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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-24913
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BIOSHIELD TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
GEORGIA 58-2181628
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) IDENTIFICATION NO.)
5655 PEACHTREE PARKWAY
NORCROSS, GA 30092
(Address of principal executive office) (Zip Code)
(770) 246-2000
(Issuer's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock and Warrants
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for the fiscal year ended June 30, 2000 were:
$945,733.
The aggregate market value of the registrant's voting stock held by
non-affiliates as of June 30, 2000 was: $66,092,952.
The number of shares outstanding of each class of registrant's common
stock as of June 30, 2000 was: Common Stock, par value no per share, 8,339,073
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be furnished
to stockholders in connection with its Annual Meeting of Stockholders expected
to be held on October 31, 2000 are incorporated by reference in Part III of this
Form 10-KSB.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I
ITEM 1. BUSINESS
BioShield Technologies, Inc. is a Georgia corporation and was organized
in 1995. The Company historically has engaged in research and development,
patent filings, regulatory issues and related activities geared towards the sale
of its retail, industrial and institutional products. Due largely to recent
Environmental Protection Agency approvals, BioShield is currently selling and
marketing primarily cleaning and deodorizing products. Many of these products
provide long-term killing action of microorganisms responsible for cross
contamination and viral contamination, along with inhibiting and controlling the
growth of over 100 viral, bacteria, fungi and yeast organisms.
On April 7, 1999, BioShield Technologies, Inc. created a subsidiary,
Allergy Superstore.com, Inc. to develop electronic commerce via the Internet.
The subsidiary subsequently changed its name to Electronic Medical Distribution,
Inc. to better describe the scope of business activities anticipated by the
subsidiary. As used in this report, the term "Company" refers to BioShield
Technologies, Inc. ("BSTI") and its majority owned subsidiary Electronic Medical
Distribution, Inc. ("eMD"). eMD integrates services for providers with a
comprehensive Internet based product and healthcare website. These services
include point of care medication management, electronic patient charting,
pharmaceutical fulfillment and pharmaceutical care services. eMD launched its
consumer and physician web site in January 2000.
As a result, BioShield currently operates in two distinct business
segments, antimicrobial and biostatic products for use within the retail and
institutional markets through BioShield and pharmaceutical healthcare via the
internet through eMD. BSTI is comprised of four business divisions for the sale,
distribution, and development of antimicrobial, biostatic, and medical related
products for the Internet, retail, industrial and institutional, and Specialty
Chemical markets.
On July 3, 2000, BioShield Technologies, Inc. announced that it would
acquire AHT Corporation and integrate AHT into its eMD.com Internet Healthcare
Subsidiary. It was expected that the combined entity would offer comprehensive
Internet clinical transaction services. On September 22, 2000 AHT Corporation
filed for protection from its creditors under Chapter Eleven of the Federal
Bankruptcy Code. As a result of the filing and previous discussions with AHT
Corporation, effective September 22, 2000, the Company has agreed to purchase
the assets of AHT Corporation for approximately $15 million -- $12 million in
cash and approximately $3 million of the Company's common stock.
On July 11, 2000, BioShield Technologies, Inc. announced that it would
acquire up to 85% of the issued and outstanding common stock of Arrow-Magnolia
Corporation for a combination of stock and cash, and integrate Arrow-Magnolia
into its professional division. Subsequently, on September 22, 2000, the parties
amended their agreement to provide for payment for the Arrow-Magnolia shares in
cash. The Company will offer $5.00 per share for up to 85% of the issued and
outstanding
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common stock of Arrow-Magnolia Corporation. The total transaction is valued at
approximately $17.5 million.
ANTIMICROBIAL BUSINESS
BioShield Technologies, Inc.'s primary focus is to exploit its
proprietary technology to become the leader in antimicrobials and biocides for
consumer, Original Equipment Manufacturing, industrial, institutional,
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-inflammation, lubricity and drug delivery
onto many surfaces without changing the dimensions or physical properties of the
modified surfaces.
BioShield Technologies, Inc. believes that its antimicrobial
technologies have properties that make its products significantly more durable,
effective and safer than currently available conventional antimicrobials,
non-antibiotics, preservatives or biocides. BioShield Technologies, Inc. also
believes that certain manufacturers who utilize its technologies will be able to
significantly improve the performance of their products and in some situations
differentiate their products in a highly competitive marketplace.
Consumer Products
BioShield Technologies, Inc. believes that significant opportunities
for revenue generation continue to exist in the mass-market retail outlets
including supermarkets, mass merchandisers, drug outlets, home improvement
centers, and selected chain specialty retailers. Household cleaners and odor
eliminator products represent a retail market value in supermarkets alone of
over $2 billion per year.
The Consumer Products Division has generated sales revenue by utilizing
its patented technology through two of three business strategies and
distribution approaches. These strategies include:
BioShield Branded Products
Private Label Products
Value Added Products
BioShield Branded Products
The Company has developed, produced, sold, and marketed distinct products under
the BioShield name as well as the OdorFree(TM)and DuraLast(TM) brands. In April
1999, the Company began shipping its OdorFree(TM) product, an odor eliminator
and fabric refresher, into its initial test markets within Texas. To date, the
OdorFree(TM) products are now available in over 20,000 retail outlets throughout
the United States.
The Company has appointed representatives throughout the United States to market
its unique blend of odor eliminator products primarily
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under the OdorFree(TM)and DuraLast(TM) brands. New products are being developed
for use on clothing and other in-home surfaces that will provide sanitization
and residual protection from the growth of microorganisms. The Company intends
to distribute these products through supermarkets and other selected outlets.
Private Label Products
The Company currently produces private and controlled brand products for a
select group of food retailers within the United States. As new products are
developed some will be made available for private label distribution,
particularly those that make non-pesticidal claims.
In addition, private label opportunities will be extended into other retail
channels such as mass merchandisers. The expansion of private label sales will
only be executed in situations where both the anticipated volume and pricing are
such that positive profitability is available.
Value Added Products
Utilization of Bioshield's patented technology in leading consumer goods offered
by other organizations represents potentially lucrative licensing revenues for
the Company . The unique attributes of BioShield's technology permit
incorporation into existing products as a value-added ingredient that imparts
anti-microbial properties to the base product. The Company has generated no
revenue to date from value-added product sales.
Consumer goods categories that offer significant potential include household
cleaners, gloves, feminine hygiene, laundry and fabric care as well as
deodorants and body washes. Many other products that benefit from an
anti-microbial claim will be added as the technology progresses.
Marketing programs for value-added products will be designed to support the
global branding strategy of BioShield. The Company intends to pursue licensing
agreements with manufacturers that the Company anticipates will contain a
marketing portion that outlines the requirements that each joint product will
bear a notification of "Protected By BioShield" or other similar awareness
building program. This extension of the Company's trademarks into categories,
products, and geographies will enhance the long term branding campaign.
However, no assurance can be given by the Company at the present time that such
a program will be launched, or that if launched, will be successful.
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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 Institutional & Industrial Division business strategy is profitable,
accretive acquisitions and organic growth. The execution of both strategies
simultaneously will provide accelerated growth within the Institutional and
Industrial market segments.
Simultaneously with the acquisition strategy, the Institutional & Industrial
Division will offer selected BioShield products to other I&I companies. This
action will occur on a restricted basis, primarily with products that do not
require E.P.A. registration.
The marketing of BioShield products with the Institutional & Industrial segments
will be consistent with the other divisions of BioShield. All products that
contain the BioShield technology will be clearly labeled. Advertising for the
Company, its technology, and its products will consist of traditional media,
printed material in high distribution trade journals, direct mail, and active,
visible participation in all appropriate industry conventions.
Specialty Chemical Division
BioShield is currently engaged in testing multiple applications of its core
technology and products with leading manufacturers, many of whom are Fortune 500
companies. The Company is committed to a value-add strategy to have our leading
antimicrobial technology incorporated into the products of these leading
manufacturers. It is BioShield's intention to produce co-branded products in the
future.
The Company has also entered into agreements with specialty chemical companies
to achieve national distribution. In September 2000, BioShield entered into an
agreement with SouthChem, Inc., a subsidiary of Brenntag, a leading chemical
distributor in the Southeast. BioShield believes there will be significant
volume in these agreements that will drive substantial revenue and licensing
growth.
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The following products have been developed for sale to the industrial
and institutional markets but have not received regulatory approval (see
"Government Regulation and Approval"). No assurances can be given that EPA
approvals will be obtained and in what time frame.
BioShield AM500
- molecular bonding additive for formulating institutional and
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
- 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
- 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 products
GOVERNMENT REGULATIONS AND APPROVAL
Filings Made With the EPA to Date and Current Applications.
In February 2000, the Company received US EPA registration for its
concentrated active ingredient, BSTI 1860. This active ingredient is highly
concentrated and is solvent based. It can be used to formulate
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microbiostatic agents and will be the Company's own source of active ingredient
for formulated BioShield products. It is manufactured by the Company and
eliminates the need to obtain this active ingredient from other registered
sources. Also in February, the EPA approved a registration for AM500 and AM500I
specific for commercial and industrial applications. The EPA approved AM500I for
use in formulating laundry additives, carpet treatment products, upholstery and
drapery treatment products to impart bacteriostatic/fungistatic activity in many
of the foregoing products and others. The EPA also approved the use of AM500
against odor causing bacteria, bacteria that causes staining and discoloration,
fungi (mold and mildew) and algae as a static agent. The EPA approved AM500 and
AM500I to be used to impart durable, bacteriostatic and fungistatic protection
to substrates for the following commercial and industrial applications:
"air filters/materials; aquarium filter material; bed sheets,
blankets and bedspreads; buffer pads (abrasive and polishing); carpets
and draperies; fiberfill; fiberglass duct board; fire hose fabric;
humidifier belts; mattress pads and ticking; men's underwear and
outerwear; non-woven disposable diapers; non-woven polyester; outerwear
apparel; 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; throw
rugs; toilet tank and seat covers; umbrellas; upholstery vacuum cleaner
bags and filters; women's hosiery; and women's intimate apparel,
concrete additive for repair and renewal of sewer pipes and manholes
and concrete sewer structures (not be used in the treatment of storm
drains").
In July 2000, the US EPA approved the Company's patented antimicrobial
for direct homeowner use applications. This allows the consumer to use AM500
within the home, bathroom and kitchen. Numerous homeowner applications have been
approved such as:
"air purification systems, tubs, glazed tiles, shower
curtains, shower stalls, washable walls, fiberglass, cabinets, floors,
window sills, bed sheets, blankets, bedspreads, socks, athletic shoes,
underwear, shoe insoles, carpeting, fabrics made of acrylic, cotton,
nylon, polyester, rayon silk, etc."
The Company is awaiting EPA approval for additional products with the
same active ingredient as AM500. These products are water-based products and
contain, 1.5%, 0.75% and 0.50% active ingredient, respectively. These products
provide bacteriostatic and fungistatic protection to substrates noted above.
They are intended for homeowner ready-to-use applications.
In September 2000, BioShield received two more US patents, for a total
of three patents, that cover certain applications of the Company's base
technology.
The Company has requested EPA approval for registration of BSTI 3651PI,
to enable it to make certain claims regarding the antimicrobial and
microbiostatic properties of the products. The Company believes BSTI 3651PI is a
unique product. Formulation of the silane-integrated system, is solvent based.
However, BSTI 3651PI provides stable aqueous solutions.
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The primary use claims, included in the application for BSTI 3651PI,
are as an active ingredient for formulating disinfectants and sanitizers for use
on hard non-porous surfaces, and as a microbiocide for use in laundry additives,
carpet treatment products, upholstery and drapery treatment products, and
treatment products, and to give surface microbiostatic treatment effective
against a wide variety of bacteria, fungi, and algae.
The strength of BSTI 3651PI lies in its intended use in sanitizers and
disinfectants. BSTI 3651PI 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, BSTI 3651PI is ideally
suited as a preservative and as active components of sanitizers and
disinfectants.
Materials treated with formulations containing antimicrobial agent BSTI
3651PI are preserved by the bacteriostatic, fungistatic and action imparted by
the active ingredient. BSTI 3651PI inhibits 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. BSTI 3651PI forms a coating on a wide variety of substrates
and microbiostatic action is exhibited on contact.
The Company intends to seek approval that BSTI 3651PI can be used for
incorporation into and treatment of the following applications to impart
durable, microbiostatic protection;
"air filters/materials; aquarium filter material; bed sheets,
blankets, and bedspreads; buffer pads (abrasive and polishing); carpets
and draperies; fiberfill; fiberglass duct board; 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; 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; 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, tubs, glazed tiles, shower curtains, shower stalls,
washable walls, fiberglass etc."
The Company also intends to seek approval on BSTI 3651PI to be used to
formulate disinfectants and sanitizers to be used on hard non-porous surfaces
such as sinks; tiles; tubs; toilets; countertops; bathroom fixtures; stoves;
exercise equipment; walls; doorknobs; telephones; garbage cans; floors;
cabinets; and shower stalls. BSTI 3651PI is intended for formulating
disinfectants and sanitizers to be used in areas such as homes, offices,
hospitals, institutions, schools, restaurants, locker rooms, medical facilities
and other like areas that are prone to bacteria and odors.
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Future Filings
The Company plans to seek approval on a modified version of its core
active ingredient. The modification of the product involves the elimination of
the highly toxic solvent (methanol). This modified active ingredient is highly
soluble, less toxic to the user during application and still delivers the
micro-biostatic properties. This would be an alternate source of active
ingredient manufactured by the Company. The Company also plans to seek approval
on a variety of end use products with disinfectant and sanitization properties.
Over the next several years, when adequately capitalized, the Company
intends to seek EPA and FDA food contact approvals for BioShield products as
preservatives 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, concrete materials,
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
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 silane based and non-silane based antimicrobial 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 surfaces new desired
properties.
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 antimicrobial and new active ingredients and formulations useful in the
markets currently providing antimicrobial products. Products range from
antimicrobial absorbents to cleaning solutions and disinfectants and household
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's 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, 2000, and 1999, the Company
incurred expenses of approximately $845,000 and $718,000, respectively,
resulting from Company-sponsored research and development activities. Research
and development is expected to remain a significant component of the Company's
business. However, the Company may abandon or de-emphasize its research and
development activities with respect to the primary development
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projects and expand research and development of other products as circumstances
warrant. The Company has contracted out a substantial part of its research and
intends to continue to do so while utilizing its staff for monitoring such
research.
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 harvested 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's antimicrobial products and the graft may be possible. The Company
believes that the unique properties of the Company's core technology may, in the
future and under certain circumstances, allow certain products based upon its
technology to form a bound protective layer that allows the grafted skin to
breathe and transport liquids, but reduce and/or prohibit the entry of
microorganisms.
Integration of the Company's products and research in the future may
lead to new skin treatment products that the Company believes may provide
effective skin condition treatment. Adverse skin conditions caused by microbes
may be 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.
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 durable or temporary. One approach in the future may be to chemically
bond currently available anti-rejection medication to the silane. 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.
Cleaning and Maintenance Products. The residual activity of the Company
products provides protection to many surfaces. Application of the products is
primarily to clean surfaces. Integration of the Company products into new
cleaning products may lead to new products providing protection to surfaces and
equipment while cleaning. These new cleaning and maintenance products will be
developed for industrial and institutional applications, for example, hospitals,
food processing plants and commercial cleaning and consumer applications, for
example, bathroom, carpet and kitchen cleaning. 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. OdorFree(TM)
is a new odor eliminator product that was recently developed which does not
require regulatory approval. The product incorporates one of BioShield's
proprietary chemical additives and is available for household use on
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upholstery, rugs and clothing. OdorFree(TM) is effective in eliminating odors,
which include odors associated with food, cigarette smoke, tobacco and fire
smoke; mold or mildew (musty), certain human body odors (on fabrics) and garbage
odors, among others. OdorFree(TM) is available in regular and extra strength.
OdorFree(TM) has been clinically tested and is hypoallergenic.
PHARMACEUTICAL HEALTHCARE BUSINESS
eMD Subsidiary
eMD's comprehensive end-to-end medication management solution incorporates
technology built on a Java-based open platform architecture and connectivity,
which serves as a foundation to our offering. The suite of products and services
for physicians and patients and connectivity includes robust functionality that
on their own provides benefits, but when combined as an overall solution may in
the future provide significant appeal to the healthcare industry. Utilization of
the solution by key trading partners results in a valuable collection of data
for analysis, which is used to complete the quality cycle for determining
appropriate utilization, ultimately improving outcomes.
Point Of Care Medication Management Solution
The Point of Care Medication Management Solution ("PMMS") is a unique solution
for ordering and filling prescriptions that reduces liability for doctors and
risk for patients. The Point of Care Medication Management Solution lies at the
center of eMD's revenue opportunities. The Company expects that revenue will
generated from transaction fees paid when a patient's prescription is
transmitted to a network pharmacy, sales of new prescriptions and refills,
over-the-counter-drugs and other health-related products.
Prescription Writing
Through eMD's browser-based internet application, physicians order prescriptions
and refills that can be filled either by the eMD on-line pharmacy or the
patient's pharmacy of choice. The prescription can be printed for the patient or
transmitted in a standardized, electronic format directly to the participating
pharmacy. The prescription writing process is designed so it adapts to the
physician's workflow, and is initiated simply by selecting a patient from the
current list. User options include a conventional desktop or laptop computer,
IBM's Edge of Network internet device ("EON") which is compact and can be
mounted in every examining room or convenient web-connected wireless palm
device, which supports mobility required by the workflow of physicians.
Drug Interaction Screening
A critically important feature is the system's ability to automatically flag for
a physician that a patient may have a drug or food interaction with a potential
prescription. If the patient is seeing more than one doctor (e.g., internist,
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cardiologist, oncologist), all prescriptions can be entered into the system to
avoid a potentially dangerous, even fatal, interaction with or between any of
the medications.
Formulary Check
Our Point of Care Medication Management Solution also has a formulary check that
assists with pre-adjudication against the benefit plan coverage. As the
prescriptions are written, the physician can automatically check medications
against health plan drug formularies. If the drug is not on that formulary, the
doctor can immediately find a comparable substitute. Pre-screening the script
for plan compliance ensures that patients benefit optimally from their plan
coverage and reduces the need for follow-up calls from the pharmacist.
Patient Education
In pursuit of improved clinical outcomes, managed care plans and regulatory
agencies are demanding that patients be educated on their condition and
medications. As a result, physicians are taking increased interest and the
necessary steps to support these activities. Using PMMS, physicians are able to
print monographs of medication information for the patient right at the time
that a prescription is written. This educational activity is documented in the
patient medical chart and reports can be generated to audit compliance with
patient education requirements of each medication prescribed.
Medication Compliance Monitoring
The system automatically tracks information necessary to manage clinical
follow-up and reminders. The eMD customer care center uses reporting tools
against the PMMS data store that assists them to proactively contact patients to
ensure that they have both received their prescriptions and are taking them
correctly. Reminder calls are made to the patient when refills are due. Because
of the end-to-end capabilities of the system, not only is the order information
tracked, but the fulfillment information is also tracked providing the
opportunity to manage appropriate utilization.
Patient History
The patient medical history feature will, in the future, provide a means for
monitoring compliance and the effectiveness of medications. The Company expects
that reporting tools will be available so that the physicians can obtain
detailed information on their prescribing patterns. These reporting tools will
assist physicians in evaluating the care of their patients and verifying
prescribing patterns against managed care and insurance plan protocols. Through
the patient history, physicians will be able to review a patient's medication
history and prescribe appropriately based on the patient's previous response to
treatment. The patient will have access the same information from a secure,
password protected section of the consumer web site.
CLINICAL SERVICES
eMD completes its solution to the physician by focusing on clinical outcomes
through our clinical services division and by offering services for education,
compliance monitoring and clinical studies awarded through grants.
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Patient Compliance Monitoring
eMD's customer care center is staffed with physicians, clinical pharmacists and
other medical professionals who are available to answer questions from patients
regarding their medications and conditions. The customer care center proactively
contacts patients to ensure that they have received their prescriptions and are
taking them correctly. If a patient is experiencing side effects or other
problems with the medication, eMD professionals contact the patient's physician.
As refills are due, a proactive call is made to remind patients of their
refills. The success of this program is instrumental in driving down healthcare
costs for providers, hospitals and insurance companies.
Grants and Sponsorships
The clinical services division provides services such as compliance monitoring,
clinical studies, clinical trials and education programs which will be sponsored
through grants from private and governmental sources, although no educational
grants have been received by the Company at the present time. After a clinical
trial is completed, the initial sponsor may continue funding for ongoing
compliance and education services related to the specific disease or medication.
The publication of these studies, additionally, underscores eMD's commitment and
credibility.
Consumer Oriented Web Site
eMD hosts a consumer healthcare web site that is chronic disease and wellness
focused. The website includes lab services, online health centers for
self-education and an online store. Promoting the physician/patient
relationship, the site gives the patient access to the same information charted
by the physician and allows for safe and convenient management of refills.
LabAmerica
LabAmerica is an internet-based medical laboratory testing service with more
than 1,400 locations nationwide. LabAmerica has three distinct focuses ---
corporate wellness and drug testing programs for employers as well as an
offering direct to consumers. Consumers seeking healthcare can now supplement
care from their physician without an office visit by ordering their own blood,
urine and other laboratory tests online with results within 24 hours. We offer
14 different tests that screen for chronic, modifiable and preventable diseases.
Health Centers
The Company's web site is filled with more than thirty health centers of content
directed to consumers either suffering from chronic diseases such as asthma,
allergies and heart disease or interested in wellness advice. eMD sees the
consumer side of its web site, including the health centers, as support for its
overall solution to the physician and the consumer. Currently,
<PAGE> 15
we do not generate revenue from the advertising on the consumer website in order
to give the physician and consumer quality, unbiased medical content. However,
medical content that is developed for our web site is licensed to other
companies for private branding.
EMD REVENUE MODEL
eMD is still in the developmental stage with little or no material level of
revenues to date. eMD anticipates that it will produce revenue from the
following sources:
POINT OF CARE MEDICATION MANAGEMENT SOLUTION
Transaction Fees
The Point of Care Medication Management solution will be strategically placed in
the physician's office where the majority of all healthcare transactions
originate. There are several sources that provide revenue opportunities for eMD
based on transaction processing. The eMD network of pharmacies will pay
transaction fees for the successful delivery of legible prescriptions and the
provision of a communication pathway that allows the pharmacy to be closely
linked with the physician's office. A bi-directional communication channel will
be created through the use of the pharmacy view of the same data captured in the
point of care solution. The pharmacist will, in the future, have the ability to
directly communicate to the physician and the clinical staff in order to request
refills and to receive important messages.
Other transactional revenue sources include Managed Care Organizations (MCOs)
and Pharmacy Benefit Managers (PBMs). These entities, although different, share
the same desire to automate the formulary and prescribing process to provide
more efficient delivery, better outcomes and in turn lower cost. Both the MCOs
and PBMs pay transaction fees for pre-authorizations (automation of the
pre-approval process for drugs off formulary or covered by special benefit
options), formulary automation, compliance initiatives, and prescription and
injectible orders.
eMD also receives transaction fees from strategic partners where automation of
desired functions are performed by eMD solutions. These include automation of
injectible orders to the managed care preferred provider or automation of a
formulary for a complex partner such as hospice organizations. In addition, the
pharmaceutical industry pays transaction fees for services associated with
driving brand product recognition to not only the physician's office but to the
consumers through compliance. The pharmaceutical industry is grappling with the
need to prove desired outcomes due to proper management of prescription
medications. eMD's ability to track and monitor compliance and subsequently
aggregate data in a publishable format is very attractive to the pharmaceutical
industry.
Transaction-based revenue streams provide a solid basis for long-term revenue.
eMD intends to aggressively solidify
<PAGE> 16
relationships with additional business partners for future growth and additional
transactions.
Prescription Sales
eMD pharmacy is an option to patients whose physicians utilize the point of care
medication management solution. The pharmacy was designed for patients'
convenience. It is most often the option of choice for patients participating in
clinical or compliance studies. Because eMD operates its own pharmacy, we are
uniquely positioned to understand the legal aspects of medication management and
can further service physicians by providing additional insight and services that
competitors do not. Currently the eMD pharmacy is licensed in 44 states and has
over 70 managed contracts covering over 167 million lives. In the states where
eMD is not licensed, we have established business partners to fill the
prescriptions. eMD derives revenue from prescriptions filled in our pharmacy.
Clinical Services Division
This area distinguishes eMD from its competitors. Healthcare experts in this
division have created unique services to extend the potential of the physician
to improve patient outcomes, while decreasing physician workload.
Patient Compliance and Clinical Study Programs
The patient compliance program involves contacts with patients to ensure that
the medication is received, is being taken correctly, there are no side effects
and also place reminder calls when refills are due. Clinical studies leverage
aspects of this compliance program but additionally monitor patient's results
when following a designated protocol that includes educational components. A
formal statistical analysis is used to summarize the results of the studies.
These programs generate revenue from charges to pharmaceutical companies and
other interested parties.
Consumer Oriented Web Site
The Company expects that the consumer web site will produce revenue from
LabAmerica, a web-based healthcare company that provides medical laboratory
testing through locations nationwide. Additionally, medical content that is
developed for our web site is licensed to other companies to compliment their
Internet strategies.
Consumer Website
eMD's web site is filled with content that is directed to consumers suffering
from chronic diseases. The web site is also designed to provide a communication
pathway between the physicians and patients. The "My Medical History" section of
the web site allows patients to view the information captured as a by-product of
prescriptions written through the point of care medication management solution.
Patients can update their physician on their current medical and
<PAGE> 17
prescription history through this secured communication channel. The web site
also features an on-line store where over-the-counter drugs can be purchased as
well as a serving as fulfillment center for prescription drugs. eMD receives
revenue from the sale of products and prescriptions through the consumer web
site.
LabAmerica
LabAmerica has three distinct focuses - corporate wellness and drug testing for
employer groups as well as a direct to consumer approach.
- A corporate wellness initiative is complemented by eMD's
ability to provide a full Internet strategy that provides an essential
ongoing educational component. A complete health risk assessment
including a full wellness panel provides the basis for ongoing
education. Employees also have the ability to self direct lab tests for
a variety of health screenings. The corporate wellness services provide
an ongoing revenue stream for eMD not only on lab transactions but also
through the licensing of content and educational programs.
- eMD also provides drug screening for corporations.
Corporations can submit their drug screening requests via their own
branded Internet site. The individual being screened can go to an
authorized collection facility of their convenience. eMD has access to
laboratory locations nationwide. eMD provides the medical review
officer who reviews and signs off on all drug screenings and returns
the results directly to the employer through their branded Internet
site. eMD derives revenue from each drug screen performed.
- LabAmerica is an Internet-based medical lab testing service.
Consumers seeking healthcare can order their own blood and urine tests
online without a trip to the doctor's office. LabAmerica is primarily
focused on disease categories that are modifiable and preventable if
diagnosed and treated early. Since many consumers are taking more
control of their healthcare, eMD believes consumers who want a quick
and efficient way to obtain information of interest or concern will
utilize LabAmerica frequently.
EMPLOYEES
The Company on June 30, 2000 had one hundred and five employees. Five of
these employees are executive officers, five are
<PAGE> 18
involved in research and development, thirty three are in marketing and sales,
thirty are in information technology, website and content development, eight are
in medical and pharmacy and twenty four are in operating, administrative and
clerical functions.
ITEM 2. PROPERTY
During fiscal year 2000, the Company, entered into a contract to lease
55,300 square feet in a free standing building in a high-tech executive office
park. The facility is located at 5655 Peachtree Parkway Norcross, Georgia. This
building contains offices, meeting rooms, computer facilities, and a pharmacy..
The Company believes that these facilities are adequate for its present and
anticipated needs. In addition, the Company currently leases a 6,900 square foot
facility which contains meeting rooms and an organic chemistry lab with a
biological storage area located at 4405 International Blvd., Suite B109,
Norcross, Georgia.
ITEM 3. LEGAL PROCEEDINGS
See Commitments and Contingency footnote attached to the Financial
Statements thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE> 19
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From September 30, 1998, the effective date of BioShield Technologies,
Inc. ("BSTI") initial public offering, to March 30, 1999, BioShield
Technologies, Inc.'s common stock was traded in the form of units which
contained two shares of common stock and two warrants under the symbol "BSTIU".
Since March 30, 1999, BioShield Technologies, Inc.'s common stock ("Common
Stock") has been publicly traded in the NASDAQ Small Cap Market on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") under
the symbol "BSTI" and its warrants have traded under the symbol "BSTIW".
Effective February 22, 2000 the Company called all outstanding publicly traded
warrants.
The following table sets forth the range of the Common Stock on NASDAQ
for the fiscal quarters indicated, as reported by NASDAQ.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH BID LOW BID
------------- -------- -------
<S> <C> <C>
September 30, 1999 ................ $15.69 $ 8.25
December 31, 1999 ................. $12.00 $ 8.50
March 31, 2000 .................... $40.00 $16.00
June 30, 2000 ..................... $18.63 $ 9.50
</TABLE>
Prices represent final daily transactions between dealers without
retail mark-up, markdown or commissions, and may not represent actual
transactions.
As of June 30, 2000, the Company had approximately 51 shareholders of
record. This does not include shareholders who hold stock in their accounts at
broker/dealers.
The Company has not paid cash dividends on its common stock in the past
and does not expect to pay a cash dividend in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
BioShield Technologies, Inc. ("BSTI") is a Georgia corporation and was
organized in 1995. The Company historically has engaged in research and
development, patent filings, regulatory issues and related activities geared
towards the sale of its retail, industrial and institutional products. BioShield
is currently selling and marketing cleaning and deodorizing products. Many of
these products provide long-term killing action of microorganisms responsible
for cross contamination and viral contamination, along with inhibiting and
controlling the growth of over 100 viral, bacteria, fungi and yeast organisms.
The Company has continued to successfully build brand recognition and market
penetration of its new "OdorFree(TM)" product line. This brand is competing in
the multi-million dollar odor elimination packaged goods category. The national
rollout is proceeding on a strategic basis by establishing its market presence
within each individual market. Currently OdorFree(TM) is sold through several
super market chains.
On April 7, 1999, the Company created a subsidiary to develop
electronic commerce via the Internet. Electronic Medical Distribution,
<PAGE> 20
Inc. ("the subsidiary", doing business as "eMD.com"), seeks to integrate four
product offerings for providers (point of care medication management, electronic
medical records, pharmaceutical fulfillment and pharmaceutical care services)
with a comprehensive Internet based product and healthcare website. eMD.com
launched its consumer and physician web site in early January 2000.
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Years Ended June 30, 2000 and 1999
The Company's revenue increased to $946,000 for the fiscal year ended
June 30, 2000, from $305,000 for the fiscal year ended June 30, 1999. The
increase was attributable to an increase in the distribution of the OdorFree(TM)
product, primarily in the mid and southwestern United States, along with the
introduction of two sizes of Hypoallergenic OdorFree(TM). The Company also
gained new market penetration in the northern and southeastern United States. As
of June 30, 2000, the Company had distributed its products in over 6,000 retail
outlets. Gross profit of $305,000 for the fiscal year ended June 30, 2000
represents 33% of net sales as compared to $116,000, or 38% of net sales, for
the fiscal year ended June 30, 1999. The decrease in gross margin is a result of
the change in product mix and packaging year over year. During the fourth
quarter of fiscal 2000, certain of the Company's customers purchased abnormally
high levels of the Company's antimicrobial products.
Cost of sales was $641,000 or 67% of sales and $189,000 or 62% of sales
for the fiscal years ended June 30, 2000 and 1999, respectively. The higher cost
of sales in fiscal 2000 was attributable to higher sales of the Hypoallergenic
OdorFree(TM) product during the period, partially offset by efficiencies
attained in the production of the Company's antimicrobial products.
The Company's research and development expenses increased to $845,000
for the year ended June 30, 2000 from $718,000 for the year ended June 30, 1999.
The increased expenses related primarily to formulation development costs of the
Company's antimicrobial products and other products under development in medical
and clinical trials combined with development cost to paid to other parties. All
related research and development expenses for the fiscal year ended June 30,
2000 were directly related to BioShield Technologies, Inc.
Web site development cost net of related amortization in the amount of
$3,761,000 were directly related to eMD.com. This includes third party
programming, software and hardware purchases which was captured and capitalized
as of June 30, 2000 with amortization of costs over a three year period.
Marketing and selling expenses increased to $6,119,000 for the year
ended June 30, 2000 from $781,000 for the fiscal year ended June 30, 1999. The
increase was attributable primarily to initial expenses in eMD and an increase
in marketing program cost and other cost associated with the antimicrobial
products. Marketing and selling expenses also increased due to an increase in
personnel and personnel related costs which is a result of the full impact of
the presence of eMD and the Company's expanded sales and marketing organization.
Marketing and selling expenses related to BioShield were $3,368,000 for the year
ended June 30, 2000, an increase of $2,587,000 from
<PAGE> 21
$781,000 incurred during the same period in the previous year. This increase
relates principally to the rollout of the OdorFree product line, repackaging
efforts and other one-time setup charges for certain retail accounts related to
slotting charges. Marketing and selling expenses related to eMD.com totaled
$2,751,000 for the year ended June 30, 2000 as compared to zero for the same
period in prior year (eMD.com began operation in April 1999). The increase is a
result of pre-selling activities targeting physicians and physician groups in
support of the new website. Significant costs include initial development of
marketing materials and costs related to continuous technological improvement
and testing of the web site.
<PAGE> 22
General and administrative expenses increased to $18,548,000 for the
year ended June 30, 2000 from $2,068,000 for the year ended June 30, 1999.
General and administration expenses for BioShield were $6,176,000, an increase
of $4,408,000 over the same period the prior year. These higher costs related
primarily to an increase in personnel and personnel related cost to improve
market share. There were no borrowings or interest expense incurred for the
fiscal year ending June 30, 2000. General and administrative expenses related to
eMD.com totaled $12,372,000 for the year ended June 30, 2000 from $300,000 for
the year ended June 30, 1999 (eMD.com began operation in April 1999). These
higher costs related to an increase in personnel and personnel related costs,
legal and regulatory fees, consulting services and facility costs.
As a result of the reasons set forth above, the Company generated a net
loss of ($24,590,000) or $(2.95) per common share for the year ending June 30,
2000 compared to a net loss of ($3,290,000) or $(0.57) per common share for the
year ended June 30, 1999. Cumulative losses from the inception of the Company to
June 30, 2000 totaled ($27,880,000) or ($3.66) per common share.
Years Ended June 30, 1999 and 1998
Fiscal year 1999 net sales of $305,000 were 34% lower than fiscal year
1998 net sales of $462,000. Sales in 1998 were higher because of initial
shipments of new products to chain store customers which created an initial
surge in sales to fill the pipeline. During 1999 sales of certain products were
suspended pending resolution of the EPA's claim that the labeling for certain
products were outside of prior EPA approvals received. This resulted in the
recall and relabeling of certain products. The Company also made initial
shipments to certain industrial customers in fiscal 1998.
Gross profit was $116,000 in fiscal year 1999, or 38% of net sales as
compared to $308,000 for fiscal year 1998, which was 67% of net sales. This
decrease was due primarily to the recall and relabeling of certain products as
required by the EPA and to a shift in product mix weighted more toward the
retail market, which traditionally has a lower profit margin than the industrial
market.
Marketing and selling expenses were $781,000 in fiscal year 1999
compared to $473,000 in fiscal year 1998. This change represents an increase of
$308,000 or 39% over fiscal 1998. The increase reflects the investment made in
additional staff and related expenses to support the retail and private label
sales program as well as an increase in advertising and media production costs
associated with the initial phases of the OdorFree(TM) product line rollout.
General and administrative expenses for fiscal 1999 were $2,068,000, a 95%
increase over fiscal 1998 expenses $1,060,000. These higher costs were primarily
due to an increase in staff and expenses associated with building the Company's
corporate infrastructure and the start-up and organization costs directly
related to eMD.com, Inc. Included in eMD.com start-up expenses was approximately
$165,000 related to web site development and $300,000 related to increased
staffing and legal costs of organization.
Research and development expenses in fiscal year 1999 were $718,000 compared
to $232,000 in fiscal 1998. The $486,000 increase
<PAGE> 23
was due to additional staff and costs associated with ongoing projects and
testing related to future EPA filings and applications.
Other income (expense) increased from $(15,000) in fiscal 1998 to
$160,000 in fiscal 1999. During fiscal 1999, the Company recognized royalty fees
of $75,000 and income from the sale of certain research and development of
$16,000. This income was the result of an exclusive sales and distribution
agreement with a third party entered into during 1998.
Interest and dividend income in fiscal 1999 was $102,000. This
represents a $99,000 increase over fiscal 1998 interest income of $4,000. The
increase was due to a larger invested cash balance as a result of proceeds from
the initial public offering completed in September, 1998.
Interest expense was $17,000 in fiscal year 1999 compared to $18,000 in
fiscal year 1998. The interest expense relates mainly to interest paid to
private note holders who loaned an aggregate of $450,000 to the Company in the
third and fourth quarters of 1998. All such notes were repaid from proceeds of
the initial public offering during the second quarter of fiscal 1999.
As a result of the reasons set forth above, the Company generated a net
loss of ($3,290,000) or ($ 0.57) per common share for the year ended June 30,
1999 compared to a net loss of ($1,472,000) or ($0.33) for the year ended June
30, 1998. The Company generated a cumulative net loss from inception to June 30,
1999 of ($5,632,000) or ($1.22) per common share.
LIQUIDITY
At June 30, 2000, the Company had cash and cash equivalents totaling
$6,173,000 compared to $2,501,000 at June 30, 1999. The increase in cash of
$3,672,000 is primarily due to redemption of the outstanding warrants attached
to the Company's initial public offering which expired February 22, 2000 for
$8,402,000, completion of convertible series A and series B preferred stock
offerings totaling $14,000,000 in January 2000 and June 2000 and a $2,000,000
put on the Company's existing equity line in May 2000. The redemption of the
publicly traded warrants, the put to the equity line of credit and the private
placement of series A and B preferred stock raised $58 million in the calendar
year 2000 to fund operations into calendar year 2001.
The Company's primary uses of cash to date have been in operating
activities to fund research and development including clinical trials, and
marketing and selling and general and administrative expenses. As of June 30,
2000, the Company's investment in equipment, website development cost and
leasehold improvement, net of depreciation and amortization was $5,778,000.
During the year ended June 30, 2000, the Company spent $5,132,000 in capital
expenditures. The Company has approximately $8 million available to draw upon at
June 30, 2000 based upon existing equity lines of credit, and an additional $ 50
million available upon the effectiveness of a registration statement covering
the issuance of additional shares.
The Company's ability to fund its operating requirements and maintain
an adequate level of working capital until it achieves positive cash flows will
depend primarily on its ability to borrow, raise capital
<PAGE> 24
in the public equity markets, and generate substantial growth in sales of its
antimicrobial products combined with transaction, prescription and internet lab
testing through its majority owned subsidiary, eMD.com.
The Company however, expects to continue to have a substantial need to
fund operating losses and the purchases of additional capital equipment for an
indefinite period. Accordingly, the Company will be required to obtain
additional capital in the near future. The development of eMD.com, as well as
commercialization of the parent company's antimicrobial products will require
additional capital. The Company is actively seeking to obtain additional funds
through public or private equity or debt funding, strategic collaborative
agreements, or from other sources. The Company's failure to generate substantial
growth in the sales of its antimicrobial and its e-commerce healthcare products;
progress in research and development programs; the cost and timing of seeking
regulatory approvals of the Company's product under development; the Company's
ability to manufacture products at an economically feasible cost; cost in
filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights and changes in economic, regulatory, or competitive
conditions or the Company's planned business could cause the Company to require
additional capital prior to obtaining positive cash flows and substantial delay
or reduction of the scope of business. In the event the Company must raise
additional capital to fund its working capital needs, it may seek to raise such
capital through loans or issuance of debt securities, issuance of equity
securities, or through private placements. Moreover, there can be no assurance
that the Company or eMD.com will be successful in its efforts to obtain
additional capital, and that capital will be available on terms acceptable to
the Company or eMD.com or on terms that will not significantly dilute the
interests of existing shareholders.
FORWARD-LOOKING STATEMENTS
When used in this form 10-KSB, the words or phrases "will likely
result", "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as to
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
YEAR 2000 ISSUES
<PAGE> 25
The Company experienced no adverse effect from the Year 2000 millennium
bug. All operations have proceeded without incident.
MANAGEMENT CHANGES
During the quarter ended March 31, 2000 the Company completed
termination negotiations with Timothy Hyerdal, former Chief Financial Officer
for BioShield Technologies. Subsequent to June 30, 2000, the Company completed
negotiations with Jacques Elfersy regarding his resignation from the Company's
Board of Directors effective June 21, 2000 and concluding his day to day
responsibilities as an employee as of August 1, 2000.
SUBSEQUENT EVENTS
On July 3, 2000, BioShield Technologies, Inc. announced that it would
acquire AHT Corporation and integrate AHT into its eMD.com Internet Healthcare
Subsidiary. It was expected that the combined entity would offer comprehensive
Internet clinical transaction services. Subsequently, AHT sued the Company and
certain of its officers alleging breach of contract and asserting damages of
approximately $ 70 million. On September 21, 2000, the Company filed its Answer
and Counterclaim. On September 22, 2000 AHT Corporation filed for protection
from its creditors under Chapter Eleven of the Federal Bankruptcy Code. In
conjunction with the filing and previous discussions with AHT Corporation, and
effective September 22, 2000, the Company has agreed to provide AHT with up to $
1.5 million in emergency financing and to purchase the assets of AHT Corporation
for approximately $15 million -- $12 million in cash and approximately $3
million of the Company's restricted common stock -- in exchange for stay and
subsequent dismissal of the lawsuit with prejudice.
On July 11, 2000, BioShield Technologies, Inc. announced that it would
acquire up to 85% of the issued and outstanding common stock of Arrow-Magnolia
Corporation for a combination of stock and cash, and integrate Arrow-Magnolia
into its professional division. Subsequently, on September 22, 2000, the parties
amended their agreement to provide for payment for the Arrow-Magnolia shares in
cash. The Company will offer $5.00 per share for each outstanding share of
Arrow-Magnolia Corporation. The total transaction is valued at approximately
$17.5 million.
In September, 2000, eMD entered into a strategic alliance with RapidRx,
an operator of closed-door pharmacies. Under the terms of the Agreement, eMD
agreed to purchase a minority interest in RapidRx, as well as provide its PMS
medication management and prescription writing services to RapidRx' pharmacies.
RapidRx has agreed to use the proceeds of eMD's investment to accelerate the
development of its pharmacy sites and to use eMD an its exclusive vendor for
electronic and wireless prescription transmission.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recently Adopted Pronouncements
In March 2000, the Emerging Issues Task Force (the "EITF") reached a consensus
on Issue No. 00-2 Accounting for Web Site Development Costs. The consensus
addresses how an entity should
<PAGE> 26
account for costs incurred to develop a web site. This consensus is effective
for fiscal quarters beginning after June 30, 2000, with earlier adoption
encouraged. The Company has adopted EITF Issue No. 00-2 for its fiscal year
ended June 30, 2000. During 2000, the Company capitalized approximately
$4,470,317 and expensed approximately $ related to web site development .
Recently Issued Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which must be adopted by July 1, 1999, with
early adoption permitted. SFAS No. 133 requires that all derivative financial
instruments be recorded as either assets or liabilities on the balance sheet and
measure those instruments at their fair value. Changes in the fair value of
derivatives will be recorded each period in earnings or other comprehensive
income, depending on whether a derivative as part of a hedge transaction and, if
it is, the type of hedge transactions. In June 1999, Statement of Financial
Accounting Standards (SFAS) No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133
was issued, amending the effective date of SFAS 133 to all fiscal quarters
beginning after June 15, 2000.
In May 2000, the EITF reached a consensus on Issue No. 00-14, Accounting for
Certain Sales Incentives. The consensus addresses when sales incentive and
discounts should be recognized and where the related revenues and expenses
should be classified in the financial statements. This consensus is effective
for reporting periods beginning after May 18, 2000.
The adoption of these two pronouncements is not expected to have a material
effect on the Company's results of operations or financial position.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are set forth on pages F-1 through F-16
attached as an exhibit to this document.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No response required.
<PAGE> 27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
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 ....................... 43 Chairman of the Board, President,
Chief Executive Officer and Director
Carl T. Garner ......................... 51 Director, Member of the Audit
and Compensation Committees
Edward U. Miller ....................... 36 Director and Chief Operating
Officer of Bioshield
Martin Savarick ........................ 61 Director, Member of the Audit
and Compensation Committees
Hugh R. Lamle .......................... 55 Director, Member of the Audit
and Compensation Committees
Geoffrey L. Faux ....................... 44 President of eMD.com
Scott Parliament ....................... 43 Chief Financial Officer, Treasurer and
Secretary
</TABLE>
Mr. Timothy C. Moses, a Director and Founder, is the Company's
Chairman, President, and Chief Executive Officer. For over a decade, Mr. Moses
has been an independent businessman and entrepreneur. 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 European Economic Community countries to the United States. Mr. Moses
is also a co-inventor of three inventions for which patent applications have
been granted 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.
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.
<PAGE> 28
Martin Savarick joined the board of directors of BioShield in 2000. He
is currently president of Savarick Consulting 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. He graduated from
Rider University in 1960 with a degree in marketing.
Edward U. Miller joined the board of directors of BioShield in January
2000 and became Chief Operating Officer of BioShield in September 2000. Mr.
Miller was the chief operating officer of Summit Marketing Services, a fully
integrated marketing company serving many Fortune 500 clients. Prior to Summit,
Mr. Miller was an investment banker with First Union Securities and Merrill
Lynch focusing on mergers and acquisitions. Before Mr. Miller's career in
investment banking, he was a tactical jet pilot in the U.S. Navy, where he
served in the Persian Gulf. Mr. Miller has a bachelor of science degree in
mathematics from the U.S. Naval Academy and a masters degree in business
administration from Harvard Business School.
Hugh. R Lamle joined the board of BioShield in 2000. Mr. Lamle is
executive vice president and a principal of M.D. Sass Investor Services, Inc.,
and is a registered investment advisor. He is also president, chief investment
officer and chief executive officer of Chase and MD Sass Partners, a joint
venture between Chase Manhattan Bank and M.D. Sass Investors. He is also a
director of coolsavings.com, a publicly traded incentive marketing company. Mr.
Lamle holds a bachelor of arts in political science and economics and a masters
degree in business administration in finance and investments from Baruch College
of the City University of New York.
Scott Parliament joined BioShield as its chief financial officer in
2000. Mr. Parliament has a 20-year track record of working with development
stage public companies, including internet start-ups. Mr. Parliament has been
the president of Internet Affinity Groups, Inc., which facilitates web-based
marketing solutions for affinity groups, and interim chief financial officer of
Consumer Financial Network, an internet financial products integrator and
subsidiary of iXL. Mr. Parliament has also held senior positions with Parlon
Ventures, Ltd., National Steel Service Center Inc. and BDO Seidman. He received
his bachelor of science degree in accounting from Ferris State University in
1980 and became a certified public accountant in 1984.
Geoffrey Faux was hired as the President of eMD in 2000. In that role,
he has responsibility for all eMD day-to-day operations, as well as
implementation of eMD's business plans and strategy. Prior to joining eMD, Mr.
Faux was the president of Orthodontic Centers of America, a New York stock
exchange listed company. Mr. Faux also brings several years of investment
banking experience to his post, including responsibility as a director of
Prudential Securities southeast investment banking group. Mr. Faux received his
masters degree in business administration from the University of Chicago.
<PAGE> 29
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, Martin Savarick is serving in Class I with a term ending
at the Company's 2000 annual meeting of shareholders, Carl T. Garner and Edward
U. Miller are serving in Class II with a term expiring at the Company's 2000
annual meeting of shareholders, and Hugh Lamle and Timothy C. Moses are serving
as Class III directors with a term expiring at the 2000 annual meeting of
shareholders. The Company currently pays 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 also reimburses all directors
for their expenses in connection with their attendance at such meetings.
The board of directors has two standing committees. The audit committee
recommends BioShield's independent auditors and reviews the results and scope of
audit and other accounting-related services provided by the auditors. Currently,
Mr. Garner, Mr. Savarick and Mr. Lamle are members of the audit committee. Mr.
Garner Mr. Savarick and Mr. Lamle are also members of the board's compensation
committee, which administers the stock option and incentive plans as well as
other executive compensation matters.
Officers are elected annually by the board of directors and serve at
the discretion of the Board.
The Company currently maintains a $1,000,000 key man life insurance
policy on the life of Mr. Moses.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth for the three years ended June 30, 2000,
compensation paid by the Company to its Chairman of the Board, Chief Executive
Officer, and Director, its former Co-Chairman of the Board, Senior Vice
President, and Director, Vice President of Sales and Marketing, and the
President of its eMD subsidiary. 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, 2000, 1999 or 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
------------------------------------
AWARDS
------------------------
ANNUAL COMPENSATION PAYOUT
------------------------------------------------ ------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
--------------------------- -------- ---------- ------- -------------- ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Timothy C. Moses........... 2000 250,000 -- 18,600 -- -- --
Co-Chairman of the Board, 1999 140,000 -- 10,000 -- 150,000 -- --
President, Chief Executive 1998 120,000 -- -- -- -- -- --
Officer and Director
Jacques Elfersy............ 2000 250,000 -- 18,600 -- -- --
Former Co-Chairman of the 1999 140,000 -- 10,200 -- 150,000 -- --
Board,
Executive, Vice President, 1998 120,000 -- -- -- -- -- --
and Director
</TABLE>
<PAGE> 30
EMPLOYMENT AGREEMENTS
The Company has entered into an Employment Agreement, dated January 1,
1998, with Mr. Moses. The agreement has an initial term commencing January 1,
1998, and expiring December 31, 2003. However, the remaining term of the
agreement will be extended automatically for one year on each July 1, beginning
July 1, 2001, so that the 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
agreement, Mr. Moses is required to devote his 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.
The agreement currently provides for a base salary at the rate of
$250,000. The base salary is then subject to increase, but not decrease, as of
January 1 of each year during the term of the agreement as determined by the
Company's Board of Directors. The 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 expressed as a percent of 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 pursuant to the matrix cannot exceed $50,000 per year.
In addition, the 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.
eMD has entered into an employment agreement with GeoffreyFaux, the
President of eMD. The Agreement has a three year term through April , 2003, and
provides for an annual salary of $ 250,000, as well as a bonus that is dependent
upon the financial performance of eMD and the achievement of certain other
milestones related to the development of eMD. The Agreement requires Mr. Faux to
devote all of his business time to the affairs of eMD, and contains certain
non-compete and no -solicitation provisions which a state court may
<PAGE> 31
determine not to enforce or only partially enforce. In addition, the Agreement
provides for the grant of a number of incentive stock options to purchase the
common stock of eMD, as well as a severance package requiring eMD to pay Mr.
Faux his then-current salary for as long as one year following his termination
without cause by the Company (as that term is defined in the Agreement).
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 board of directors
and shareholders approved the 1996 Directors Stock Option Plan in 1996 and
amended on the plan in December 1998. The incentive plan was amended by the
board of directors in December 1998 to increase the number of shares which could
be issued thereunder to 1,200,000, and subsequently amended by the Board of
Directors to further increase the number of shares issuable thereunder to
2,000,000.
<PAGE> 32
In May 1999, the Company registered the shares subject to the incentive plan
with the Commission on Form S-8.
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
2,000,000 shares of common stock for issuance pursuant to awards that may be
made under the incentive plan. Employee stock option transactions for BSTI for
the years ended June 30, 2000, are summarized as follows:
<TABLE>
<CAPTION>
Year ended
June 30, 2000
-----------------
Weighted Average
Shares price
-------- ----------------
<S> <C> <C>
Outstanding, beginning of
year 820,000 $ 5.87
. Granted 173,500 10.56
Exercised (153,000) 4.15
Forfeited (200,000) 6.30
-------- --------
Outstanding, end of year 640,500 $ 7.41
======== ========
</TABLE>
The nature, terms and conditions of awards under the incentive plan
will be determined by the board of directors compensation committee. The members
of the committee are selected by the board of directors. The current members of
the committee are Messrs. Garner, Savarick and Lamle. The incentive plan permits
the committee to make awards of common stock, incentive or non-qualified stock
options with the following terms and conditions:
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. 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.
<PAGE> 33
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 for an incentive
stock option 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 5 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 a 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. The incentive plan was amended by the board in December of
1998, to increase the total number of shares that may be issued to 1,200,000 and
to permit 5% or more shareholders/officers to participate in the plan, and
subsequently amended by the board in June 2000, to increase the total number of
shares that may be issued to 2,000,000.
<PAGE> 34
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 30, 2000 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>
PERCENT
OWNED
NAME AND ADDRESS OF
OF BENEFICIAL OWNER(1), (3) SHARES CLASS
--------------------------- --------- ---------
<S> <C> <C>
Timothy C. Moses(2)................................................... 1,662,930 19.8%
Jacques Elfersy(2).................................................... 1,407,013 16.75%
Carl T. Garner........................................................ 80,000 *
Martin Savarick....................................................... 233,291 2.8%
Edward U. Miller...................................................... 10,000 *
Hugh R. Lamle......................................................... 10,000 *
All officers and directors as a group (6 persons)..................... 3,403,234 40.51%
</TABLE>
---------------
* Less than 1%
(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 annual report
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 as of
June 30, 2000.
(2) Does not include 138,834 shares of common stock owned by each of the wives
of Messrs. Moses and Elfersy for which each of them disclaim beneficial
ownership.
(3) All Directors of the Company can receive mail and notifications at the
Company's corporate headquarters address: 5655 Peachtree Parkway, Norcross,
Georgia 30092
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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 were paid off by the Company from the proceeds of the initial
public offering.
<PAGE> 35
Upon consummation of the initial public offering, Messrs. Moses and
Elfersy received $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.
In May of 1999, the board of directors granted to each of Messrs. Moses
and Elfersy five year fully vested options to purchase 2,250,000 shares of its
subsidiary Electronic Medical Distribution, Inc. at a price of $2.00 per share.
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 unaffiliated 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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Index to Exhibits.
<PAGE> 36
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
BIOSHIELD TECHNOLOGIES, INC.
AND SUBSIDIARY
June 30, 2000 and 1999
<PAGE> 37
C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F3
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS F4
CONSOLIDATED STATEMENTS OF OPERATIONS F5
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY F6
CONSOLIDATED STATEMENTS OF CASH FLOWS F8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F10
</TABLE>
F2
<PAGE> 38
Report of Independent Certified Public Accountants
Board of Directors
BioShield Technologies, Inc.
We have audited the accompanying consolidated balance sheets of BioShield
Technologies, Inc. and Subsidiary as of June 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as, evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BioShield
Technologies, Inc. and Subsidiary as of June 30, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 2000, in conformity with
generally accepted accounting principles.
Atlanta, Georgia
September 8, 2000, except for Note O for which the date is September 22, 2000
F3
<PAGE> 39
BioShield Technologies, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,172,914 $ 2,500,561
Marketable securities 28,000 103,250
Accounts receivable 198,597 102,013
Stockholders' subscription receivable -- 4,798,750
Inventories 103,456 151,403
Prepaid expenses and other current assets 156,440 171,073
------------ ------------
Total current assets 6,659,407 7,827,050
WEB SITE DEVELOPMENT AND OTHER
PROPERTY AND EQUIPMENT, NET 5,778,388 202,400
DEPOSITS AND OTHER LONG-TERM ASSETS 96,186 194,293
------------ ------------
$ 12,533,981 $ 8,223,743
============ ============
</TABLE>
F4
<PAGE> 40
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
----------------------------------
2000 1999
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES
Contracts payable $ 1,429,254 $ --
Accounts payable 1,106,958 597,877
Officer loan payable 110,000 --
Accrued liabilities 1,209,000 195,044
Accrued compensation 905,897 58,085
Accrued interest payable -- 839
------------ -----------
Total current liabilities 4,752,109 851,845
MINORITY INTEREST 5,926,093 4,798,750
STOCKHOLDERS' EQUITY
Contributed capital
Preferred stock
Series A Convertible Preferred Stock -- --
Series B Convertible Preferred Stock 10,000,000 --
Common stock - no par value; 50,000,000 shares authorized; 8,354,073 and
6,322,315 issued and outstanding at June 30, 2000 and 1999, respectively 20,472,038 7,336,318
Additional paid-in capital 3,492,600 870,900
------------ -----------
33,964,638 8,207,218
Accumulated other comprehensive loss (77,000) (1,750)
Accumulated deficit (31,494,959) (5,632,320)
Less 35,000 shares of common stock in treasury -
at cost (536,900) --
------------ -----------
1,855,779 2,573,148
------------ -----------
$ 12,533,981 $ 8,223,743
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F5
<PAGE> 41
BioShield Technologies, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30,
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net sales $ 945,733 $ 305,336 $ 462,471
Cost of sales 640,558 188,913 154,658
------------ ----------- -----------
Gross profit 305,175 116,423 307,813
Operating expenses
Marketing and selling 6,118,677 780,566 472,945
General and administrative 18,548,682 2,067,669 1,060,417
Research and development 845,465 717,978 231,547
------------ ----------- -----------
25,512,824 3,566,213 1,764,909
------------ ----------- -----------
Loss from operations (25,207,649) (3,449,790) (1,457,096)
Other income (expense)
Royalty fees -- 75,000 --
Interest and dividend income 138,003 102,134 3,544
Interest expense -- (16,960) (18,377)
------------ ----------- -----------
138,003 160,174 (14,833)
------------ ----------- -----------
Net loss before income taxes and minority interest (25,069,646) (3,289,616) (1,471,929)
Income tax (expense) benefit -- -- --
------------ ----------- -----------
Net loss before minority interest (25,069,646) (3,289,616) (1,471,929)
Minority interest in loss of subsidiary 479,507 -- --
------------ ----------- -----------
NET LOSS (24,590,139) (3,289,616) (1,471,929)
Inducements for issuance and redemption of preferred stock (1,272,500) -- --
------------ ----------- -----------
NET LOSS APPLICABLE TO
COMMON SHAREHOLDERS $(25,862,639) $(3,289,616) $(1,471,929)
============ =========== ===========
Net loss per common share
Basic $ (3.66) $ (0.57) $ (0.33)
============ =========== ===========
Weighted average common
shares outstanding 7,066,812 5,815,191 4,395,040
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F6
<PAGE> 42
BioShield Technologies, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Common stock Preferred Stock Preferred Stock
no par value Series A Series B
-------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 4,364,421 $ 965,501 -- $ -- -- $ --
Net loss for the year ended June 30, 1998 -- -- -- -- -- --
Total comprehensive loss -- -- -- -- -- --
Proceeds from issuance of shares
under private placement offering 30,619 187,500 -- -- -- --
Stock options issued for services
rendered -- -- -- -- -- --
Contributions to capital -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 4,395,040 1,153,001 -- -- -- --
Net loss for the year ended
June 30, 1999 -- -- -- -- -- --
Unrealized loss on securities -- -- -- -- -- --
Total comprehensive loss
Proceeds from issuance of shares
under initial public offering 1,300,000 5,102,794 -- -- -- --
Proceeds from exercise of stock
warrants 612,275 1,065,523 -- -- -- --
Proceeds from exercise of stock options 15,000 15,000 -- -- -- --
Stock options issued for services rendered -- -- -- -- -- --
Compensation related to previously issued
options -- -- -- -- -- --
Contribution to capital -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 6,322,315 7,336,318 -- -- -- --
<CAPTION>
Accumulated
Additional other Common
paid-in comprehensive Accumulated stock in
capital earnings (loss) deficit treasury Total
---------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $122,400 $ -- $ (870,775) $ -- $ 217,126
Net loss for the year ended June 30, 1998 -- -- (1,471,929) -- (1,471,929)
-----------
Total comprehensive loss (1,471,929)
Proceeds from issuance of shares
under private placement offering -- -- -- -- 187,500
Stock options issued for services
rendered 156,650 -- -- -- 156,650
Contributions to capital 50,000 -- -- -- 50,000
---------- ------------ ----------- ---------- -----------
Balance at June 30, 1998 329,050 -- (2,342,704) -- (860,653)
Net loss for the year ended
June 30, 1999 -- -- (3,289,616) -- (3,289,616)
Unrealized loss on securities -- (1,750) -- -- (1,750)
-----------
Total comprehensive loss (3,291,366)
Proceeds from issuance of shares
under initial public offering -- -- -- -- 5,102,794
Proceeds from exercise of stock
warrants -- -- -- -- 1,065,523
Proceeds from exercise of stock options -- -- -- -- 15,000
Stock options issued for services rendered 95,250 -- -- -- 95,250
Compensation related to previously issued
options 121,600 -- -- -- 121,600
Contribution to capital 325,000 -- -- -- 325,000
---------- ------------ ----------- ---------- -----------
Balance at June 30, 1999 870,900 (1,750) (5,632,320) -- 2,573,148
</TABLE>
F7
<PAGE> 43
BioShield Technologies, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED
For the years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Common stock Preferred Stock Preferred Stock
no par value Series A Series B Additional
------------------- --------------------------- ------------------------- Paid-in
Shares Amount Shares Amount Shares Amount capital
------ ---------- ------------ ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999
(carried forward) 6,322,315 7,336,318 -- -- -- -- 870,900
Net loss for the year ended
June 30, 2000 -- -- -- -- -- -- --
Unrealized loss on securities -- -- -- -- -- -- --
Total comprehensive loss -- -- -- -- -- --
Proceeds from exercise of
stock warrants 1,644,236 9,053,150 -- -- -- -- --
Proceeds from exercise of
stock options 74,263 82,570 -- -- -- -- 2,161,500
Stock warrants issued for
services rendered -- -- -- -- -- -- --
Compensation related to
stock options issued -- -- -- -- -- -- 360,200
Contribution to capital -- -- -- -- -- -- 100,000
Proceeds from issuance of
shares under preferred
stock agreement -- -- 200 4,000,000 -- -- --
Conversion of preferred stock 213,259 2,000,000 (100) (2,000,000) -- -- --
Repurchase of preferred stock -- -- (100) (2,000,000) -- -- --
Repurchase of common stock -- -- -- -- -- -- --
Proceeds from issuance of
shares under equity credit
agreement 100,000 2,000,000 -- -- -- -- --
Proceeds from issuance of
shares under preferred
stock agreement -- -- -- -- 500 10,000,000 --
----------- ---------- ----------- ------------ ----------- ----------- ----------
Balance at June 30, 2000 8,354,073 $20,472,038 -- $ -- 500 $10,000,000 $3,492,600
=========== =========== =========== ============ =========== =========== ==========
<CAPTION>
Accumulated
other Common
comprehensive Accumulated stock in
earnings (loss) deficit treasury Total
--------------- ------------ --------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1999
(carried forward) (1,750) (5,632,320) -- 2,573,148
Net loss for the year ended
June 30, 2000 -- (24,590,139) -- (24,590,139)
Unrealized loss on securities (75,250) -- -- (75,250)
-------------
Total comprehensive loss (24,665,389)
-------------
Proceeds from exercise of
stock warrants -- --
-- 9,053,150
Proceeds from exercise of
stock options -- -- -- 82,570
Stock warrants issued for
services rendered -- -- -- 2,161,500
Compensation related to
stock options issued -- --
-- 360,200
Contribution to capital -- -- -- 210,000
Proceeds from issuance of
shares under preferred
stock agreement -- (251,250) -- 3,748,750
Conversion of preferred stock --
Repurchase of preferred stock -- (300,000) -- (2,300,000)
Repurchase of common stock -- -- (536,900) (536,900)
Proceeds from issuance of
shares under private placement -- -- -- 2,000,000
Proceeds from issuance of
shares under preferred
stock agreement -- (721,250) -- 9,278,750
------------ ------------- ----------- -----------
Balance at June 30, 2000 $ (77,000) $ (31,494,959) $ (536,900) $ 1,965,779
============ ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F8
<PAGE> 44
BioShield Technologies, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30,
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(24,590,139) $(3,289,616) $(1,471,929)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 984,912 28,215 14,426
Minority interest in loss of subsidiary (479,507) -- --
Issuance of stock, stock options and stock
warrants for services rendered 2,521,700 216,850 156,650
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable (96,584) 8,068 (80,787)
Inventory 47,947 6,381 (15,590)
Prepaid expenses and
other current assets 14,633 (168,573) 17,568
Deposits and other assets 98,107 (133,382) (1,107)
Increase in:
Accounts payable 509,081 288,339 140,658
Officer loan payable 110,000 -- --
Accrued liabilities and payroll 1,851,929 (79,770) 26,806
------------ ----------- -----------
Net cash used in operating activities (19,027,921) (3,123,488) (1,213,305)
------------ ----------- -----------
Cash flows from investing activities:
Capital expenditures (5,131,646) (125,904) (76,480)
Purchase of marketable securities -- (105,000) --
------------ ----------- -----------
Net cash used by investing activities (5,131,646) (230,904) (76,480)
------------ ----------- -----------
</TABLE>
F9
<PAGE> 45
BioShield Technologies, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For the years ended June 30,
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from debt -- -- 655,000
Repayment of debt -- (655,000) --
Contribution to capital 100,000 325,000 50,000
Proceeds from stock warrants exercised 9,053,150 1,065,523 --
Proceeds from stock options exercised 82,570 15,000 --
Proceeds from issuance of Series A
Preferred Stock, net 3,748,750 -- --
Redemption of Series A Preferred Stock (2,300,000) -- --
Proceeds from issuance of Series B
Preferred Stock, net 9,278,750 -- --
Proceeds from common stock issuances, net 2,000,000 5,102,794 187,500
Repurchase of common stock for the treasury (536,900) -- --
Proceeds from common stock issuances
of subsidiary, net 6,405,600 -- --
------------ ----------- ---------
Net cash provided by financing activities 27,831,920 5,853,317 892,500
------------ ----------- ---------
Net increase (decrease) in cash 3,672,353 2,498,925 (397,285)
Cash at beginning of period 2,500,561 1,636 398,921
------------ ----------- ---------
Cash at end of period $ 6,172,914 $ 2,500,561 $ 1,636
============ =========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period
for interest $ -- $ 34,498 $ --
</TABLE>
Non-cash investing and financing activities
During the year ended June 30, 2000, the Company partially financed the
development of its Website through contracts with vendors.
The accompanying notes are an integral part of these statements.
F10
<PAGE> 46
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE A - NATURE OF OPERATIONS
BioShield Technologies, Inc. ("BSTI"), was incorporated on June 1,
1995. BSTI was formed to develop, manufacture and distribute certain
antimicrobial agents and products. Patents for these new agents and
products are currently pending. BSTI is in the process of developing
distribution channels for these products throughout the United States
and internationally.
On April 27, 1999, BSTI acquired 99% of the outstanding common stock of
a newly formed entity, Allergy Superstore.com, Inc. The corporate name
of the newly acquired subsidiary was subsequently changed to Electronic
Medical Distribution, Inc. ("eMD.com"). eMD.com was formed to develop
electronic commerce via the internet integrating point of care
medication management, electronic medical records, pharmaceutical
fulfillment and pharmaceutical care services for healthcare providers.
eMD.com launched its consumer and physician web site during January
2000.
BSTI and eMD.com were formerly in the development stage and their
efforts through March 31, 2000 have been principally devoted to
organizational activities, raising capital, regulatory approvals,
research and development and further investigation into new markets.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of presentation
The consolidated financial statements include the accounts of BSTI, and
its majority-owned (92.5%) subsidiary, eMD.com (collectively, the
"Company"). All material intercompany accounts and transactions have
been eliminated in the consolidated financial statements.
2. 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.
3. Marketable securities
The Company categorizes marketable securities as available-for-sale
securities, as defined by the Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. A separate component of stockholders' equity reports
the net amount of unrealized holding gains and losses until realized.
F11
<PAGE> 47
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. 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.
5. Web site development and amortization
The Company accounts for costs incurred for the development of its web
site in accordance with Emerging Issues Task Force Issue No. 00-2,
Accounting for Web Site Development Costs. All costs incurred during
the planning stage of development are expensed. Costs related to
application and infrastructure development are generally capitalized.
Costs to operate the web site are generally expensed as incurred.
Capitalized web site development costs are amortized over 36 months.
Amortization expense related to web site costs totaled $709,300 for the
year ended June 30, 2000.
6. 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 $276,000, $28,000 and
$14,000 for the years ended June 30, 2000, 1999 and 1998, respectively.
Estimated service lives are as follows:
Office equipment 3 years
Machinery, leasehold improvements,
furniture and equipment 5-10 years
7. 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.
F12
<PAGE> 48
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. 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.
9. 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.
10. Research and development costs
The costs of research and development include, among other things,
consumable supplies and materials to be used for the development of the
Company's intended products, and the cost of testing and consulting
related to filing with the Environmental Protection Agency (EPA) and
patent filings. Research and development costs are expensed when
incurred and amounted to $845,465, $717,978 and $231,547 for the years
ended June 30, 2000, 1999 and 1998, respectively.
11. 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 $1,757,219, $597,550 and $228,192
for the years ended June 30, 2000, 1999 and 1998, respectively.
Included in advertising expense was $987,312 of slotting fees paid to
retailers or their agents for the year ended June 30, 2000. No slotting
fees were paid for 1999 and 1998. The Company expenses slotting fees as
incurred.
12. 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. Diluted loss per common share is not disclosed because the
effect of the exchange or exercise of common stock equivalents would be
antidilutive.
At June 30, 2000, options and warrants for the purchase of 1,710,781
shares of BSTI and eMD.com common stock convertible into 623,640 shares
of BSTI common stock were outstanding and are potentially dilutive.
F13
<PAGE> 49
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
13. Stock-based compensation
Financial Accounting Statement No. 123, Accounting for Stock Based
Compensation, encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock (see Note G).
14. Fair value of financial instruments
The Company's financial instruments include cash, marketable
securities, accounts receivable and accounts payable. Because of their
short maturities, the carrying amount approximates fair market value.
NOTE C - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
Raw Materials $ 85,808 $ 60,273
Work in Process -- 47,993
Finished Goods 17,648 43,137
-------- --------
$103,456 $151,403
======== ========
</TABLE>
F14
<PAGE> 50
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE D - WEBSITE DEVELOPMENT COSTS AND OTHER PROPERTY AND EQUIPMENT
Website development costs and other property and equipment consist of
the following:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
----------- ---------
<S> <C> <C>
Leasehold improvements $ 671,217 $ 33,385
Office furniture and equipment 1,503,795 125,891
Machinery and equipment 163,550 88,700
----------- ---------
Total other property and equipment 2,338,562 247,976
Less accumulated depreciation (321,191) (45,576)
----------- ---------
Net other property and equipment 2,017,371 202,400
Website development costs, net of amortization of $709,300 3,761,017 --
----------- ---------
$ 5,778,388 $ 202,400
=========== =========
</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
2009 and require the Company to pay all maintenance costs. Rent expense under
these leases was $481,592, $72,082 and $64,835 for the years ended June 30,
2000, 1999 and 1998, respectively.
Commitments under noncancelable operating leases including leases
entered into after June 30, 2000 are summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year:
<S> <C>
2001 $ 848,903
2002 803,065
2003 810,065
2004 778,956
2005 794,448
Thereafter 3,339,900
-----------
Total $ 7,375,337
===========
</TABLE>
F15
<PAGE> 51
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE E - COMMITMENTS AND CONTINGENCIES - Continued
Mergers and Acquisitions
On June 30, 2000, BSTI entered into an agreement to acquire AHT
Corporation ("AHT") and integrate AHT into its eMD.com internet
healthcare subsidiary. It was expected that the combined entity would
offer comprehensive internet clinical transaction services.
Subsequently, the agreement was amended as a result of a lawsuit filed
by AHT alleging breach of contract. See Note O. The amended agreement
is expected to be consummated during fiscal 2001.
Subsequent to year end, BSTI entered into another acquisition
agreement. See Note O.
Employment Agreements
The Company has an employment agreement with the chief executive
officer of BSTI expiring December 31, 2003. The agreement provides for
an annual base salary of $250,000, an annual performance bonus based on
a matrix of sales dollars and profit before income tax not to exceed
$50,000 per year, and a severance package in the event of termination
other than for cause or good reason as defined within the agreement.
The Company also has an employment agreement with the president of
eMD.com, expiring April 2003. The agreement provides for an annual base
salary of $250,000, a performance bonus based on financial performance
and development milestones of eMD.com, a grant of incentive stock
options to purchase shares of eMD.com common stock, and a severance
package.
Employment Termination Agreement
On June 21, 2000, the Executive Vice President and Co-Chairman of the
Board of Directors of BSTI resigned. Effective August 1, 2000, the
Company entered into a semi-retirement agreement with the former
officer. Under this agreement, the Company must pay the former officer
$25,000 upon execution of the agreement, $30,833 per month for twelve
months, followed by $20,833 per month for thirty months for consulting
services to be rendered over the term of the agreement. Additionally,
the Company must provide health, dental, life insurance and disability
benefits on the same basis as he received prior to his resignation and
an automobile allowance of $1,500 per month and a stipend of $1,500 per
month for an executive suite for 42 months. Furthermore, the former
officer will receive options to purchase 150,000 shares of BSTI common
stock at $24.414 per share.
Contracts Payable
The Company has contracts payable to two vendors for website
development costs. Payments of $121,186 are payable monthly to one
vendor through March 2001. Payments of $100,000 are payable monthly to
the other vendor through January 2001.
F16
<PAGE> 52
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE F - PREFERRED STOCK
BSTI has 10,000,000 authorized shares of preferred stock, in
accordance with its Articles of Incorporation. During the year ended
June 30, 2000, 200 shares were designated as Series A Convertible
Preferred Stock ("Series A") and 500 shares were designated as Series
B Convertible Preferred Stock ("Series B"). Both Series A and Series B
have a stated value of $20,000 per share, convey no voting rights and
are convertible into BSTI common stock at the options of the holder.
The Series A conversion rate is based on 80% of the average market
price of BSTI common stock twenty days preceding the conversion date
and provides for a 4% cumulative return. The Company may redeem Series
A shares at 105% of the stated value within 30 days of issuance, at
110% of the stated value from 31 to 120 days of issuance, and at 120%
of stated value thereafter. The Series B conversion rate is based on
the lesser of $19.70 per share or 90% of the lowest average market
price of BSTI common stock for any three days in any ten consecutive
trading days preceding the conversion date and provides for a 5%
cumulative return.
In January 2000, 200 shares of Series A were issued for $3,748,750. In
April 2000, BSTI redeemed 100 of these shares for $2,300,000. The
remaining 100 shares were converted into 213,250 shares of BSTI common
stock in June 2000. The discount on issuance and the excess of the
redemption price over the carrying amount are included in the statement
of operations as an increase in the loss applicable to common
shareholders.
In June 2000, 500 shares of Series B were issued for $9,278,750 and
are convertible until June 14, 2003. As of June 30, 2000, 500 shares
are outstanding. The discount on issuance is included in the statement
of operations as an increase in the loss applicable to common
shareholders.
NOTE G - STOCK OPTIONS AND WARRANTS
The Board of Directors of BSTI has approved two stock options plans.
Under the 1997 Stock Incentive Plan, the Company may grant options to
officers and key employees for up to 1,200,000 shares of common stock.
This plan provides for the expiration of options ten years from the
date of grant, with the exception of options issued to an over 10%
owner, for which expiration is five years from the date of grant. The
exercise price of options granted must equal at least 100% of the
market value, or 110% of the market value for over 10% owners, on the
date granted. Under the 1996 Directors' Stock Option Plan, the Company
may grant options to directors of the Company for up to 1,000,000
shares of common stock. This plan provides for options to be
immediately exercisable and provides for the expiration of options
five years from the date of grant. Options are granted at market value
at the date of grant.
F17
<PAGE> 53
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE G - STOCK OPTIONS AND WARRANTS - Continued
Employee stock option transactions for BSTI for the years ended June
30, 2000, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
June 30, 2000 June 30, 1999 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
year 820,000 $ 5.87 90,000 $ 1.67 60,000 $ 2.00
Granted 173,500 10.56 745,000 6.27 30,000 1.00
Exercised (153,000) 4.15 (15,000) 1.00 - -
Forfeited (200,000) 6.30 - - - -
--------- ------- --------- ------- ------- ------
Outstanding, end of year 640,500 $ 7.41 820,000 $ 5.87 90,000 $ 1.67
======== ======= ========= ======= ======= =======
Options exercisable at year end 612,000 410,000 90,000
Weighted average fair value of
options granted during the
year $ 7.76 $ 3.15 $ 3.83
</TABLE>
The following table summarizes information about employee stock
options for BSTI outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted Weighted
Range of Number Average Average Number Weighted
Exercise Outstanding at Contractual Exercise Exercisable at Average
Price June 30, 2000 Life (Years) Price June 30, 2000 Exercise Price
---------- ------------- ------------ ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.00 15,000 2.50 $ 1.00 15,000 $ 1.00
2.00- 3.00 360,000 2.94 2.78 360,000 2.78
5.00 42,000 2.86 5.00 42,000 5.00
5.75-10.00 35,000 4.11 8.40 25,000 7.96
11.00-20.00 172,500 4.13 16.53 170,000 16.60
22.00-31.50 16,000 4.70 23.51 - -
------- ---- ------- ------- ------
640,500 3.35 $ 7.41 612,000 $ 6.94
======= ==== ======= ======= ======
</TABLE>
F18
<PAGE> 54
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE G - STOCK OPTIONS AND WARRANTS - Continued
The Board of Directors of eMD.com has approved two employee stock
options plans. Under the 1999 Equity Incentive Plan, the Company may
grant options to officers and key employees of eMD.com or BSTI for up
to 4,500,000 shares of common stock of eMD.com. This plan provides for
the expiration of options ten years from the date of grant, with the
exception of options issued to an over 10% owner, for which expiration
is five years from the date of grant. The exercise price of options
granted must equal at least 100% of the market value, or 110% of the
market value for over 10% owners, on the date granted. This plan also
allows for non-qualified stock options to be issued at an exercise
price not less than 85% of fair market value on the date of grant.
Under the 1999 Directors' Stock Option Plan, the Company may grant
options to directors of the Company for up to 2,000,000 shares of
common stock of eMD.com. This plan provides for initial option grants
to be immediately exercisable and subsequent grants to be exercisable
equally over twelve months, and provides for the expiration of options
ten years from the date of grant. The plan requires all options to be
granted at an exercise price equal to market value at the date of
grant.
Employee stock option transactions for eMD.com for the years ended
June 30, 2000, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
June 30, 2000 June 30, 1999 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 4,650,000 $ 2.00 - $ - - $ -
Granted 1,996,750 4.59 4,650,000 2.00 - -
Exercised (155,000) 4.19 - - - -
Forfeited - - - - - -
---------- ------ ---------- ------- ------- ------
Outstanding, end of year 6,491,750 $ 2.75 4,650,000 $ 2.00 - $ -
========== ====== ========== ======= ======= ======
Options exercisable at year end 4,650,000 4,650,000 -
Weighted average fair value of
options granted during the
year $ 3.99 $ 0.001 $ -
</TABLE>
F19
<PAGE> 55
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE G - STOCK OPTIONS AND WARRANTS - Continued
The following table summarizes information about employee stock
options for eMD.com outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------
Weighted Weighted
Range of Number Average Average Number Weighted
Exercise Outstanding at Contractual Exercise Exercisable at Average
Price June 30, 2000 Life (Years) Price June 30, 2000 Exercise Price
---------- ------------- ------------ --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.00 4,680,000 3.84 $ 2.00 4,680,000 $ 2.00
4.67 1,811,750 4.67 4.71 - -
--------- ---- ------ --------- ------
6,491,750 4.08 $ 2.75 4,680,000 $ 2.00
========= ==== ====== ========= ======
</TABLE>
The Company follows the practice of recording amounts received upon
the exercise of certain options by crediting common stock. No charges
are reflected in the statements of operations as a result of the grant
or exercise of options to or by employees. The Company realizes an
income tax benefit from the exercise of certain stock options and the
exercise and early disposition of the shares acquired via certain
other stock options. This benefit results in a reduction to income
taxes payable and an increase to additional paid-in capital.
The Company uses the intrinsic value method in accounting for stock
options issued to employees and directors. In applying this method,
compensation cost of $360,200, $61,250, and $116,250 has been
recognized for the years ended June 30, 2000, 1999 and 1998,
respectively. Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates for awards under
those plans, the Company's net loss and loss per share would have
resulted in the pro forma amounts indicated below:
<TABLE>
<CAPTION>
June 30, 2000 June 30,1999 June 30, 1998
-------------- ------------ -------------
<S> <C> <C> <C> <C>
Net loss applicable As reported $ (25,862,639) $ (3,291,366) $ (1,471,929)
to common Adjustment related to BSTI (2,158,507) (754,271) -
shareholders Adjustment related to eMD.com (1,887,407) - N/A
--------------- -------------- -------------
Pro forma $ (29,908,553) $ (4,045,637) $ (1,471,929)
=============== ============== =============
Basic net loss
per common
share As reported $ (3.66) $ (0.57) $ (0.33)
Adjustment related to BSTI (0.30) (0.13) -
Adjustment related to eMD.com (0.27) - -
--------------- -------------- -------------
Pro forma $ (4.23) $ (0.70) $ (0.33)
=============== ============== =============
</TABLE>
F20
<PAGE> 56
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE G - STOCK OPTIONS AND WARRANTS - Continued
The fair values were estimated using the Black Scholes options-pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
June 30, 2000 June 30,1999 June 30, 1998
-------------- ------------ -------------
<S> <C> <C> <C>
BSTI
Expected dividend yield 0.0% 0.0% 0.0%
Expected price volatility 85.20% 84.96% 84.96%
Risk-free rate of return 7.0% 6.5% 6.5%
Expected life of options 3.0 years 3.0 years 3.0 years
eMD.com
Expected dividend yield 0.0% 0.0% N/A
Expected price volatility 122.00% 1.00% N/A
Risk-free rate of return 7.0% 6.5% N/A
Expected life of options 5 years 3 years N/A
</TABLE>
Stock Options Issued to Non-Employees
During the years ended June 30, 1996 and 1998, BSTI issued options to
purchase 180,000 shares of common stock of BSTI at an exercise price
of $5.00 per share to three members of its advisory board. These
options are exercisable as of June 30, 2000. Compensation cost of
$40,400 and $121,600 has been recognized in the accompanying financial
statements for the years ended June 30, 1999 and 1998, respectively.
No options were issued to advisory board members during the year ended
June 30, 2000.
During the year ended June 30, 1999, BSTI issued options to purchase
4,000 shares of common stock at an exercise price of $8.94 per share
and 4,000 shares of common stock at an exercise price of $14.81 per
share to a non-employee for consulting services. These options vest
one year from the grant date and expire five years from the grant
date. Consulting expense of $34,000 has been recognized for the year
ended June 30, 1999 related to these options.
During the year ended June 30, 1999, eMD.com issued options to
purchase 90,000 shares of common stock of eMD.com at an exercise price
of $2.00 per share to three members of its medical advisory board. The
options vest immediately and expire five years from the date of grant.
No options were issued to medical advisory board members during the
year ended June 30, 2000.
F21
<PAGE> 57
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE G - STOCK OPTIONS AND WARRANTS - Continued
Warrants
In connection with a private placement offering during the year ended
June 30, 1998, warrants for the purchase of 490,000 shares of BSTI
were issued with an exercise price ranging from $5.00 to $5.25
expiring April 2003. Also, during the year ended June 30, 1998,
warrants for the purchase of 18,750 shares of BSTI were issued in
connection with other private placement offerings. These warrants have
a five-year term and an exercise price of $0.50.
In connection with its initial public offering during the year ended
June 30, 1999, warrants for the purchase of 1,365,000 shares of BSTI
were issued with an exercise price ranging from $6.00 to $7.50
expiring September 2003.
In connection with the issuance of Series B Convertible Preferred Stock
during the year ended June 30, 2000, warrants for the purchase of
79,281 shares of BSTI were issued with an exercise price of $18.92
expiring June 14, 2000.
During the year ended June 30, 2000, warrants for the purchase of 375,000
shares of BSTI were issued for services rendered in lieu of cash with
exercise prices ranging from $5.00 to $17.00 expiring July and August
2004. Consulting expense of $1,923,900 has been recognized for the year
ended June 30, 2000 related to these warrants.
Stock warrant transactions for BSTI for the years ended June 30, 2000,
1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
June 30, 2000 June 30, 1999 June 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Outstanding, beginning of year 1,890,977 1,138,252 629,502
Granted 454,281 1,365,000 508,750
Exercised (1,458,586) (612,275) -
Forfeited (4,391) - -
------------- ------------- ------------
Outstanding, end year 882,281 1,890,977 1,138,252
============= ============= ============
</TABLE>
During the year ended June 30, 1999, warrants for the purchase of
100,000 shares of eMD.com common stock were issued with an exercise
price of $5.126 expiring June, 2004.
In connection with the issuance of BSTI's Series A Convertible
Preferred Stock during the year ended June 30, 2000, warrants for the
purchase of 200,000 shares of eMD.com common stock were issued with an
exercise price of $5.126 expiring January, 2005.
F22
<PAGE> 58
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE G - STOCK OPTIONS AND WARRANTS - Continued
During the year ended June 30, 2000, warrants for the purchase of
60,000 shares of eMD.com were issued with an exercise price of $5.126
expiring June 2004, for services rendered. Consulting expense of
$237,600 has been recognized for the year ended June 30, 2000 related
to these warrants.
During the year ended June 30, 2000, warrants for the purchase of
10,098 shares of eMD.com common stock were issued with an exercise
price of $5.00 expiring May 2002, for goods received. Fixed assets of
$50,490 has been capitalized for the year ended June 30, 2000 related
to these warrants.
Stock warrant transactions for eMD.com for the years ended June 30,
2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
Year ended Year ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Outstanding, beginning of year 100,000 --
Granted 270,098 100,000
Exercised -- --
Forfeited -- --
---------- ----------
Outstanding, end year 370,098 100,000
========== ==========
</TABLE>
NOTE H - INCOME TAXES
The following is a summary of the significant components of the
Company's deferred income tax assets which are reduced to zero by a
related valuation allowance:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Operating loss carryforwards $ 10,146,000 $ 1,867,560
Payroll tax accruals -- 121,080
Options for services 1,147,000 142,234
------------ ------------
Gross deferred tax assets 11,293,000 2,130,874
Deferred tax asset valuation allowance (11,293,000) (2,130,874)
------------ ------------
Net deferred income tax asset $ -- $ --
============ ============
</TABLE>
F23
<PAGE> 59
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE H - INCOME TAXES - Continued
The income tax provisions for the years ended June 30, 2000, 1999 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 the 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, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Income tax benefit at applicable Federal rate of 34% $ 9,078,000 $ 1,118,469 $ 500,456
State tax benefit, net of Federal income tax effect 107,000 131,585 58,877
Other (22,874) (3,939) (1,638)
9,162,126 1,246,115 577,695
Increase in deferred income tax asset valuation allowance (9,162,126) (1,246,115) (577,695)
------------ ------------ ------------
Net income tax benefit $ -- $ -- $ --
============ ============ ============
</TABLE>
At June 30, 2000, the Company had net operating loss carryforwards for
U.S. income tax purposes of approximately $26,700,000 available to
reduce future taxable income. These loss carryforwards will expire in
fiscal years 2004 through 2020.
The Company experienced a change in control, as defined under Section
382 of the Internal Revenue Code, during 1999. As a result, the
utilization of the net operating losses that expire in 2019 and prior
will be limited to a maximum amount annually as defined by the Internal
Revenue Code. As a result of these limitations, a significant portion
of the tax loss carryforwards could expire unused.
NOTE I - SIGNIFICANT CUSTOMERS
During 1997, the Company entered into sales agreements with two
customers that included provision for certain exclusive marketing rights and
preferential payment terms. The customers terminated these agreements during
1999. Sales to four customers totaled approximately $270,000 or 26% of total
sales during the year ended June 30, 2000. Sales to four customers totaled
approximately $185,000 or 61% of total sales for the year ended June 30, 1999.
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 the periods presented.
F24
<PAGE> 60
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE J - NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Pronouncements
In March 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus on Issue No. 00-2 Accounting for Web Site Development Costs.
The consensus addresses how an entity should account for costs incurred
to develop a web site. This consensus is effective for fiscal quarters
beginning after June 30, 2000, with earlier adoption encouraged. The
Company has adopted EITF Issue No. 00-2 for its fiscal year ended June
30, 2000. During 2000, the Company capitalized approximately $4,470,000
and expensed approximately $3,330,000 related to web site development.
Recently Issued Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities, which must be
adopted by July 1, 1999, with early adoption permitted. SFAS No. 133
requires that all derivative financial instruments be recorded as
either assets or liabilities on the balance sheet and measure those
instruments at their fair value. Changes in the fair value of
derivatives will be recorded each period in earnings or other
comprehensive income, depending on whether a derivative as part of a
hedge transaction and, if it is, the type of hedge transactions. In
June 1999, Statement of Financial Accounting Standards (SFAS) No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133 was issued, amending
the effective date of SFAS 133 to all fiscal quarters beginning after
June 15, 2000.
In May 2000, the EITF reached a consensus on Issue No. 00-14,
Accounting for Certain Sales Incentives. The consensus addresses when
sales incentives and discounts should be recognized and where the
related revenues and expenses should be classified in the financial
statements. This consensus is effective for reporting periods beginning
after May 18, 2000.
The adoption of these two pronouncements is not expected to have a
material effect on the Company's results of operations or financial
position.
F25
<PAGE> 61
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE K - SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131
Disclosures About Segments of an Enterprise and Related Information,
which was adopted by the Company during 1999.
BSTI operates primarily in the antimicrobial and biostatic products
segment. During 1999, the Company established a subsidiary, eMD.com
which operates in the pharmaceutical distribution segment via the
internet.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each business requires different technology and marketing
strategies. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. The
Company evaluates performance based on gross profit.
Sales to significant customers reported in Note I relate to the
antimicrobial and biostatic products segment only.
The following tables provide summarized information concerning the Company's
reportable segments.
<TABLE>
<CAPTION>
Antimicrobial
and Biostatic Pharmaceutical
Products Distribution Total
------------- -------------- ------------
<S> <C> <C> <C>
Year ended June 30, 2000
Revenues from products/services $ 935,559 $ 10,064 $ 945,733
Gross profit 303,298 1,877 305,175
Segment profit (loss) (10,024,758) (14,565,381) (24,590,139)
Interest income 60,478 73,908 134,386
Interest expense -- -- --
Depreciation and amortization 77,477 907,435 984,912
Segment assets 818,847 11,715,134 12,533,981
</TABLE>
F26
<PAGE> 62
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE K - SEGMENT INFORMATION - Continued
<TABLE>
<S> <C> <C> <C>
Year ended June 30, 1999
Revenues from products/services $ 305,336 $ -- $ 305,336
Gross profit 116,423 -- 116,423
Segment profit (loss) (2,824,391) (465,225) (3,289,616)
Interest income 102,134 -- 102,134
Interest expense 16,960 -- 16,960
Depreciation and amortization 26,857 1,358 28,215
Segment assets 3,239,449 4,984,284 8,223,743
</TABLE>
For the year ended June 30, 1998, all operations and assets related to
the antimicrobial and biostatic products segment.
NOTE L - RELATED PARTY TRANSACTIONS
At June 30, 2000, the Company owed $110,000 to an officer and principal
shareholder of the Company. This officer loan payable is non-interest
bearing and is due on demand.
During 1999, the Company signed an agreement with a third party vendor
to develop the eMD.com website. Pursuant to the agreement, the vendor
received 600,000 shares of eMD.com common stock during the first
quarter of fiscal 2000. The Company has paid this vendor/shareholder
$1,605,930 and $ -0- during the years ended June 30, 2000 and 1999,
respectively, related to website development costs. At June 30, 2000,
$969,488 is due to this vendor. The amount is classified as "Contracts
Payable".
At June 30, 1999, the Company had $79,667 due from related parties
included in accounts receivable.
During 2000, a principal stockholder contributed $100,000 to additional
paid-in capital of the Company without further consideration. During
1999, two principal shareholders contributed $325,000 to additional
paid-in capital of the Company without further consideration. In June
1998, a principal stockholder contributed $50,000 to additional paid-in
capital of the Company without further consideration.
F27
<PAGE> 63
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE L - RELATED PARTY TRANSACTIONS - continued
During 1998, the Company entered an exclusive sales and distributorship
agreement with a related party. Under this agreement, the Company
receives royalty payments based on the level of sales of its products
made by the distributor. Royalty payments are subject to an annual
minimum amount. In addition, the distributor has agreed to pay the
Company $50,000 in monthly installments over two years to be used by
the Company to continue its research and development of products,
product improvement and patent execution. Payments related to this
agreement did not begin until 1999. The Company recorded $75,000
related to royalties which is reported as royalty fees in the financial
statements. The Company recorded income of $16,667 related to research
and development under this agreement which has been netted against
research and development expense in the accompanying financial
statements.
NOTE M - FORMATION OF ELECTRONIC MEDICAL DISTRIBUTION, INC.
On April 27, 1999, the Company acquired 99% of the outstanding common
stock of a newly formed entity, Allergy Superstore.com, Inc. The
corporate name of the newly acquired subsidiary was subsequently
changed to Electronic Medical Distribution, Inc. (eMD.com). On June 30,
1999, eMD.com, BSTI, and certain investors entered into a securities
purchase agreement whereby eMD.com would sell up to an aggregate of
3,218,884 shares of common stock to the investors at a price of $4.67
per share. As of June 30, 1999, investors had purchased 1,070,664
shares for an aggregate purchase price of $5,000,000 under this
agreement. The net proceeds of $4,798,750, which were received from
escrow on July 6, 1999, are included in current assets under the
caption Stockholder subscription receivable at June 30, 1999. In
connection with the purchase of stock, the investors also received
warrants for the purchase of 100,000 shares of eMD.com common stock at
an exercise price of $5.126 per share. These warrants have a five year
term. At June 30, 2000 and 1999, there were 29,951,178 and 29,070,664
of issued and outstanding shares of eMD.com, respectively.
The securities purchase agreement provides for a conversion feature
which allows the holder of eMD.com common stock to exchange their
shares for BSTI common stock at a predetermined exchange rate provided
eMD.com has not consummated an initial public offering within twelve
months of the purchase of stock under this agreement. BioShield has
reserved the number of shares of common stock needed in connection with
the conversion right and warrants issued by eMD.com. At June 30, 2000
there were 1,284,797 shares of eMD.com common stock representing
$5,458,750 of minority interest that included the conversion feature
noted above. Because this portion of the minority interest is
guaranteed by means of conversion into BSTI common stock, there was no
reduction of this portion of minority interest as a result of eMD.com's
loss for the year.
eMD.com has also granted options for the purchase of 4,740,000 shares
of common stock pursuant to various stock options plans to members of
its board of directors and members of its advisory board. All options
have a 5 year term and an exercise price of $2.00 per share.
F28
<PAGE> 64
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE N - PRIVATE EQUITY CREDIT AGREEMENTS
On June 30, 1999, BSTI entered into an equity agreement with an
investor whereby the Company may issue and sell to the investor, from
time to time, up to $6,250,000 of BSTI's common stock. Subsequently,
this agreement was amended to increase the issuance limit to
$10,000,000 of BSTI's common stock.
Pursuant to the agreement, the Company may exercise a put by giving
notice to the investor of the investment amount that the Company
intends to require the investor to purchase. The number of shares which
the investor will receive is determined by dividing the investment
amount by the purchase price, determined as the market price of the
common stock on the date that the notice of the put is delivered to the
investor less 20% of the market price. Unless the Company obtains
requisite approval of its shareholders in accordance with the corporate
laws of the State of Georgia and the applicable rules of NASDAQ, no
more than 19.99% of the outstanding common stock may be issued and sold
under this agreement.
The Company must reserve at all times the maximum number of common
shares to enable the Company to issue a sufficient number of shares
having an aggregate purchase price of the lesser of $10,000,000 or
number of shares having an aggregate purchase price of the lesser of
$10,000,000 less the number of shares actually delivered under the
agreement. Additionally, the average market bid prices for the twenty
trading days preceding the Company's notice to put the shares to the
investor must equal or exceed $1.00 per share.
On June 14, 2000, BSTI entered into another equity agreement with the
same investor whereby the Company may issue and sell to the investor,
from time to time, up to $50,000,000 of BSTI's common stock.
This agreement has terms similar to the $10,000,000 agreement with the
following exceptions. The purchase price for the put is determined as
the market price of the common stock on the date that the notice of the
put is delivered to the investor less 10% of the market price. The
aggregate average daily trading volume must equal or exceed $500,000
and the average of the market bid prices must equal or exceed $7.50 per
share for the ten trading days immediately preceding both the date of
the Company's notice to put the shares to the investor and the date of
the closing of the sale of shares to the investor.
As of June 30, 2000, the Company has put 100,000 shares to the investor
under these agreements. At June 30, 2000, the Company had $58,000,000
available under these agreements subject to the terms therein. Also,
the Company has reserved 2,500,000 shares of BSTI common stock at June
30, 2000 related to these agreements.
As of June 30, 1999, the Company had not put any shares under these
agreements.
F29
<PAGE> 65
BioShield Technologies, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE O - SUBSEQUENT EVENTS
Litigation
ON SEPTEMBER 7, 2000, AHT CORPORATION FILED SUIT AGAINST THE COMPANY
AND CERTAIN OF ITS OFFICERS ALLEGING BREACH OF CONTRACT RELATED TO THE
JUNE 30, 2000 ACQUISITION AGREEMENT (SEE NOTE E) AND ASSERTING DAMAGES
OF $70,000,000. ON SEPTEMBER 21, 2000, THE COMPANY FILED ITS ANSWER AND
COUNTERCLAIM. ON SEPTEMBER 22, 2000, AHT FILED FOR PROTECTION FROM ITS
CREDITORS UNDER CHAPTER ELEVEN OF THE FEDERAL BANKRUPTCY CODE. ALSO, ON
SEPTEMBER 22, 2000 THE COMPANY ENTERED INTO A REVISED ASSET PURCHASE
AGREEMENT WITH AHT, PURSUANT TO WHICH THE COMPANY HAS AGREED TO
PROVIDE AHT WITH UP TO $1,500,000 IN EMERGENCY FINANCING AND TO
PURCHASE THE ASSETS OF AHT FOR APPROXIMATELY $12,000,000 IN CASH AND
$3,000,000 IN BSTI'S COMMON STOCK. IN EXCHANGE, AHT HAS AGREED TO STAY
LITIGATION AND SUBSEQUENTLY DISMISS THE SUIT WITH PREJUDICE. THIS ASSET
PURCHASE AGREEMENT IS SUBJECT TO THE APPROVAL OF THE BANKRUPTCY COURT.
Mergers and Acquisitions
On July 7, 2000, BSTI entered into an agreement to acquire up to 85% of
the issued and outstanding common stock of Arrow-Magnolia Corporation
("Arrow-Magnolia") for a combination of cash and BSTI common stock and
to integrate Arrow-Magnolia into its professional division. On
September 22, 2000 BSTI and Arrow-Magnolia amended the agreement to
allow BSTI to purchase up to 85% of the issued and outstanding
Arrow-Magnolia common stock for $5.00 per share in cash. The total
transaction is valued at approximately $17,500,000. The agreement is
expected to be consummated during fiscal 2001.
Loan Agreement
On September 22, 2000, the Company entered into a loan agreement with a
financial institution. The agreement provides for a term loan in the
principal sum of $14,000,000 bearing interest at 9.50% per annum and
maturing on September 23, 2001. The loan is secured by an assignment of
3,000,000 shares of restricted, unregistered common stock of BSTI owned
by eMD.com.
F30
<PAGE> 66
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BioShield Technologies, Inc.
Date: September 28, 2000
/s/ TIMOTHY C. MOSES
--------------------------------------------
TIMOTHY C. MOSES
President and Chief Executive Officer
Date: September 28, 2000
/s/ SCOTT PARLIAMENT
--------------------------------------------
Scott Parliament
(Chief Financial Officer)
A-67
<PAGE> 67
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
10.113 Employment Agreement between the Company and Edward U. Miller dated
August 18, 2000
10.114 Employment Agreement between eMD and Denean Rivera dated July 23,
2000
10.115 Semi-Retirement Agreement between the Company and Jacques Elfersy
dated August 1, 2000
10.116 Agreement and Plan of Merger by and among the Company, AHT
Corporation and AHT Acquisition Corp, dated June 30, 2000,
incorporated by reference to Exhibit 2.1 to the form S-4 filed by
the Company with the Commission on August 3, 2000.
10.117 Acquisition Agreement between the Company and Arrow-Magnolia
International, Inc. dated July 7, 2000
10.118 Amendment to Acquisition Agreement between Arrow Magnolia and the
Company dated September 22, 2000
10.119 DIP Financing, Escrow and Settlement Agreement by and between the
Company, AHT Corporation and AHT Acquisition Corp., dated September
22, 2000
10.120 Asset Purchase Agreement by and between AHT Corp and the Company
dated September 22, 2000
10.121 Irrevocable collateral assignment of Common Stock and loan agreement
by and between Electronic Medical Distribution, Inc. and The Corey -
Channing Trust dated September 22, 2000
23.1 Consent of Independent Auditors
27 Financial Disclosure Schedules (For SEC use only)
</TABLE>
A-68
