<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
March 20, 1996
Innotech, Inc.
(exact name of registrant as specified in its charter)
Delaware 0-27746 54-1560349
(State or other (Commission File No.) (IRS Employee
jurisdiction of Identification No.)
incorporation)
5568 Airport Road, Roanoke, Virginia 24012
(Address of principal executive (Zip code)
offices)
Registrant's telephone no., including area code: (540) 362-2020
TOTAL NUMBER OF PAGES: 26
<PAGE>
ITEM 5. OTHER EVENTS.
Following the consummation of the public offering of 3,000,000 shares of
Common Stock of Innotech, Inc. (the "Company") on March 20, 1996, the
Company's independent auditors updated their February 9, 1996 independent
auditors' report to February 9, 1996, except as to Note 14, which is as of
March 20, 1996, on the Company's balance sheets as of December 31, 1994 and
1995, and the related statements of loss, stockholders' equity (deficit) and
cash flows for each of the years in the three-year period ended December 31,
1995, which appeared in the Prospectus of the Company, dated March 14, 1996
(the "Prospectus"). The Prospectus was filed with the Securities and Exchange
Commission on March 15, 1996, pursuant to Rule 424(b) promulgated under the
Securities Act of 1933, as amended. The updated independent auditors' report
removes an explanatory paragraph relating to the Company's ability to continue
as a going concern. In addition, Note 14 to the Company's financial statements
included in the Prospectus has been revised to remove the discussion of
management's plans regarding the Company's ability to continue as a going
concern. Note 14 now reflects that the Company consummated a public offering
of 3,000,000 shares of its Common Stock on March 20, 1996. Other than the
change discussed above, there were no other substantive changes to the
financial statements or notes to the Company's financial statements included
in the Prospectus.
The independent auditors' report, as updated, and the financial statements,
as revised, are set forth below:
2
<PAGE>
INNOTECH, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. 4
Financial Statements:
Balance Sheets as of December 31, 1994 and 1995......................... 5
Statements of Loss for the years ended December 31, 1993, 1994 and
1995................................................................... 7
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1993, 1994 and 1995....................................... 8
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995................................................................... 10
Notes to Financial Statements........................................... 12
</TABLE>
3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Innotech, Inc.:
We have audited the accompanying balance sheets of Innotech, Inc., a
development stage company through June 30, 1993, as of December 31, 1994 and
1995, and the related statements of loss, stockholders' equity (deficit) and
cash flows for each of the years in the three-year period ended December 31,
1995. 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Innotech, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1995
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Roanoke, Virginia
February 9, 1996, except as
to note 14, which is as
of March 20, 1996
4
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
---------------------- DECEMBER 31,
1994 1995 1995 (NOTE 1)
---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 13)..... $ 119,468 $ 4,921,700 $ 4,921,700
Accounts receivable, net (notes 2, 5 and
11):
Trade, net of allowance for doubtful
accounts of $16,000 and $92,367
at December 31, 1994 and 1995, respec-
tively................................ 914,271 2,135,568 2,135,568
Other.................................. 15,115 28,709 28,709
---------- ----------- -----------
Total accounts receivable, net....... 929,386 2,164,277 2,164,277
---------- ----------- -----------
Inventories (note 5):
Raw materials.......................... 80,227 891,306 891,306
Work-in-process........................ 11,634 274,794 274,794
Finished goods......................... 1,696,918 1,454,667 1,454,667
---------- ----------- -----------
Total inventories.................... 1,788,779 2,620,767 2,620,767
---------- ----------- -----------
Prepaid expenses and other current
assets.................................. 176,553 241,950 241,950
---------- ----------- -----------
Total current assets................. 3,014,186 9,948,694 9,948,694
---------- ----------- -----------
Property and equipment, net (notes 4, 5
and 6)................................... 1,504,833 1,790,075 1,790,075
Deferred public offering charges (note
14)...................................... -- 333,430 333,430
Other assets, net of accumulated amortiza-
tion (note 5):
Organization costs....................... 26,974 18,882 18,882
Patents and technology rights............ 1,209,320 1,337,387 1,337,387
Debt issuance costs...................... 167,085 72,677 72,677
Deferred loss on sale/leaseback (note
6)...................................... -- 25,958 25,958
---------- ----------- -----------
Total other assets................... 1,403,379 1,454,904 1,454,904
</TABLE>
<TABLE>
<S> <C> <C> <C>
---------- ----------- -----------
Total assets............................ $5,922,398 $13,527,103 $13,527,103
========== =========== ===========
</TABLE>
(Continued)
5
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
-------------------------- 1995 (NOTE
1994 1995 1)
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Borrowings under line of credit, net
of unamortized discount of $140,781
at December 31, 1994 (note 5)...... $ 434,219 $ -- $ --
Current installments of long-term
debt (notes 5 and 13).............. -- 63,332 63,332
Current installments of obligations
under capital leases
(note 6)........................... 24,472 182,804 182,804
Accounts payable.................... 2,337,269 2,034,560 2,034,560
Accrued expenses and other current
liabilities (note 12).............. 1,093,087 772,510 772,510
Customer deposits (note 10)......... 322,787 149,439 149,439
Liability to financing companies
(note 12).......................... 340,780 61,076 61,076
Option payment (note 12)............ -- 1,500,000 --
------------ ------------ ------------
Total current liabilities........ 4,552,614 4,763,721 3,263,721
Long-term debt, net of unamortized
discount of $1,090,890 at
December 31, 1994 and $300,341 at
December 31, 1995, excluding current
installments (notes 5 and 13)....... 3,964,842 2,416,327 2,416,327
Obligations under capital leases,
excluding current installments
(note 6)............................ 69,807 364,903 364,903
------------ ------------ ------------
Total liabilities................ 8,587,263 7,544,951 6,044,951
------------ ------------ ------------
Stockholders' equity (deficit) (notes
5, 7, 8, 10, 11, 12 and 14):
Series A convertible, redeemable
preferred stock, $.001 par value.
Authorized 850,000 shares; issued
and outstanding 700,000 shares at
December 31, 1994 and 1995 and none
at pro forma December 31, 1995
(liquidation value $10 per share
plus accrued dividends)............ 7,351,919 8,080,207 --
Series B convertible, redeemable
preferred stock, $.001 par value.
Authorized 152,500 shares; issued
and outstanding 152,500 shares at
December 31, 1994 and 1995 and none
at pro forma December 31, 1995
(liquidation value $10 per share
plus accrued dividends)............ 1,367,193 1,510,260 --
Series D convertible, redeemable
preferred stock, $.001 par value.
Authorized 2,150,000 shares; issued
and outstanding 1,999,999 shares at
December 31, 1995 and none at pro
forma December 31, 1995
(liquidation value $10 per share
plus accrued dividends)............ -- 13,011,157 --
Common stock, $.001 par value.
Authorized 20,000,000 shares at
December 31, 1994 and 70,000,000
shares at December 31, 1995; issued
and outstanding 704,285, 772,991
and 4,795,867 shares at December
31, 1994 and 1995 and pro forma
December 31, 1995, respectively.... 704 773 4,796
Preferred stock warrants, 38,462
issued and outstanding at December
31, 1994 and 1995 and 23,415 common
stock warrants (following
conversion) issued and outstanding
at pro forma December 31, 1995..... -- -- --
Common stock warrants, 286,624
issued and outstanding at December
31, 1994 and 1,207,052 issued and
outstanding at December 31, 1995
and pro forma December 31, 1995.... 1,372,690 7,878,377 7,878,377
Additional paid-in capital.......... 2,719,587 5,844,007 29,941,608
Deferred compensation (note 8)...... (107,140) (1,937,453) (1,937,453)
Accumulated deficit................. (15,369,818) (28,405,176) (28,405,176)
------------ ------------ ------------
Total stockholders' equity
(deficit)....................... (2,664,865) 5,982,152 7,482,152
Commitments and contingencies (notes
5, 6, 7, 8, 10, 12 and 14)
------------ ------------ ------------
Total liabilities and
stockholders' equity (deficit).. $ 5,922,398 $ 13,527,103 $ 13,527,103
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
STATEMENTS OF LOSS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Net sales (note 11).................... $ 4,019,428 $ 4,104,571 $ 6,438,202
Cost of sales.......................... 3,357,268 3,963,276 5,368,238
----------- ----------- ------------
Gross profit....................... 662,160 141,295 1,069,964
Selling, general and administrative
expenses (note 12).................... 4,040,547 6,327,822 8,129,907
Research and development costs, net of
revenues of $160,000 earned on
development agreements for the year
ended December 31, 1995 (note 10)..... 1,150,264 1,732,118 1,830,079
----------- ----------- ------------
Operating loss..................... (4,528,651) (7,918,645) (8,890,022)
Other income (deductions):
Interest expense..................... (97,025) (624,255) (1,192,596)
Interest income...................... 34,742 25,893 112,766
Other, net (note 10)................. 52,619 349,274 (10,382)
----------- ----------- ------------
Other income (deductions), net..... (9,664) (249,088) (1,090,212)
----------- ----------- ------------
Loss before extraordinary item..... (4,538,315) (8,167,733) (9,980,234)
Extraordinary item--loss on
extinguishment of debt (note 5)....... -- -- (612,538)
----------- ----------- ------------
Net loss........................... $(4,538,315) $(8,167,733) $(10,592,772)
=========== =========== ============
Pro forma net loss per common share
(note 1(m)) (unaudited)............... $ (1.70)
============
Pro forma weighted average number of
common shares outstanding (note 1(m))
(unaudited)........................... 6,223,932
============
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE, CONVERTIBLE, CONVERTIBLE,
REDEEMABLE REDEEMABLE REDEEMABLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------ ------------------ --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... -- $ -- -- $ -- -- $ --
Issuance of preferred
stock for cash ($10 per
share, less issuance
costs of $679,821)
(note 7)............... 700,000 6,320,179 -- -- -- --
Issuance of common stock
warrants (note 8)...... -- -- -- -- -- --
Accretion on
convertible, redeemable
preferred stock (note
7)..................... -- 40,953 -- -- -- --
Undeclared dividends on
convertible, redeemable
preferred stock (note
7)..................... -- 262,500 -- -- -- --
Deferred compensation
related to stock
options (note 8)....... -- -- -- -- -- --
Amortization of deferred
compensation (note 8).. -- -- -- -- -- --
Net loss................ -- -- -- -- -- --
------- ---------- ------- ---------- -------- ----------
Balance, December 31,
1993................... 700,000 6,623,632 -- -- -- --
Issuance of common stock
for cash ($23.04 per
share)................. -- -- -- -- -- --
Issuance of preferred
stock for cash ($10 per
share, less issuance
costs of $179,326)
(note 7)............... -- -- 108,500 905,674 -- --
Exchange of common stock
for Series B
Convertible, Redeemable
Preferred Stock
(exchange rate of
.4341)................. -- -- 44,000 440,000 -- --
Issuance of common stock
warrants (notes 5 and
8)..................... -- -- -- -- -- --
Exercise of common stock
options ($15.97 per
share) (note 8)........ -- -- -- -- -- --
Accretion on
convertible, redeemable
preferred stock (note
7)..................... -- 98,287 -- 21,519 -- --
Undeclared dividends on
convertible, redeemable
preferred stock (note
7)..................... -- 630,000 -- -- -- --
Amortization of deferred
compensation (note 8).. -- -- -- -- -- --
Net loss................ -- -- -- -- -- --
------- ---------- ------- ---------- -------- ----------
Balance, December 31,
1994................... 700,000 7,351,919 152,500 1,367,193 -- --
Issuance of common stock
pursuant to litigation
settlement
(note 12).............. -- -- -- -- -- --
Issuance of preferred
stock for cash ($10 per
share, less issuance
costs of $387,019 and
allocation to common
stock warrants of
$2,202,412) (notes 7
and 8)................. -- -- -- -- 357,955 990,122
Conversion of
outstanding long-term
debt to convertible,
redeemable preferred
stock ($10 per share,
less allocation to
common stock warrants
of $823,721) (notes 5,
7 and 8)............... -- -- -- -- 40,000 153,890
Exchange of Series C
Convertible, Redeemable
Preferred Stock for
Series D Convertible,
Redeemable Preferred
Stock.................. -- -- -- -- (397,955) (1,574,749)
Issuance of preferred
stock for cash ($10 per
share, less issuance
costs of $1,365,395 and
allocation to common
stock warrants of
$3,575,819) (notes 7
and 8)................. -- -- -- -- -- --
Issuance of preferred
stock in exchange for
professional services
($10 per share) (note
7)..................... -- -- -- -- -- --
Exercise of common stock
options (4 shares at
$15.97 per share and
249 shares at $6.56 per
share) (note 8)........ -- -- -- -- -- --
Issuance of common stock
warrants (note 8)...... -- -- -- -- -- --
Exercise of common stock
warrants (8,362 shares
at $.0079 per share and
4,366 shares at $.079
per share) (note 8).... -- -- -- -- -- --
Expiration and
cancellation of common
stock warrants (note
8)..................... -- -- -- -- -- --
Accretion on
convertible, redeemable
preferred stock (note
7)..................... -- 98,288 -- 28,692 -- 225,043
Undeclared dividends on
convertible, redeemable
preferred stock (note
7)..................... -- 630,000 -- 114,375 -- 205,694
Deferred compensation
related to stock
options (note 8)....... -- -- -- -- -- --
Amortization of deferred
compensation (note 8).. -- -- -- -- -- --
Net loss................ -- -- -- -- -- --
------- ---------- ------- ---------- -------- ----------
Balance, December 31,
1995................... 700,000 $8,080,207 152,500 $1,510,260 -- $ --
======= ========== ======= ========== ======== ==========
</TABLE>
(Continued)
8
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
<TABLE>
<CAPTION>
SERIES D
CONVERTIBLE, COMMON
REDEEMABLE COMMON STOCK
PREFERRED STOCK STOCK WARRANTS TOTAL
- ---------------------- --------------- ---------------------- ADDITIONAL STOCKHOLDERS'
EQUIVALENT PAID-IN DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIT)
- --------- ----------- ------- ------ ---------- ---------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $ -- 704,281 $ 704 -- $ -- $2,420,044 $ (339,761) $ (1,610,511) $ 470,476
-- -- -- -- -- -- -- -- -- 6,320,179
-- -- -- -- 43,720 -- -- -- -- --
-- -- -- -- -- -- -- -- (40,953) --
-- -- -- -- -- -- -- -- (262,500) --
-- -- -- -- -- -- 299,475 (299,475) -- --
-- -- -- -- -- -- -- 483,560 -- 483,560
-- -- -- -- -- -- -- -- (4,538,315) (4,538,315)
- --------- ----------- ------- ------ --------- ---------- ---------- ----------- ------------ ------------
-- -- 704,281 704 43,720 -- 2,719,519 (155,676) (6,452,279) 2,735,900
-- -- 19,099 19 -- -- 439,981 -- -- 440,000
-- -- -- -- -- -- -- -- -- 905,674
-- -- (19,099) (19) -- -- (439,981) -- -- --
-- -- -- -- 242,904 1,372,690 -- -- -- 1,372,690
-- -- 4 -- -- -- 68 -- -- 68
-- -- -- -- -- -- -- -- (119,806) --
-- -- -- -- -- -- -- -- (630,000) --
-- -- -- -- -- -- -- 48,536 -- 48,536
-- -- -- -- -- -- -- -- (8,167,733) (8,167,733)
- --------- ----------- ------- ------ --------- ---------- ---------- ----------- ------------ ------------
-- -- 704,285 704 286,624 1,372,690 2,719,587 (107,140) (15,369,818) (2,664,865)
-- -- 55,725 56 -- -- 511,836 -- -- 511,892
-- -- -- -- 336,382 2,202,412 -- -- -- 3,192,534
215,327 1,575,657 -- -- 125,810 823,721 -- -- -- 2,553,268
418,525 1,574,749 -- -- -- -- -- -- -- --
1,333,025 8,389,044 -- -- 546,147 3,575,819 -- -- -- 11,964,863
33,122 331,213 -- -- -- -- -- -- -- 331,213
-- -- 253 -- -- -- 1,699 -- -- 1,699
-- -- -- -- 4,220 -- -- -- -- --
-- -- 12,728 13 (12,728) (96,265) 96,663 -- -- 411
-- -- -- -- (79,403) -- -- -- -- --
-- 554,919 -- -- -- -- -- -- (906,942) --
-- 585,575 -- -- -- -- -- -- (1,535,644) --
-- -- -- -- -- -- 2,514,222 (2,514,222) -- --
-- -- -- -- -- -- -- 683,909 -- 683,909
-- -- -- -- -- -- -- -- (10,592,772) (10,592,772)
- --------- ----------- ------- ------ --------- ---------- ---------- ----------- ------------ ------------
1,999,999 $13,011,157 772,991 $ 773 1,207,052 $7,878,377 $5,844,007 $(1,937,453) $(28,405,176) $ 5,982,152
========= =========== ======= ====== ========= ========== ========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(4,538,315) $(8,167,733) $(10,592,772)
Adjustments to reconcile net loss to
net cash used in
operating activities:
Extraordinary item--loss on extin-
guishment of debt.................. -- -- 612,538
Depreciation and amortization of
property and equipment............. 91,722 311,269 320,706
Amortization of other assets........ 21,926 161,999 177,296
Amortization of discounts on
borrowings under line of credit and
long-term debt..................... -- 141,019 328,064
Amortization of deferred
compensation (note 8).............. 483,560 48,536 683,909
Loss (gain) on sale of equipment.... (1,897) -- 10,382
Loss on litigation settlement (note
12)................................ -- 650,000 111,892
Professional services received in
exchange for common stock.......... -- -- 331,213
Provision for doubtful accounts..... 16,000 100,398 75,000
Net (increase) decrease in:
Temporary investments.............. (401,488) 401,488 --
Accounts receivable, net........... (1,199,427) 158,643 (1,309,891)
Note receivable from officer (note
3)................................ 46,186 11,964 --
Inventories........................ (1,369,903) (418,876) (831,988)
Prepaid expenses and other current
assets............................ (74,815) (76,757) (65,397)
Net increase (decrease) in:
Accounts payable................... 1,587,628 368,096 (302,709)
Accrued expenses and other current
liabilities....................... 181,150 227,464 350,959
Customer deposits.................. 491,587 (501,020) (173,348)
Liability to financing companies... -- 340,780 (279,704)
----------- ----------- ------------
Net cash used in operating activ-
ities........................... (4,666,086) (6,242,730) (10,553,850)
----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment... (1,235,702) (531,067) (533,712)
Proceeds from sale of equipment....... 5,800 -- 500,000
Additions to other assets............. (130,157) (467,346) (212,135)
----------- ----------- ------------
Net cash used in investing activ-
ities........................... (1,360,059) (998,413) (245,847)
----------- ----------- ------------
</TABLE>
(Continued)
10
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in borrowings
under line of credit................... $ -- $ 575,000 $ (575,000)
Proceeds from issuance of long-term
debt................................... -- 5,055,732 900,000
Payments on long-term debt and capital
leases................................. (158,120) (10,724) (1,049,148)
Proceeds from issuance of common stock.. -- 440,068 2,110
Proceeds from issuance of preferred
stock and common stock warrants, net of
issuance costs......................... 6,320,179 905,674 15,157,397
Proceeds from option payment (note 12).. -- -- 1,500,000
Deferred public offering charges (note
14).................................... -- -- (333,430)
---------- ---------- -----------
Net cash provided by financing
activities......................... 6,162,059 6,965,750 15,601,929
---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents.............................. 135,914 (275,393) 4,802,232
Cash and cash equivalents, beginning of
year..................................... 258,947 394,861 119,468
---------- ---------- -----------
Cash and cash equivalents, end of year.... $ 394,861 $ 119,468 $ 4,921,700
========== ========== ===========
Supplemental disclosures of cash flows
information:
Cash paid for interest.................. $ 104,088 $ 474,413 $ 1,193,251
========== ========== ===========
</TABLE>
Noncash transactions:
Capital lease obligations of $105,003 and $608,576 were
incurred in 1994 and 1995 when the Company entered into
several leases for equipment.
Discounts on borrowings under line of credit and long-term
debt of $175,977 and $1,196,713, respectively, were recorded
in 1994 in connection with the issuance of common stock
warrants.
19,099 shares of common stock were exchanged for 44,000 shares
of Series B Convertible, Redeemable Preferred Stock, with a
value of $440,000, in 1994.
55,725 shares of common stock and a note payable for $240,000
were issued in 1995 to satisfy accrued litigation costs (note
12).
397,955 shares of Series C Convertible, Redeemable Preferred
Stock, with accrued dividends thereon of $205,694, were
exchanged for 418,525 shares of Series D Convertible,
Redeemable Preferred Stock in 1995.
Long-term debt of $2,521,732, with related accrued interest
payable of $31,536, was converted into a combination of
40,000 shares and 215,327 shares of Series C Convertible,
Redeemable Preferred Stock and Series D Convertible,
Redeemable Preferred Stock, respectively, and 125,810 Class I
warrants in 1995.
See accompanying notes to financial statements.
11
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Innotech, Inc. (the Company) develops, manufactures and sells in-office
fabrication systems for plastic eyeglass lenses. The Company's fabrication
system (the System) is comprised of equipment, which includes a curing
chamber, glass molds and accessories, and proprietary plastic single vision
optics (Power Plates) and polymerizable resins (Power Plates and resins are
collectively referred to as Consumables).
The Company was in the development stage from its formation on October 15,
1990 through June 30, 1993.
(b) Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original or remaining maturities of three
months or less at the time of purchase to be cash equivalents. At December 31,
1995, the Company had cash equivalents totaling $5,176,206, comprised of money
market funds and overnight investments with two financial institutions.
(c) Inventories
Inventories are valued at the lower of cost (determined on the first-in,
first-out basis) or market.
(d) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of property and equipment is calculated using both
straight-line and accelerated methods over the estimated useful lives of the
assets. Estimated useful lives are five to fifteen years for equipment and
seven years for furniture and fixtures. Leasehold improvements are amortized
straight line over the shorter of the lease term or estimated life of the
asset. Maintenance, repairs and minor replacements are charged to expense as
incurred; major renewals and betterments are capitalized. The cost and related
accumulated depreciation or amortization on property and equipment are
eliminated from the accounts upon disposal, and any resulting gain or loss is
included in the determination of net income or loss.
Equipment under capital leases is stated at the present value of minimum
lease payments at the inception of the leases. These assets are amortized over
the estimated useful lives of the assets.
(e) Deferred Public Offering Charges
Deferred public offering charges represent deferred costs related to the
public offering of the Company's common stock (see note 14). These deferred
costs will be charged against the gross proceeds of the public offering.
(f) Other Assets
Organization costs and patents and technology rights are being amortized
over periods of five and seventeen years, respectively, using the straight-
line method. Amortization began June 30, 1993 when the Company commenced
operations. Debt issuance costs are being amortized on a straight-line basis
over the related debt repayment periods, ranging from eight months to five
years. Deferred loss on sale/leaseback is being amortized on a straight-line
basis over the forty-two month term of the related lease.
12
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(CONTINUED)
(g) Customer Deposits
Customer deposits reflect deposits made when purchase orders are placed (see
note 10).
(h) Income Taxes
Income taxes are accounted for using the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated 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 in effect for the year in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in net income or loss in the period that includes the enactment
date.
(i) Revenue Recognition
Revenue is recognized at the time of product shipment or delivery to the
customer, based on shipping terms. The purchase price of the System includes a
one-year limited warranty; however, since warranty costs have been nominal,
the Company does not accrue a specific warranty reserve.
(j) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(k) Reclassifications
Certain reclassifications have been made to prior years' financial
statements to place them on a basis comparable with the current year's
financial statements.
(l) Pro Forma Balance Sheet (Unaudited)
The pro forma balance sheet as of December 31, 1995 gives effect, on a pro
forma basis, to the conversion of all outstanding shares of preferred stock
(including all accrued dividends thereon) into 4,022,876 shares (including
150,000 shares issuable in connection with the option payment (see note 12))
of common stock as if such conversion had occurred on December 31, 1995.
(m) Pro Forma Net Loss per Common Share (Unaudited)
Pro forma net loss per common share is computed based on the weighted
average number of shares of common stock outstanding during the period.
Pursuant to the requirements of the Securities and Exchange Commission, common
stock and convertible, redeemable preferred stock issued by the Company during
the 12 months immediately preceding the public offering (see note 14), plus
common stock options and common stock warrants issued during the same period,
have been included in the calculation of pro forma weighted average number of
common shares outstanding for all periods presented (using the treasury stock
method and the initial public offering price of $10.00 per share). In
addition, the calculation of the pro forma weighted average number of common
shares outstanding also includes shares of common stock as if all shares of
convertible, redeemable preferred stock which were not issued during the 12
months immediately preceding the public offering, were converted into common
stock on the respective original dates of issuance.
13
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the changes in the allowance for doubtful accounts follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- --------- -------
<S> <C> <C> <C>
Balances, beginning of year...................... $ -- $ 16,000 $16,000
Provision for doubtful accounts.................. 16,000 100,398 75,000
Recoveries of accounts written off............... -- -- 1,367
Accounts written off............................. -- (100,398) --
------- --------- -------
Balances, end of year............................ $16,000 $ 16,000 $92,367
======= ========= =======
</TABLE>
(3) NOTE RECEIVABLE FROM OFFICER
The Company had an agreement with an officer to extend loans through
December 1, 1993 in the aggregate of up to $60,000. Under the officer's
employment agreement, the outstanding balance of the loans would be forgiven
by the Company in the form of a bonus, based upon the satisfaction of certain
performance criteria. The Company recognized $46,186 and $11,964 of bonus
expense related to these loans for the years ended December 31, 1993 and 1994,
respectively.
(4) PROPERTY AND EQUIPMENT, NET
A summary of property and equipment, net follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Equipment (note 6)................................... $1,523,029 $1,464,770
Furniture and fixtures............................... 92,991 109,452
Leasehold improvements............................... 303,543 320,196
Construction in progress............................. -- 347,335
---------- ----------
1,919,563 2,241,753
Less accumulated depreciation and amortization....... (414,730) (451,678)
---------- ----------
Property and equipment, net........................ $1,504,833 $1,790,075
========== ==========
</TABLE>
14
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND BORROWINGS UNDER LINE OF CREDIT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
13% promissory notes, with interest payable monthly
and principal due in a single installment on March
22, 1999, collateralized by equipment, inventories,
receivables and intangible assets.................... $3,000,000 $2,700,000
13% promissory notes, with interest payable monthly
and principal due in a single installment on August
29, 1999, collateralized by equipment, inventories,
receivables and intangible assets.................... 1,000,000 --
13% unsecured subordinated notes, with interest
payable monthly and principal due in a single
installment on September 22, 1999.................... 1,055,732 --
Promissory note, with monthly principal payments of
$7,500 through April 1996 and $4,167 from May 1996
through April 1997, with interest payable monthly at
7% commencing May 1996, collateralized by two
patents. A required principal payment of $100,000 was
made in August 1995.................................. -- 80,000
---------- ----------
Total long-term debt................................ 5,055,732 2,780,000
Less unamortized discount............................. (1,090,890) (300,341)
---------- ----------
Total long-term debt, net of unamortized discount... 3,964,842 2,479,659
Less current installments............................. -- (63,332)
---------- ----------
Long-term debt, excluding current installments...... $3,964,842 $2,416,327
========== ==========
</TABLE>
At December 31, 1995, long-term debt matures as follows:
<TABLE>
<S> <C>
Years ending December 31,
1996......................................................... $ 63,332
1997......................................................... 16,668
1998......................................................... --
1999......................................................... 2,700,000
----------
Total...................................................... $2,780,000
==========
</TABLE>
During 1994, detachable warrants to purchase 224,398 shares of the Company's
common stock were issued in connection with its long-term debt (see note 8). A
total of $1,196,713 of the proceeds from long-term debt was allocated to the
detachable warrants, based on the estimated fair values of the warrants at the
dates issued, and has been reflected as common stock warrants in the
accompanying financial statements. The related reduction in the recorded
principal amounts of long-term debt is being amortized as interest expense
over the life of the debt.
During 1995, the unsecured subordinated notes and certain promissory notes
were either converted to preferred stock or repaid. In connection with the
debt extinguishment, the Company recognized an extraordinary loss of $612,538,
consisting of the write-off of both the unamortized discount on the debt and
the unamortized portion of debt issuance costs.
15
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT AND BORROWINGS UNDER LINE OF CREDIT--(CONTINUED)
The Company had a $1,000,000 open-end revolving line of credit with a
commercial bank to provide interim working capital. The line of credit was
collateralized by letters of credit and similar instruments personally
provided by Company stockholders. The amount available under the line of
credit at any date was calculated as 96.5 percent of the collateral value,
with interest on the outstanding balance equal to the 30-day LIBOR plus one
percent (7.0625 percent at December 31, 1994). Borrowings outstanding under
this line of credit were $434,219, net of unamortized discount of $140,781, at
December 31, 1994. The line of credit was paid in full and expired during
1995.
Detachable warrants to purchase 18,506 shares of the Company's common stock
were issued in connection with the revolving line of credit (see note 8). A
total of $175,977 of the proceeds from borrowings under the line of credit was
allocated to the detachable warrants, based on the estimated fair value of the
warrants at the date issued, and has been reflected as common stock warrants
in the accompanying financial statements. The related reduction in the
recorded borrowings outstanding under the line of credit was amortized as
interest expense over the term of the line of credit.
The above debt obligations contain restrictive provisions prohibiting the
payment of dividends and certain covenants relative to other nonfinancial
matters.
(6) LEASES
The Company is obligated under various leases for certain facilities and
equipment. The following schedule analyzes equipment under leases that have
been accounted for as capital leases and are reported in the accompanying
balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- ---------
<S> <C> <C>
Equipment under capital leases.......................... $105,003 $ 713,579
Less accumulated amortization........................... (12,938) (121,742)
-------- ---------
Equipment under capital leases, net................... $ 92,065 $ 591,837
======== =========
</TABLE>
At December 31, 1995, minimum rental payments due under capital and
operating leases with original terms in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
<S> <C> <C>
Years ending December 31,
1996................................................ $ 228,011 $131,806
1997................................................ 216,235 22,072
1998................................................ 163,928 --
1999................................................ 13,323 --
--------- --------
Total minimum lease payments.......................... 621,497 $153,878
========
Less imputed interest (rates ranging from 8% through
24%)................................................. (73,790)
---------
Present value of net minimum lease payments........... 547,707
Less current installments of obligations under capital
leases............................................... (182,804)
---------
Obligations under capital leases, excluding current
installments......................................... $ 364,903
=========
</TABLE>
16
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) LEASES--(CONTINUED)
On January 3, 1995, the Company entered into a sale/leaseback agreement
which provided for the sale and leaseback of certain equipment. This
equipment, with a net book value of $536,340, was sold for $500,000 and was
leased back by the Company over a 42-month period at $14,544 per month. The
$36,340 loss on the sale of the equipment is being amortized over the life of
the lease. The agreement requires the Company to repurchase all of the
equipment at the end of the lease term for an amount equal to its fair market
value, but not less than $50,000 or more than $150,000, or to extend the lease
an additional 12 months at $10,500 per month and purchase all of the equipment
at the end of the extended lease term for $12,500.
Total rent expense under operating leases was $115,491, $112,498 and
$171,050 for the years ended December 31, 1993, 1994 and 1995, respectively.
Included in total rent expense is $14,960 of lease payments made to a related
party for the year ended December 31, 1993. This lease terminated during 1993.
Taxes, insurance and maintenance expenses relating to all leases are
obligations of the Company.
(7) STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock:
Effective November 10, 1992, the predecessor to the Company (Parent) entered
into an agreement of merger with the Company, then a wholly-owned subsidiary
of the Parent. On December 30, 1992, the Parent merged into the Company which
became the surviving entity. Each share of common stock of the Parent was
converted into 500 shares of the Company's common stock. In September 1993,
the Board of Directors approved a 5-for-1 common stock split for stockholders
of record on December 15, 1993. In addition, the Company effected a 1-for-
7.89789 reverse stock split of common stock on December 21, 1995. All share
and per share data, as well as all preferred stock conversion ratios, stock
options and warrants, have been adjusted retroactively to reflect the
aforementioned stock splits.
At December 31, 1995, there were 70,000,000 authorized shares of common
stock, $.001 par value. Of the shares authorized but unissued at December 31,
1995, approximately 6,725,000 shares were reserved for the conversion of
preferred stock and for stock options and warrants (see note 8). Upon the
consummation of the Company's initial public offering of common stock (see
note 14), all outstanding shares of preferred stock will be converted into
common stock.
Preferred Stock:
The Company has authorized a total of 5,000,000 shares of preferred stock,
of which 850,000 shares are authorized for Series A Convertible, Redeemable
Preferred Stock (Series A Stock), 152,500 shares are authorized for Series B
Convertible, Redeemable Preferred Stock (Series B Stock) and 2,150,000 shares
are authorized for Series D Convertible, Redeemable Preferred Stock (Series D
Stock) (collectively Preferred Stock). The Preferred Stock contains certain
anti-dilution provisions, as described in the Company's Amended and Restated
Certificate of Incorporation.
The Series A Stock is convertible at the holder's option, at any time, into
0.6088 shares of common stock. The Series B Stock is convertible at the
holder's option, at any time, into 1.0430 shares of common stock. The Series D
Stock is convertible at the holder's option, at any time, into 1.5255 shares
of common stock plus an additional amount of shares of common stock for
accrued and unpaid dividends on the Series D Stock at the rate of 9 percent
per annum from the date of issuance until the date of conversion. The
conversion rates of the Preferred Stock will be increased if equity securities
of the Company are sold at prices less than the respective conversion rates
then in effect, except in limited situations.
17
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
The outstanding Preferred Stock will be mandatorily converted into common
stock upon an "Event of Conversion." An "Event of Conversion" is defined as
the completion of a public offering by the Company (see note 14) of a
prescribed size and at a prescribed price or the conversion, on a cumulative
basis, of more than 66 2/3 percent (on a common stock equivalent basis) of
shares of the Preferred Stock.
The Company is obligated to offer to redeem on June 30, 2000 at the
liquidation value of $10 per share, plus any accrued and unpaid dividends, any
outstanding shares of the Preferred Stock not previously converted into common
stock.
The holders of the Preferred Stock vote on all matters as to which holders
of common stock are entitled to vote, with each share of the Preferred Stock,
for voting purposes, deemed to be equivalent to that number of shares of
common stock into which each such share of Preferred Stock would then be
convertible.
The Preferred Stock was recorded at fair value on the date of issuance less
issuance costs. The excess of the liquidation value over the carrying value is
being accreted by periodic charges to accumulated deficit over the life of the
issue.
The holders of the Preferred Stock are entitled to receive cumulative
dividends at the rate of 9 percent per annum accruing from the date of
issuance. Accumulated undeclared dividends on Series A Stock, Series B Stock
and Series D Stock were $1,522,500, $114,375 and $585,575, respectively, at
December 31, 1995. In the event of a liquidation and with respect to the
payment of dividends, the Series D Stock is senior in rank to the common
stock, the Series A Stock and the Series B Stock. All accrued dividends will
be paid only upon a merger, sale of control, consolidation (and certain
similar events) or liquidation of the Company. In the event of a liquidation
of the Company, the holders of the Series D Stock are entitled to receive,
prior and in preference to any distributions to all other Company equity
holders, a per share liquidation preference equal to $10.00 plus accrued and
unpaid dividends through the date of the liquidation for each share of Series
D Stock (the Liquidation Preference). Thereafter, any remaining payments will
be paid to holders of shares of the Series A Stock and the Series B Stock up
to their respective Liquidation Preferences, and the holders of common stock
and the holders of the Series D Stock (on a common stock equivalent basis)
will share in any remaining payments, pro rata based upon their respective
stockholdings.
In the event of a merger, consolidation, other corporate reorganization,
sale of control, or any transaction in which all or substantially all of the
assets of the Company are sold (a Sale), the holders of the Series D Stock are
entitled to receive in cash or securities in preference over the common stock,
the Series A Stock and the Series B Stock an amount equal to 2.5 times the
Liquidation Preference for share purchases of Series D Stock purchased in
August 1995 and an amount equal to 2.25 times the Liquidation Preference for
share purchases thereafter. Any remaining payments will be paid to holders of
shares of the Series A Stock and the Series B Stock up to their respective
Liquidation Preferences, and the holders of common stock will share in any
remaining payments, pro rata based upon their respective stockholdings.
Stockholders' Agreement:
The Company, certain principal stockholders and certain members of
management have entered into a stockholders' agreement, which will terminate
upon the closing of a public offering of the Company's common stock (see note
14). This agreement, among other things, includes restrictions on the sale of
the Company's common stock and Preferred Stock and provides for the election
of the Company's directors.
18
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) STOCK OPTIONS AND WARRANTS
Stock Options:
Pursuant to various stock option agreements, the Company has granted options
to acquire the Company's common stock to certain officers, directors,
employees and consultants of the Company.
The aggregate number of shares under option pursuant to these agreements was
as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1992............ 77,229 $ .0158-13.4090
Granted............................................. 28,975 $ 3.0140-16.4260
---------
Options outstanding at December 31, 1993............ 106,204 $ .0158-16.4260
Granted............................................. 46,798 $10.6464-15.9695
Exercised........................................... (4) $15.9695
Expired............................................. (11,704) $12.9652-15.9695
---------
Options outstanding at December 31, 1994............ 141,294 $ .0158-16.4260
Granted............................................. 1,256,058 $ .0079-17.2964
Exercised........................................... (253) $ 6.5552-15.9695
Expired............................................. (33,830) $ 8.6877-15.9695
---------
Options outstanding at December 31, 1995............ 1,363,269 $ .0079-16.4260
=========
</TABLE>
Of the options outstanding at December 31, 1995, 833,518 options have an
exercise price of $8.69 per share until August 31, 1996. On the first day of
each calendar quarter thereafter, the exercise price will increase at a rate
of 7.5 percent per quarter. Upon the consummation of a public offering (see
note 14), the exercise price will be increased to $15.50 per share and the 7.5
percent price increase will be eliminated.
In connection with the issuance of Series D Stock during 1995, the Company
reduced the option price per share on certain outstanding common stock options
to the estimated fair value of the Company's common stock upon issuance of the
Series D Stock. As a result, a total of 55,234 options with exercise prices
ranging from $10.65 to $17.30 per share were reduced to $6.56 per share.
Generally, options vest within one to five years of the grant date. Options
exercisable at December 31, 1994 and 1995 approximated 87,541 and 418,772,
respectively.
The Company has recorded deferred compensation on certain options granted to
officers at exercise prices which were less than the estimated fair value of
the common stock at the date of the grant of the options. Deferred
compensation is recorded as a reduction of stockholders' equity, with a
corresponding increase in additional paid-in capital, and is being amortized
as compensation expense over the vesting periods of the related options. The
Company recognized compensation expense related to these options of $483,560,
$48,536 and $683,909 for the years ended December 31, 1993, 1994 and 1995,
respectively.
19
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) STOCK OPTIONS AND WARRANTS--(CONTINUED)
Deferred compensation at December 31, 1995 will be amortized as compensation
expense, based on vesting provisions, as follows:
<TABLE>
<S> <C>
Years ending December 31,
1996......................................................... $ 441,195
1997......................................................... 427,043
1998......................................................... 398,738
1999......................................................... 398,738
2000......................................................... 271,739
----------
Total...................................................... $1,937,453
==========
</TABLE>
The stock option agreements contain certain accelerated vesting provisions
which provide for 100 percent vesting upon termination or a change in control,
as defined.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), which is effective for transactions entered into in
fiscal years beginning after December 15, 1995. The Company is currently
evaluating the requirements of SFAS 123.
Warrants:
During 1993, the Company issued detachable Class B warrants in conjunction
with the sale of Series A Stock. The warrants entitle the holder to purchase
Series A Stock, which is in turn convertible into 23,415 shares of common
stock. Based on the estimated fair value of these warrants at the date issued,
none of the proceeds from the Series A Stock issuance was allocated to these
warrants.
During 1994, the Company issued detachable warrants, in conjunction with
each of its debt transactions, which entitle the holders to purchase its
common stock. Warrants granted in conjunction with the Company's issuance of
long-term debt include Class C warrants, Class D warrants, Class E warrants
and Class G warrants. Warrants granted in conjunction with the Company's
revolving line of credit were Class H warrants. A portion of the proceeds from
the debt transactions was allocated to these warrants, based on the estimated
fair value of the warrants at the date issued, and has been reflected as
common stock warrants in the accompanying financial statements (see note 5).
During 1995, the Company issued detachable Class I and Class J warrants, in
conjunction with the issuance of Series C Stock and Series D Stock, which
entitle the holders to purchase its common stock. A portion of the proceeds
from the Series C Stock and Series D Stock issuances was allocated to the
Class I warrants, based on the estimated fair value of the warrants at the
date issued, and has been reflected as common stock warrants in the
accompanying financial statements. Based on the estimated fair value of the
Class J warrants at the date issued, none of the proceeds from the Series D
Stock issuance was allocated to these warrants.
20
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) STOCK OPTIONS AND WARRANTS--(CONTINUED)
A summary of detachable warrants outstanding at December 31, 1995 is
presented below:
<TABLE>
<CAPTION>
WARRANT EQUIVALENT EXERCISE PRICE EXPIRATION
CLASS TYPE SHARES PER SHARE DATE
------- -------------- ---------- -------------- ------------------
<S> <C> <C> <C> <C>
B.............. Series A Stock 38,462 $ 13.00 January 30, 1999
C.............. Common Stock 48,592 $ 0.079 March 31, 1999
D.............. Common Stock 63,308 $ 6.56 March 31, 2004
E.............. Common Stock 17,403 $ 0.079 September 30, 1999
G.............. Common Stock 59,411 $0.0079 September 23, 2004
H.............. Common Stock 14,140 $ 0.079 December 1, 1996
I.............. Common Stock 999,978 $0.0079 March 29, 2005
J.............. Common Stock 4,220 $ 9.64 September 30, 2004
</TABLE>
In connection with the issuance of Series D Stock during 1995, the Company
reduced the exercise price of the Class D warrants from $16.43 per share to
$6.56 per share.
(9) INCOME TAXES
The Company had no income tax benefit for the years ended December 31, 1993,
1994 and 1995, which differed from amounts computed by applying the U.S.
federal income tax rate of 34 percent to the Company's net loss, as a result
of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income tax
benefit............................ $(1,543,027) $(2,777,029) $(3,601,542)
Reduction of (increase in) income
tax benefit resulting from:
Increase in beginning-of-the-year
balance of the valuation
allowance for deferred tax
assets........................... 1,717,802 3,075,923 3,990,558
State tax benefit, net of federal
tax impact....................... (179,202) (320,881) (416,296)
Other, net........................ 4,427 21,987 27,280
----------- ----------- -----------
Total........................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The significant components of deferred income tax benefit for the years
ended December 31, 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax benefit, exclusive of
the increase in beginning-of-the-
year balance of the valuation
allowance for deferred tax
assets............................ $(1,717,802) $(3,075,923) $(3,990,558)
Increase in beginning-of-the-year
balance of the valuation allowance
for deferred tax assets........... 1,717,802 3,075,923 3,990,558
----------- ----------- -----------
Total.......................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
21
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) INCOME TAXES--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1994 and 1995 are
presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 4,392,336 $ 8,075,017
Organization costs, principally due to
capitalization for tax purposes................ 244,757 174,827
Deferred compensation, principally due to
amortization for financial reporting purposes.. 236,307 495,919
Accrued expenses, principally due to accrual of
bonuses and vacation for financial reporting
purposes....................................... 68,277 146,603
Other........................................... 6,074 45,943
----------- -----------
Total gross deferred tax assets............... 4,947,751 8,938,309
Less valuation allowance........................ (4,947,751) (8,938,309)
----------- -----------
Net deferred tax asset........................ $ -- $ --
=========== ===========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
At December 31, 1995, the Company had net operating loss carryforwards
(NOLs) for income tax purposes available to offset future taxable income as
follows:
<TABLE>
<CAPTION>
NET OPERATING LOSS EXPIRATION
CARRYFORWARDS DATES
------------------ ------------------
<S> <C>
$ 2,099 September 30, 2006
495,945 September 30, 2007
1,849,550 September 30, 2008
6,609,798 September 30, 2009
2,613,567 December 31, 2009
9,701,478 December 31, 2010
-----------
$21,272,437
===========
</TABLE>
Previous securities transactions have resulted in an "ownership change"
within the meaning of Section 382 of the Internal Revenue Code of 1986, as
amended. The Company's ability to use its NOLs existing at the time of such an
ownership change to offset its taxable income, if any, generated in future
taxable periods is subject to an annual limitation. The public offering (see
note 14) will likely result in an additional Section 382 ownership change.
This could further limit the ability of the Company to use its NOLs to offset
any future taxable income. The change in ownership provisions of Section 382
do not have any impact on the expiration dates of the NOLs.
(10) DEVELOPMENT AGREEMENTS
The Company entered into two development and supply agreements relating to
its research and development. In December 1992, these two agreements were
replaced with formal purchase orders. Under the prior development and supply
agreements, the purchasers each provided facilities for the testing of three
Systems which were supplied at no cost. They agreed to furnish technical and
market information to assist
22
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(10) DEVELOPMENT AGREEMENTS--(CONTINUED)
with the System development and received options to purchase, at a discount,
an aggregate of 625 commercially saleable Systems. In addition, the purchasers
were each granted options to acquire 2.5 percent of the Company's capital
stock at the time the options were issued, which have been exercised. In
connection with the options to purchase commercially saleable Systems, the
purchasers received exclusivity privileges and were required to make advance
deposits. Customer deposits at December 31, 1993 and 1994 included $817,939
and $317,300, respectively, of deposits related to these agreements. Customer
deposits of $380,639 were recorded as other income during 1994 upon failure by
the purchasers to perform in accordance with the terms of the purchase
arrangements. The remaining $437,300 was repaid, $120,000 during 1994 and
$317,300 during 1995.
The Company entered into an agreement to market and sell photochromic
eyeglass lenses manufactured by the Company. Subject to the approval of a
final product and the payment of an annual license fee of $500,000, the
Company plans to sell photochromic eyeglass lenses on a limited exclusive
basis to the other party to this agreement. The exclusive license will have a
term of one year and is renewable at the other party's option for up to three
additional years, subject to certain conditions, upon payment to the Company
of additional license fees. Under the agreement, the Company retains the right
to directly sell photochromic eyeglass lenses to System users and purchasers.
For the year ended December 31, 1995, the Company has received no license fee
under this agreement.
The Company entered into an agreement to jointly develop a technology for
manufacturing lenses made of standard and advanced lens materials. The other
party to the agreement has agreed to pay the Company approximately $500,000 in
development fees in connection with the agreement if certain development
thresholds are met. The agreement provides that if the parties determine that
the development project is successful, the parties will attempt to negotiate
terms concerning the technologies developed. For the year ended December 31,
1995, the Company has offset research and development costs by $160,000
received under this agreement.
(11) BUSINESS AND CREDIT CONCENTRATIONS
The Company's customers are located primarily throughout the United States.
International sales accounted for less than 10 percent of net sales for the
years ended December 31, 1993 and 1994. For the year ended December 31, 1995,
international sales accounted for 13 percent of net sales.
For the year ended December 31, 1993, the Company had net sales to two
customers (Texas State Optical, Inc. (TSO) and LensCrafters, Inc.), each of
which accounted for more than 5 percent of the Company's net sales,
aggregating approximately $2,437,000, or 61 percent of net sales (TSO 40
percent and LensCrafters, Inc. 21 percent). For the year ended December 31,
1994, the Company had net sales to two customers (National Vision Associates
Ltd. (NVA) and TSO), each of which accounted for more than 5 percent of the
Company's net sales, aggregating approximately $1,169,000, or 28 percent of
net sales (NVA 6 percent and TSO 22 percent). For the year ended December 31,
1995, the Company had net sales to two customers (NVA and Vision Express
U.K.), each of which accounted for more than 5 percent of the Company's net
sales, aggregating approximately $1,189,000, or 19 percent of net sales (NVA
10 percent and Vision Express U.K. 9 percent).
At December 31, 1994, the Company had no customers with accounts receivable
balances exceeding 5 percent of total stockholders' deficit. At December 31,
1995, the Company had one customer with an accounts receivable balance
exceeding 5 percent of total stockholders' equity. The aggregate receivable
balance of this
23
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(11) BUSINESS AND CREDIT CONCENTRATIONS--(CONTINUED)
customer was approximately $519,000, or 24 percent of total accounts
receivable and 9 percent of total stockholders' equity.
The Company is substantially dependent upon suppliers from which it
purchases most of the components used in the System, such as Power Plates,
molds, resins, semi-finished lens blanks and parts for assembling the curing
chambers. In general, the Company uses one separate supplier for each
component. Management believes there are a number of sources for components;
however, the Company could incur significant delays in deliveries and
increased costs if it were required to change suppliers or if the Company
experienced delays in obtaining adequate supplies of products from the
Company's suppliers.
(12) COMMITMENTS AND CONTINGENCIES
During 1994, the Company entered into an agreement with Secured Funding
Source (Secured) to expand the sales of Systems by providing nonrecourse
leasing arrangements to potential customers. Under the terms of the agreement,
the Company sells Systems to Secured, who in turn leases the Systems to its
customers. The terms of the agreement require Secured to provide advance
funding to the Company to be used as working capital. In addition to the
leasing arrangement with Secured, during the fourth quarter of 1994, the
Company implemented a power lease program. Under this program, the Company
sells Systems to the financing company, on a nonrecourse basis, and is
obligated to pay for an agreed-upon number of initial lease payments (i.e.
three months, six months) on behalf of approved lease customers. The value of
these lease payments (power lease payments) is recorded as a reduction of the
net sales price (sales discount) and as a liability to financing companies at
the time of sale. Under both the agreement with Secured and the power lease
program, the leasing companies have the right to take possession of the
equipment as remedy, with no legal recourse against the Company in the event
of a customer default. No remarketing agreements exist between the Company and
any of the leasing companies. The Company's total liability in connection with
its agreement with Secured, including advance funding and the power lease
payments, was $272,130 and $40,015 at December 31, 1994 and 1995,
respectively. In addition, the Company was obligated at December 31, 1994 and
1995 for power lease payments of $68,650 and $21,061, respectively, to other
financing companies.
During 1993, a lawsuit was filed against the Company alleging infringement
by the Company of two patents relating to the molding of optical lenses. On
February 27, 1995, a settlement agreement and release was signed by both
parties, providing for the payment by the Company of consideration totaling
$650,000. The total consideration of $650,000, including a cash payment of
$10,000, issuance of Company common stock with an aggregate value equal to
$400,000 and a full recourse secured promissory note in the aggregate
principal amount of $240,000, was accrued by the Company and included in the
accompanying statement of loss for the year ended December 31, 1994. During
1995, in connection with this settlement, the Company issued 17,069 shares of
common stock with an aggregate value of $111,892 to certain preferred
stockholders consistent with an anti-dilution provision.
The Company and certain of its stockholders, optionholders and
warrantholders have entered into an option agreement with another party
(Optionholder), under which the Optionholder acquired an option to purchase
ultimately all of the outstanding shares of capital stock of the Company at a
net aggregate exercise price of approximately $85,000,000. In consideration of
the grant of the option, the Company received $1,500,000, which is reflected
as an option payment liability in the accompanying December 31, 1995 balance
sheet. Pursuant to the terms of the option agreement, the option has
terminated and the Optionholder will receive 150,000 shares of Series D Stock
in satisfaction of the option payment liability on the effective date of the
registration statement for a public offering of the Company's common stock
(see note 14).
24
<PAGE>
INNOTECH, INC.
(A DEVELOPMENT STAGE COMPANY THROUGH JUNE 30, 1993)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company is subject to environmental laws and regulations at both the
federal and state levels. At December 31, 1995, the Company is not aware of
any material violations or areas of noncompliance with respect to federal and
state laws and regulations covering environmental matters. In the opinion of
management, any costs incurred resulting from environmental matters will not
have a material adverse effect on the Company's financial position or results
of operations.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to Be Disposed Of (SFAS 121). SFAS 121
requires companies to review long-lived assets and certain identifiable
intangibles to be held, used or disposed of, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company is required to adopt SFAS 121 in 1996. The Company
believes the adoption of SFAS 121 will not have a significant effect on its
financial statements.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments (SFAS 107), requires the Company to disclose
the estimated fair values of its financial instruments. SFAS 107 defines the
fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments: The carrying amounts reported in the
balance sheet for cash and cash equivalents and long-term debt approximate
fair value. The fair value of long-term debt is estimated by discounting the
future cash flows of each instrument at rates currently offered to the Company
for similar debt instruments of comparable maturities.
(14) PUBLIC OFFERING
In December 1995, the Company's Board of Directors authorized the filing of
a registration statement for a public offering of the Company's common stock.
On March 20, 1996, the Company consummated a public offering of 3,000,000
shares of the Company's common stock and received net proceeds of
approximately $26 million.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
INNOTECH, INC.
(Registrant)
Date: November 26, 1996 /s/ STEVEN A. BENNINGTON
-------------------------------------
Steven A. Bennington
President and
Chief Operationg Officer
26
