public offering
contained herein. At its planned rate of spending, the Company estimates that
the net proceeds of the proposed offering combined with projected revenues will
only be sufficient for approximately 12 months of activity. However, there can
be no assurances that the underlying assumed levels of revenue and expense will
be accurate or adequate.
18
<PAGE>
BUSINESS
The italicized terms used in this Prospectus are defined in the Glossary
beginning on page 50.
General.
BioShield Technologies, Inc., a Georgia corporation formed in 1995, is
a development stage company engaged in the development, marketing, and sale of
surface modifying antimicrobials and biostatic products, primarily through third
party licensing arrangements. The Company's primary focus is to exploit its
proprietary technology to become the leader in topical antimicrobials and
biocides for consumer, industrial and institutional markets, environmental
services, and medical device markets. BioShield products are an easily applied
reactive coating technology that modifies surfaces of all types, by creating an
invisible covalent bond between surfaces and a variety of chemical agents.
Through the cross linking technology, these antimicrobial properties and other
chemical agents can impart many performance-enhancing characteristics, such as
residual antimicrobial activity, removal of (surface-borne and air-borne)
allergens which may cause respiratory discomfort or asthma, infection
resistance, anti-inflamation, lubricity and drug delivery onto many surfaces
without changing the dimensions or physical properties of the modified surfaces.
The Company believes that its antimicrobial technologies have revolutionary
properties that make its products significantly more durable, effective,
versatile, and safer than currently available conventional antimicrobials for
treatment of hard and soft surfaces, surface modified medical devices, allergy
and respiratory conditions and preservatives. The Company believes that certain
manufacturers who utilize the Company's technologies are able to significantly
improve the performance of their products and, in many cases, differentiate
their products in a highly competitive marketplace.
The Company focuses on providing value added and unique antimicrobial
solutions to a variety of industries and product categories. Examples of
products in the market or under development that utilize the BioShield
technology include surface-borne and air-borne products which remove or
eliminate certain allergens from the air which may cause respiratory discomfort
or asthma, nine (9) consumer products exhibiting residual antimicrobial
efficacy, a powder form of add-mixture for the control of specialty
microorganisms, antimicrobial bio-barrier treatment for acute wound care, and
control of food borne contaminates. The Company believes further opportunities
exist to commercialize its covalent bonding technology for other market
applications, such as acute and chronic wound sites, artificial synthetic skins,
cardiology and urinary catheters, timed released anti-inflammatory and the
promotion of host cell attachment and transplant/medical device anti-rejection.
However, no assurances can be given that the Company will be successful in
commercializing any such applications or obtaining the required regulatory
approvals.
The Company's objective is to exploit its proprietary technology
patents, technical and marketing property, and future regulatory approval from
the United States Environmental Protection Agency ("EPA") and United States Food
and Drug Administration ("FDA") to become the leader in topical antimicrobial
and biocide products for the consumer, industrial and institutional markets,
environmental services, and medical device markets. The Company believes that
its antimicrobial technologies have revolutionary properties that make its
products significantly more durable, effective, and safer than currently
available conventional antimicrobials, non-antibiotics, preservatives, or
biocides. No objectives can be given that the Company will be successful in
meeting its objective.
Market Needs For Modified Antimicrobials.
The need to develop and provide protection against bacteria, fungi,
algae, yeast, and viruses has long been recognized. However, the use of
long-lasting bacteriostatic finishes has gained attention during the past
decade. This is magnified by the fact that the mortality rate from viruses and
bacteria has, according to The Centers for Disease Control and Prevention
increased 58% between 1980 and 1992 and is now the third major cause of
mortality, ranking behind only heart disease and cancer. Most recently,
according to the New England Journal of Medicine, certain forms of bacteria are
being associated with or are contributing factors to certain diseases including
some forms of cancer. Additionally, approximately 800,000 to 1.2 million
commercial buildings might be suffering from some form of "sick building
syndrome," according to the Occupational Safety and Health Association (OSHA).
More than 70 million workers might suffer from health problems caused by faulty
buildings. The Company believes that there has been a significant increase in
demand for environmental services.
Advantages.
The Company believes its technology is significantly different, and has
many advantages and advances over conventional antimicrobials, non-antibiotic
treatments, or biocides which, themselves, offer no residual activity, long term
solution or ability for performance enhancement and are prone to adaptation and
declining efficacy due to microbial mutations. The Company's products contain no
heavy metals, mercury or formaldehyde. BioShield products are versatile
antimicrobials, easily applied, reactive coating technology that modifies
surfaces of all types, by creating an invisible covalent bond between surfaces
and a variety of chemical agents. The Company believes that its antimicrobial
technology has revolutionary properties that make them significantly more
durable, effective, versatile and safer than currently available technologies.
Unlike other antimicrobial materials, the Company's key active ingredient has,
to date, not been shown to cause genetic mutation or to be teratogenic (causing
physical defects in developing embryos). The Company has filed (but has not yet
obtained) certain applications for patents with the United States Patent and
Trademark Office with respect to its proprietary technology. Specifically, the
Company has discovered and claimed a variety of new compositions and methods of
making and using its proprietary antimicrobial products and the manipulation and
moiety of performance enhancing properties. The Company intends to continue to
pursue patent protection in the United States and other commercially important
foreign countries for its core technologies, improvements thereon, and for
certain specific products that it develops.
The Company's technology provide almost any surface with continuous
antimicrobial protection, killing a variety of viruses and bacteria as they come
in contact with the treated surface. Reapplication of the Company's
antimicrobial technology is generally not needed for up to six months to a year
in some instances. Certain manufactured devices or products, with BioShield's
antimicrobial covalent technology, provide protection to a wide array of
disposable products as the treated surface continues in many cases to kill
microorganisms for the life of the product.
The Company's technology can potentially be used to provide
manufacturers with the following surface properties.
Non Mutation. The Companies antimicrobial products take effect on contact with
the organism. It remains surface attached and is not absorbed or "ingested" by
the microorganism. As a result, to date no mutation-adaptation of microorganisms
involving the Company's active ingredient have been reported, as is frequently
the case with antibiotic compounds.
Residual Activity. Antimicrobial cleaning and treatment of surfaces is of great
importance and benefit to most environments. Disinfection and sanitation are
required application steps in, for example food processing and hospital
environments. Part of every day cleaning is to remove visible soil and invisible
organisms from surfaces. Beginning shortly after the disinfection and sanitation
step new bacteria and other microorganism can reinfect most surfaces. The
Company's antimicrobial coating converts surfaces to provide residual activity.
The residual activity allows the continuous destruction of microorganisms on the
treated surface. It continuously kills bacteria and other microorganisms that
come in contact with the surface long after the cleaning steps are completed.
The residual activity can last for six months or longer depending on the
environment.
Non Leaching. Antimicrobial treatments often migrate or leach from the
application site into the surrounding environment. This migration slowly
depletes the surface of active ingredient and possibly contaminates adjacent
sites. The Company's unique technology is based on chemistry that binds the
Company's active ingredient to the surface and has been shown to prevent the
active ingredient from leaching quickly into the environment. This ability to
localize the activity prevents the undesired spread into adjacent materials and
provides for a prolonged presence and antimicrobial activity at the application
site.
Contamination Resistance. Antimicrobial treatment of surfaces is advantageous
when the risk of infection is of concern. Uncontrolled growth of microorganisms
in the environment can be the source of microorganisms that cause infections,
diseases, allergies, spoilage of products, and aesthetic devaluation. Lethal
antibiotic-resistant organisms have become endemic in U.S. hospitals. The
Company's technology has been shown in many cases to reduce the extent of
bacterial growth on treated versus untreated surfaces. This reduction of surface
organisms provides a cleaner environment and reduced risk from surface
contamination.
20
<PAGE>
Versatility.
The Company's surface conversion technology is an integrated
technology. It combines the chemistry and action of several individual molecules
into one application system. The Company's integrated technology can be
modified, providing a versatility to design new coatings with a variety of
properties based on the original technology.
The Company's long term viability, profitability, and growth will
depend upon successful commercialization of the products resulting from its
research and product development activities. The Company will attempt to gain
market share by forming alliances with strong marketing partners. The Company's
goal is to obtain new and broader approvals for its claims and products through
the EPA and through the FDA. Examples of products in the market or under
development that uses the BioShield technology include surface-borne and
air-borne products which remove or eliminate certain allergens which may cause
respiratory discomfort or asthma, nine (9) consumer products exhibiting residual
antimicrobial efficacy, powder form of add-mixture for the control of specialty
microorganisms, antimicrobial bio-barrier treatment for acute wound care,
artificial synthetic skins cardiology and urinary catheters and control of food
borne contaminates. However, no assurances can be given that the Company will be
successful in commercializing any such applications or obtaining the required
regulatory approvals.
The Company's products provide most surfaces with continuous
antimicrobial protection, killing viruses, and bacteria as they come in contact
with the treated surface depending upon the environment. Reapplication of the
Company's retail antimicrobial products is generally not needed for up to six
months to a year in some instances. Certain OEM products provide protection to a
wide array of disposable products as the treated surface continues to kill
microorganisms for the life of the product.
Overview of Technology.
The Company's products provide antimicrobial solutions based on
reactive silane quaternary ammonium salts. These salts, either independently or
as part of an integrated system, are comprised of up to two different silanes
and a suitable solvent, commonly an alcohol solvent and/or water. These
integrated systems are designed to bind to many surfaces forming an invisible
antimicrobial coating. This solution is antimicrobially active and provides
protection against microorganisms. Binding or strong interaction with the
surface of a substrate allows the antimicrobial to remain active on the surface,
often for many subsequent years, possibly the lifetime of the treated article.
The original system has found many applications over the years and extensive
data have been collected regarding the safety, application, and durability of
the product. A limitation of the product in its original form is the dependence
on methanol as a solvent. Methanol is a highly toxic, flammable substance and
when misused may cause blindness or death. In addition, dissolution in water is
slow and aqueous solutions of high concentrations have a limited shelf life.
These limitations prevented a broad scale distribution and application of the
original integrated system. The Company's inventions overcame these limitations
in creating essentially non-toxic, water stable, aqueous solutions. This
innovation allows for many unique end use applications while the base technology
continues to have utility in a wide variety of other markets.
The Company has filed four patents pertaining to the stabilization of
the silane intergrated system in different systems including water. Based on the
water stabilized integrated antimicrobial silane system, the Company has
developed numerous end use products and more products are under development.
Forward Thinking.
The integrated system provides the flexibility to modify individual
parts of the system. For example, removing one component and replacing it with
another more heat stable renders the entire system more heat stable. This is an
important feature for incorporation of the system into thermoplastic materials.
This same flexibility is complemented by the large amount of formulation
experience. Modifications and mixtures that enhance hydrophobic character,
hydrophilic character, antisoiling, antistatic, dye fastness, handle, and other
favorable end-use substrate properties are available both under certain patents
and under proprietary knowledge.
In addition to providing improved antimicrobial properties, research
into new materials based on silane integrated systems is expected to provide new
products such as anti-rejection agents for use in human organ transplants. An
example is the problem of rejection of transplant organs or artificial implants
by the receiving body's immune system. Rejection is often based on the
recognition of the implant as a foreign body. This recognition is affected by
the surface of the implant. Silane treatment of implants may change the surface
and recognition of the implant. A possible modification of the silane is the
incorporation of body proteins to mask the implant or attachment of molecules
known to reduce the likelihood of rejection. However, no assurances can be given
that the Company will be successful in commercializing any such applications or
obtaining the required regulatory approvals.
Although there has been an enormous interest in silane chemistry,
historically, product development has not been focused on end-use products
containing reactive silane, possibly because of the difficulty associated with
providing safe means of application, for example from aqueous solutions. By
providing water stable solutions of reactive silanes, a whole field of chemistry
research with many useful molecules synthesized and characterized is readily
available to the Company for commercialization. However, no assurances can be
given that the Company will obtain the required regulatory approvals or will be
successful in bringing any of these products to market.
In summary, the Company has developed new technologies for the
stabilization of reactive silanes or silane integrated systems in user friendly
solvents, primarily water. This new technology allows the utilization of a
well-known antimicrobial system into medical and consumer products providing
durable treatments possibly otherwise unavailable.
Marketing and Sales.
There are numerous product, process, and service uses for the Company's
unique antimicrobial technologies. Viewed collectively, they form the basis of a
mini-industry built around a single key active ingredient chemistry that, like
penicillin, might change the way microbes are controlled in the future.
The largest number of opportunities require additional development
activities. In some, much of the technical work has been completed and generally
only regulatory work is required. In others, significant technical development
is still required.
The Company intends to initially concentrate its efforts towards the
marketing and sales of products for the retail consumer and industrial markets.
The Company believes that product market is comprised of four primary
segments as described below: Retail-Household Care products,
Industrial-Institutional products, Healthcare products, and Environmental
Services.
Technical development has been completed on several products, and many
are ready for commercialization in areas where regulatory requirements permit.
Initially, however, products are being commercialized by the Company in the
retail consumer market and institutional and industrial (I & I) marketplaces as
described below.
Products Market Segment.
Retail-Household Care Market. The Company believes that its largest
near-term opportunities for revenue generation exist in the mass-market retail
outlets including supermarkets, mass volume retailers, drug stores and perhaps
DIY (do- it-yourselfers) outlets. Household cleaners represent a retail market
value in the annual range of $1.5 billion dollars in supermarkets only.
To capitalize on this opportunity the Company is developing a network
of manufacturer's representative firms to market its first antimicrobial retail
products. These are primarily traditional food "brokers" plus general
merchandise reps. General merchandise reps are frequently more effective with
drug and mass volume retailers, such as Walgreens, CVS, Eckerd, K-Mart, etc.
In nine southeastern states, the Company has engaged a regional food
trade brokerage firm, Budd Mayer Company, which has offices in Atlanta, GA;
Nashville, TN; Charlotte, NC; Tampa, FL; Memphis, TN; Raleigh, NC; Miami, FL;
Fayetteville, AR; Greenville, SC; Orlando, FL; Jackson, MS; Birmingham, AL;
Jacksonville, FL; Little Rock, AR; and Montgomery, AL.
As of June 1, 1998, the Company has acceptance in several major
supermarket accounts buying locally in the Georgia market. The Company's first
two retail products are BioShield Mold & Mildew (stain) and Odor Protectant and
BioShield Carpet and Upholstery Cleaner. Kroger (150 stores), Winn Dixie (101),
A & P (51), Cub Foods (13) and wholesaler Super-Valu have committed to stock
these products in what the Company estimates to be approximately 550 retail
outlets.
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Company products for the Florida, North/South Carolina and Georgia
markets are scheduled for shipping/advertising in the third and fourth calendar
quarters of 1998.
The Company believes that the challenge of greatest magnitude for the
Company is to develop consumer awareness, induce first time purchase of such
products and build brand awareness.
The Company will be required to expend approximately 11.5% of revenues
from these retail outlets toward media placement and advertising of which radio
will account for approximately 75-80% of the total planned budget. Creative
approaches are being "tested" and, the Company presently anticipates, will be
kicked-off in four-week flights in Georgia in September and Florida during
October. Additionally, the Company has set aside 10% of sales to these retail
outlets (which accrues on a quarterly basis and which is redeemable on a
quarterly basis) for in-store premium promotion programs. All radio spots will
be tagged with names of retailers with the Company's items on their shelves.
The Company has commenced the process of selecting marketing support in
the advertising and public relations arenas. The Company plans to spend at least
$818,500 for advertising and public relations through 1999. The Company's
spending levels in advertising and account development funds will enable the
Company to find talented agencies to build creative and results-oriented
activities.
The Company launched additional products BioShield KleenAire Healthy
Home Systems (to reduce airborne allergens) and BioShield Antimicrobial stain
guard (for fabrics) in the Spring of 1998 on the QVC cable channel and
anticipates commencing distribution into new and existing supermarket chains
effective the fourth quarter of 1998. The Company anticipates introducing a
total of seven retail lines by the end of 1999.
Industrial and Institutional Markets (I & I).
The Company intends to follow a path taken by many other proprietary
chemical manufacturers and has targeted leading industrial and institutional
products companies that currently formulate and market to this industry.
The following products have been developed for sale to the industrial and
institutional markets but have not received regulatory approval. (See
"Government Regulation"):
BioShield AM500
- molecular bonding additive for formulating institutional
industrial disinfectants
- molecular bonding additive for formulating sanitizers
and microbiocides
- for use in laundry additives
- additive for carpet treatment products
- for use in upholstery and drapery treatment products
- for use in building cleaning and treatment products
- additive for household cleaning products
- for use in food processing plants
BioShield AM36.OI
- molecular bonding additive for formulating institutional and
industrial disinfectants - molecular bonding additive for
formulating sanitizers and microbiocides - for use in laundry
additives - for use additive for carpet treatment products - for
use in upholstery and drapery treatment products - in building
cleaning and treatment products - additive for household cleaning
products - for use in food processing plants - higher strength
than BioShield AM500
BioShield AM3651P
- molecular bonding additive for formulating institutional and
industrial disinfectants - can be used similar to BioShield
AM36.OI - produces coating with migrating properties - for use as
preservative in personal care product
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Technology Licensing Activities.
The Company is seeking to finalize private label agreements with certain
manufacturers in the janitorial and sanitary supply industry. The manufacturing
and technology licensing program incorporates a licensing agreement for an
initial term of two (2) years. This agreement allows licensees to purchase
BioShield industrial concentrates for private label use in either BioShield
supplied formulations or formulae that are developed independently by the
licensee. BioShield structures the agreement so that a royalty is collected on
each unit (quart, gallon, etc.) of product that is shipped by the licensee which
contains BioShield. In structuring the licensing agreements exclusivity in
certain market channels or product categories has not been given as a general
practice, however, agreements are being structured to allow a "market lead time
advantage" in certain segments so long as volume purchases of the industrial
concentrates by the licensee are met on a predetermined basis.
Initial discussions are underway with several large direct industrial
prospect accounts. However, none have been consummated to date. Sales to these
direct accounts, as well as those through reselling distributors are expected to
be slow until approval of pending EPA registrations.
The Environmental Services Market.
The environmental services market describes the treatment of materials
in-place. The Company will seek to exploit opportunities in the aftercare market
through two distribution channels. The first of these channels is the sale of
BioShield products through specialty distributors and is targeted at the small
operator that will treat residences and small commercial buildings. The second
distribution channel is being developed with bulk sales, full technical training
and support, and will target the large restoration companies and other high
volume users who see the value in the technical support and the more technical
market positioning sell.
Microbial contamination causes a variety of problems, ranging from odors,
staining, rotting and defacement of goods to allergies, illnesses, and other
health related problems. This may allow for the development of business
opportunities directed at solving specific problems. These include Company
products to prevent musty odors and staining caused by mold, providing a
hypoallergenic environment for people with allergies, asthmatics, and persons
with respiratory ailments, and the prevention of algal and fungal deterioration
and staining of roofing shingles. The Company believes that other potential
applications may include treatment of swimming pools and building exteriors to
provide additional market potential. These applications will require EPA
approval for antimicrobial claims. However, no assurances can be given that the
Company will be successful in commercializing any of these products or will
receive EPA or other required regulatory approvals.
The Indoor Environmental Quality (IEQ) market includes all enclosed space
that is occupied by people, animals, plants, and valuable or perishable items.
Microbial problems within these structures are the prime focus of the Company in
this segment of the antimicrobials marketplace. Within the large array of indoor
pollutants and mitigating factor, microorganisms are the only pollutants that
may produce a gas (VOC metabolic wastes), a particulate (spores and somatic
parts), or a toxin, which may result in human irritation, allergy sensitization,
or disease.
Agreements with QVC, Healthsafe and Others.
The Company currently has several agreements in place for distribution
rights to its different antimicrobial technologies on an exclusive basis. The
Company has entered into various sales distribution agreements for its products.
The most significant of which are through QVC and HealthSafe Environmental
Products, Inc. Since the Company's inception sales through QVC have accounted
for $225,000 in revenues and through HealthSafe of $330,000 in revenues for a
total of 71.6% of revenues.
Currently the Company has given HealthSafe Environmental, Inc. the
worldwide right to exclusively distribute the BioShield 36.OI concentrate
product for use in the commercial/residential building restoration industry.
Such application includes applications before or after building disasters
(floods, fire, water damage) for the prevention and control of microbial
contamination. In addition, HealthSafe has the exclusive worldwide right to
distribute concentrates to the allergy and respiratory discomfort medical
market. Such applications to large interior surface areas will be marketed
pending EPA approval to assist in the prevention and control of health related
illnesses caused from exposure to microbial germs. This contract requires
HealthSafe to purchase $1.3 million, $2.6 million, and $3.9 million for the
first three years, with additional years of not less than 120% of previous years
purchases. To date, HealthSafe is in default of the terms of the licensing
agreement and has not, among other things, achieved the required minimum
purchase amounts. The Company is currently in negotiations with HealthSafe to
enter into a new licensing agreement with HealthSafe contingent upon various
regulatory approvals from the EPA. No assurances can be given that such
approvals will be obtained or that such negotiations will result in a new
licensing agreement.
Pursuant to an agreement dated November 1997, the Company has entered
into a marketing and distribution agreement to build brand equity with QVC (the
"QVC Agreement") to promote its products on an exclusive basis via direct
response television. The Agreement is renewable on an approval basis. However,
the Agreement will be automatically renewed in the event that net purchases by
QVC equal $1,500,000 during the first year and 110% of such amount each year
thereafter. QVC has also agreed to work with the Company to help it introduce
six (6) new consumer products on QVC's television shopping program during the
term of the Agreement. The Company has also granted QVC certain option rights to
purchase shares of the Company's Common Stock upon exceeding $2,000,000 in net
purchases.
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In addition to the two contracts above, the Company has entered into
certain agreements with Concrete Microtech, Inc., (CMT) and Sanitary Coding
Systems. CMT has the right to use the technology within the concrete pipe
industry as an additive for sewer pipe. To date, CMT has successfully specified
AM500 in three municipalities waste water treatment contracts and one additional
municipality has already installed what the Company estimates to be
approximately 5,000 linear feet of sewer pipe using BioShield. To date, CMT is
in default of the terms of the licensing agreement and has not, among other
things, achieved the required minimum purchase amounts. The Company is currently
in negotiations with CMT to enter into a new licensing agreement with CMT
contingent upon various regulatory approvals from the EPA. No assurances can be
given that such approvals will be obtained or that such negotiations will result
in a new licensing agreement.
Manufacturing.
The only manufacturing contemplated by the Company is the production of
its antimicrobial concentrates. No special equipment is required other than
typical chemical manufacturing vessels, which are in abundant supply. The
Company is currently producing its concentrates at its Lithonia, Georgia,
location and does not, in the foreseeable future, plan any additional
manufacturing operations. The Company intends to use chemical compounders
located around the U.S. and as centrally located to the Company's four U.S.
market segments. The Company may elect to open distribution centers in these
markets.
Competition.
The antimicrobial industry is an expanding and changing industry
characterized by intense competition. The key active ingredients used by the
industry have not changed significantly in the last twenty-five or more years.
Another characteristic of the modern antimicrobial industry is the increasing
involvement of foreign companies in the field. These companies have found the
USA regulatory climate very complex and costly (money and time) and their
products appear to be of the traditional leaching types where they utilize
reservoirs in fibers or coatings to try to extend the useful life of their
products. Others have entered the market with slight modifications of old
technologies that on some substrates extend the life of their products but
clearly fail to deal with all of the other problems that are inherent in the
active-ingredients list.
The Company believes that its ability to compete will be dependent in
large part upon its ability to continually enhance and improve its products and
technologies and to build a tradename presence that obviates the nature of the
technologies. In order to do so, the Company must effectively utilize and expand
its research and development capabilities and, once developed, expeditiously
convert new technology into products and processes that can be commercialized.
This must be complemented with the marketplace expansions encompassed in this
document.
The Company's ability to compete is based primarily on scientific and
technological superiority, technical support, availability of patent protection,
access to adequate capital, the ability to develop, acquire, and market products
and processes successfully, the ability to obtain further governmental approvals
and the ability to serve the particular needs of commercial customers with
service, products, and tradenames. Corporations and institutions with greater
resources than the Company may, therefore, have a significant competitive
advantage. The Company's potential competitors include consumer products
companies, product based pharmaceutical companies, and biotechnology companies.
Almost all of these potential competitors have substantially greater capital
resources, research and development capabilities, manufacturing and marketing
resources, and experience than the Company. The Company's competitors may
succeed in developing products or processes that are more effective or less
costly than any that may be developed by the Company, or that gain regulatory
approval prior to the Company's products. The Company also expects that the
number of its competitors and potential competitors will increase as more
antimicrobial products receive commercial marketing approvals from the EPA, FDA
or analogous foreign regulatory agencies. Any of these competitors may be more
successful than the Company in manufacturing, marketing and distributing its
products.
There can be no assurance that the Company will be able to compete successfully.
Patents and Proprietary Rights.
The Company seeks patent protection for its technology and products. It
typically files United States patent applications and related foreign patent
applications as soon as such technology and products are developed. The Company
files foreign patent applications on some of its technology and products in
countries where, in the Company's opinion, business considerations warrant such
filings. The foreign countries in which the Company files patent applications
usually include Japan, Canada, Australia, and countries of the European Economic
Community.
The Company has applied for four United States patents on its core
technology of novel composition and one joint patent with Emory University
("Emory") with respect to methods for producing water-stable organosilanes and
methods of using these compositions.
In addition, the Company intends to file additional patent applications
in the future for improvements in its core technologies and for specific
products that it develops. There can be no assurance, however, that the
Company's patent applications will mature into issued patents, or, if issued,
that such patents will be adequate to protect the Company's products or
processes. In addition, there can be no assurance that the Company will be able
to obtain any necessary or desired additional licenses to patents or
technologies of others or that the Company will be able to develop its own
additional patentable technologies.
Patent Claims Made By Others.
The Company entered into a Research Agreement with Emory University on
December 22, 1995. As a result of work performed pursuant to this Research
Agreement, Emory University has filed at least two patent applications, one
composition patent independently and the other an end-use patent jointly with
the Company. The Emory Application discloses and claims technologies developed
in conjunction with the Company that are different from, but similar to, only
one of the three technologies developed solely by the Company and on which the
Company is actively pursuing its own patents. If patents ultimately issue out of
the Emory Application, Emory may in the future seek to assert to the Company
that the manufacture, sale, and use of certain antimicrobial products may
infringe certain claims of their Emory Application patent and/or foreign
counterparts thereof.
The Company believes that its current products would not infringe any
claims that might issue from the Emory Application. However, any determination
in the future that one or more Company products infringe in the Emory
Application patent could have a material adverse effect on the business and
operations of the Company.
In addition, there can be no assurance that the Company is aware of all
patents or patent applications that may materially affect the Company's ability
to make, use, or sell any products. United States patent applications are
confidential while pending in the United States Patent and Trademark Office
("PTO"), and patent applications filed in foreign countries are often first
published six months or more after filing. Any conflicts resulting from
third-party patent applications and patents could significantly reduce the
coverage of the patents or patent applications licensed to the Company and limit
the ability of the Company to obtain meaningful patent protection. If patents
are issued to other companies that contain competitive or conflicting claims,
the Company may be required to obtain licensees to these patents or to develop
or obtain alternative technology. There can be no assurance that the Company
will be able to obtain any such license on acceptable terms or at all. If such
licenses are not obtained, the Company could be delayed in or prevented from the
development or commercialization of its product candidates, which would have a
material adverse effect on the Company. See "Business--Patents" and "Proprietary
Rights" and "Certain Transactions."
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The Company believes that its patent position involves complex legal
and factual questions. There can be no assurance that any future patent
applications or any patents issued to the Company will provide it with
competitive advantages or that the Company's use of its technology will not be
challenged as infringing upon the patents or proprietary rights of others, or
that the patents or proprietary rights of others will not have an adverse effect
on the ability of the Company to do business. Furthermore, there can be no
assurance that others will not independently develop similar technology or that
others will not design technology to circumvent the Company's existing or future
patents or proprietary rights. In the event that the Company's technology were
deemed to be infringing upon the rights of others, the Company could be subject
to damages or enjoined from using such technology or the Company could be
required to obtain licenses to utilize such technology. No assurance can be
given that any such licenses would be made available on terms acceptable to the
Company, or at all. If the Company were to be unable to obtain such licenses, it
could encounter significant delays in introducing products to the market while
it attempts to design around the patents or rights infringed upon, or the
Company's development, manufacture and sale of products requiring such licenses
could be foreclosed. In addition, the Company could experience a loss of
revenues and may incur substantial costs in defending itself and indemnifying
its strategic partners in patent infringement or other actions based on
proprietary rights violations brought against it or its strategic partners. The
Company could also incur substantial costs in the event it finds it necessary to
assert claims against third parties to prevent the infringement of its patents
and proprietary rights by others.
In March of 1997, the Company filed trademark applications for Duralast
and BioShield with the United States Patent and Trademark Office. The Company is
presently aware of a prior trademark filing for the name "BioShield," which the
Company believes has not been used in interstate commerce and has been
abandoned. The Company has instituted a cancellation proceeding with the U.S.
Patent and Trademark Office with respect to such prior trademark filing. No
assurances can be given that the Company will be successful in such cancellation
proceeding or in securing a trademark for the name BioShield.
The Company relies on proprietary know-how and confidential information
and employs various methods, such as entering into confidentiality and
non-competition agreements with its current employees and with third parties to
whom it has divulged proprietary information, to protect the processes,
concepts, ideas and documentation associated with its technologies. Such methods
may afford incomplete protection, and there can be no assurance that the Company
will be able to protect adequately its trade secrets or that other companies
will not acquire information that the Company considers proprietary. The Company
will be materially adversely affected if it cannot maintain its proprietary
technologies.
Government Regulation.
Environmental Protection Agency. The Company's research and development,
manufacturing, distribution, and sales activities are subject to comprehensive
regulation by numerous governmental authorities in the United States and other
countries. The Company's current products and products in short-term
development, where pest control claims are made, are regulated by the EPA. The
key applicable regulations governing pesticide products are the Federal
Insecticide, Fungicide, and Rodenticide Act (FIFRA) and Federal Food, Drug, and
Cosmetic Act (FFDCA) as amended by the Food Quality Protection Act (FQPA) of
August 3, 1996, and other federal statutes and regulations, and certain state,
local and tribal regulations. These statues and regulations govern the
development, testing, formulation, manufacture, labeling, storage, record
keeping, quality control, advertising, promotion, sale, distribution and
approval of pesticide products. Failure to comply with applicable requirements
can result in fines, recall or seizure of products, total or partial suspension
of production, refusal by the government to approve marketing of the product,
and criminal prosecution.
In order to obtain EPA approval of a new product, the Company and its
strategic partners, if any, must submit proof of safety, efficacy, purity, and
stability, and the Company must demonstrate validation of its manufacturing
process. The testing and application process is expensive and time consuming,
often taking years to complete. There is no assurance that the EPA will act
favorably or quickly in reviewing applications. With respect to patented
products, processes, or technologies, delays imposed or caused by the
governmental approval process may materially reduce the period during which the
Company will have the exclusive right to exploit them. Delays could also affect
the commercial advantages derived from the proprietary processes. There is no
assurance that the regulatory agencies will find present or future submissions
of the Company to be adequate.
The Company's planned pesticide products include certain antimicrobial
products for non-agricultural uses. EPA's Office of Pesticide Programs recently
has been extensively reorganized. Among other things, OPP has recently
established a new Antimicrobial Division (AD) to manage the registration and
reregistration of antimicrobial products with non-agricultural uses. This
interdisciplinary approach will allow most registration and reregistration
activities to be consolidated within a single division and may yield
efficiencies and shorten review times. However, the reorganization can be
expected to cause substantial delays at first as new policies and procedures are
implemented by persons who in many cases will be somewhat unfamiliar with the
responsibilities of their new positions.
Food and Drug Administration. The Company's research and development
activities are subject to comprehensive regulation by numerous governmental
authorities in the United States and other countries. If the Company is able to
produce and market products, such production and marketing will place the
Company under continued regulation. Among the applicable regulations in the
United States, pharmaceutical and over-the-counter drugs products are subject to
the Federal Food, Drug and Cosmetic Act, the Public Health Service Act, other
federal statutes and regulations, and certain state and local regulations. These
statutes and regulations govern the development, testing, formulation,
manufacture, labeling, storage, record keeping, quality control, advertising,
promotion, sale, distribution and approval of drug products. Failure to comply
with applicable requirements can result in fines, recall or seizure of products,
total or partial suspension of production, refusal by the government to approve
marketing of the product and criminal prosecution. As the proprietary silane
chemistry is not considered an over-the-counter drug, all products for human
application will be considered new drugs.
A new drug or medical device may not be legally marketed for commercial
use in the United States without FDA approval. In addition, upon approval, a
drug may only be marketed for the indications, in the formulations and at the
dosage levels approved by the FDA. The FDA also has the authority to withdraw
approval of drugs or devices in accordance with applicable statutes and
regulations. Analogous foreign regulators impose similar approval requirements
relating to commercial marketing of a drug or medical device in their respective
countries and may impose similar restrictions and limitations after approval.
In order to obtain FDA approval of a new drug product, the Company and
its strategic partners, if any, must submit proof of safety, efficacy, purity,
and stability and validation of its manufacturing process. The testing and
application process is expensive and time consuming, often taking years to
complete. There is no assurance that the FDA will act favorably or quickly in
reviewing applications. With respect to patented products, processes or
technologies, delays imposed or caused by the governmental approval process may
materially reduce the period during which the Company will have the exclusive
right to exploit them. Delays could also affect the commercial advantages
derived from proprietary processes. The FDA has recently increased its scrutiny
and regulation of antimicrobial and antiviral agents. There is no assurance that
the regulatory agencies will find present or future submissions of the Company
to be adequate.
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To obtain approval of medical devices, a premarket notification
(510(k)) or premarket approval (PMA) application must be submitted to FDA that
proves the device is as safe and effective or substantially equivalent to a
legally marketed device. There is no assurance that the FDA will act favorably
or quickly in reviewing applications. With respect to patented products,
processes or technologies, delays imposed or caused by the governmental approval
process may materially reduce the period during which the company will have the
exclusive right to exploit them. Delays could also affect the commercial
advantage derived from proprietary processes. There is no assurance that the
regulatory agencies will find present or future submissions of the Company to be
adequate.
The Company is currently considering numerous applications for the
proprietary technology, which may require multiple IND and NDA submissions prior
to commercial sale. The development of the appropriate pre-clinical safety,
efficacy, and chemistry testing may require a minimum of one (1) year to produce
and will not be funded from the proceeds of this Offering. Portions of this data
may be appropriate for support of numerous IND applications for each proposed
use-pattern (for example, anti-acne/wrinkle facial preparation, wound care
products, body sanitizer, and synthetic skin.) The IND application may become
effective thirty (30) days following receipt by the FDA. Although there is no
assurance that the FDA will grant the IND.
Human clinical trials are typically conducted in three sequential
phases with some amount of overlap allowed. Preclinical tests must be conducted
by laboratories that comply with FDA Good Clinical Practices regulations
governing the testing of drugs in humans and animals,. Phase 1 trials normally
consist of testing the product in a small number of patient volunteers for
establishing safety (adverse effects), dosage tolerance, metabolism,
distribution, excretion and clinical pharmacology. In Phase 2, the continued
safety and initial efficacy of the product are evaluated in a somewhat larger
patient population, and appropriate dosage amounts and treatment intervals are
determined. Phase 3 trials typically involve more definitive testing of the
appropriate dose for safety and clinical efficacy in an expanded patient
population at multiple clinical testing centers. A clinical plan or "protocol,"
accompanied by the approval of the research center's Institutional Review Board,
must be submitted to the FDA prior to commencement of each clinical trial. The
Clinical Research and Development phases on the average last 5 years.
The Institutional Review Board ("IRB") evaluates the protocol and
monitors the conduct of the study to protect the rights and safety of the human
subjects. An IRB may require changes in a protocol, and there can be no
assurance that an IRB will permit any given study to be initiated or completed.
In addition, the FDA may order the temporary or permanent discontinuation of
clinical trials at any time. In light of this process, the Company must
necessarily rely on other persons and institutions to conduct studies. The
Company cannot guarantee that such persons and institutions will conduct studies
properly. There also can be no assurance that Phase 1, Phase 2 and Phase 3
testing of the Company's products will be completed successfully within any
specified time period, if at all.
All the results of the preclinical and clinical studies on a
pharmaceutical or device product are submitted to the FDA in the form of an NDA
or PMA, for approval to commence commercial distribution. Submission of an NDA
or PMA does not assure FDA approval for marketing. The application review
process takes more than two years on average to complete. However, the process
may take substantially longer if the FDA has questions or concerns about a
product or studies regarding the product. In general, the FDA requires at least
two adequate and well-controlled clinical studies demonstrating efficacy with
sufficient levels of statistical assurance. However, additional support may be
required. The FDA also may request additional information relating to safety or
efficacy, such as long-term toxicity studies. In responding to NDA or a PMA, the
FDA may grant marketing approval, require additional testing and/or information
or deny the application. Accordingly, there can be no assurance about any
specific time frame for approval, if any, of products by the FDA. The FDA also
may require post-marketing testing and surveillance to monitor the safety record
of a product and its continued compliance with regulatory requirements.
The facilities of each pharmaceutical and device manufacturer must be
registered with and approved by the FDA as compliant with the agency's good
manufacturing practice regulations ("GMP"). In order to comply with GMP,
manufacturers must continue to expend time, money and effort in production,
record keeping and quality control. In addition, manufacturers must be
registered with the United States Environmental Protection Agency and similar
state and local regulatory authorities if they generate toxic or dangerous waste
streams. Other regulatory agencies, such as the Occupational Safety and Health
Administration, also monitor manufacturing facilities for compliance with
workplace safety regulations. Each of these organizations conducts periodic
establishment inspections to confirm continued compliance with its regulations.
Failure to comply with any of these regulations could mean fines, interruption
of production and even criminal prosecution.
For foreign markets, the company is subject to regulatory requirements,
review procedures and product approvals which, generally, may be as extensive,
if not more extensive, as those in the United States. Although the technical
descriptions of the clinical trials are different, the trials themselves are
often substantially the same as those in the United States. Approval of a
product by regulatory authorities of foreign countries must be obtained prior to
commencing commercial product marketing in those countries, regardless of
whether FDA approval has been obtained. The time and cost required to obtain
market approvals in foreign countries may be greater than required for FDA
approval and may be subject to delay. There can be no assurance that regulatory
authorities of foreign countries will grant approval.
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There are a number of anticipated applications that require listing
with the Cosmetics, Toiletries, and Fragrances Association (CTFA) inventory.
This is largely a procedural process but one that will have to be done before
the Company can fully capitalize on the use of its active ingredient or its
formulations in the personal care industry.
Filings Made With the EPA to Date and Current Applications and Future Filings.
In May 1997, the Company made application to the EPA for registration
of BioShield AM500 and AM500I to enable it to make certain claims regarding the
antimicrobial properties of products.
The Company has included with the EPA registration application the
claims for AM500, which, the Company believes, are sufficiently documented to
allow approval by the EPA without further testing. However, no assurances can be
given in this regard. Because of the unique properties of BioShield AM500,
additional applications for this product appear feasible and the following list
of claims is not intended as a list of all possible applications and benefits of
BioShield AM500. The primary uses listed in the application are as an active
ingredient for formulating disinfectants, sanitizers, and microbiocides for use
in laundry additives, carpet treatment products, upholstery and drapery
treatment products, and building cleaning and treatment products, and to give a
surface durable antimicrobial treatment effective against a wide variety of
bacteria, fungi, algae and yeast.
The Company has requested EPA approval for AM500 and AM500I to be used
to impart durable, broad-spectrum antimicrobial protection to substrates for the
following applications:
air filters/materials; aquarium filter material; bed sheets, blankets and
bedspreads; buffer pads (abrasive and polishing); carpets and draperies;
fiberfill; fiberglass ductboard; fire hose fabric; humidifier belts; mattress
pads and ticking; men's underwear and outerwear; non-woven disposable diapers;
non-woven polyester; outerwear apparel; disposable polyurethane foam cushions
for Lapidus Airfloat Systems; polyurethane and polyethylene foam, when covered;
polyurethane foam for packaging and cushioning in non-food contact applications;
roofing materials; sand bags, tents, tarpaulins, sails, and ropes; athletic and
causal shoes; shoe insoles; shower curtains; socks; providing residual
self-sanitizing activity against athlete's foot fungus throw rugs; toilet tank
and seat covers; umbrellas; upholstery vacuum cleaner bags and filters; women's
hosiery; and women's intimate apparel.
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Additional information and tests have been requested by the EPA in
support of the applications. In May 1998, the Company provided additional
information to the EPA for the AM500I products, as requested by the EPA. The EPA
is currently reviewing the newly submitted information. The Company has not
responded to the request for additional information for the remaining products.
Future Filings.
The Company intends to submit applications to the EPA for registration
of BioShield AM36.OI and AM3651P, to enable it to make certain claims regarding
the antimicrobial properties of products. The Company's new industrial strength
products AM36.OI and AM3651P are two new, and the Company believes, unique
products. Whereas both are new formulations of the silane-integrated system,
neither product is water based. However, AM36.OI and AM3651P provide stable
aqueous solutions.
The primary use claims, intended to be included in the application for
AM36.OI and AM3651P, are as an active ingredient for formulating disinfectants,
sanitizers and microbiocides for use in laundry additives, carpet treatment
products, upholstery and drapery treatment products, and building cleaning and
treatment products, and to give a surface durable antimicrobial treatment
effective against a wide variety of bacteria, fungi, algae and yeast. The
following features are planned as descriptions of the products in the
application:
Whereas AM36.OI is a concentrate designed for ease of application and
durability, the strength of AM3651P lies in its intended use as a preservative.
AM3651P is a blend of active ingredients chosen for their performance. The
interplay of the ingredients of the active blend provides high efficiency in
small concentrations. The Company believes that because of this interplay of the
ingredients and the resulting independence from toxic compounds such as
chlorine, formaldehyde or formaldehyde donors, AM3651P is ideally suited as a
preservative.
Materials treated with formulations containing the antimicrobial agent
AM36.OI or AM3651P are preserved by the bacteriostatic, fungistatic and
algistatic action imparted by the active ingredient. AM36.OI and AM3651P inhibit
the growth of microorganisms that are responsible for causing odor,
discoloration and deterioration. It also provides residual inhibition of
microorganisms to aid in the control of these deleterious effects. AM36.OI and
AM3651P form a coating on a wide variety of substrates and antimicrobial action
is exhibited on contact.
The Company intends to seek approval that AM36.OI and AM36.51P can be
used to impart durable, broad-spectrum, antimicrobial protection to substrates
for the following applications:
air filters/materials; aquarium filter material; bed sheets, blankets, and
bedspreads; buffer pads (abrasive and polishing); carpets and draperies;
fiberfill; fiberglass ductboard; fire hose fabric; humidifier belts; mattress
pads and ticking; men's underwear and outerwear; non-woven disposable diapers;
non-woven polyester; outerwear apparel; disposable polyurethane foam cushions
for Lapidus Airfloat Systems; polyurethane foam polyethylene foam, polyurethane
foam used as a growth medium for non-food crops and plants; roofing materials;
sand bags, tents, tarpaulins, sails, and ropes; athletic and casual shoes; shoe
insoles; shower curtains; socks; providing residual self-sanitizing activity
against athlete's foot fungus; toilet tank and seat covers; umbrellas;
upholstery vacuum cleaner bags and filters; vinyl wallpaper and wallpaper for
non-food contact surfaces; women's hosiery; and women's intimate apparel.
In addition, it is planned to seek approval for use of AM3651P as a
preservative in FDA regulated products, including cosmetic articles, such as
skin creams; hair treatment products, for example shampoos; non-regulated
products, including detergents and detergent formulations; other preservative
applications, such as interior and exterior paints, latex, machine oils, and
lubricants; cutting fluids; water for cooling systems and swimming pools which
may require EPA registration. However, no assurances can be given that the
Company will be successful in commercializing any of these products or will
receive any of the required regulatory approvals.
Research and Development.
Research and development activities are performed principally by Dr. Joachim
Berkner, Director of Research and Development, Organic Chemistry, of the
Company.
The Company's core technologies are in aqueous reactive silanes and
antimicrobial products. Combinations of both technologies are producing
compounds with new properties and are setting new standards. The Company's new
product releases in the near future will be based on these core technologies.
Research on
29
<PAGE>
silane based and non-silane based antimicrobials will expand application of
antimicrobial Company products from pesticides to medications and treatments to
preventive care. Research on silane based durable products will provide the
applicator with the opportunity to give any surface any desired new property.
Future development efforts are anticipated to focus on development of
antimicrobial products for medical applications, specifically, human and animal
skin treatments, new formaldehyde free product preservatives, agricultural and
food antimicrobials, and new active ingredients and formulations useful in the
markets currently providing antimicrobial products, ranging from antimicrobial
absorbents to cleaning solutions and disinfectants and other household and
products. Products in this category include materials treated by the
manufacturer, for example socks, shower curtains and carpets. Product
development in this category is anticipated on a market-need basis in
collaboration with the manufacturers. In addition, a number of new applications
based on the uniqueness of the Company products are anticipated. There can be no
assurance that the Company will be successful in developing these or other
products.
During the fiscal years ended June 30, 1997, and 1998, the Company
incurred expenses of $74,000 and $157,000, respectively, resulting from
Company-sponsored research and development activities. Research and development
is expected to remain a significant component of the Company's business. In the
short term, the Company expects to concentrate on the primary development
projects and intends to use approximately $712,080 of the estimated net proceeds
of this Offering and other funds to the extent they are, or may become,
available for such projects. However, the Company may abandon or de-emphasize
its research and development activities with respect to the primary development
projects and expand research and development of other products as circumstances
warrant. The Company has contracted out substantially all of its clinical
research and intends to continue to do so while utilizing its staff for
monitoring such research.
1. Antimicrobial Biobarriers: Burn Care/Synthetic Skin.
Commonly, the greater the skin damage, the greater the risk of
infection. The skin damage and the risk of infection are especially serious in
burn victims. To this day, proper treatment of burn patients remains a challenge
to the healthcare professional. In addition to direct wound application, the
Company believes that the Company's technology may, under certain conditions, be
appropriate for application to skin grafts, either manufactured or from cadavers
and most importantly, animal collagen matrixes. Collagen matrix based products
are frequently applied graft materials. In addition to their importance as skin
grafts, their chemical composition is such that a very favorable bonding with
the Company antimicrobial products and the graft may be possible. The Company
believes that the unique properties of the Company's core technology may, under
certain circumstances, allow certain products based upon its technology to form
a bound protective layer that allows the grafted skin to breath and transport
liquids, but reduce/prohibit the entry of microorganisms.
The initial intention of the antimicrobial protective layer is to
provide protection. Integration of additional features, such as the slow release
of growth stimulants to accelerate the healing process is contemplated for
future exploration. Development of compounds beneficial to the healing process
is planned parallel to the skin graft development. Each integrated part has to
be evaluated separately for efficacy, and the focus of the skin graft
application lies in the antimicrobial protection. However, the flexibility of
the Company technologies is expected to provide several new additions to the
skin graft technology.
Integration of the Company's products and research may lead to new skin
treatment products that the Company believes may provide continuous effective
skin condition treatment. Adverse skin conditions caused by microbes appear
susceptible to treatment by the Company's products. However, no assurances can
be given that the Company will be successful in commercializing any of these
products or will receive any of the required regulatory approvals.
2. Transplant/Medical Device Treatments.
A common problem in the transplant of organs or artificial implants is
rejection by the receiving body's immune system. The rejection is often based on
the recognition of the implant as a foreign body. This recognition is affected
by the surface of the implant. Silane treatment of implants changes the surface
of the implant, the treatment can be modified to be permanent or temporary. (For
example, permanent on man-made implants and temporary on organ transplant
transplants). One approach may be to chemically bond currently available
anti-rejection medication to the silane. Design, synthesis, and characterization
of this application is planned at the Company facilities and initial tests are
to be performed at collaborating laboratories to prove efficacy and viability
30
<PAGE>
of this approach. This application will require FDA approval prior to clinical
testing and commercial introduction. However, no assurances can be given that
the Company will be successful in commercializing any of these products or will
receive any of the required regulatory approvals.
3. Quaternary Ammonium Salts of Phosphate Esters as Pesticidal Polymer
Additives.
Phosphate esters have long been known to be effective pesticides. Over
the years, these compounds developed into especially useful additives for
polymers by reacting to the free acid of the phosphate ester with tertiary
amines. The antimicrobial activity of the amine is secondary in this approach.
The primary function of the amine is to "solubilize" the phosphate ester amine
salt in the polymer, allowing the active ingredient to migrate in the polymer.
The amines selected for this approach are known surfactants and often used as
polymer additives. Once exposed on the surface of the polymer, the amine
"surfactant" again aids in the migration of the phosphate, providing
antimicrobial activity.
A potential new invention may be the use of a quaternary ammonium as
the cation in the phosphate ester salt. The quaternary ammonium salt would be
distinguished from the amine salts used in the previous inventions by having
four alkyl chains attached to the nitrogen atom. According to a preliminary
literature review, this is a novel idea and similar products have only been
disclosed for antimicrobial active quaternary ammonium phosphate ester salts for
cleaning applications. This new compound may perform similarly or better than to
the previously disclosed compounds. However, no assurances can be given that the
Company will be successful in commercializing any of these products or will
receive any of the required regulatory approvals.
Property.
The Company's executive and administrative offices are located at 4405
International Blvd., Suite B109, Norcross, Georgia in a 6,900 square foot
facility leased by the Company. The building contains offices, meeting rooms,
and an organic chemistry lab with biological storage area. In addition the
Company currently leases a 5,000 square foot manufacturing facility in Lithonia,
Georgia for the production of the Company's active antimicrobial agent. The
Company believes that the facility is adequate for its present and anticipated
uses.
Employees.
The Company currently has seven employees, two of whom are executive
officers, one of whom is involved in research and development, three of whom are
in marketing and sales, and one of whom is clerical staff. The Company believes
that its relations with its employees are good. None are covered by a collective
bargaining agreement with the Company.
Legal Proceedings.
The Company is not a party to any material legal proceedings.
31
<PAGE>
MANAGEMENT
Directors, Executive Officers, and Significant Employees.
The following table sets forth certain information regarding the
directors, executive officers, and significant employees of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Timothy C. Moses 42 Co-Chairman of the Board, President, Chief
Executive Officer and Director
Jacques Elfersy 47 Co-Chairman of the Board, Senior Vice
President, Secretary, Treasurer and Director
Jeffrey A. Parker 41 Chief Operating Officer and Vice President of
Marketing and Sales
Douglas Moore 62 Vice President, National Sales
Dr. Joachim Berkner 32 Director of Research and Development, Organic
Chemistry
Carl T. Garner 51 Director
Michel Azran 52 Director
</TABLE>
Mr. Timothy C. Moses, a Director and Founder, is the Company's
Co-Chairman, President, and Chief Executive Officer, and Director of Marketing
and Sales. For over a decade, Mr. Moses has been an independent businessman and
entrepreneur with Mr. Elfersy, the Senior Vice President of the Company. His
career has spanned from sales and marketing to Director of Securities and
Investment. He has developed knowledge in the chemical and chemical siloxane
industry and business since leaving his former employer, Dow Corning Corporation
in 1986, where he acted as liaison between management and technical sales in the
role of new product planning and launches. As President of his former company,
DCI, Inc., a silicone and siloxane based technology company, Mr. Moses was
instrumental in seeking and raising of investment capital as well as Director of
Marketing and Sales to clients on a direct basis. Mr. Moses co-developed a new
antimicrobial silicone based coating system for textile applications and
coordinated sales from the (EEC) European Economic Community countries to the
United States. Mr. Moses is also a co-inventor of three inventions for which
patent applications have been filed by the Company on its core antimicrobial
technologies. Mr. Moses is a graduate of a division of Georgia Institute of
Technology where he received his B.S.
degree in 1980.
Mr. Jacques Elfersy, a Director and Founder/Co-Founder, is the
Company's Co-Chairman, Senior Vice President, acting Chief Financial Officer,
Secretary, and Treasurer. Mr. Elfersy has been instrumental in the discovery,
development, and patent filing of the Company's core antimicrobial technology.
In addition to his duties, Mr. Elfersy continues to oversee the Company's
research and development activities and objectives. Mr. Elfersy is a graduate of
the McGill University where he earned his Bachelor's Degree in Civil Engineering
in 1979. For a decade, Mr. Elfersy has been an independent businessman and
entrepreneur. His career reflects extensive knowledge of silicone-based
technology and silane-based antimicrobial (as a result of his past employment
and business relationship with Dow Corning) program management and supervision
of large-scale projects and installations, contract negotiations and
implementation, and customer support services and communications. As Executive
Vice President of his former Company, DCI, Inc., a silicone-based technology and
silane-based antimicrobial, Mr. Elfersy was instrumental in the implementation
of research and development on projects requiring antimicrobial-based coating
processes and production application. In addition, he acted as senior management
of engineering and production and was responsible for meeting critical time
frames and budgets as well as manpower constraint requirements.
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<PAGE>
Mr. Jeffrey A. Parker has agreed to become the Chief Operating Officer
and Vice President of Marketing and Sales for the Company upon completion of the
proposed Initial Public Offering. Mr. Parker began his career in 1981 at Oscar
Mayer Foods Corporation where he was promoted through a variety of positions
from Sales Representative, Corporate Recruiting Manager, Assistant Product
Manager, and Product Manager in just three and one-half years. In 1985, he
joined Schering-Plough Corporation for approximately one year as Product Manager
for Seasonal Products. In 1986, he was recruited and joined Con Agra
Incorporation to become General Manager, Frozen Convenience Foods. In his three
years with Con Agra, Mr. Parker was promoted to Division General Manager. In
1989, Mr. Parker joined Sara Lee Corporation, Bryan Foods Grocery Division where
he became President and Chief Executive Officer of Sweet Sue Kitchens after its
acquisition by Sara Lee. Additionally, he assumed presidency at Bryan Grocery
Products in January 1991. In 1992, Mr. Parker joined Foster Farmer as the
President and General Manager, Food Service, Processed Meats and Turkey
Products. In 1995, Mr. Parker became president and Chief Executive Officer of
Crider Incorporation and Crider Poultry Incorporation where he was instrumental
in improving product mix and profitability. Mr. Parker received his Bachelors'
degree in Business Administration in 1980 and his Masters in Public
Administration in 1981 from Jacksonville State University.
Mr. Douglas Moore is a significant employee and has been the Vice
President National Sales, of the Company since March 1997. Mr. Moore has 40
years of sales and marketing experience. Mr. Moore received his B.B.A. Finance
from Emory University in Atlanta, Georgia, in 1957. He then began his career at
Proctor & Gamble with assignments for a total of eight years in Nashville,
Atlanta, Birmingham, and Columbus, Georgia, as a Unit Manager and District Head
Salesman for Territory Sales. Mr. Moore then spent several years with a Kroger
Company division and ten years with Warner Lambert Company with assignments as
Director of Broker Operations and Sales Operations, Manager of Marketing
Development, Sales Training and Sales Operations, and Chicago District Manager.
He then became a National Sales Manager for the W.E. Bassett Company, Derby,
Connecticut, from 1978 to 1981, and the Director, Sales Merchandising, for
Tambrands, Inc. from 1981 to 1985 when he developed the Maxithins product
launch. Mr. Moore then served as Vice President, Marketing and Sales Service for
Faberge, Inc., Mahwah, New Jersey, from 1985 to 1988 and Vice President,
Administration and Sales - Suncare/Skincare, for Eclipse Labs, Inc. of Boca
Raton, Florida, in 1988 and 1989 before beginning an extended period as a
marketing and sales consultant to numerous clients prior to joining the Company
in March 1997.
Dr. Joachim Berkner is a significant employee and has been Director of
Research and Development, Organic Chemistry, of the Company since January 1996.
Dr. Berkner has served as consultant to Alpha Gamma Research; a company involved
in cancer research since 1992 and as a consultant to Chemical Products
Technology, a company involved in dye synthesis and process development since
1995. He has published several articles on Organic Chemistry and polymers and
has co-authored several sections of the Encyclopedia of Reagents for Organic
Synthesis. Dr. Berkner received his Ph.D. in Chemistry and BioChemistry from the
Georgia Institute of Technology in the fall of 1996 and received his valdiplom
in Chemistry from Philipps Univeritat Marburg in Marburg, Germany, in 1990.
Carl T. Garner has been a Director of the Company since 1996. Since 1995,
Mr. Garner has been a partner in Garner and Nevins (a division of Nevins
Marketing Group, Inc.), a promotional and advertising agency based in Atlanta,
Georgia. Mr. Garner received a B.S. in Business/Accounting from Jacksonville
State University in 1969, a masters degree in Management from Georgia College in
1977, and a masters degree in Business Administration from Jacksonville State
University in 1978. Mr. Garner also acts as an Advisory Director to the Company.
Mr. Michel M. Azran has been a Director of the Company since December 1997.
Since August 1994, he has been a partner at J.C. Bradford & Co., a securities
and brokerage firm. From 1982 through 1994, Mr. Azran was employed by The
Robinson-Humphrey Company, Inc. and last served in the capacity of Senior Vice
President - Investments. He holds an Accounting and Finance degree from
University of Lyons (1967) and Paris (1975) and was in public accounting in
France until October 1977
The Company's directors are divided into three classes which serve
staggered three-year terms or until their successors have been duly elected and
qualified. Currently, Michel M. Azran is serving in Class I with a term ending
at the Company's 1998 annual meeting of shareholders, Carl T. Garner is serving
in Class II with a term expiring at the Company's 1999 annual meeting of
shareholders, and Jacques Elfersy and Timothy C. Moses are serving in Class III
directors with a term expiring at the 2000 annual meeting of shareholders.
Following the initial public offering, the Company currently intends to pay
directors who are not employees of the Company a fee of (i) $1,000 per regularly
scheduled Board meeting attended (or $250 for participation in a regularly
scheduled Board meeting by conference telephone) and (ii) $12,000 annually. The
Company reimburses all directors for their expenses in connection with their
attendance at such meetings.
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<PAGE>
The Company maintains an audit committee that consists of its two independent
directors, Michel M. Azran and Carl T. Garner. The Company will maintain at
least two independent directors on the Board of Directors.
Officers are elected annually by the Board of Directors and serve at
the discretion of the Board.
The Company currently maintains $1,000,000 key man life insurance
policies on the lives of each of Mr.
Moses and Mr. Elfersy
Executive Compensation.
The following table sets forth for the three years ended June 30, 1998,
compensation paid by the Company to its Co-Chairman of the Board, Chief
Executive Officer, and Director and its Co-Chairman of the Board, Senior Vice
President, Acting Chief Financial Officer, Secretary, Treasurer, and Director.
None of the Company's other executive officers had annual compensation in excess
of $100,000 for services rendered during any of the three years ended June 30,
1998, 1997 or 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Other Annual
Name and Principal Position Year Salary Bonus Compensation
---- ------ ----- ------------
<S> <C> <C> <C> <C>
Timothy C. Moses, 1998 120,000 - -
Co- Chairman of the Board, 1997 120,000 - -
President, Chief Executive 1996 120,000 - -
Officer and Director.
Jacques Elfersy, 1998 120,000 - -
Co-Chairman of the Board, 1997 120,000 - -
Executive, Vice President, 1996 120,000 - -
Acting Chief Financial Officer,
Director of Regulatory Affairs,
Secretary, Treasurer, and Director.
</TABLE>
Employment Agreements.
The Company has entered into Employment Agreements, each dated January
1, 1998, with Mr. Moses and Mr. Elfersy. The agreements have an initial term
commencing January 1, 1998, and expiring December 31, 2003. However, the
remaining term of each agreement will be extended automatically for one year on
each July 1, beginning July 1, 2001, so that each agreement expires three (3)
years from such date, unless either party notifies the other party in writing of
an intent not to renew at least ninety (90) days prior to the applicable July
1st. Under the agreements, each of Mr. Moses and Mr. Elfersy is required to
devote their full business time to the affairs of the Company. The agreements
also contain certain non-compete provisions, which provisions a state court may
determine not to enforce or only to partially enforce.
Each agreement provides for a base salary at the rate of $125,000. The
base salaries are then subject to increase, but not decrease, as of January 1,
in the case of Messrs. Moses and Elfersy, of each year during the term of the
agreements as determined by the Company's Board of Directors. Each agreement
also provides for an annual performance bonus based upon a matrix of dollar
sales levels and dollar before-tax profitability. Cells within the matrix
represent specific combinations of sales and profits, with performance falling
within a particular cell resulting in a bonus to the Mr. Moses or Mr. Elfersy
expressed as a percent of his base salary. This matrix, which allows for bonuses
running from 0% to 150% of base salary, is constructed to reward the executive
for reaching specific combinations of sales and profit levels with higher sales
and profit resulting in a larger bonus. The maximum amount paid to either Mr.
Moses or Mr. Elfersy pursuant to the matrix cannot exceed $50,000 per year.
In addition, each agreement provides a severance package in the event
the executive is terminated other than for cause (as defined) or the executive
terminates his agreement for good reason (as defined) an amount equal to the sum
of (A) the greater of two (2) years of the base salary applicable to the
executive on the date of termination or the base salary (assuming no increases)
payable for remaining term of his agreement assuming no termination, plus (B)
two (2) times the average of the annual bonuses paid or payable to the executive
during the term of his agreement, payable in six (6) equal, consecutive monthly
installments commencing no later than thirty (30) days after the date of
termination. In addition, all outstanding options, stock grants, share of
restricted stock or any other equity, incentive compensation shall be and become
fully vested and nonforfeitable and the executive and the executive's family
will be entitled to receive welfare plan benefits (other than continued group
long-term disability coverage) generally available to executives with comparable
responsibilities or positions for a period of two (2) years from the date of
termination at the same cost to the executive as is charged to such executives
from time to time for comparable coverage.
35
<PAGE>
The Company has entered into an employment agreement, dated as of
September 18, 1998, with Mr. Parker. The agreement has an initial term
commencing upon the closing of the initial public offering of the Company, and
expiring on the third anniversary thereof. Under the agreement, Mr. Parker is
required to devote his substantially full time and attention to the affairs of
the Company. The agreements also contain certain non-compete provisions, which
provisions a state court may determine not to enforce or only to partially
enforce. The agreement provides for a base salary at the rate of $150,000. In
addition, the agreement provides a severance package in the event Mr. Parker is
terminated other than for cause (as defined) or the executive terminates his
agreement for good reason (as defined) an amount equal to the lessor of (i) the
remaining unexpired term of the agreement or (ii) one year from the date of
termination. He shall also be entitled to medical insurance, benefits provided
to other executives, and the issuance by the Company, upon each of the first
three anniversary dates of his employment, of options to acquire 50,000 shares
of the Company's Common Stock. Such options shall be exercisable at the initial
public offering price and which will also be subject to certain additional
terms, conditions, and restrictions.
Advisory Board.
The Company's Advisory Board (the "Advisory Board") was organized to
review and evaluate the Company's research and development programs and to
advise the Company generally in addressing various scientific and business
issues. The Company generally selects for membership persons who have experience
in finance, marketing and science. Members of the Advisory Board ("Advisors")
may meet as a group or individually with management of the Company. They are not
employed by the Company and may have commitments to, or consulting or advisory
agreements with, other entities that may limit their availability to the
Company. These entities may also be competitors of the Company. The Company is
not aware of any conflict of interest between work performed by Advisors on
behalf of the Company and work performed by them on behalf of other parties. The
Company requires each Advisor to execute a confidentiality agreement upon the
commencement of his or her relationship with the Company. The agreements
generally provide that all confidential information made known to the individual
during the term of the relationship is the exclusive property of the Company and
shall be kept confidential and not disclosed to third parties. The current
members of the Advisory Board are as follows:
Mr. Martin Savarick, age 58, is currently President of The Printstar
Group, Inc., a marketing and management consulting firm. He has been the
Chairman of the Board, President, and Chief Executive Officer of two publicly
traded companies - Beacon Photo Service, Inc. and Imprint Products, Inc. Both
companies dealt with retail customers throughout the United States exclusively
on a mail-order basis. The companies employed various innovative marketing
techniques to advertise and sell its products. Mr. Savarick also served as
President of a fund raising organization and of a direct mail marketing
consulting firm.
Dr. Cecil R. Smith, age 44, is currently Chief Executive Officer and
Director in BioShield Research Corporation, a company based in Powell,
Ohio, which conducts biohazard control evaluations for indoor environmental
quality of such buildings and develops contamination control protocols for
the biotechnology/pharmaceutical industry and provides site safety
analysis. Since 1987, Dr. Smith has also been Assistant Vice President of
Environmental Health and Safety of the Ohio State University. In that
capacity, Dr. Smith is responsible for the administration of an
environmental, occupational health and radiation safety program that
includes biological/chemical safety, safety engineering, industrial
hygiene, infectious/hazardous waste management, safety training and
environmental compliance. Since 1991, Mr. Smith has also served as
Assistant Professor to the Ohio State University, School of Public Health.
Dr. Smith received his Ph.D. in Public Health and Masters Degree in Public
Health from the University of North Carolina. In 1983 and 1980,
respectively, Dr. Smith received his B.S. in Microbiology from North Dakota
State University in 1977 and his B.A. in Biology and Natural Science from
Gustavus Adolphus College in 1975.
Edward H. Brown, age 42, is a partner in Schreeder, Wheeler & Flint, based in
Atlanta, Georgia. Mr. Brown is a corporate lawyer and has served as corporate
counsel to the Company since 1995. Mr. Brown received his J.D. from the
Washington and Lee University, School of Law in Lexington, Virginia in 1984 and
his B.A. from University of Virginia in 1980.
36
<PAGE>
Advisors receive reimbursement of travel expenses, connected with
Company business, and stock options, for consultation services, which include
assisting the Company in the development of a marketing plan as well as research
plan to elucidate the biological effects, safety and efficacy of the Company's
products and assisting the Company in analyzing data from research trials and
other studies concerning the Company's products. The Company anticipates that
each Advisor will devote approximately six days per year to the affairs of the
Company in his capacity as an Advisor, consisting of three one-day meetings of
the Advisory Board to be held each year and preparation for such meetings.
Indemnification of Directors and Officers.
The Company's Bylaws provide for the Company to indemnify each director
and officer of the Company against liabilities imposed upon him (including
reasonable amounts paid in settlement) and expenses incurred by him in
connection with any claim made against him or any action, suit or proceeding to
which he may be a party by reason of his being or having been a director or
officer of the Company. The Company has also entered into Indemnification
Agreements with each officer and director pursuant to which the Company will, in
general, indemnify such persons to the maximum extent permitted by the Company's
Bylaws and the laws of the State of Georgia against any expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement incurred in
connection with any actual or threatened action or proceeding to which such
director or officer is made or threatened to be made a party by reason of the
fact that such person is or was a director or officer of the Company. The
foregoing provisions may reduce the likelihood of derivative litigation against
directors and may discourage or deter shareholders or management from suing
directors for breaches of their duty of care, even though such an action, if
successful, might otherwise benefit the Company and its shareholders.
Insofar as indemnification of liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, or persons controlling the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of his counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Stock Option Plans.
In December 1997, the Board of Directors adopted and the shareholders
of the Company approved the 1997 Stock Incentive Plan (the "Incentive Plan").
The Board of Directors and shareholders approved the 1996 Directors Stock Option
Plan (the "Director Plan") in 1996
Terms of Incentive Plan.
The Incentive Plan provides the Company with increased flexibility to
grant equity-based compensation to key employees, officers and consultants of
the Company. The purpose of the Incentive Plan is to: (i) provide incentives to
stimulate individual efforts toward the Company's long-term growth and
profitability; (ii) encourage stock ownership by officers, key employees and
consultants by enabling them to acquire a proprietary interest in the Company in
the form of shares of Common Stock or to receive compensation based on
appreciation in the value of the Common Stock; and (iii) provide a means of
obtaining, rewarding and retaining key personnel. The Company has reserved
400,000 shares of Common Stock for issuance pursuant to awards that may be made
under the Incentive Plan. Awards of 30,000 shares of Common Stock were granted
under the Incentive Plan to key employees in March of 1998 of which 30,000
options are currently exercisable at a price of $1.00 per share.
The nature, terms and conditions of awards under the Incentive Plan
will be determined by the Stock Option Committee of the Board of Directors (the
"Committee"). The members of the Committee are selected by the Board of
Directors. The current members of the Committee are Messrs. Garner and Azran.
The Incentive Plan permits the Committee to make awards of Common Stock,
incentive or non-qualified stock options (collectively, "Stock Incentives") with
the following terms and conditions:
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<PAGE>
Terms and Conditions of all Stock Incentives. The number of shares of
Common Stock as to which a Stock Incentive may be granted will be determined by
the Committee in its sole discretion. To the extent required under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations thereunder relating to compensation to be treated as qualified
performance-based compensation, the maximum number of shares of Common Stock
with respect to which options or SARs may be granted during any one-year period
to any employee may not exceed 25,000. Each Stock Incentive will either be
evidenced by a Stock Incentive Agreement or Stock Incentive Program, in each
case containing such terms, conditions and restrictions as the Committee may
deem appropriate. Stock Incentives are not transferable or assignable except by
will or by the laws of descent and distribution and are exercisable only by the
recipient during his or her lifetime or by the recipient's legal representative
in the event of the recipient's death or disability.
Stock Awards. The number of shares of Common Stock, subject to a Stock
Award and restrictions or conditions on such shares, if any, will be determined
by the Committee. The Committee may require a cash payment from the recipient in
an amount no greater than the aggregate fair market value of the shares of
Common Stock awarded, as determined at the date of grant.
Options. Options may be either incentive stock options, as described in
Section 422 of the Code, or non-qualified stock options. The exercise price of
each option will be determined by the Committee and set forth in a Stock
Incentive Agreement but may not be less than the fair market value of the Common
Stock on the date the option is granted. The exercise price may not be less than
110% of the fair market value of the Common Stock on the date the option is
granted. The exercise price may not be changed after the option is granted, and
options may not be surrendered in consideration of, or exchanged for, a grant of
a new option with a lower exercise price. Incentive stock options will expire 10
years after the date of grant. Non-qualified stock options will expire on the
date set forth in the respective Stock Incentive Agreement. Payment for shares
of Common Stock purchased upon exercise of an option may be made in any form or
manner authorized by the Committee in the Stock Incentive Agreement or by
amendment thereto. In the event of a recipient's termination of employment, the
option or unexercised portion thereof will expire no later than three months
after the date of termination, except that in the case of the recipient's death
or disability, such period will be extended to one year. The Committee may set
forth longer time limits in the Stock Incentive Agreement, although in such
cases incentive stock option treatment will not be available under the Code.
Termination and Amendment of the Incentive Plan.
The Board of Directors may amend or terminate the Incentive Plan without
stockholder approval at any time; provided, however, that the Board may
condition any amendment on the approval of the stockholders if such approval is
necessary or advisable with respect to tax, securities or other applicable laws.
No such termination or amendment without the consent of the holder of a Stock
Incentive may adversely affect the rights of a holder under the terms of that
Stock Incentive.
Changes in Capitalization.
The Incentive Plan provides for an adjustment of the number of shares of
Common Stock reserved and subject to awards issued pursuant to the Incentive
Plan and of the exercise price of options granted under the Incentive Plan in
the event of any increase or decrease in the number of issued shares of Common
Stock resulting from a subdivision or combination of shares or the payment of a
stock dividend in shares of Common Stock or any other increase or decrease in
the number of shares of Common Stock outstanding effected without receipt of
consideration by the Company. In the event of a merger, consolidation or other
reorganization of the Company or a tender offer for its shares of Common Stock,
the Committee may take such action as it deems necessary or appropriate to
reflect the effect of the applicable transaction, including but not limited to:
(i) the substitution, adjustment or acceleration of awards; (ii) the removal of
restrictions on awards; or (iii) the termination of outstanding awards in
exchange for the cash value of the vested portion of the award.
Federal Income Tax Consequences.
The following discussion outlines generally the federal income tax
consequences of the receipt of options under the Incentive Plan. Individual
circumstances may vary these results. The federal income tax laws and
regulations are frequently amended, and each participant should rely on his or
her own tax counsel for advice regarding federal income tax treatment under the
Incentive Plan. If the recipient is subject to Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), special rules may apply
to determine the federal income tax consequences of certain option exercises.
Participants in the Incentive Plan should consult their own tax advisors as to
the specific tax consequences applicable to them and to the tax consequences
applicable to other types of Stock Incentives that may be awarded under the
Incentive Plan.
Incentive Stock Options. The recipient of an incentive stock option is
not subject to any federal income tax upon the grant of such an option pursuant
to the Incentive Plan, nor does the grant of an incentive stock option result in
an income tax deduction for the Company. Further, a recipient will not recognize
income for federal income tax purposes and the Company normally will not be
entitled to any federal income tax deduction as a result of the exercise of an
incentive stock option and the related transfer of shares of Common Stock to the
recipient. However, the excess of the fair market value of the shares
transferred upon the exercise of the incentive stock option over the exercise
price for such shares generally will constitute an item of alternative minimum
tax adjustment to the recipient for the year in which the option is exercised.
Thus, certain recipients may increase their federal income tax liability as a
result of the exercise of an incentive stock option under the alternative
minimum tax rules under the Code. If the shares of Common Stock transferred
pursuant to the exercise of an incentive stock option are disposed of within two
years from the date the option is granted or within one year from the date the
option is exercised, the recipient generally will recognize ordinary income
equal to the lesser of (1) the gain recognized (i.e., the excess of the amount
realized on the disposition over the exercise price) or (2) the excess of the
fair market value of the shares transferred upon exercise over the exercise
price for such shares. The balance, if any, of the recipient's gain over the
amount treated as ordinary income on disposition generally will be treated as
long- or short-term capital gain depending upon whether the holding period
applicable to long-term capital assets is satisfied. The Company normally would
be entitled to a federal income tax deduction equal to any ordinary income
recognized by the recipient, provided the Company satisfies applicable federal
income tax withholding requirements. If the shares of Common Stock transferred
upon the exercise of an incentive stock option are disposed of after the holding
periods have been satisfied, such disposition will result in a long-term capital
gain or loss treatment with respect to the difference between the amount
realized on the disposition and the exercise price. The Company will not be
entitled to a federal income tax deduction as a result of a disposition of such
shares after these holding periods have been satisfied.
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<PAGE>
Non-Qualified Options. A recipient will not recognize income upon the
grant of a non-qualified option or at any time prior to the exercise of the
option or a portion thereof. At the time the recipient exercises a non-qualified
option or portion thereof, he or she will recognize compensation taxable as
ordinary income in an amount equal to the excess of the fair market value of the
Common Stock on the date the option is exercised over the price paid for the
Common Stock, and the Company will then be entitled to a corresponding
deduction. Depending upon the period for which shares of Common Stock are held
after exercise, the sale or other taxable disposition of shares acquired through
the exercise of a non-qualified option generally will result in a short- or
long-term capital gain or loss equal to the difference between the amount
realized on such disposition and the fair market value of such shares when the
non-qualified option was exercised. Special rules apply to a participant who
exercises a non-qualified option by paying the exercise price in whole or in
part by a transfer of shares of Common Stock to the Company.
Director Plan.
The purpose of the Director Plan is to provide an incentive to outside
directors and members of the Company's Advisory Board ("Advisors") for
continuous association with the Company and to reinforce the relationship
between participants' rewards and shareholder gains. The Company has reserved
1,000,000 shares of Common Stock pursuant to awards that may be made under the
Director Plan. Awards of 120,000 shares of Common Stock were issued by the
Company in 1997 to Advisory Directors; and 120,000 shares of Common Stock were
issued by the Company in 1996 to Advisors. Pursuant to the Director Plan,
options vest in three stages, 20,000 shares at date of grant and 20,000 shares
on the first and second anniversary of the date of the stock option agreement.
120,000 of such options are currently exercisable pursuant to the Director Plan.
Consultants.
The Company has entered into a consulting agreement in November 1997
with R.T. Consulting, Inc. ("R.T."), to provide the Company with various
consulting services, including rendering strategic and financial advice,
developing marketing plans and materials, financial plans and budgets, and
initiating strategic business initiatives. Pursuant to its agreement with the
Company, R.T. will receive $3,000 per calendar month for a period of four (4)
calendar years commencing on the effective date of a registration statement
filed with the SEC with respect to any initial public offering.
In May 1998, the Company entered into an agreement with Revere Financial
Group, Inc. ("Revere") to provide Edgarization, pre-press services, and
assistance with the roadshow presentation in connection with this Offering in
exchange for a fee equal to $50,000. Revere is a company affiliated with Tejas
Securities Group, Inc., one of the underwriters.
In August 1998, the Company entered into a consulting agreement with
Moran Marketing Company, Inc. to provide the Company with various consulting
services relating to, among other things, the formulation of strategic marketing
and business plans, and the retention of key employees. Pursuant to the terms of
the Agreement, Moran Marketing receives a monthly consulting fee of $7,500 for
the months of September, October, and November, which fee shall increase to
$12,500 per month no sooner than December 1, 1998, and such agreement may be
terminated by either party upon ninety (90) days' prior written notice. In
addition, Maran Marketing is entitled to certain commissions and licensing fees
on sales, licensing, and marketing of the Company's products.
39
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information as of the date of this
Prospectus and as adjusted to reflect the sale of 650,000 units offered hereby,
based upon information obtained from the persons named below, relating to the
beneficial ownership of shares of Common Stock by (i) each person known to the
Company to own five percent or more of the outstanding Common Stock, (ii) each
director of the Company and (iii) all officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
Before the Offering (1) After the Offering (3)
--------------------- ----------------------
Shares
Name and Address Shares Percent Offered by Shares Percent
of Beneficial Owner Owned of Class Shareholders (2) Owned of Class
- ------------------- -------- -------- ---------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Timothy C. Moses (4)
405 North Errol Court, N.W.
Atlanta, Georgia 30327 1,357,927 28.0% 97,500 1,260,427 20.5%
Jacques Elfersy (4)
1771 East Clifton Road
Atlanta, Georgia 30307 1,505,117 31.1% 97,500 1,407,617 22.9%
Carl T. Garner
4473 Chattahoochee Plantation
Marietta, Georgia 30067 40,000 * -0- 40,000 *
All officers and directors
as a group (5 persons) 2,903,044 59.9% 195,000 2,708,044 44.1%
* Less than 1%
- -------
</TABLE>
(1) A person is deemed to be a beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus upon the
exercise of options or warrants. Each beneficial owner's percentage ownership is
determined by assuming that options held by such person (but not those held by
any other person) and that are exercisable within 60 days from the date of this
Prospectus have been exercised.
(2) Offered pursuant to the over-allotment option granted to the Underwriters.
(3) Assumes full exercise of over-allotment option for a total of 195,000 shares
of Common Stock granted by Selling Shareholders to the Underwriters. See
"Underwriting." Messrs. Moses and Elfersy have agreed to pay a pro-rata share of
the selling expenses of the Offering if the over-allotment option is exercised
by the Underwriters. (4) Does not include138,834 shares of Common Stock owned by
each of the wives of Messrs. Moses and Elfersy for which each of them disclaim
beneficial ownership.
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<PAGE>
CERTAIN TRANSACTIONS
In June 1998, Timothy C. Moses and Jacques Elfersy contributed
approximately $50,000 of capital to the Company. Subsequent to June 30, 1998,
Messrs. Moses and Elfersy contributed an additional $325,000 of capital to the
Company. Such contributions were funded by the private sale to accredited
investors of 124,995 shares of Common Stock of the Company owned by such persons
since 1995 at a purchase price of $3.00 per share.
In January, March, and June 1998, Judith B. Turner, the mother-in-law
of Timothy C. Moses, lent the Company $30,000, $25,000, and $25,000,
respectively. The Company has agreed to repay such sums to Mrs. Turner pursuant
to three promissory notes, dated January 16, 1998, February 27, 1998, and June
5, 1998 (the "Notes"). Each of the Notes mature on the earlier of the first
anniversary of issuance or the effective date of the initial public offering and
bear interest at the rate of 8% per annum.
Upon consummation of this Offering, Messrs. Moses and Elfersy will receive
$307,133 in the aggregate from the Company representing repayment of accrued and
unpaid salary due and payable by the Company to such persons for their
employment for the period June 1995 through June 30, 1998.
Although the Company believes that the foregoing transactions were on
terms no less favorable to the Company than would have been available from
unaffiliated third parties in arm's length transactions, there can be no
assurance that this is the case. The Company will comply with Sections VII A and
B of the NASAA Statement of Policy Regarding Loans and Other Material Affiliated
Transactions, amended November 18, 1997, regarding future material affiliated
transactions. Pursuant to these Sections, the Company represents that (i) all
future material affiliated transactions and loans will be made or entered into
on terms that are no less favorable to the Company than those that could be
obtained from unaffliated third parties and (ii) all future material affiliated
transactions and loans, and any forgiveness of loans, will be approved by a
majority of the Company's independent directors who do not have an interest in
the transactions and who will have access, at the Company's expense, to the
Company's counsel or to independent legal counsel. There can be no assurance,
however, that future transactions or arrangements between the Company and its
affiliates will be advantageous, that conflicts of interest will not arise with
respect thereto or that if conflicts do arise, that they will be resolved in
favor of the Company.
41
<PAGE>
DESCRIPTION OF SECURITIES
Units.
Each Unit consists of two shares of Common Stock and two Warrants. The
Shares and the Warrants included in the Units may not be separately traded until
March 29, 1999, unless earlier separated upon ten day's written notice from the
Representatives to the Company.
Common Stock.
The Company is authorized to issue 50,000,000 shares of Common Stock,
without par value, and 10,000,000 of blank check preferred stock. As of
September 9, 1998 there were 4,844,125 shares of Common Stock issued. There were
63 holders of record of Common Stock, as of September 9, 1998.
The holders of outstanding shares of all classes of Common Stock are
entitled to share ratably in any dividends paid on the Common Stock when, as and
if declared by the Board of Directors out of funds legally available. Each
holder of Common Stock is entitled to one vote for each share held of record.
The Common Stock is not entitled to cumulative voting or preemptive rights and
is not subject to redemption. Upon liquidation, dissolution or winding-up of the
Company, the holders of Common Stock are entitled to share ratably in the net
assets legally available for distribution. All outstanding shares of Common
Stock are fully paid and non-assessable.
Warrants.
The Warrants will be issued in registered form under, governed by, and
subject to the terms of a warrant agreement (the "Warrant Agreement") between
the Company and the American Securities Transfer & Trust, Inc. as warrant agent
(the "Warrant Agent"). The following statements are brief summaries of certain
provisions of the Warrant Agreement. Copies of the Warrant Agreement may be
obtained from the Company or the Warrant Agent and have been filed with the
Commission as an exhibit to the Registration Statement of which this Prospectus
is a part.
Each Warrant entitles the holder thereof to purchase at any time one
share of Common Stock at an exercise price per share of $6.00, at any time after
the Common Stock and Warrants become separately tradable until September 29,
2003. The right to exercise the Warrants will terminate at the close of business
on September 29, 2003. The Warrants contain provisions that protect the Warrant
holders against dilution by adjustment of the exercise price in certain events,
including but not limited to stock dividends, stock splits, reclassification or
mergers. A Warrant holder will not possess any rights as a shareholder of the
Company. Shares of Common Stock, when issued upon the exercise of the Warrants,
in accordance with the terms thereof, will be fully paid and non-assessable.
Commencing six months after the date of this Prospectus, the Company
may redeem some or all of the Warrants at a call price of $0.05 per Warrant,
upon thirty (30) day's prior written notice if the closing sale price of the
Common Stock on The Nasdaq SmallCap Market has equaled or exceeded $10.00 per
share for ten (10) consecutive days.
The Warrants may be exercised only if a current prospectus relating to
the underlying Common Stock is then in effect and only if the shares are
qualified for sale or exempt from registration under the securities laws of the
state or states in which the purchaser resides. So long as the Warrants are
outstanding, the Company has undertaken to file all post-effective amendments to
the Registration Statement required to be filed under the Securities Act, and to
take appropriate action under federal law and the securities laws of those
states where the Warrants were initially offered to permit the issuance and
resale of the Common Stock issuable upon exercise of the Warrants. However,
there can be no assurance that the Company will be in a position to effect such
action, and the failure to do so may cause the exercise of the Warrants and the
resale or other disposition of the Common Stock issued upon such exercise to
become unlawful. The Company may amend the terms of the Warrants, but only by
extending the termination date or lowering the exercise price thereof. The
Company has no present intention of amending such terms. However, there can be
no assurances that the Company will not alter its position in the future with
respect to this matter.
Transfer Agent and Registrar.
The Transfer Agent and Registrar, for the Units, the Common Stock and
the Warrants, is American Securities Transfer & Trust, Inc., 1825 Lawrence
Street, Suite 444, Denver, Colorado 80202.
42
<PAGE>
Underwriters' Warrants.
Upon the closing of this Offering, the Company has agreed to sell to
the Underwriters, for nominal consideration, Underwriters' Warrants to purchase
up to 65,000 Units. These Units will be substantially similar to the Units
offered hereby. The Underwriters' Warrants may not be sold, transferred,
assigned or hypothecated for one year, except to the officers of the
Underwriters and their successors and dealers participating in the Offering
and/or their partners or officers. The Underwriters' Warrants are exercisable at
150% of the public offering price, subject to adjustment in certain events to
protect against dilution, for a four-year period commencing one year from the
effective date of this Offering. See "Underwriting."
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 6,144,125
shares of Common Stock outstanding. Of these shares, the 1,300,000 shares sold
in this Offering (1,495,000 if the over-allotment option is exercised in full)
will be freely tradable in the public market without restriction under the
Securities Act, except shares purchased by an "affiliate" (as defined in the
Securities Act) of the Company. The remaining 4,844,125 shares (the "Restricted
Shares") (4,649,125 if the over-allotment option is exercised in full) will be
"restricted shares" within the meaning of the Securities Act and may be publicly
sold only if registered under the Securities Act or sold in accordance with an
applicable exemption from registration, such as those provided by Rule 144 under
the Securities Act.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) is entitled to sell Restricted Shares if at
least one year has passed since the later of the date such shares were acquired
from the Company or any affiliate of the Company. Rule 144 provides, however,
that, within any three-month period, such person may only sell up to the greater
of 1% of the then outstanding shares of the Company's Common Stock
(approximately 61,000 shares following the completion of this Offering) or the
average weekly trading volume in the Company's Common Stock during the four
calendar weeks immediately preceding the date on which the notice of the sale is
filed with the Commission. Sales pursuant to Rule 144 also are subject to
certain other requirements relating to manner of sale, notice of sale and
availability of current public information. Any person who has not been an
affiliate of the Company for a period of ninety (90) days preceding a sale of
Restricted Shares is entitled to sell such shares under Rule 144 without regard
to such limitations if at least two years have passed since the later of the
date such shares were acquired from the Company or any affiliate of the Company.
Shares held by persons who are deemed to be affiliated with the Company are
subject to such volume limitations regardless of how long they have been owned
or how they were acquired.
Without consideration of contractual restrictions described below, an
aggregate of 4,844,125 shares of Common Stock, representing 78.8% of the
outstanding shares of the Common Stock, or 4,649,125 shares representing 75.7%
if the over-allotment option is exercised in full will be eligible for sale in
the public market pursuant to Rule 144 after the completion of this Offering.
The Company is unable to estimate the number of shares that may be sold from
time to time under Rule 144, since such number will depend upon the market price
and trading volume for the Common Stock, the personal circumstances of the
sellers and other factors.
After this Offering, executive officers, directors and senior
management will own 2,903,044 shares of the Common Stock (2,708,044 if the
Underwriters' over-allotment option is exercised). The Company's shareholders
and directors (excluding the 195,000 shares of Common Stock offered by Messrs.
Moses and Elfersy pursuant to the over-allotment option described herein) have
entered into an agreement with the Representatives providing that they will not
sell or otherwise dispose of any shares of Common Stock held by them for a
period of one year after the date of this Prospectus without the prior written
consent of the Representatives, except for shares sold upon exercise of the
over-allotment option. The 1998 Warrants are subject to an unconditional
one-year lock-up from the first trading day of this Offering which prevents a
holder of the 1998 Warrants from exercising such warrants or otherwise
transferring, conveying, or assigning such warrants for such one-year period.
The Company can make no prediction as to the effect, if any, that
offers or sales of these shares would have on the market price of the Common
Stock. Nevertheless, sales of significant amounts of restricted shares in the
public markets could adversely affect the fair market price of Common Stock, as
well as impair the ability of the Company to raise capital through the issuance
of additional equity securities.
44
<PAGE>
UNDERWRITING
The following section is a summary of all of the material terms of the
Underwriting Agreement and does not purport to be complete. A copy of the
Underwriting Agreement has been filed as an exhibit to this Registration
Statement.
Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, the Company has agreed to sell to the Underwriters named
below, and each of the Underwriters, for whom Tejas Securities Group, Inc.,
Redstone Securities, Inc., and Seaboard Securities, Inc., (the
"Representatives") are acting as Representatives, has severally agreed to
purchase the number of Units set forth opposite its name in the following table.
Underwriters Number of Units
Tejas Securities Group, Inc. 240,000
Redstone Securities, Inc. 100,000
Seaboard Securities, Inc. 175,000
Westport Capital Markets, LLC 50,000
Capital West Securities 50,000
Centex Securities, Inc. 25,000
Grant Bettingen, Inc 10,000
Total........................................ 650,000
=======
The Representatives have advised the Company that the Underwriters
propose to offer the Units to the public at the initial public offering price
per unit set forth on the cover page of this Prospectus and to certain dealers
at such price less a concession of not more than $0.45 per Unit, of which $0.15
may be reallowed to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company and the Selling Shareholders have granted to the
Underwriters an option, exercisable during the 45-day period after the date of
this Prospectus, to purchase up to 97,500 additional Units to cover
over-allotments, if any, at the same price per share as the Company will receive
for the 650,000 Units that the Underwriters have agreed to purchase. If the
over-allotment option is exercised in full, the Selling Shareholders will sell
195,000 shares of Common Stock to the Underwriter. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
Units that the number of Units to be purchased by it shown in the above table
represents as a percentage of the 650,000 Units offered hereby. If purchased,
such additional Units will be sold by the Underwriters on the same terms as
those on which the 650,000 Units are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The holders of approximately 4,844,125 shares of the Common Stock,
after the Offering, have agreed with the Representatives that, until one year
after the date of this Prospectus, subject to certain limited exceptions, they
will not sell, contract to sell, or otherwise dispose of any shares of Common
Stock, any options to purchase shares of Common Stock, or any securities
convertible into, exercisable for, or exchangeable for shares of Common Stock,
owned directly by such holders, or with respect to which they have the power of
disposition, without the prior written consent of the Representatives.
Substantially all of such shares will be eligible for immediate public sale
following expiration of the lock-up periods, subject to the provisions of Rule
144. See "Shares Eligible for Future Sale."
The Underwriters have the right to offer the Securities offered hereby
only through licensed securities dealers in the United States who are members of
the National Association of Securities Dealers, Inc. and may allow such dealers
such portion of its ten (10%) percent commission as the Underwriters may
determine.
The Underwriters will not confirm sales to any discretionary accounts
without the prior written consent of their customers.
45
<PAGE>
In connection with this Offering, the Underwriters and certain selling
group members may engage in certain transactions that stabilize, maintain or
otherwise affect the market price of the Units, the Common Stock and the
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase the Units, the Common Stock and the Warrants for the purpose of
pegging, fixing or maintaining the market price of such securities. The
Underwriters may also create a short position in the Units by selling more Units
in connection with this Offering than it is committed to purchase from the
Company, and in such case the Representatives may reduce all or a portion of
that short position by purchasing the Units, the Common Stock and the Warrants
in the open market. The Representatives also may also elect to reduce any short
position by exercising all or any portion of the over-allotment option described
herein. In addition, the Representatives may impose "penalty bids" on certain
Underwriters and selling group members. This means that if a Representative
purchases shares of Common Stock or Warrants in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock or
the Warrants, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares of Common Stock or
Warrants as part of this Offering. Any of the transactions described in this
paragraph may stabilize or maintain the market price of the Units, the Common
Stock and the Warrants at a level above that which might otherwise prevail in
the open market.
Neither the Company nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Units, the Common Stock and the
Warrants. In addition, neither the Company nor the Underwriters make any
representation that the Underwriters or any selling group members will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Company has agreed to pay the Representatives a non-accountable
expense allowance of 2.00% of the gross amount of the Units sold ($130,000 on
the sale of the Units offered) at the closing of the Offering. The Underwriters'
expenses in excess thereof will be paid by the Representatives. To the extent
that the expenses of the underwriting are less than that amount, such excess
shall be deemed to be additional compensation to the Underwriters. In the event
this Offering is terminated before its successful completion, the Company may be
obligated to pay the Representatives a maximum of $25,000 on an accountable
basis for expenses incurred by the Underwriters in connection with this
Offering.
The Company has agreed that for a period of five years from the closing
of the sale of the Units offered hereby, it will nominate for election as a
director a person designated by the Representatives, and during such time as the
Representatives have not exercised such right, the Representatives shall have
the right to designate an observer, who shall be entitled to attend all meetings
of the Board and receive all correspondence and communications sent by the
Company to the members of the Board. The representatives have not yet identified
to the Company the person who is to be nominated for election as a director or
designated as an observer.
The Underwriting Agreement provides for indemnification among the
Company and the Underwriters against certain civil liabilities, including
liabilities under the Securities Act. In addition, the Underwriters' Warrants
provide for indemnification among the Company and the holders of the
Underwriters' Warrants and underlying shares against certain civil liabilities,
including liabilities under the Securities Act, and the Exchange Act.
Underwriters' Warrants.
Upon the closing of this Offering, the Company has agreed to sell to
the Underwriters, for nominal consideration, the Underwriters' Warrants to
purchase up to 65,000 Units consisting of 130,000 shares of Common Stock and
65,000 warrants. The Underwriters' Warrants are exercisable at 150% of the
public offering price for a four-year period commencing one year from the
effective date of this Offering. The Underwriters' Warrants may not be sold,
transferred, assigned or hypothecated for a period of one year from the date of
this Offering except to the officers of the Underwriters and their successors
and dealers participating in the Offering and/or their partners or officers. The
Underwriters' Warrants will contain anti-dilution provisions providing for
appropriate adjustment of the price per share subject to the Warrants under
certain circumstances. The holders of the Underwriters' Warrants have no voting,
dividend or other rights as shareholders of the Company with respect to shares
underlying the Underwriters' Warrants until the Underwriters' Warrants have been
exercised.
For the term of the Underwriters' Warrants, the holders thereof will be
given the opportunity to profit from a rise in the market value of the Company's
shares, with a resulting dilution in the interest of other shareholders. The
holders of the Underwriters' Warrants can be expected to exercise the
Underwriters' Warrants at a time when the Company would, in all likelihood, be
able to obtain needed capital by an offering of its unissued shares on terms
more favorable to the Company than those provided by the Underwriters' Warrants.
Such facts may adversely affect the terms on which the Company can obtain
additional financing. Any profit realized by the Underwriters on the sale of the
Underwriters' Warrants or shares issuable upon exercise of the Underwriters'
Warrants may be deemed additional underwriting compensation.
46
<PAGE>
If the Representatives, at their election, at any time one year after
the date of this Prospectus, solicits the exercise of the Warrants, the Company
will be obligated, subject to certain conditions, to pay the Representatives a
solicitation fee equal to 5% of the aggregate proceeds received by the Company
as a result of the solicitation. No warrant solicitation fees will be paid
within one year after the date of this Prospectus. No solicitation fee will be
paid if the market price of the Common Stock is lower than the exercise price of
the Warrants at such time, no solicitation fee will be paid if the Warrants
being exercised are held in a discretionary account at the time of exercise,
except where prior specific approval for exercise is received from the customer
exercising the Warrants, and no solicitation fee will be paid unless the
customer exercising the Warrants states in writing that the exercise was
solicited and designates in writing the Representative or other broker-dealer to
receive compensation in connection with the exercise. The Representatives may
re-allow a portion of the fee to soliciting broker-dealers.
Regulation M may prohibit the Representatives or any other soliciting
broker-dealer from engaging in any market making activities with regard to the
Company's securities for the period from five (5) business days (or such other
applicable period as Regulation M may provide) prior to any solicitation by a
Representative of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that a Representative may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Representatives may be
unable to provide a market for the Company's securities during certain periods
while the Warrants are exercisable.
Determination of Offering Price.
The initial public offering price was determined by negotiations
between the Company and the Representatives. The factors considered in
determining the public offering price include the Company's revenue growth since
its organization, the industry in which it operates, the Company's business
potential and earning prospects and the general condition of the securities
markets at the time of the Offering. The offering price does not bear any
relationship to the Company's assets, book value, net worth or other recognized
objective criteria of value.
Prior to this Offering, there has been no public market for the
Securities, and there can be no assurance than an active market will develop.
The Nasdaq SmallCap Market.
The Units, Common Stock, and Warrants have been applied for listing on
The Nasdaq SmallCap Market under the trading symbols "BSTIU," "BSTI," and
"BSTIW," respectively. The Offering is contingent upon the Company's obtaining
300 shareholders.
LEGAL MATTERS
The validity of the issuance of the Securities offered hereby will be
passed upon for the Company by Sims Moss Kline & Davis LLP, Atlanta, Georgia.
Raymond L. Moss, a partner with Sims Moss Kline & Davis LLP, owns or has the
right to acquire 35,209 shares of Common Stock. Certain legal matters in
connection with the sale of the Securities offered hereby will be passed upon
for the Underwriters by Winstead Sechrest & Minick P.C., Dallas, Texas.
EXPERTS
The financial statements for each of the three fiscal years in the
period ended June 30, 1998, included in this Prospectus have been so included in
reliance on the report of Grant Thornton LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
47
<PAGE>
<TABLE>
<CAPTION>
GLOSSARY
<S> <C>
Alkyl Groups - Univalent groups derived from alkanes by removal of a hydrogen atom from any carbon
atom: CnH2n+1-. See also cycloalkyl groups. Cf. hydrocarbyl groups.
Antimicrobial - Harmful to microorganisms by either killing or inhibiting growth. Antimicrobial
pesticides comprise a broad range of products designed to control undesirable
microorganisms such as bacteria, viruses, or algae on non-living (inanimate) objects
or surfaces(1), and on raw fruits and vegetables. Antimicrobial products are marketed
in several formulations, including sprays, liquids, concentrated powders, and gases.
Uses range from swimming pools to medical equipment to sinks and toilets to wood
preservatives to drinking water for humans and livestock. Antimicrobial products can
be divided into public health uses and non-public health uses.
Antimicrobial agent - A chemical that kills or inhibits the growth of
microorganisms.
Bacteriostatic - Antimicrobial agent that is capable of inhibiting bacterial growth without killing.
Biostatic - A term loosely used for bacteriostatic.
Ester - An organic compound formed by the reaction of acid and alcohol.
Hydrocarbyl group - Univalent (having a valence of one) groups formed by removing a hydrogen atom from a
hydrocarbon.
Lyophilic - A general term ("solvent loving") applied to a specific solute and solvent mixed
together, indicating the solubility relationship between the two. A highly water
soluble material such as acetone would be termed lyophilic in water.
Lyophobic - The opposite of lyophilic ("solvent hating"). A hydrocarbon, for example, would be
lyophobic in relation to water. If the solvent in question were changed to octane,
the hydrocarbon would then become lyophilic.
Phosphate Ester - Synonym for phosphoric acid ester.
Polymers - A long series of molecules.
Quaternary ammonium - Derivatives of ammonium compounds,
NH4+ Y-, in which all four of the hydrogens
bonded to nitrogen have been replaced with
hydrocarbyl groups.
Silane - Saturated silicon hydrides, analogues of the alkanes; i.e. compounds of the general
formula SinH2n+2. Silanes may be subdivided into silane, oligosilanes and
polysilanes. Note: hydrocarbyl derivatives and other derivatives are often referred to
loosely as silanes.
Substrate - The material to be treated or applied to.
Surface active agent - The descriptive generic term for
soaps and other materials that preferentially
adsorb at interfaces as a result of the presence
of both lyophilic and lyophobic structural units,
the adsorption generally resulting in the
alteration of the surface or interfacial
properties of the system.
Surfactant - The term for "surface active agents."
Tertiary amine - Derivatives of ammonia, NH3, in which all three of the hydrogens bonded to nitrogen
have been replaced with hydrocarbyl groups. E.g. (CH3)3N trimethylamine.
</TABLE>
48
<PAGE>
C O N T E N T S
Page
Report of Independent Certified Public Accountants F-1
Financial Statements
Balance Sheets as of June 30, 1996, 1997, and 1998 F-2
Statements of Operations for the year
ended June 30, 1996, 1997, and 1998 F-3
Statement of Stockholders Equity (deficit) for
the year ended June 30, 1996, 1997, and 1998 F-4
Statements of Cash Flows for
the year ended June 30, 1996, 1997, and 1998 F-5
Notes to Financial Statements F-6
49
<PAGE>
Report of Independent Certified Public Accountants Board of Directors BioShield
Technologies, Inc. We have audited the accompanying balance sheets of BioShield
Technologies, Inc., as of June 30, 1996, 1997 and 1998, and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance
with generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial
position of BioShield Technologies, Inc. as of June 30, 1996, 1997 and 1998, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles. /s/ Grant Thornton LLP
Atlanta, Georgia August 5, 1998
F-1
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
BALANCE SHEETS
As of June 30, 1996, 1997 and 1998
ASSETS
<TABLE>
<CAPTION>
June 30,
1996 1997 1998
----------------- ---------------- ---------
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 25,066 $ 398,921 $ 1,636
Accounts receivable - 29,294 110,081
Inventories 38,034 142,194 157,784
Prepaid expenses and other current assets 11,791 20,068 2,500
-------------- -------------- ---------------
Total current assets 74,891 590,477 272,001
PROPERTY AND EQUIPMENT, NET - 42,657 104,711
DEPOSITS AND OTHER LONG-TERM
ASSETS 2,847 59,804 60,911
$ 77,738 $ 692,938 $ 437,623
============== ============== ===============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C> <C> <C>
Notes payable $ - $ - $ 450,000
- - No-es 205,000 - other
Accounts payable 44,951 168,880 309,538
Accrued payroll 213,603 306,932 315,361
Accrued interest payable - - 18,377
-------------- -------------- ---------------
Total current liabilities 258,554 475,812 1,298,276
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - no par value; 50,000,000
shares authorized, 3,969,698, 4,364,421 and
4,395,040 issued and outstanding at
June 30, 1996, 1997 and 1998, respectively 115,500 965,501 1,153,001
Additional paid-in capital 60,000 122,400 329,050
Deficit accumulated during the development
stage (356,316) (870,775) (2,342,704)
- -------- -------------- --------------
(180,816) 217,126 (860,653)
-------------- -------------- ---------------
$ 77,738 $ 692,938 $ 437,623
============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Years ended June 30, 1996, 1997 and 1998
<TABLE>
<CAPTION>
June 1, 1995 (inception) Year ended Year ended
to June 30, June 30, June 30,
1996 1997 1998 1997 1998
-------------- ------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 775,315 $ 1,237,786 $ 775,315 $ 462,471
Cost of sales - 315,822 470,480 315,822 154,658
----------- ----------- ------------ ----------- --------------
Gross profit - 459,493 767,306 459,493 307,813
Operating expenses
Marketing and selling 5,608 218,995 691,940 213,387 472,945
General and administrative 195,515 895,699 2,030,411 700,184 1,134,712
Research and development 185,094 258,876 416,128 73,782 157,252
----------- ----------- ------------ ----------- --------------
386,217 1,373,570 3,138,479 987,353 1,764,909
----------- --------- ------------ ----------- --------------
Loss from operations (386,217) (914,077) (2,371,173) (527,860) (1,457,096)
Other income (expense)
Consulting income, net of consulting
expenses of $19,474 and $62,227
for the periods ended June 30,
1997 and 1996, respectively 29,901 39,908 39,908 10,007 -
- - In3,394t income 6,938 3,394 3,544
Interest expense - - (18,377) - (18,377)
----------- ----------- ------------ ----------- -------------
29,901 43,302 28,469 13,401 (14,833)
----------- ----------- ------------ ----------- -------------
Net loss before income taxes (356,316) (870,775) (2,342,704) (514,459) (1,471,929)
Income tax (expense) benefit - - - - -
----------- ----------- ------------ ----------- -------------
Net loss $ (356,316)$ (870,775) $ (2,342,704) $ (514,459) $ (1,471,929)
=========== =========== ============ =========== =============
Net loss per common share
Basic $ (0.09) $ (0.21) (0.53) $(0.12)$ (0.33)
========== ====== ====== ===== ===========
Weighted average common
shares outstanding 3,917,177 4,150,720 4,395,040 4,150,720 4,395,040
=========== =========== ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended June 30, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Deficit
accumulated
Common stock Additional during the
no par value paid-in development
Shares Amount capital stage Total
<S> <C> <C> <C> <C> <C>
Balance at June 1, 1995 - $ - $ - $ - $ -
Proceeds from original issuance
of shares 3,907,086 500 - - 500
Proceeds from issuance of shares
under a private placement offering 62,612 115,000 - - 115,000
Issuance of stock warrants for
services rendered - - 60,000 - 60,000
Net loss - June 1, 1995 (inception)
through June 30, 1996 - - - (356,316) (356,316)
----------- ----------- ----------- ------------ -----------
Balance at June 30, 1996 3,969,698 115,500 60,000 (356,316) (180,816)
Proceeds from issuance of shares
under a private placement offering 149,723 275,001 - - 275,001
Proceeds from issuance of shares
under a private placement offering 245,000 600,000 - - 600,000
Stock issuance costs related to
private placement offerings - (25,000) - - (25,000)
Issuance of stock warrants for
services rendered - - 62,400 - 62,400
Net loss for the year ended
June 30, 1997 - - - (514,459) (514,459)
------------ ----------- ----------- ------------ ------------
Balance at June 30, 1997 4,364,421 965,501 122,400 (870,775) 217,126
Proceeds from issuance of shares
under private placement offering 30,619 187,500 - - 187,500
Issuance of stock options for
services rendered - - 156,650 - 156,650
Contribution to capital - - 50,000 - 50,000
Net loss for the period ended
June 30, 1998 - - - (1,471,929) (1,471,929)
------------ ----------- ----------- ------------ ------------
Balance at June 30, 1998 4,395,040 $ 1,153,001 $ 329,050 $ (2,342,704) $ (860,653)
============ =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Years ended June 30, 1996, 1997 and 1998
<TABLE>
<CAPTION>
June 1, 1995 (inception) Year ended Year ended
to June 30, June 30, June 30,
1996 1997 1998 1997 1998
-------------- ------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (356,316) $ (870,775) $ (2,342,704) $ (514,459) $ (1,471,929)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization
expense 1,504 18,040 32,466 16,536 14,426
Issuance of stock and stock
options for services rendered 60,000 122,400 279,050 62,400 156,650
Changes in operating assets
and liabilities:
(Increase) decrease in:
Accounts receivable - (29,294) (110,081) (29,294) (80,787)
Inventory (38,034) (142,194)` (157,784) (104,160) (15,590)
Prepaid expenses and
other current assets (12,862) (34,310) (16,742) (21,448) 17,568
Stock issuance costs - 42,000 (42,000) (42,000) -
Deposits and other
Assets (3,280) (18,667) (19,774) (15,387) (1,107)
Increase in:
Accounts payable 44,951 168,880 309,538 123,929 140,658
Accrued liabilities and
payroll 213,603 306,932 333,738 93,329 26,806
----------- ---------- ----------- ------------ -------------
Net cash used in operating
activities (90,434) (520,988) (1,734,293) (430,554) (1,213,305)
------- -------- ----------- ---------- -----------
Cash flows from investing activities:
Capital enditures - (45,592) (122,072) (45,592) (76,480)
------- -------- ---------- ----------- --------
Cash flows from financing activities:
Proceeds from debt - - 655,000 - 655,000
Contribution to capital 50,000 50,000
Private offering of stock, net 115,500 965,501 1,153,001 850,001 187,500
----------- ---------- ----------- ------------ -------------
Net cash provided by
financing activities 115,500 965,501 1,858,001 850,001 892,500
----------- ---------- ----------- ------------ -------------
Net increase (decrease) in
cash 25,066 398,921 1,636 383,855 (397,285)
Cash at beginning of period - - - 25,066 398,921
----------- ---------- ----------- ------------ -------------
Cash at end of period $ 25,066 $ 398,921 $ 1,636 $ 398,921 $ 1,636
=========== ========== =========== ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Years ended June 30, 1996, 1997 and 1998
NOTE A - NATURE OF OPERATIONS
BioShield Technologies, Inc. (the "Company") was incorporated on June 1,
1995. The Company was formed to develop, manufacture and distribute certain
antimicrobial agents and products. Patents for these new agents and products
are currently pending. The Company is in the process of developing
distribution channels for these products throughout the United States and
internationally.
The Company is in the development stage and its efforts though June 30, 1998,
have been principally devoted to organizational activities, raising capital,
regulatory approvals, research and development and further investigation into
new markets.
During the next fiscal year, the Company is planning an initial public
offering.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity of
three months or less to be cash equivalents. The carrying value of cash and
cash equivalents approximates fair value due to the relatively short-term
nature of the instruments.
2.Revenue Recognition
The Company recognizes revenue and provides for the estimated cost of returns
and allowances in the period the products are shipped and title transfers to
the customer.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventories consist primarily of
raw materials, work in progress and finished goods.
4. Property, Equipment and Depreciation
Property and equipment are recorded at historical cost. Depreciation is provided
for in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives on a straight-line basis. Depreciation
expense related to property and equipment charged to operations was
approximately $0, $3,000 and $14 000 for the periods ended 1996, 1997 and 1998,
respectively.
F-6
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years ended June 30, 1996, 1997 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Property, Equipment and Depreciation - Continued
Estimated service lives are as follows:
Office Equipment 3 years
Machinery, leasehold improvements,
furniture and equipment 5-10 years
5.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 disclosures 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 these estimates.
6.Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance is
provided for deferred tax assets when it is more likely than not that the
asset will not be realized.
7.Research and Development Costs
The costs of research and development and consumable supplies and materials
to be used for the development of the Company's intended products are
expensed when incurred. Research and development expense was $185,094,
$73,782 and $157,252 for the periods ending June 30, 1996, 1997 and 1998,
respectively. Research and development expense for the period ended June 30,
1996, included $120,000 of certain officers' compensation that related to
conceptual formulation, testing and design of product alternatives.
F-7
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years ended June 30, 1996, 1997 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. Advertising Costs
The Company expenses the cost of advertising the first time advertising takes
place. Costs of developing advertising materials are expensed at the time the
advertising materials are produced and distributed to customers. Advertising
expense was $0, $69,932 and $228,192 for the periods ended June 30, 1996,
1997 and 1998, respectively.
9. General and Administrative Costs
General and administrative costs include, among other things, the cost of
testing and consulting related to filings with the Environmental Protection
Agency (EPA) and patent filings as well as professional fees associated with
private placement offerings and the Company's proposed initial public
offering.
10. Reverse Stock Split
Effective December 11, 1997, the Company's shareholders approved a reverse
split, which had the following effect on all outstanding securities:
Common stock - 2.45 for 3.00
Warrants - 1 for 2
The exercise price on all warrants issued prior to December 11, 1997 was
reduced to $0.50 in connection with the reverse split.
All share and per share amounts and option and warrant amounts have been
restated retroactively to reflect these reverse splits.
11. Loss Per Common Share
Basic loss per common share has been calculated using the weighted average
number of shares of common stock outstanding during each period as adjusted
for the reverse split as discussed in Note B-10. Diluted loss per common
share is not disclosed because the effect of the exchange or exercise of
common stock equivalents would be anti-dilutive.
F-8
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years ended June 30, 1996, 1997 and 1998
NOTE C - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1996 1997 1998
<S> <C> <C> <C>
Raw Materials $ 27,155 $ 100,146 $ 83,482
Work in Progress 10,879 30,828 42,893
Finished Goods - 11,220 31,409
----------- ----------- ----------
$ 38,034 $ 142,194 $ 157,784
=========== =========== ==========
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
Property and Equipment consists of the following:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1996 1997 1998
<S> <C> <C> <C>
Leasehold improvements $ - $ - $ 33,385
Office furniture and equipment - 23,890 28,433
Machinery and equipment - 21,702 60,254
----------- ----------- ----------
Total property and equipment - 45,592 122,072
Less accumulated depreciation - (2,935) (17,361)
----------- ----------- ----------
$ - $ 42,657 $ 104,711
=========== =========== ==========
</TABLE>
NOTE E - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain office and operating facilities and certain equipment
under operating lease agreements that expire on various dates through 2000 and
require the Company to pay all maintenance costs. Rent expense under these
leases was $0, $16,133 and $64,835 for the years ended June 30, 1996, 1997 and
1998, respectively.
F-9
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years ended June 30, 1996, 1997 and 1998
NOTE E - COMMITMENTS AND CONTINGENCIES - Continued
Commitments under noncancelable operating leases are summarized as follows:
Fiscal Year:
1999 $ 67,833
2000 61,770
2001 and Thereafter 4,860
------------
Total $ 134,463
============
NOTE F - STOCKHOLDERS' EQUITY
Warrants
At June 30, 1997, warrants for the purchase of 959,004 shares had been issued in
connection with various private placement offerings. In connection with the
reverse split discussed in Note B-10, the restated number of warrants
outstanding at June 30, 1997 was 479,502, with an exercise price of $0.50. The
expiration date was also restated to reflect a five-year term expiring in April
2003. In connection with a private placement offering during the year ended June
30, 1998, warrants for the purchase of 490,000 shares were issued with an
exercise price ranging from $5.25 (Initial Public Offering Price) to $5.78 (110%
of Initial Public Offering Price) expiring April 2003. Also, during the year
ended June 30, 1998, warrants for the purchase of 18,750 shares were issued in
connection with private placement offerings. These warrants have a five-year
term and an exercise price of $0.50.
Warrants Issued for Services in Lieu of Cash
During the year ended June 30, 1997, warrants to purchase 150,000 shares were
issued to consultants at an exercise price of $0.50. The Company recorded
$62,400 of expense during the year ended June 30, 1997, as a result of
issuing these warrants.
Options
During 1996, the Company implemented a directors' stock option plan covering
all members of the Company's board of directors. The provisions of this plan
included a grant of options to acquire 120,000 shares of common stock at an
exercise price of $2.00 per share for the period ended June 30, 1996. The
Company recorded $60,000 of expense during the period ended June 30, 1996 as
a result of granting these options.
No options were granted during the year ended June 30, 1997.
F-10
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years ended June 30, 1996, 1997 and 1998
NOTE F - STOCKHOLDERS' EQUITY - Continued
Options - Continued
During the year ended June 30, 1998, the Company issued options to purchase
120,000 shares of common stock at an exercise price of $5.00 per share to two
members of its advisory board. The options vest over a three-year period
allowing each optionee to acquire 20,000 shares beginning on each anniversary
date of the grant and expiring five years from the date of grant.
The Company also issued options to employees for 30,000 shares of common
stock at an exercise price of $1.00 per share. The Company uses the intrinsic
value method in accounting for its stock option plan. In applying this
method, compensation cost of $156,650 has been recognized in the accompanying
financial statements for the year ended June 30, 1998. No compensation cost
was recognized for the period ended June 30, 1997. Had compensation cost for
the Company's stock options plans been determined based on the fair value at
the grant dates for awards under this plan, the Company's net loss and loss
per share would have resulted in the pro forma amounts indicated below:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1997 June 30,1998
------------- ---------------------------------
<S> <C> <C> <C> <C>
Net loss As reported $ (356,316) $ (514,459) $ (1,471,929)
Pro forma (371,616) (527,847) (1,471,929)
Net loss per
common share As reported $ (0.09) $ (0.12) $(0.33)
Pro forma (0.09) (0.12) (0.33)
</TABLE>
For purposes of the pro forma amounts above, the fair value of each option
grant was estimated by reference to other equity instruments issued during
the period to non-employees.
In addition, warrants to purchase 75,000 shares of common stock have been
reserved for the Company's underwriters in connection with the Company's
proposed initial public offering. The vesting of these warrants is contingent
upon a certain level of net proceeds obtained from the offering.
F-10
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years ended June 30, 1996, 1997 and 1998
NOTE F - STOCKHOLDERS' EQUITY - Continued
Stock option and warrant transactions are summarized as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
June 30, 1996 June 30, 1997 June 30, 1998
------------------ ----------------- -----------------
Weighted Weighted Weighted
Average average average
Exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period - $ - 120,000 $ 2.00 749,502 $ 0.74
Issued in connection with private
placement offerings - - 479,502 0.50 450,000 5.25
Issued in connection with
private placement offering - - - - 40,000 5.78
Issued in connection with
private placement offering - - - - 18,750 0.50
Issued to non-employees for
services rendered - - 150,000 0.50 - -
Issued to employees - - - - 30,000 1.00
Issued to advisory board 120,000 2.00 - - 120,000 5.00
Exercised - - - - - -
Canceled - - - - - -
------- ------- ---------- ------ ----------- ------
Outstanding, end of period 120,000 $ 2.00 749,502 $ 0.74 1,408,252 $ 2.69
======= ======== ======= ====== ========= =====
</TABLE>
The weighted average remaining contractual life of options and warrants
outstanding is approximately 4.5 years as of June 30, 1998.
NOTE G - INCOME TAXES
The Company's temporary differences result in a deferred income tax asset
which is reduced to zero by a related valuation allowance, summarized as
follows:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1996 1997 1998
Deferred income tax assets:
<S> <C> <C> <C>
Operating loss carryforwards $ 30,767 $ 163,918 $ 658,883
Payroll accruals 81,169 116,634 119,837
Options for services 22,800 46,512 106,039
---------- ----------- ----------
Gross deferred tax assets 134,736 327,064 884,759
Deferred tax asset valuation allowance (134,736) (327,064) (884,759)
---------- ----------- ----------
Net deferred income tax asset $ - $ - $ -
========== =========== ==========
</TABLE>
F-11
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years ended June 30, 1996, 1997 and 1998
NOTE G - INCOME TAXES - Continued
The income tax provisions for the years ended June 30, 1996, June 30, 1997
and 1998, differ from the amounts determined by applying the applicable U.S.
statutory federal income tax rate to pretax results of operations. These
differences are a result of applying valuation allowances against the
deferred tax assets.
Reconciliations of statutory Federal tax rates to the effective tax rate for
the years ended June 30, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1996 1997 1998
<S> <C> <C> <C>
Income tax benefit at applicable Federal rate of 34% $ 121,147 $ 174,916 $ 500,456
State tax benefit, net of Federal income tax effect 14,253 20,578 58,877
Other (664) (3,166) (1,638)
134,736 192,328 557,695
Increase in deferred income tax asset valuation allowance (134,736) (192,328) (557,695)
----------- ----------- -----------
Net income tax benefit $ - $ - $ -
=========== =========== ===========
</TABLE>
At June 30, 1998, the Company had operating loss carryforwards for U.S.
income tax purposes of approximately $1,700,000 available to reduce future
taxable income. These loss carryforwards will expire in fiscal years 2011
through 2013.
NOTE H - SIGNIFICANT CUSTOMERS
During 1997, the Company entered into sales agreements with two customers that
include provisions for certain exclusive marketing rights and preferential
payment terms. These agreements range from one to three years and provide for
minimum purchase commitments on behalf of these customers. Sales to these
customers totaled approximately $555,000 or 72% of total sales during the year
ended June 30, 1997. Sales to two customers totaled approximately $151,000 or
33% of total sales for the year ended June 30, 1998. No other customer
represented more than 10% of sales during this period.
F-12
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years ended June 30, 1996, 1997 and 1998
NOTE I - NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards (SFAS) 131, Disclosure About
Segments of An Enterprise and Related Information, which is effective for
fiscal years beginning after December 15, 1997 requires companies to report
information about an entity's different types of business activities and the
different economic environments in which it operates, referred to as
operating segments. Management does not expect the adoption of this SFAS to
have a material impact on the Company's results of operations or its
financial condition.
NOTE J - CONTINUED OPERATIONS
The Company's continued existence as a going concern is ultimately dependent
upon the success of future operations and its ability to obtain additional
financing. As shown in the financial statements, the Company incurred losses
of $356,316, $514,459 and $1,471,929 for the periods ended June 30, 1996,
1997 and 1998, respectively. Management believes that its ability to generate
sufficient revenues may depend on the success of a proposed initial public
offering. The Company is dependent on the proceeds of this offering in order
to continue operations.
NOTE K - NOTES PAYABLE
Notes payable consist of ninety $5,000 notes payable to individuals totaling
$450,000 at June 30, 1998. The notes are due the earlier of the completion of a
successful initial public offering or March 2001. The notes bear interest at 10%
per annual during the first twelve months, 13% per annum during the second
twelve months, and 15% per annum during the third twelve months. In connection
with these notes, 90 warrants for the purchase of 450,000 shares at an exercise
price of $5.25 (Initial Public Offering) were issued (see Note F). The value
attributable to these warrants is not significant to the accompanying financial
statements and accordingly, the value has not been included therein.
Other notes payable consists of a $80,000 note payable to a relative of a
principle stockholder bearing interest at 8% and maturing the earlier of a
successful initial public offering or May 1999. Other notes payable also
includes a $125,000 note payable to an individual bearing interest at prime
plus 2% and maturing the earlier of a successful initial public offering or
six months.
The carrying value of notes payable approximates fair value due to the
relatively short maturities of the notes.
F-13
<PAGE>
BioShield Technologies, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years ended June 30, 1996, 1997 and 1998
NOTE L - RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENT
In June 1998, a principal stockholder contributed $50,000 to additional
paid-in capital of the Company without further consideration.
Subsequent to June 30, 1998, two principal stockholders contributed $325,000
to additional paid-in capital of the Company without further consideration.
Subsequent to June 30,1998, warrants for the purchase of 449,085 shares were
exercised at an exercise price of $0.50 per share generating additional
equity of $224,542.
F-14
<PAGE>
No person has been authorized to give any information or to make any
representation in connection with this offering other than those contained in
this Prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company or any
Underwriter. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstance, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information herein is correct as of any time subsequent to the date hereof.
650,000
UNITS
EACH UNIT CONSISTING OF
TABLE OF CONTENTS TWO SHARES OF COMMON STOCK
PAGE AND TWO
REDEEMABLE COMMON
Additional Information.................... 2 STOCK
PURCHASE WARRANTS
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 13
Dividend Policy........................... 14 BIOSHEILD
Dilution.................................. 15 TECNOLOGIES
Short term Debt and Capitalization........ 16
Management's Discussion and............... OFFERING PRICE
Analysis of Financial Condition $10.00 PER UNIT
and Results of Operation................. 17
Business.................................. 19
Management................................ 32
Principal Shareholders.................... 40
Certain Relationships
and Related Transactions............... 41 PROSPECTUS
Description of Securities................. 42
Shares Eligible For Future Sale........... 44 September 29 ,1998
Underwriting.............................. 45 Tejas Securities
Group, Inc.
Legal Matters............................. 47 Redstone Securities, Inc.
Experts................................... 47 Seaboard Securities , Inc.
Glossary.................................. 48
Index to Financial Statements............. 49
.........Until October 24, 1998 , all dealers effecting transactions
in the registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition
to the obligations of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
