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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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: 0-27746
INNOTECH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1560349
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5568 AIRPORT ROAD, ROANOKE, VIRGINIA 24012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 362-2020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 28, 1997, the aggregate market value of the Registrant's Common
Stock held by non-affiliates was approximately $0.
As of March 28, 1997, 8,956,096 shares of the Registrant's Common Stock were
outstanding.
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INNOTECH, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PART I
ITEM 1. BUSINESS
GENERAL
Innotech, Inc., a Delaware corporation ("Innotech" or the
"Company"), develops, manufactures and sells lens casting fabrication systems
that enable optometrists, opticians, ophthalmologists and other optical
retailers to custom fabricate high-quality multifocal and single vision plastic
eyeglass lenses at the point of sale more cost-effectively and quickly than
traditional channels of distribution. The Company's system (the "Excalibur
System"), which is based upon its patented SurfaceCasting technology, is capable
of fabricating millions of different lenses of various styles, materials and
prescriptions that the Company believes constitute a substantial majority of the
standard hard plastic multifocal and single vision prescriptions generally
dispensed. The Company has sold over 850 Excalibur Systems worldwide since the
Excalibur System was introduced in May 1993.
Innotech also sells single vision optics ("Power Plates") and
polymerizable resins ("resins" and, together with Power Plates, "consumables")
for use in the Excalibur System. The consumables create a recurring revenue
stream for the Company as customers replenish the consumables used in the
Excalibur System. Because of the proprietary nature of the consumables and the
Company's numerous patents covering its technology, Innotech anticipates that it
will be the sole source of supply for the consumables. The Excalibur System can
fabricate both clear and photochromic single vision, bifocal and progressive
addition lenses. Innotech also is developing additional premium-priced
consumables for use in the Excalibur System. See "--Products" and "--Research
and Development."
Innotech was incorporated in Delaware in November 1992. The
Company's predecessor was incorporated in Virginia in October 1990 and was
merged into the Company in December 1992. The Company's principal executive
offices are located at 5568 Airport Road, Roanoke, Virginia 24012, and its
telephone number is (540) 362-2020.
RECENT DEVELOPMENTS
On February 10, 1997, the Company entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Johnson & Johnson (the "Parent")
and INO Acquisition Corp., a
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wholly owned subsidiary of Johnson & Johnson (the "Purchaser"), which provided
for the acquisition of all of the common stock of the Company at a price of
$13.75 per share, payable in cash. Under the terms of the Merger Agreement, on
February 18, 1997, the Purchaser commenced a tender offer to purchase all of the
outstanding shares of the Company's common stock not already owned by the
Parent, the Purchaser or any other subsidiary of the Parent at a cash price of
$13.75 per share (the "Offer"). The Merger Agreement provided that, subject to
the satisfaction of certain conditions, the Offer would be followed by a merger
of the Purchaser with and into the Company, in which case those shares that were
not purchased in the Offer (other than shares held in the Company's treasury, by
the Parent, the Purchaser or any other subsidiary of the Parent, or by
stockholders duly exercising appraisal rights as provided by Delaware law) would
be converted into the right to receive in cash the price paid per share pursuant
to the Offer (the "Merger"). The Offer expired on March 17, 1997, and the
Purchaser acquired and paid for an aggregate of 8,422,121 shares of common stock
pursuant to the terms of the Offer. Following the termination of the Offer, the
Parent owned indirectly approximately 99% of the outstanding common stock,
including shares previously owned by another subsidiary of the Parent. In
accordance with the Merger Agreement and the Delaware General Corporation Law,
the Purchaser merged with and into the Company on March 21, 1997, and the
Company became a wholly owned subsidiary of the Parent.
The Merger Agreement provided that during the term of the Merger
Agreement, the Company would carry on its business in the ordinary course and
use all reasonable efforts to preserve intact its business organization, keep
available the services of its current officers and employees and preserve its
relationships with customers, suppliers, licensors, licensees, distributors and
others having business dealings with it. Pursuant to the Merger Agreement, the
Company was prohibited from taking certain actions prior to the effective date
of the Merger without the Parent's prior written consent including, but not
limited to, making capital expenditures in excess of certain amounts and
entering into any agreements or understandings relating to the distribution,
sale or marketing by third parties of the Company's products. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
Simultaneously with entering into the Merger Agreement, Dr.
Ronald D. Blum, the Chairman of the Board of Directors of the Company, Chief
Executive Officer and Secretary of the Company, Chase Venture Capital
Associates, L.P. ("CVCA") and CIBC Wood Gundy Ventures, Inc. ("CIBC"), the
Parent and the Purchaser entered into a Stockholder Agreement, dated as of
February 10, 1997 (the "Stockholder Agreement"). Pursuant to the Stockholder
Agreement, each of Dr. Blum, CVCA and CIBC agreed to sell or tender pursuant to
the Offer, and the Purchaser agreed to purchase, all 3,331,608 shares of
outstanding common stock of the Company owned by them, representing
approximately 37% of the
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outstanding shares on February 10, 1997, at a price per share equal to $13.75.
The Purchaser acquired from Dr. Blum, CVCA and CIBC an aggregate of 3,331,608
shares of common stock on or about March 18, 1997, pursuant to the terms of the
Stockholder Agreement.
The Company's plans, intentions and business strategies set forth
in this Annual Report on Form 10-K may be modified, supplemented and/or
abandoned by the Parent following the Merger.
THE EXCALIBUR SYSTEM AND SURFACECASTING
The Company's business strategy is to increase sales and achieve
profitability through the continued development and commercialization of the
Company's patented SurfaceCasting technology and related patented and
proprietary Power Plates, resins, and other lens products. The Company intends
to pursue this strategy by (i) attempting to increase sales of Excalibur
Systems, (ii) attempting to increase sales of consumables and (iii) further
commercializing the Company's new products developed through its research and
development efforts. The Company is also developing eyeglass lens products to be
sold or licensed independently of the Excalibur System, including advanced lens
products and materials that could be sold to wholesale lens laboratories or
licensed to others.
The Excalibur Systems are used by eyewear dispensers to fabricate
plastic eyeglass lenses at the point of sale using the Company's patented
SurfaceCasting technology. The following steps are taken to fabricate lenses in
the Excalibur System:
(1) the operator selects the appropriate Power Plates for the
lenses based upon the distance power of the prescription (including spherical
and astigmatic power, if any);
(2) the operator selects the appropriate proprietary glass molds
which incorporate the bifocal, progressive addition or single vision optics
required by the prescription;
(3) the Power Plates are positioned onto the molds;
(4) the operator inputs the prescription and the type of lenses
to be fabricated into the computerized curing chamber and dispenses the resin
from the cartridge onto the molds;
(5) the mold, resin and Power Plate assembly are placed in
the curing chamber; and
(6) following the completion of the curing cycle, the mold
assembly is withdrawn from the curing chamber and the finished lenses are
separated from the reusable molds.
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During the curing cycle, ultraviolet radiation and heat are
applied to cure the resin, which bonds to each Power Plate and forms a hard,
cured optical layer that has the appropriate distance and bifocal or progressive
add powers on its convex surface. The fabrication process produces high-quality
plastic lenses in approximately 25 to 50 minutes (depending upon the lens
material and type), including estimated preparation time.
Eyewear dispensers using the Excalibur System are able to
fabricate plastic progressive addition lenses (no-line bifocal lenses) on site
in less than one hour for a materials cost of approximately $19.95 per pair for
lenses made of standard plastic lens materials (excluding the cost of capital
equipment), whereas eyewear dispensers who purchase standard plastic uncut
progressive addition lenses from wholesale lens laboratories pay prices
generally ranging from $30 to $80 per pair. Excalibur System users are able to
bypass the wholesale lens laboratory, thereby reducing their cost of sales. In
addition, because eyewear dispensers are able to bypass wholesale laboratories,
they are able to improve customer service as a result of the reduced time
required to deliver finished eyeglasses to the consumer.
Multifocal lenses (e.g., bifocals and progressive addition
lenses) must be custom made for the particular lens material, prescription, add
power and astigmatism of each customer, and a full inventory of finished
multifocal lenses would require, in theory, millions of finished lenses to be
stocked. As a result, neither wholesale lens laboratories nor eyewear dispensers
maintain a full inventory of finished multifocal lenses in stock. The standard
Excalibur System is capable of fabricating in excess of eight million different
lenses of various styles, materials and prescriptions with a relatively low
level of consumables inventory, requiring significantly less storage space than
what would be required to keep a comprehensive inventory of such finished lenses
in stock.
PRODUCTS
The Company sells the Excalibur System which includes the desktop
computerized curing chamber, Power Plates, resin cartridges, reusable glass
molds and other related accessories. The Excalibur System is capable of
fabricating clear and photochromic lenses (which automatically darken when
exposed to sunlight) in the form of progressive addition, bifocal and single
vision lenses. Most of the Power Plates and resins recently sold by the Company,
however, are used to fabricate clear progressive addition lenses and bifocal
lenses.
In 1996, the Company introduced an improved personal
computer-based curing chamber which improves the automation of the Company's
previous curing chambers. The improved chamber includes an internal modem, solid
state electronics, a universal
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power supply which is capable of operating the chamber worldwide and an optical
wand for reading bar codes from consumables packaging.
The Company sells three types of Power Plates and six types of
resins that are used in the Excalibur System to fabricate such lenses. Resins
are sold in pre-packaged plastic cartridges which are inserted into the
dispenser located on the front of the curing chamber. Presently, Power Plates
for nonphotochromic lenses are made from CR-39, a standard hard plastic lens
resin, and high index plastic materials. High index materials produce thinner
and lighter lenses and have a higher refractive index than CR-39. Power Plates
for PhotoPlastic lenses, the Company's current photochromic lenses, are made
from CR-307, an advanced plastic lens resin. CR-39(R) and CR-307(R) are
registered trademarks of PPG Industries, Inc. In 1996, the Company introduced
several new consumables products based upon advanced lens materials that can be
used to fabricate additional premium plastic lens products. These included high
index lenses (with a refractive index of 1.57) marketed under the name LiteVue,
and progressive addition lenses incorporating an advanced design marketed under
the name Innotech Crystal.
The current list price of the Excalibur System is $19,950. Power
Plates and cartridges containing resins, marketed under the name Genesis, are
sold separately from the Excalibur Systems. Power Plates range in price from
approximately $8.30 per pair to $35.00 per pair, depending upon the plastic lens
materials used. The standard package of Power Plates and resins inventory
supplied with the Excalibur System has a list price of approximately $4,000. The
prices for the Excalibur Systems and consumables may increase or decrease
depending upon certain factors, including the volume of purchases. Glass molds
used in the Excalibur Systems can be purchased from the Company if they break or
become worn or scratched.
In the United States, the Company owns 12 issued patents and one
patent application that has been allowed, and has 17 patent applications pending
relating to its current and future SurfaceCasting eyeglass lens products and
processes. The Company also owns several patents in foreign countries and has
filed numerous patent applications abroad. The SurfaceCasting process and the
Company's resin formulations, Power Plates and molds used in the Excalibur
System incorporate the Company's proprietary technology. As a result of the
Company's intellectual property rights, the Company anticipates that it will be
the sole source of supply of consumables for users of the Excalibur System. See
"--Patents, Trademarks and Proprietary Information." The Company also expects to
obtain recurring revenues, to a lesser extent, from sales of additional molds
for use in the fabrication process as well as sales of maintenance contracts for
the Excalibur Systems in the future.
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RESEARCH AND DEVELOPMENT
The Company has invested and continues to invest substantially in
research and development activities in order to introduce new and innovative
premium consumables, improve and expand existing consumables product lines,
develop eyeglass lens products which can be sold independently from the
Excalibur System and reduce manufacturing costs related to its products.
For the years ended December 31, 1996, 1995, and 1994, the
Company spent approximately $2,186,000, $1,830,000, and $1,732,000,
respectively, on research and development activities, net. In 1995, the Company
received $160,000 under research and development agreements which was used to
offset research and development costs.
Plastic photochromic lenses, introduced in 1990, were estimated
to have accounted for in excess of 15% of all plastic lenses sold in the United
States in 1996. The market share attained by photochromic lenses since their
introduction in 1990 has been mostly at the expense of glass photochromic
lenses. The plastic photochromic lenses currently made by the Company and most
other lens manufacturers require processing by third parties. The Company is
developing a proprietary photochromic lens, to be marketed under the name
PhotoShades, to be fabricated in the Excalibur System using conventional hard
plastic lens resins such as CR-39, as well as high index and polycarbonate lens
materials. Polycarbonate lenses have certain advantages over lenses made of
CR-39, including a higher refractive index and superior impact resistance and,
as a result, polycarbonate lenses are popular choices for children and athletes.
The Company believes that these photochromic lens products would represent new
products that are not currently available from other lens manufacturers.
Development efforts are also directed toward reducing
manufacturing costs, continuing improvements in the curing chamber's design and
increasing the Excalibur System's level of automation.
In the future, the Company also plans to conduct further research
in an effort to adapt its SurfaceCasting technology to commercialize a
custom-fit bifocal contact lens, which would provide toric correction as well as
precise bifocal positioning. The Company has been granted four patents in the
United States pertaining to manufacturing methods for SurfaceCasting multifocal
contact lenses. The Company may seek a joint venture partner for the development
of a commercial product, and any contact lens used for such a product is
anticipated to be supplied by existing contact lens manufacturers that have
previously obtained from the United States Food and
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Drug Administration (the "FDA") approval for their contact lens products.
In 1996, the Company purchased a warrant to acquire 15% of the
outstanding units of Prism Ophthalmics, L.L.C. ("Prism") and an option to
acquire all of the outstanding equity interests of Prism. Prism, formed in 1996,
owns a United States patent and two patent applications for lenses which are
surgically implanted in the eye and are designed to improve central field loss,
a cause of blindness. Prism is researching and developing a commercial product
based upon its technology. See "MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Executive Vice President of
Engineering, Research and Development, and a director of the Company, and his
wife are the owners of approximately 46% of the outstanding equity interests of
Prism. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." Commercialization
of contact lenses and/or surgically implanted lenses will require substantial
additional research and will require premarket notice to or premarket approval
by the FDA.
In August 1995, Innotech entered into an agreement with Corning
Incorporated to develop jointly a technology for manufacturing lenses made of
standard and advanced lens materials. The agreement was terminated by mutual
agreement. In August 1995, the Company also entered into an agreement with
Benson Eyecare Corporation to market and sell photochromic eyeglass lenses made
of advanced lens materials manufactured by the Company. Pursuant to its terms,
such agreement was terminated.
SALES AND MARKETING
Innotech markets and sells the Excalibur System and consumables
directly to independent practitioners, such as optometrists, opticians and
ophthalmologists, as well as to optical retail chains. The Company focuses its
sales efforts on its estimated target market of 20,000 independent practitioners
who generate annual sales of $250,000 or more at each dispensing location, sell
on average at least five pairs of multifocal lenses each day and operate
finishing equipment. At present, presbyopia (an increasing difficulty of the eye
to accommodate both near and far vision) is the Company's principal vision
correction market. The Company offers its Excalibur Systems through 23 employed
sales representatives, and three international sales representatives. In
general, the Company's sales representatives are opticians or have other prior
experience in selling lens products in their market.
The Company, in August 1995, began hiring a sales force to focus
on selling consumables to users of Excalibur Systems. The consumables sales
force, which presently consists of 12 representatives (most of whom are trained
as opticians), is
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separate from the sales force that sells Excalibur Systems. The consumables
sales representatives periodically visit Excalibur System users after the
Excalibur System is purchased to obtain purchases of consumable reorders, to
offer continuing product training, education on the benefits and capabilities of
the Excalibur System and introduction of new products, and to provide other
customer services. All sales representatives are paid salary and receive
incentive compensation based upon their total sales.
In addition to its direct sales force, the Company markets its
products through trade show exhibits, direct mail, advertising and
telemarketing. To a lesser extent, the Company uses public relations to create
and maintain market awareness of its products. The Company sometimes refers
potential customers to third-party leasing companies which provide financing to
such customers. See Note 12 of the "Notes to the Company's Financial
Statements." In 1997, the Company commenced a new marketing program which
included the lease of the curing chamber and the consignment of consumables
together with the requirement of a minimum monthly purchase of consumables.
The Company has sold over 850 Excalibur Systems worldwide since
the Excalibur System was introduced in May 1993. Excalibur Systems have been
sold to and the Company's lenses are dispensed by several large optical
retailers, such as Vision Express UK Ltd. and its affiliates (collectively,
"Vision Express") and National Vision Associates Ltd. ("NVA"), which operates in
Wal-Mart Stores, Inc. During the year ended December 31, 1996, sales to Vision
Express and NVA accounted for approximately 30% and 1%, respectively, of the
Company's net sales. During the year ended December 31, 1995, sales to NVA and
Vision Express accounted for approximately 10% and 9%, respectively, of the
Company's net sales. Sales to Texas State Optical, Inc. ("TSO") and NVA
accounted for approximately 22% and 6%, respectively, of the Company's net sales
for the year ended December 31, 1994. See Note 11 of the "Notes to the Company's
Financial Statements." NVA and TSO were ranked seventh and eleventh,
respectively, in optical retail sales in the United States in 1994. Vision
Express is a large optical retailer in Europe. The loss of sales from Vision
Express could have a material adverse effect upon the Company's business and
results of operations. The Company also has sold Excalibur Systems to numerous
independent optometrists, opticians and ophthalmologists.
The Company's customers are located primarily throughout the
United States. For the years ended December 31, 1996 and 1995, international
sales accounted for approximately 36% and 13%, respectively, of the Company's
net sales. International sales accounted for less than 10% of the Company's net
sales for the year ended December 31, 1994.
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As of February 28, 1997 and February 15, 1996, the Company had
firm orders for its products amounting to approximately $145,000 and $550,000,
respectively.
INSTALLATION, SERVICE AND TRAINING
The Company employs five technicians located in the United States
and two technicians located in the United Kingdom who install and maintain
Excalibur Systems for the Company's customers. Installation, maintenance and
replacement parts for the Excalibur System during the first year and for the
molds during the first 90 days following the sale are included in the purchase
price of the Excalibur System. Training in the use and operation of the
Excalibur System is also included in the purchase price. In the future, the
Company may offer annual equipment maintenance contracts to customers for a
fixed fee and charge customers without maintenance agreements for parts and
labor. The Company maintains a toll-free telephone number for consumables
orders, technical assistance and maintenance calls. The consumables sales force
also provides technical support to Excalibur Systems owners. The Company
warrants that, if customers follow certain procedures and protocols, its
customers' patients will adapt to the Company's current progressive addition
lens products and that its customers will be able to properly cast in the
Excalibur System progressive addition and photochromic lens products.
MANUFACTURING
Outside suppliers currently manufacture approximately 50% of the
CR-39 Power Plates, almost all of the resins and all of the other components of
the Excalibur System. The Company modifies all Power Plates, assembles the
curing chamber, mold cabinets and accessories, and tests, inspects and packages
all component parts of the Excalibur System at its facilities before delivery to
its customers.
In 1996, the Company established production operations in a
leased facility to manufacture Power Plates and mix resins based on advanced
lens materials as well as CR-39. The manufacture of consumables by the Company
is subject to regulation and inspection from time to time by the FDA for
compliance with Good Manufacturing Practice ("GMP"). Failure to comply with such
regulations or delay in attaining compliance may adversely affect the Company's
manufacturing activities and could result in, among other things, fines, recall
or seizure of products and total or partial suspension of production. See
"--Government Regulation."
The principal materials and parts currently used by the Company
in the production of the consumables and other components of the Excalibur
System are standard and advanced plastic lens
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materials, specialized chemicals used in the SurfaceCasting resin, glass molds,
motors, ultraviolet lamps, printed circuit boards, displays and other electrical
components. The Company is at present substantially dependent upon suppliers
from which it purchases most of the components and materials for the Excalibur
System, consumables and molds. In general, the Company uses one separate
supplier for each component and material. The Company believes that the
components and materials currently used by it in the production of the
consumables and the Excalibur System are available from a number of sources,
except for progressive addition molds and the CR-307 lens materials. It could
take in excess of six months to secure an alternative supplier of progressive
addition molds in the event of the loss of the Company's current supplier. The
Company presently attempts to maintain an inventory of not less than 60 days for
component parts and materials. The Company has certain of its components and
tooling manufactured abroad and may have additional components provided by
foreign suppliers in the future. The loss of a supplier for any material or part
used by the Company or the inability of a supplier to fulfill the Company's
demands would cause significant delays in deliveries and material additional
costs, especially with respect to progressive addition molds.
COMPETITION
The vision care industry is subject to intense competition from a
variety of sources. The Company competes with wholesale lens laboratories and
with manufacturers of point-of- sale lens fabrication systems, manufacturers of
contact lenses, lens manufacturers and providers of medical treatments to
correct refractive disorders.
Currently, the Company's primary competition is from wholesale
lens laboratories, of which there are over 1,000. Wholesale lens laboratories
provide finished lenses to eyewear dispensers according to requested
prescriptions. Wholesale lens laboratories generally deliver finished lenses to
eyewear dispensers, on the average, within one to seven days from the receipt of
an order. Wholesale lens laboratories provide advantages over in-office
fabrication because no up-front capital costs are necessary and most fabrication
is done outside the dispenser's location. There may be, in the future, further
acquisitions of wholesale lens laboratories by lens manufacturers. Any resulting
integration of the manufacturing and distribution of eyeglass lenses may cause
reductions in the prices of lenses and increase competition, perhaps
significantly, against the Company.
The Company is aware of four other commercially available systems
for fabricating plastic lenses at the point of sale. They are traditional
surfacing, modified surfacing (also known as pre-blocked surfacing), laminating,
and whole lens casting. Each method involves conforming the front, back or both
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surfaces of a plastic lens to specified geometric shapes. Surfacing is the
traditional method in which multifocal lenses are fabricated and is used
predominantly by wholesale lens laboratories where it enjoys widespread
acceptance. With the exception of large optical retailers that operate surfacing
lens laboratories on-site, the Company believes that surfacing has not gained
widespread market acceptance in an in-office setting because of high capital
equipment investment, skilled labor, space and inventory requirements. The
Company does not believe that these four on-site fabrication methods, to date,
have substantial market presence in the segment of the market in which the
Excalibur System competes. The Company believes that the combination of several
qualities of the Excalibur System provides the Company with certain competitive
advantages over manufacturers of other in-office plastic lens fabrication
systems depending on the nature of the competitive system. These qualities
include speed, reduced capital equipment costs, simplicity of operation, reduced
space and inventory requirements, materials and ease of use. It is anticipated,
however, that manufacturers of point-of-sale lens fabrication systems will
continue to develop and enhance their products to make them more attractive to
lens dispensers.
In addition, the Company competes indirectly with manufacturers
of contact lenses and providers of medical treatments for refractive disorders,
such as commercial laser treatments and surgical and non-surgical techniques.
However, the Company does not consider competition from contact lens
manufacturers significant because of the difficulty of successfully fitting
currently available multifocal contact lenses for presbyopia and the tendency of
contact lens wearers to also own eyeglasses. Current medical treatments, such as
laser vision correction and radial keratomy, also have proven to be largely
ineffective in correcting presbyopia because such procedures do not treat the
cause of presbyopia, the inability of the lens within the eye to accommodate for
near and far vision. At present, manufacturers of laser vision correction
equipment have indicated that their principal markets do not include correction
of presbyopia, the Company's principal vision correction market. In addition,
many patients who have undergone medical treatments for vision correction still
require eyeglasses, although the prescription required may be weaker. Additional
medical research is being conducted with respect to surgical and oral
pharmaceutical treatments for presbyopia. The Company, however, is not aware of
any commercially available procedures or products.
The Company believes substantial research and development is
being conducted by competitors and others with respect to lens fabrication
systems that enable eyewear dispensers to fabricate high-quality plastic
eyeglass lenses at the point of sale. The Company anticipates that this research
and development will continue and may intensify and accelerate.
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The development and/or widespread acceptance of any new processes or products,
including new lens shapes, sizes, coatings and materials that cause the
Company's products to become obsolete, non-competitive or incompatible could
have a material adverse effect on the Company's financial condition and results
of operations. In addition, many of the Company's competitors have significantly
greater financial, technological, marketing and other resources than the
Company, which could enable such competitors to develop new processes or
products. Moreover, many of the Company's competitors have significantly greater
experience than the Company in developing new lenses, lens materials and
fabrication technologies, and there can be no assurance that the Company will be
able to compete effectively with such competitors.
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company believes that the protection afforded by its patented
technology, SurfaceCasting, and related patents and its proprietary confidential
know-how are essential to its future revenues and earnings. In the United
States, the Company owns 12 issued patents and one patent application has been
allowed, and has 17 patent applications pending related to its current and
future SurfaceCasting eyeglass lens products and processes. While the Company
has filed numerous foreign patent applications, it has limited patent protection
in Europe and certain other foreign countries. The Company intends to file
additional patent applications in the future in both the United States and
abroad. The Company believes that the patents which have been issued to it
provide adequate protection for the current SurfaceCasting technology, the
Excalibur System and its current consumables product line. The Company has four
additional issued patents and has filed several patent applications principally
related to the application of SurfaceCasting to multifocal contact lenses. The
ultimate degree of patent protection obtained for new products and certain
existing products will depend upon the degree of success in the prosecution of
the patent applications currently pending in the United States Patent and
Trademark Office and elsewhere. In the event patents are not issued from its
applications, the Company will rely upon trade secret laws and confidentiality
and non-competition agreements, which provide a lesser degree of protection than
patents.
Purchasers of Excalibur Systems acquire from the Company an
implied license to fabricate lenses in the Excalibur System using the Company's
patented technology. In general, use of the Excalibur System with consumables
manufactured by others constitutes a violation of the Company's patents and
licenses. There is no assurance that others will not develop technologies to
circumvent the Company's patents and licenses, and if such parties violated the
Company's patents and licenses, there is no assurance the Company could detect
such violations or deter future violations. Enforcement of the Company's rights,
patents
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and licenses may be costly, time-consuming and, in some situations, impossible.
Although the Company attempts to protect its intellectual
property rights through patents, trademarks, trade secrets and confidentiality
and non-competition agreements when appropriate, there can be no assurance that
the Company will be able to protect its technology adequately, that competitors
will not be able to develop similar technology independently, that the claims
allowed on any patents held by the Company will be sufficiently broad to protect
the Company's technology or that the Company's patents will provide a
significant competitive advantage for its products. Moreover, the Company
believes that obtaining foreign patents may be more difficult than obtaining
domestic patents because of differences in patent laws. In addition, the
protection provided by foreign patents once they are obtained may be weaker than
the protection provided by United States patents.
The Company has from time to time been the subject of legal
disputes involving the intellectual property rights of others. To date, such
litigation has not had a material adverse effect on the Company and no
litigation is currently pending. See Note 12 of the "Notes to the Company's
Financial Statements." Any litigation in the future to enforce patents issued to
the Company, to protect trade secrets or know-how possessed by the Company or to
defend the Company against claimed infringement of the rights of others will be
time-consuming and costly.
Moreover, the manufacture and sale of products that the Company
may seek to develop or market in the future may involve the use of processes,
products or information, the rights to which may be held by others, even though
the technology associated therewith may have been independently developed by the
Company. There can be no assurance that the Company will be able, for financial
reasons or otherwise, to obtain ownership or license rights with regard to the
use of such processes, products or information or, if obtained, that the use of
such rights will be on terms favorable to the Company.
The Company has a perpetual, royalty-free exclusive license from
Dr. Ronald Blum covering two patents and one patent application relating to
whole lens casting technology as it pertains to SurfaceCasting. This license is
not deemed by management to be material to the Company. Dr. Blum retains the
rights to whole lens casting with regard to these patents and such patent
application. All patents and patent applications relating to SurfaceCasting
invented by the employees of the Company (including SurfaceCasting patents
invented by Dr. Blum prior to forming the Company) have been assigned to the
Company.
The Company has registered trademarks for Excalibur (relating to
the curing chamber), Genesis (relating to the
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SurfaceCasting resin), the Innotech name and logo, Merlin (relating to the
progressive addition lens design), PhotoPlastics (relating to its current line
of photochromic lenses), Power Plate and SurfaceCasting. The Company has applied
for trademark protection for PhotoFast (relating to its proprietary photochromic
plastic lenses), LiteVue (relating to its high index plastic lenses), Excalibur
LensSystem (relating to the newly introduced personal computer-based curing
chamber), Innotech Crystal (relating to its new progressive addition lens
design), PhotoShades (relating to its planned proprietary photochromic plastic
lenses), and Optical Excellence for Less (relating to its slogan).
GOVERNMENT REGULATION
Medical devices, including the Company's consumables products,
are subject to extensive government regulation by the FDA under the Federal
Food, Drug and Cosmetic Act and, in some instances, by foreign and state
governments. The FDA regulates the clinical testing, manufacture, labeling,
sale, distribution and promotion of medical devices. Included among these
regulations are premarket clearance procedures and GMP, which all medical
devices are subject to in the absence of an exemption. Other general FDA
regulations relate to establishment registration and inspection, medical device
listing, labeling, prohibitions against misbranding and adulterating and
requirements for maintaining records and making reports. Noncompliance with
applicable FDA requirements, including GMP, can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure to obtain premarket clearance,
withdrawal of marketing approval and criminal prosecution. The FDA also has the
authority to require repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
The FDA classifies all medical devices into one of three classes,
with Class I being the least stringently regulated and Class III being the most.
The Company's current consumables are considered to be Class I devices. Before
any Class I, II or III new medical device can be introduced into the market, the
manufacturer must either (i) obtain premarket clearance through either the
510(k) premarket notification process or the lengthier premarket approval
("PMA") process or (ii) be exempt from such clearance procedures. A 510(k)
clearance will be granted if the submitted information establishes that the
proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device. The FDA may request extensive data, possibly including
that clinical studies of the device's safety and efficacy be performed, before a
substantial equivalence determination can be made. It generally takes from four
to 12 months from the date of submission to obtain a 510(k) clearance, but it
may take longer. A PMA application must be filed if a
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proposed device is not substantially equivalent to a legally marketed Class I or
Class II device. PMAs must be supported by valid scientific evidence that
typically includes extensive data, including human clinical trials, to
demonstrate the safety and efficacy of the device. Toward the end of the PMA
review process, the FDA will generally conduct an inspection of the
manufacturer's facilities to ensure compliance with GMP. Approval of a PMA
generally takes one or more years from the date of submission of the
application. The PMA process can be expensive, uncertain and lengthy, and a
number of devices for which FDA approval has been sought by other companies have
never been approved for marketing.
The Company believes that the only currently marketed products of
the Company that are subject to regulation as medical devices by the FDA are the
consumables, which become components of prescription spectacle lenses that are
fabricated by the Excalibur System. Due to the status of prescription spectacle
lenses as Class I medical devices and their exemption by regulation from the
FDA's premarket clearance requirements, the Company believes that no premarket
notification or PMA is required with respect to the consumables it currently
markets. In the event that the Company's future consumables do not qualify for
such exemptions, the Company could experience substantial costs and delays in
connection with compliance with any applicable FDA notification, approval,
testing and/or product modification regulations.
In the event the Company seeks to sell contact lenses using the
Company's SurfaceCasting technology or Prism seeks to sell surgically implanted
lenses, the Company and/or Prism would be required to obtain clearance of a
510(k) notification or approval of a PMA application by the FDA before
commercialization in the United States. The FDA premarket clearance process (and
underlying clinical studies) can take several months to several years to
complete and can require substantial commitments of financial resources and
management's time and effort. Delays in obtaining requisite regulatory approvals
or the failure to obtain required clearances in the United States and other
countries would adversely affect or prevent the marketing of the contact lens
products and/or surgically implanted lenses.
Any products manufactured or distributed by the Company under FDA
oversight are subject to extensive and continuing regulation by the FDA. For
example, GMP regulations impose certain procedural and documentation
requirements upon the Company with respect to manufacturing and quality
assurance activities. Although many of the Power Plates and resins currently
sold by the Company are manufactured by third-party suppliers, the Company
modifies all Power Plates it sells and is expanding its consumables
manufacturing capabilities. The manufacture and modification of consumables and
future manufacture of other consumables by the Company are subject to
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regulation and inspection from time to time by the FDA for compliance with GMP.
There can be no assurance that the FDA will not, during the course of an FDA
inspection of existing or new facilities, identify what it considers to be
deficiencies in GMP or other requirements and request or require remedial
action.
In addition to GMP and any premarket clearance requirements, the
Company is subject to labeling, recordkeeping, reporting, registration and
product listing requirements, and its facilities are subject to periodic FDA
inspection, including the products, equipment and records maintained at the
facilities that are subject to the FDA's jurisdiction and inspection authority.
Changes in existing requirements or adoption of new requirements or policies by
the FDA or foreign or other domestic regulatory authorities could adversely
affect the ability of the Company to comply with regulatory requirements.
The Company is also subject to United States environmental laws
and regulations concerning emissions into the air, waste water discharges and
the generation, handling, storage, transportation and disposal of hazardous
wastes, and to other federal, state and local laws and regulations. The Company
believes that it possesses all material permits and licenses necessary for the
operation of its business, including its manufacturing facilities, and that its
operations are in compliance in all material respects with the terms of all
applicable environmental laws. It is impossible to predict accurately what
effect these laws and regulations will have on the Company in the future.
Certain processes, including those for cleaning lenses and mold assemblies and
certain other manufacturing processes use a variety of volatile and other
potentially hazardous substances. It is the Company's policy to meet or exceed
all applicable environmental, health and safety laws and regulations. While the
Company believes that it is in compliance in all material respects or exempt
from complying with applicable laws and regulations, there can be no assurance
that the Company will be able to continue to do so or that the Company will not
be subject to any fines or penalties for any inadvertent violation or
determination that it is either not in compliance or entitled to an exemption.
EMPLOYEES
The Company employs approximately 180 persons on a full-time
basis and engages two persons on a part-time basis, all of whom are located in
the United States. The Company also has retained two consultants located
overseas, one of whom is a sales representative and one of whom is a technician.
None of the Company's employees are represented by a collective bargaining
agreement. Labor relations are considered by the Company to be good.
SCIENTIFIC AND DEVELOPMENT ADVISORS
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The Company has assembled a group of scientific and development
advisors with diverse backgrounds, including research, academia, industry,
private practice and government agencies. These advisors provide the Company
with expertise in its research programs and discuss research and product
development programs, as well as long-term strategy, trends and technological
developments in the industry. The Company consults with these advisors on an
informal basis, as needed, and these advisors are compensated for their
participation in meetings with the Company.
ITEM 2. PROPERTIES
The Company leases a facility of approximately 30,400 square feet
in Roanoke, Virginia and a facility of approximately 13,400 square feet in
Petersburg, Virginia. The Roanoke facility contains the Company's executive
offices, research and development laboratories, and manufacturing, warehousing,
distribution and packaging facilities. This facility is leased through February
2007. The Company intends to lease an additional 30,000 square feet of warehouse
space adjacent to the existing Roanoke facility following completion of
construction expected in 1997 or 1998. The Petersburg facility contains
manufacturing and packaging operations. The lease expired in August 1996, and
the Company is presently negotiating a new lease. The Company believes that its
current properties are sufficient for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on
October 2, 1996 (the "Meeting"). The only matter voted on and approved by the
holders of shares of the Company's common stock was the proposal to elect two
members to the Company's Board of Directors to serve for a three-year term and
until their successors are duly elected and qualified. The Company's Amended and
Restated Certificate of Incorporation provides that the Board of Directors is
divided into three classes with the term of office of one class expiring each
year. There were 5,815,002 shares of common stock cast in favor of electing each
of Gregory J. Forrest and Ian M. Kidson, which represented a majority of the
shares of the Company's common stock cast for such proposal. Holders of 13,400
shares withheld their votes for each such candidate. There were no broker
non-votes or abstentions. In addition, the terms of office of Dr. Ronald D.
Blum, Dr. Mitchell J. Blutt, Dr. Amitava Gupta, Michael Packard and Dr. Damion
Wicker continued after the meeting.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The shares of the Company's common stock are traded in the
over-the-counter market and prices are quoted on The Nasdaq National Market
under the symbol "IIII." The following table sets forth, for each of the periods
indicated, the high and low last reported sales prices per share as reported by
The Nasdaq National Market and the Dow Jones News Retrieval Service. The common
stock commenced trading on March 14, 1996.
Sales Price
-----------
1996 High Low
- ---- ---- ---
First Quarter (March 14, 1996-March 31, 1996).... $10.250 $8.000
Second Quarter................................... 11.750 8.125
Third Quarter.................................... 11.375 7.375
Fourth Quarter................................... 10.500 7.750
1997
- ----
First Quarter (through March 17, 1997) 13.563 8.125
On February 10, 1997, the last full day of trading before the
public announcement of the execution of the Merger Agreement, the reported
closing sale price of the Company's common stock on The Nasdaq National Market
was $8.875 per share. On March 17, 1997, the reported closing sale price of the
Company's common stock on The Nasdaq National Market was $13.625 per share. The
Company's common stock was delisted from The Nasdaq National Market on March 24,
1997, as a result of the Merger. Price quotations in the over-the-counter market
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual trading transactions.
As of March 28, 1997, the Company's common stock was held by one
holder of record.
Since its inception, the Company has not declared or paid any
dividends on its shares of common stock. In addition, the loan agreement with
the Company's secured lenders prohibits the payment of dividends on the common
stock. The notes in respect of such loan agreement mature in March 1999.
Between February and November 1996, the Company issued 40,677
shares of common stock for an aggregate purchase price of $62,200 to five
employees and former employees in connection with the exercise of outstanding
options to purchase common stock. These transactions were made in reliance upon
the exemptions
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provided in Section 4(2) of the Securities Act of 1933 (the "Securities Act"),
Rule 701 and/or Regulation D promulgated by the Securities and Exchange
Commission (the "SEC") thereunder ("Regulation D") promulgated by the SEC
thereunder. In 1996, the Company issued 1,126,579 shares of common stock for an
aggregate purchase price of $143 cash, plus the cancellation forfeit of warrants
to purchase 1,407 shares of common stock, to 32 persons and entities (all of
which were existing investors in the Company) in connection with the exercise of
outstanding warrants to purchase common stock. These transactions were made in
reliance upon the exemptions provided in Section 4(2) of the Securities Act and
Regulation D.
The Company believes that each purchaser in each of the
transactions described above had access and an opportunity, through such
purchaser's relationship with the Company, to review all relevant information
concerning the Company and each such purchaser had sufficient knowledge and
experience in business and financial matters to evaluate the merit and risks of
such investment. Each purchaser of securities in each of the above transactions
made pursuant to Regulation D represented such purchaser's intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates issued in such transactions. In transactions made in
reliance upon Regulation D, all investors represented to the Company that they
were "accredited investors" as defined in Regulation D.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Financial Statements and the Notes thereto included elsewhere herein
and with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
Years Ended December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ---------
(in thousands, except per share data)
Statement of Loss Data:
Net Sales $ 10,121 $ 6,438 $ 4,104 $ 4,019 $ --
Cost of sales 7,636 5,368 3,963 3,357 --
-------- -------- -------- -------- ---------
Gross profit 2,485 1,070 141 662 --
Selling, general and
administrative expenses 11,434 8,130 6,328 4,041 709
Research and development
costs(1) 2,186 1,830 1,732 1,150 496
-------- -------- -------- -------- ---------
Operating loss (11,135) (8,890) (7,919) (4,529) (1,205)
Other income (deductions)
Interest expense (517) (1,193) (624) (97) (9)
Interest income 840 113 26 35 11
Other, net (10) (10) 349 53 --
-------- -------- -------- -------- ---------
Other income (deductions),
net 313 (1,090) (249) (9) 2
-------- -------- -------- -------- ---------
Loss before extraordinary
item (10,822) (9,980) (8,168) (4,538) (1,203)
Extraordinary item - loss
on extinguishment of debt -- (613) -- -- --
-------- -------- -------- -------- ---------
Net loss $(10,822) $(10,593) $ (8,168) $ (4,538) $ (1,203)
======== ======== ======== ======== =========
Net loss per common share
(pro forma for 1995) $ (1.44) $ (1.70)
======== ========
Weighted average number of
common shares outstanding
(pro forma for 1995) 7,493 6,224
======== ========
December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ---------
(in thousands)
Balance Sheet Summary:
Cash and cash equivalents $ 13,246 $ 4,922 $ 119 $ 395 $ 259
Working capital (deficit) 19,318 5,185 (1,538) 458 (560)
Total assets 29,681 13,527 5,922 5,745 1,377
Long-term debt and capital
lease obligations, less
current installments 2,665 2,781 4,035 -- --
Common stock subject to put/
call agreement 834,063 -- -- -- --
Redeemable preferred stock -- 22,602 8,719 6,624 --
Accumulated deficit (40,200) (28,405) (15,370) (6,452) (1,611)
Total stockholders' equity
(deficit) 22,593 5,982 (2,665) 2,736 470
- --------
(1) Research and development costs are net of revenues of $160,000 and $391,000
earned on development agreements for the years ended December 31, 1995 and 1992,
respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Company's Financial
Statements and the Notes thereto which are included on pages F-1 through F-29 in
this Annual Report on Form 10-K.
Certain statements in this Form 10-K constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
financial performance and future events, particularly relating to sales of
consumables and Excalibur Systems, gross profit, gross profit margin, as well as
the need for future capital. Such statements involve known and unknown risks,
uncertainties and contingencies, many of which are beyond the control of the
Company, which could cause actual results and outcomes to differ materially from
those expressed herein. Factors that might affect such forward-looking
statements set forth in this Form 10-K include, among others, potential
customers' acceptance of the Company's products, changes in the Company's
marketing strategy and business plan, additional risks and uncertainties related
to international sales, continuing sales of Excalibur Systems to, and continued
use of the purchased Excalibur Systems by, the Company's largest customer,
development and/or acceptance of the competitive products by others, the
continued ability of the Company to develop and market new and differentiated
plastic lens products, competitive factors and the successful and efficient
manufacture of consumables at the Company's facilities.
OVERVIEW
Innotech derives its revenues principally from sales of Excalibur Systems
and consumables. Historically, sales of Excalibur Systems have accounted for a
majority of the Company's net sales. It is the Company's experience that as the
cumulative number of installed Excalibur Systems grows, usage and sales of the
consumables also increase. In 1994, Innotech revised its marketing strategy and
reduced the price of the Excalibur System designed to increase market
penetration and thereby increase and accelerate demand for consumables. Since
the implementation of this strategy, the Company has experienced significant
increases in sales of Excalibur Systems and consumables, together with an
increase in total gross profit.
The Company's business strategy is to increase sales and achieve
profitability through the continued development and commercialization of its
patented SurfaceCasting technology and related patented and proprietary Power
Plates and resins. The Company intends to pursue this strategy by seeking to
(i) increase sales of Excalibur Systems, (ii) increase sales of consumables and
(iii) further commercialize the Company's new products developed through its
research and development efforts. See "BUSINESS". As consumables revenue
increases, the Company expects that its potential profitability will be
enhanced. The Company believes it will require additional Excalibur Systems
sales and, therefore, time before the Company can realize the overall benefits
of its strategy. Any future profitability of the Company will also be
significantly impacted by its success in reducing manufacturing costs of the
Power Plates and, to a lesser extent, the Excalibur Systems and resins.
In May 1993, the Company shipped the first commercial Excalibur System.
Since that time the Company has sold over 850 Excalibur Systems. As a result of
its growth, the Company has significantly expanded its administrative, selling,
service, and research and development capabilities, and the related expenses
have increased. Further expansion will continue to result in increases in such
expenses. In the first half of 1995, the Company began the internal assembly of
the curing chambers and mold storage cabinets that comprise the Excalibur System
and discontinued purchases of completely assembled curing chambers and mold
storage cabinets from outside suppliers. In 1996, Innotech completed its
initial public offering of 3,000,000 shares of common stock and used some of the
proceeds to purchase the equipment and tooling necessary to manufacture certain
new consumables products on a commercial scale to reduce its cost of sales and
to augment its current sources of supply. Also, the Company introduced new
products for use in the Excalibur System.
RESULTS OF OPERATIONS
Fiscal Years Ended December 31, 1996 and 1995
Net sales. Total net sales increased by $3,683,000, or 57%, to
$10,121,000 for the year ended December 31, 1996 from $6,438,000 for the year
ended December 31, 1995. This increase was due to a significant volume increase
in sales of consumables as well as an increase in the number of Excalibur
Systems sold by the Company. Net sales for the year ended December 31, 1995
were adversely affected by the Company's weakened liquidity condition, which
impaired its ability to maintain desired levels of inventory and limited
spending on sales and marketing efforts. With the completion of financings in
the third and fourth quarters of 1995 and the initial public offering in March
1996, the Company's liquidity position has significantly improved, allowing the
Company to acquire inventory to fulfill order backlogs, resume and increase
selling and marketing programs and expand the number of sales personnel. The
Company believes that these actions have had a positive impact upon sales.
A substantial portion of the Company's 1996 sales were derived from one
non-U.S. customer. The loss of these sales could have a material adverse effect
upon the Company's business and operating results and there can be no
assurance that such customer will continue to place orders with the Company for
consumables or Excalibur Systems in the amount or magnitude of those occurring
in 1996. The Company expects that sales of Excalibur Systems, and to a lesser
extent, consumables to such customer will decrease from their prior levels as
the Company has materially fulfilled existing purchase orders for the customer.
However, the Company does expect continuing orders, at significantly reduced
levels. (See Note 11 to the Financial Statements.)
Net sales of consumables increased $2,511,000, or 93%, to $5,203,000 for
the year ended December 31, 1996 from $2,692,000 for the year ended December 31,
1995. This increase in net sales of consumables was primarily attributable to
increased demand resulting from orders generated from a single large optical
retailer, an increase in the total installed base of Excalibur Systems and the
introduction of new consumables products, most of which were higher-priced
premium products. These included photochromic lenses and improved design
progressive addition lenses.
Net sales of Excalibur Systems increased $1,172,000, or 31%, to $4,918,000
for the year ended December 31, 1996 from $3,746,000 for the year ended December
31, 1995. This sales growth was due to a 38% increase in the number of
Excalibur Systems sold by the Company, offset in part by further price decreases
for Excalibur Systems during 1996, in connection with the Company's marketing
strategy of increasing market penetration by reducing the price of the Excalibur
System, and thereby increasing and accelerating demand for consumables. Growth
in Excalibur System unit sales during the year ended December 31, 1996 versus
1995 was principally due to fulfilling orders from a single large optical
retailer.
A significant portion of the Company's 1996 sales were derived
internationally (see Note 11 to the Financial Statements). Sales to customers
outside of the United States are typically subject to certain additional risks,
including, but not limited to, currency exchange fluctuations and their
(possibly adverse) effect on demand.
Gross profit. Gross profit for the year ended December 31, 1996 of
$2,485,000 was $1,415,000, or 132%, greater than the year ended December 31,
1995. Gross profit margin increased 48% to 24.6% for the year ended December
31, 1996 from 16.6% for 1995. The increase in gross profit was due to the
increase in sales of consumables, which included an increase in the sale of
higher-margin consumables, as well as the increased sales of Excalibur Systems.
The increase in gross profit margin was primarily due to reduced overhead costs
per unit and manufacturing efficiencies achieved in the production of Power
Plates and increased sales of higher-margin products, offset in part by the
start-up costs of lens casting operations at a new manufacturing facility. The
gross product margin on Excalibur Systems improved during 1996
over 1995 due also to the in-house assembly of the chamber, which during the
first six months of 1995 was still being assembled outside of the Company. The
gross profit margin was further enhanced by the additional sales of mold
products which are higher margin products. However, the gross profit and gross
profit margin have been in the past, and will be in the future, adversely
affected by the reduction of the sales price of the Excalibur System in
connection with the implementation of the Company's marketing strategy.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $3,304,000, or 41%, to $11,434,000 for the
year ended December 31, 1996 from $8,130,000 for the year ended December 31,
1995. The increase was primarily attributable to the implementation of planned
growth in the Company's sales and marketing departments. The sales force
build-up, commenced in the first quarter of 1996, was necessary to accommodate
current and expected future sales volumes of Excalibur Systems and consumables.
In connection with common stock options granted to executive officers
during 1995 having exercise prices below the estimated fair value of the common
stock, the Company has incurred compensation expense of approximately $100,000
in each fiscal quarter, and would continue to incur compensation expense of
approximately $100,000 in each fiscal quarter until the third quarter of fiscal
year 2000, as such options vest. Such expense would increase during a
particular quarter if the vesting of such stock options were to accelerate
during that period upon the occurrence of certain events. Such events include,
but are not limited to, the acquisition of the Company by another entity. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
Research and development costs. Research and development costs increased
$356,000, or 19%, to $2,186,000 for the year ended December 31, 1996 from
$1,830,000 (net of revenues earned on development agreements of $160,000) for
the year ended December 31, 1995. This increase was primarily attributable to
increased development and testing of new consumables products released in 1996
and planned for future release, and enhancements of the Excalibur System.
Other income (deductions), net. Other income (deductions), net increased
$1,403,000 to $313,000 for the year ended December 31, 1996 from $(1,090,000)
for the year ended December 31, 1995. The increase was primarily the result of
a decrease in interest expense due to lower levels of debt outstanding in 1996
as compared to 1995 as well as an increase in interest income resulting from
investment of net proceeds from the initial public offering in March 1996.
Interest expense for the year ended December 31, 1996 and 1995 was inclusive of
non-cash interest expense of $92,000 and $328,000, respectively, for the
amortization of debt discounts related to the issuance of
common stock warrants with exercise prices below the common stock's estimated
fair value in connection with debt incurred during 1995 and 1994.
Net Loss. The Company's net loss increased $229,000, or 2%, to $10,822,000
for the year ended December 31, 1996 due to the factors discussed above. Also,
the net loss in 1995 of $10,593,000 included an extraordinary loss of $613,000
incurred in connection with the extinguishment of certain debt, consisting of
the write-off of unamortized discounts on such debt and the unamortized portion
of debt issuance costs.
Fiscal Years Ended December 31, 1995 and 1994
Net sales. Total net sales increased by $2,334,000, or 57%, to $6,438,000
for the year ended December 31, 1995. This increase was due principally to a
significant volume increase in sales of consumables and, to a lesser extent, an
increase in the number of Excalibur Systems sold by the Company. Additional
growth in net sales in 1995 was adversely affected by the Company's weakened
liquidity condition, which impaired its ability to maintain desired levels of
inventory and limited spending on sales and marketing efforts.
Net sales of consumables increased $1,497,000, or 125%, to $2,692,000 for
the year ended December 31, 1995 from $1,195,000 for the year ended December 31,
1994. The percentage of consumables net sales to total net sales for the year
ended December 31, 1995 grew to 42% as compared to 29% for the year ended
December 31, 1994. This increase in net sales of consumables was primarily
attributable to increased demand resulting from an increase in the cumulative
number of installed Excalibur Systems and the introduction of new consumable
products, most of which were higher-priced premium products.
Net sales of Excalibur Systems increased $837,000, or 29%, to $3,746,000
for the year ended December 31, 1995 from $2,909,000 for the year ended December
31, 1994. This sales growth was due to a 56% increase in the number of
Excalibur Systems sold by the Company, offset in part by price decreases for
Excalibur Systems beginning in July 1994 in connection with the Company's
revised marketing strategy.
Gross profit. Gross profit for the year ended December 31, 1995 of
$1,070,000 was $929,000, or 659%, greater than for the year ended December 31,
1994. Gross profit margin increased to 16.6% in 1995 from 3.4% in 1994. The
increase in gross profit was primarily due to the increase in sales of
consumables, which included an increase in the sale of higher-priced
consumables. The increase in gross profit margin was primarily due to reduced
overhead costs per unit and manufacturing efficiencies achieved in the
production of Power Plates, which resulted principally from volume increases,
and the increase in the sale of higher-priced consumables. Further improvement
in gross profit and gross profit margin continued to be adversely affected by
the reduction of the sales price of the Excalibur System beginning in July 1994
in connection with the implementation of the Company's revised marketing
strategy.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1,802,000, or 28%, to $8,130,000 for the year
ended December 31, 1995. The increase was primarily attributable to growth in
the Company's sales and marketing departments, compensation expense related to
grants of stock options having exercise prices below the estimated fair value of
the Common Stock and, to a lesser extent, severance costs related to two former
executives and professional services costs. In the last six months of 1995, the
Company hired additional sales personnel to focus on selling consumables to
users of Excalibur Systems.
Research and development costs. Research and development costs increased
$98,000, or 6%, to $1,830,000 (net of revenues earned on development agreements
of $160,000) for the year ended December 31, 1995 from $1,732,000 for the year
ended December 31, 1994. This increase was primarily attributable to increased
development and testing of new products, offset by approximately $105,000 in
salary costs related to the reclassification of an executive's responsibilities
from research and development to manufacturing.
Other income (deductions), net. Other income (deductions), net increased
$841,000 to $(1,090,000) for the year ended December 31, 1995 from $(249,000)
for the year ended December 31, 1994, primarily as a result of an increase in
interest expense. Interest expense increased $569,000 due to additional debt
balances outstanding during 1995. This was inclusive of non-cash interest
expense of $328,000 for the amortization of debt discounts related to the
issuance of warrants with exercise prices below the estimated fair value in
connection with debt incurred during 1994. Non-recurring income of $381,000
comprised of forfeited customer deposits was recorded as other income during
1994 upon failure of two purchasers to perform in accordance with the terms of
their purchase agreements.
Net loss. The Company's net loss increased by $2,425,000, or 30%, to
$10,593,000 for the year ended December 31, 1995 from $8,168,000 for the year
ended December 31, 1994 due to the factors discussed above and the extraordinary
loss of $613,000 incurred in 1995 in connection with the extinguishment of
certain debt, consisting of the write-off of unamortized discounts on such debt
and the unamortized portion of debt issuance costs.
LIQUIDITY AND CAPITAL RESOURCES.
As of December 31, 1996, the Company had cash and cash equivalents and working
capital of approximately $13,246,000 and $19,318,000, respectively. During the
quarter ended March 31, 1996, the Company completed an initial public offering
with net cash proceeds received of approximately $26,241,000. Capital
expenditures and inventory build-up for the year ended December 31, 1996 were
$2,146,000 and $3,908,000, respectively. Cash usage for the period consisted of
$14,001,000 to fund operating activities, $4,063,000 for investing activities
related primarily to property and equipment and for the investment in Prism
Ophthalmics , L.L.C. discussed below.
Effective July 19, 1996, the Company and Dr. Ronald Blum, the Company's
Chairman and Chief Executive Officer, entered into a Put/Call Agreement. This
Agreement provided for the sale by Dr. Blum and his permitted assigns to the
Company and for the purchase by the Company from Dr. Blum of an aggregate of
85,000 shares of Common Stock. The exercise price for the put and call was $9.81
per share. The Agreement was terminated by the Company and Dr. Blum on February
10, 1997.
On October 15, 1996, the Company consummated the purchase of a warrant (the
"Prism Warrant") to acquire 150,000 units of Prism and the purchase of an option
(the "Prism Option") to acquire all of the outstanding equity interests of
Prism. The Company paid to Prism a purchase price of $1,165,000 for the Prism
Warrant, which is exercisable at any time on or before December 31, 2001, at the
exercise price of $.001 per unit. The purchase price for the Prism Option was
$400,000, and, if exercised, will require an additional payment of $5,000,000
for the acquisition by the Company of all of the outstanding equity interests of
Prism. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
The Company expects that its capital requirements will increase in the
future depending on numerous factors, including but not limited to the market
penetration of Excalibur Systems, growth in sales of consumables, expansion of
its manufacturing capabilities, success of the Company's research and
development efforts, additional costs associated with the potential
commercialization of products under development, and the exercising of the Prism
Option.
The Company anticipates that its existing capital resources and anticipated
cash flows from planned operations, together with the interest income earned on
investments, will be adequate to satisfy its capital requirements through 1997.
There can be no assurance, however, that the Company will ever generate
significant revenues or achieve profitability. If the Company exercises
the option to acquire Prism, or if during 1997 the Company fails to generate
sufficient sales and gross profit from its operations, it is likely that the
Company would require additional external financing. At this time, the Company
has no committed external sources of capital. Pursuant to the Merger Agreement,
the Company became a wholly owned subsidiary of the Parent on March 21, 1997.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
As of December 31, 1996, the Company had NOLs of approximately $32,425,000
for federal income tax purposes. These NOLs, if not utilized to offset taxable
income in future periods, will begin to expire in 2006. Previous securities
transactions have resulted in an "ownership change" within the meaning of
Section 382. 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 annual limitations.
SEASONALITY.
The Company's business is somewhat seasonal, with first quarter and third
quarter results generally stronger than the other two quarters.
SUBSEQUENT EVENT
On February 10, 1997, the Company entered into the Merger Agreement with
the Parent and the Purchaser which provided for the acquisition of all the
common stock of the Company at a price of $13.75 per share, payable in cash.
The Offer terminated on March 17, 1997, and the Purchaser acquired and paid for
an aggregate of 8,422,121 shares of common stock pursuant to the terms of the
Offer. Following the termination of the Offer, the Parent owned indirectly
approximately 99% of the outstanding common stock, including shares previously
owned by another subsidiary of the Parent. In accordance with the Merger
Agreement and Delaware General Corporation Law, the Purchaser merged with and
into the Company on March 21, 1997, and the Company became a wholly-owned
subsidiary of the Parent. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item, and the
independent auditors' report thereon, are set forth on pages F-1 through F-29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The names of the current directors, their ages as of March 15,
1997, and certain other information about them (based upon information provided
by such persons) are set forth below.
<TABLE>
<CAPTION>
Year First
Name of Director and Elected as Principal Occupation During the Past
Position with the Company Age Director Five Years
- ------------------------- --- ---------- ------------------------------------
<S> <C> <C> <C>
CLASS I DIRECTOR
(term to expire in 1999)
Peter S. Galloway 55 1997 Peter S. Galloway has served as
Director director and Vice President of the
Purchaser since February 1997,
Associate General Counsel of the
Parent since 1988, and Secretary
of the Parent since 1994.
CLASS II DIRECTOR
(term to expire in 1999)
James R. Hilton 50 1997 James R. Hilton has served as director,
Director Vice President, Secretary and
Treasurer of the Purchaser since
February 1997, and Assistant
General Counsel of the Parent
since 1990.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Year First
Name of Director and Elected as Principal Occupation During the Past
Position with the Company Age Director Five Years
- ------------------------- --- ---------- ------------------------------------
<S> <C> <C> <C>
CLASS III DIRECTOR
(term to expire in 1998)
Ronald D. Blum, O.D.(1) 50 1990 Ronald D. Blum was the founder of the
Chairman of the Board, Company and has served as Chairman of
Chief Executive Officer, the Board and Secretary since the
Secretary, and Director Company's inception in October 1990.
Dr. Blum also served as President from
the Company's inception until November
1994 and has served as Chief Executive
Officer since 1994. Until December
1992, Dr. Blum also served as Chief
Executive Officer of Drs. Blum, Newman,
Blackstock and Associates,
Optometrists, P.C., an optometric
practice which he co-founded in 1977.
Dr. Blum is an inventor named on
numerous patents dealing with optical
care technologies and has been engaged
in the development of new products and
technologies since 1982. He has
written numerous articles and has
lectured at many professional
meetings. Dr. Blum has been a member
of the editorial advisory board of Eye
Care Business, an optometric industry
magazine, and he is currently a member
of the American Optometric
Association. Dr. Blum was a
contributing editor to 20/20 Magazine,
an optometric industry magazine.
</TABLE>
- ---------------------------------------
(1) Member of Nominating Committee.
Pursuant to the employment agreement with Dr. Blum, the Company
has agreed to cause the election of Dr. Blum to the Company's Board of Directors
(the "Board"). See "EXECUTIVE COMPENSATION--Employment Agreements and
Termination Agreements."
COMPENSATION OF DIRECTORS
Members of the Board do not receive compensation for their
services as directors, but directors are reimbursed for certain expenses in
connection with their attendance at meetings of the Board of Directors and
committees. Non-employee directors of the Company may participate in the
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan
provides for the automatic grant of stock options to purchase 5,000 shares of
common stock on the date on which the stockholders of the Company elect
directors at an annual meeting. The exercise price for such stock options is the
fair market value of the common stock on the date of grant, and such stock
options are exercisable beginning on the first anniversary of the date of grant,
provided that the director receiving such options has not voluntarily resigned
or been removed "for cause" as a member of the Board of Directors prior to such
date. Pursuant to the Merger Agreement, all outstanding stock options (whether
or not exercisable)
21
<PAGE>
granted under the Directors' Plan were cancelled immediately prior to the
effectiveness of the Merger for a cash payment or converted into the right
solely to receive a cash payment. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
EXECUTIVE OFFICERS
The executive officers of the Company presently consist of Dr.
Blum as Chairman of the Board, Chief Executive Officer and Secretary; Steven A.
Bennington as President and Chief Operating Officer; Dr. Gupta as Executive Vice
President of Engineering, Research and Development; Horace N. Hudson, Jr. as
Vice President of Manufacturing; Sunder H. Malkani as Vice President of
Marketing; Robert P. Padula as Vice President of Sales and Customer Care; and Jo
Ann Swasey as Chief Financial Officer, Treasurer and Controller.
The following table sets forth certain information with respect
to the executive officers of the Company who are not also directors (based upon
information provided by such persons):
Steven A. Bennington has served the Company since August 1996 as
President and since September 1993 as Chief Operating Officer. From June 1992
until August 1996, Mr. Bennington served as Vice President of Operations of the
Company. Mr. Bennington served as Vice President--International of Vismed, Inc.,
a manufacturer of in-office laminating systems, from September 1991 to June
1992. In March 1991, Mr. Bennington founded and served beyond September 1991 as
a consultant for KSC International, a consulting firm for medical
instrumentation, eyewear and vision care companies. From September 1988 to
February 1991, Mr. Bennington served as Chief Executive Officer of TechnaVision,
Inc., a manufacturer of in-office whole lens thermal casting fabrication
systems. From August 1981 to September 1988, Mr. Bennington served as Vice
President--Operations and then as Vice President--International of Allergan
Humphrey, Inc. ("Allergan"), a manufacturer of diagnostic and surgical
ophthalmic instrumentation. Mr. Bennington is 48 years old.
Horace N. Hudson has served the Company as Director of Materials
Research since August 1993 and as Vice President of Manufacturing since December
1994. From 1989 until August 1993, he worked as an independent consultant for
several companies in the ophthalmic products and equipment industry, including
Garrett Optical, Inc., Crossbows Optical Ltd. and Bausch & Lomb, Incorporated.
He was employed by Coburn Optical Industries, Inc., a manufacturer of surfacing
equipment and ophthalmic lens products, from 1972 until 1989, holding various
positions, including Vice President--Operations. Mr. Hudson is 47 years old.
22
<PAGE>
Sunder H. Malkani has served the Company as Vice President of
Marketing since October 1995. From April 1994 until October 1995, he served as a
consultant to the Company. From May 1990 until September 1995, Mr. Malkani
served as President of Healthcare Consultants, Inc., a consulting firm to
medical device companies. Mr. Malkani also served as Vice President of United
States Professional Products Group at Ciba Vision Corporation, an entity which
manufactures and distributes contact lenses, from 1985 to 1990. Mr. Malkani is
48 years old.
Robert P. Padula has served the Company as Vice President of
Sales and Customer Care since January 1995. Prior to such time, he served with
different responsibilities and a different title as Executive Vice President of
Sales and Marketing starting in February 1994. Before joining the Company, he
was employed by Allergan from 1981 to 1994 as Vice President of Sales and
Service and in several other positions. Mr. Padula is 40 years old.
Jo Ann Swasey has served the Company since February 1997 as Chief
Financial Officer, since October 1995 as Treasurer and since February 1993 as
Controller. From 1988 until February 1993, Ms. Swasey was an accountant with H.
Schwarz & Co. P.C., Public Accountants. Ms. Swasey is a certified public
accountant. Ms. Swasey is 33 years old.
There are no family relationships among any of the directors or
executive officers of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
As a public company, the Company's directors, executive officers
and beneficial owners of more than 10% of the Company's common stock are subject
to the reporting requirements of Section 16(a) of the Securities Exchange Act of
1934 ("Section 16(a)"). Based solely upon a review of Forms 3, 4, and 5 and
amendments thereto furnished to the Company during or for year ended December
31, 1996, or written representations from such persons that no Forms 5 were
required, the requirements of Section 16(a) were compiled with, except that Dr.
Wicker filed late his Initial Statement of Beneficial Ownership of Securities on
Form 3 during 1996. In addition, Dr. Blum and Mr. Padula each filed late one
Statement of Changes of Beneficial Ownership of Securities on Form 4 during
1996, and CVCA failed to file its Annual Statement of Beneficial Ownership of
Securities on Form 5 for 1996.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the years ended December 31,
1996, 1995 and 1994, all compensation awarded to, earned by or paid to the
Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company (the "Named Executive Officers"):
23
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------------- ------------
Securities
(Fiscal Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options (#) Compensation
- --------------------------- ------- -------- ------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ronald D. Blum, O.D. ...... 1996 $184,316 $52,155 75,000 $ 661
Chairman, Chief 1995 178,282 35,831 804,992
Executive Officer and 1994 150,449
Secretary
Steven A. Bennington ...... 1996 163,555 47,512 75,000 3,590
President and Chief 1995 136,825 31,303 81,602
Operating Officer 1994 114,672 25,000 $11,964(2)
Amitava Gupta, Ph.D. ...... 1996 218,143(3) 58,425 25,000 2,890
Executive Vice President 1995 208,469(3) 70,584 202,613
of Engineering, Research 1994 191,410 25,000
and Development
Sunder H. Malkani.......... 1996 154,408(3) 25,737
Vice President of 1995(4) 84,642(3) 10,008
Marketing
Robert P. Padula .......... 1996 129,769 41,760 5,885 1,270
Vice President of Sales 1995 125,000 24,680 44,192
and Customer Care 1994 105,769 19,722
</TABLE>
- ---------------------------
(1) Represents insurance premiums paid by the Company with respect to the
covered fiscal year under disability and term life insurance policies for
the benefit of the Named Executive Officer.
(2) Represents forgiveness of a loan payable to the Company.
(3) Includes certain housing expenses paid for by the Company on behalf of such
Named Executive Officers.
(4) Mr. Malkani became employed by the Company in October 1995. Includes
consulting fees paid during fiscal year 1995 prior to his employment by the
Company.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning grants of stock
options to purchase shares of common stock made during the fiscal year ended
December 31, 1996 to the Named Executive Officers:
24
<PAGE>
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
% of Potential Realizable
Number Total Value at Assumed
of Options Exercise Annual Rates of
Securities Granted Price Stock Price Appreciation
Underlying to Per Option Term (1)
Options Employees Share Expiration ------------------------
Granted (#) in Fiscal ($/Sh) Date 5% 10%
----------- --------- ------ ---------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Ronald D. Blum, O.D. . 25,000(2) 8.1 9.00 10/16/06 $ 40,722 $ 64,844
50,000(2) 16.2 9.00 10/16/06 81,445 129,687
Steven A. Bennington.. 25,000(2) 8.1 9.00 10/16/06 40,722 64,844
50,000(2) 16.2 9.00 10/16/06 81,445 129,687
Amitava Gupta, Ph.D. . 25,000 8.1 9.00 10/16/06 40,722 64,844
Robert P. Padula...... 5,885 1.9 9.00 10/16/06 9,586 15,264
</TABLE>
- -----------------------------
(1) Potential realizable value is based on the assumption that the common stock
appreciates at the annual rates shown (compounded annually) from the date of
grant until the expiration of the option term. These numbers are calculated
based on the requirements promulgated by the SEC and do not reflect any
estimate or prediction by the Company of future common stock price
increases.
(2) Such stock options are subject to different vesting schedules.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding the stock
options held as of December 31, 1996 by the Named Executive Officers. No stock
options were exercised by the Named Executive Officers in fiscal year 1996.
<TABLE>
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 1996 (#) December 31, 1996 (1)
---------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald D. Blum, O.D. ...... 716,855 163,137 $543,779 $1,155,531
Steven A. Bennington....... 100,274 81,212 185,404 143,542
Amitava Gupta, Ph.D. ...... 185,902 76,405 321,039 453,049
Sunder H. Malkani.......... 6,659 3,349 12,089 25,690
Robert P. Padula........... 47,972 21,827 39,042 69,712
</TABLE>
- ------------------------------
25
<PAGE>
(1) Amount reflects the market value of the underlying shares of common stock as
reported on The Nasdaq National Market on December 31, 1996 ($7.75 per
share) less the aggregate exercise prices of the stock options.
EMPLOYMENT AGREEMENTS AND TERMINATION ARRANGEMENTS
The Company has entered into employment agreements with Drs. Blum and
Gupta and Messrs. Bennington, Malkani and Padula. Each of the employment
agreements provides for the officer's employment in his current position(s)
through the respective dates set forth below, subject to earlier termination by
the Company or the executive officer. The terms of employment for Drs. Blum and
Gupta expire on August 31, 1998, the term of employment for Mr. Bennington
expires on August 13, 1998, the term of employment for Mr. Malkani expires on
October 2, 1997, and the term of employment for Mr. Padula expires on November
30, 1997. The terms of such agreements (except Mr. Malkani's agreement) will be
extended automatically each year for an additional one-year period unless the
executive officer or the Company provides notice that he or it does not desire
to extend the term. Pursuant to their respective employment agreements, Dr. Blum
receives an annual base salary of $190,000, Dr. Gupta receives an annual base
salary of $205,000, Mr. Bennington receives an annual base salary of $175,000,
Mr. Malkani receives an annual base salary of $115,000, and Mr. Padula receives
an annual base salary of $145,000. Until December 31, 1996, the Company
reimbursed Dr. Gupta for certain housing expenses. In addition, the Company
reimburses Mr. Malkani for certain housing expenses. Certain of such employment
agreements provide that the officer will receive specified bonuses, stock option
awards and other employee benefits, as the case may be.
Under Dr. Blum's employment agreement, the Company has agreed to use its
best efforts to cause the election of Dr. Blum to the Board until such time as
he no longer owns 10% of the common stock on a fully-diluted basis and he no
longer is an officer of the Company. Also, the Company has agreed to make
available not less than $250,000 per year during the term of his employment for
research and development activities, as determined by Dr. Blum, on behalf of the
Company.
Each of the foregoing employment agreements provides for certain
payments upon termination of the officer's employment as a result of a material
breach by the Company of the officer's employment agreement or a termination by
the Company without Cause (as defined in the employment agreements). A material
breach by the Company of the employment agreements includes a material change in
the officer's responsibilities. In such event, Dr. Blum would be entitled to
receive a lump-sum payment equal to $190,000, payments of annual base salary for
the longer of 12 months and the unexpired portion of the employment term and a
lump-sum equal to $20,833 multiplied by the number of full or
26
<PAGE>
partial months comprising the unexpired portion of the employment term. Dr.
Gupta would be entitled to receive severance payments of annual base salary for
the longer of 12 months and the unexpired portion of the employment term, plus a
pro rata portion of bonus accrued through the date of termination. Mr.
Bennington would be entitled to receive severance payments of annual base salary
for the longer of 12 months and the unexpired portion of the employment term,
plus a pro rata portion of bonus accrued through the date of termination. Mr.
Malkani would be entitled to receive severance payments amounting to 6 months of
his annual base salary, plus a pro rata portion of bonus accrued through the
date of termination. Mr. Padula would be entitled to severance payments
amounting to 12 months of his annual base salary, plus a pro rata portion of
bonus accrued through the date of termination. In addition, certain stock
options held by each of the Named Executive Officers will become immediately
exercisable upon termination of such Named Executive Officer's employment,
subject to certain conditions.
The Company has obtained key man life insurance in the aggregate amounts
of $2,500,000, $2,250,000 and $250,000 on the lives of Drs. Blum and Gupta and
Mr. Bennington, respectively. The Company's lenders are the named beneficiaries
for such insurance in the aggregate amount of $4,250,000. In addition, the
Company pays the premiums for term life insurance policies which are owned by
Dr. Gupta and Messrs. Bennington, Malkani and Padula, and for a disability
policy which is owned by Dr. Blum.
The commencement of the Offer by the Purchaser and the consummation
Merger constituted a "change in control" under certain of the Company's stock
option plans and stock option agreements. Upon a change of control, as defined
in such stock option plans and agreements, stock options thereunder became fully
exercisable, subject to the other terms of the applicable stock option plans and
agreements. Pursuant to the Merger Agreement, all outstanding stock options
(whether or not exercisable) have been cancelled immediately prior to the
effectiveness of the Merger for a cash payment or converted into the right
solely to receive a cash payment. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF VOTING SECURITIES
The following table sets forth, as of the close of business on March 28,
1997, the beneficial ownership of common stock by (a) any person who is known by
the Company to be the beneficial owner of more than five (5%) percent of any
class of voting securities of the Company (based upon information in Schedules
13D or 13G, as amended, filed by such persons), (b) each director of the Company
(including the designees of the Purchaser), (c)
27
<PAGE>
each Named Executive Officer and (d) all current directors and executive
officers of the Company as a group (based on information furnished by such
persons on or prior to such date). Beneficial ownership has been determined in
accordance with Rule 13d-3 promulgated under the Exchange Act. Under this Rule,
certain shares may be deemed to be beneficially owned by more than one person
(if, for example, persons share the power to vote or the power to dispose of the
shares). In addition, shares are deemed to be beneficially owned by a person if
the person has the right to acquire the shares (for example, upon exercise of a
Company stock option) within sixty (60) days of the date as of which the
information is provided, and in computing the percentage ownership of any
person, the amount of shares is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of these
acquisition rights. As a result, the percentage of outstanding shares of any
person as shown in the following table does not necessarily reflect the person's
actual voting power at any particular date.
<TABLE>
<CAPTION>
Shares Percentage
Beneficial Owner Beneficially Owned (1) Beneficially Owned
- --------------- ------------------ ------------------
<S> <C> <C>
Johnson & Johnson/2/ 8,956,096 100%
Ronald D. Blum, O.D./3/ 0 0
Steven A. Bennington/3/ 0 0
Amitava Gupta, Ph.D./3/ 0 0
Sunder H. Malkani/3/ 0 0
Robert P. Padula/3/ 0 0
Peter S. Galloway/3/ 0 0
James R. Hilton/3/ 0 0
All current executive 0 0
officers and directors
as a group (9 persons)
</TABLE>
- ---------------------------
/1/ All shares of common stock owned by the Named Executive Officers and the
persons serving as directors of the Company prior to the consummation of
the Offer were, to the Company's knowledge, tendered to and purchased by
the Purchaser pursuant to the Offer and/or the Stockholder Agreement.
All outstanding and unexercised stock options held by the Named
Executive Officers and the persons serving as directors of the Company
prior to the consummation of the
28
<PAGE>
Offer have been (or will be by the effective date of the Merger)
cancelled in exchange for, or converted into the right to receive, the
cash payments provided for in the Merger Agreement as described under
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below.
/2/ The address of such entity is One Johnson & Johnson Plaza, New
Brunswick, New Jersey 08933.
/3/ The address of such person, for purposes hereof, is c/o Innotech, Inc.,
5568 Airport Road, Roanoke, Virginia 24012.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 10, 1997, the Company entered into the Merger Agreement
with the Parent and the Purchaser, which provided for the acquisition of all of
the common stock of Company at a price of $13.75 per share, payable in cash.
Under the terms of the Merger Agreement, on February 18, 1997, the Purchaser
commenced the Offer to purchase all of the outstanding shares of the Company's
common stock not already owned by the Parent, the Purchaser or any other
subsidiary of the Parent at a cash price of $13.75 per share. The Merger
Agreement provided that, subject to the satisfaction of certain conditions, the
Offer would be followed by a merger of the Purchaser with and into the Company,
in which case those shares that were not purchased in the Offer (other than
shares held in the Company's treasury, by the Parent, the Purchaser or any other
subsidiary of the Parent, or by stockholders duly exercising appraisal rights as
provided by Delaware law) would be converted into the right to receive in cash
the price paid per share pursuant to the Offer. The Offer expired on March 17,
1997, and the Purchaser acquired and paid for an aggregate of 8,422,121 shares
of common stock pursuant to the terms of the Offer. Following the termination of
the Offer, the Parent indirectly owned, through its subsidiaries, approximately
99% of the outstanding common stock, including shares owned by Johnson & Johnson
Development Corporation, a subsidiary of the Parent. In accordance with the
Merger Agreement and the Delaware General Corporation Law, the Purchaser merged
with and into the Company on March 21, 1997, and the Company became a wholly
owned subsidiary of the Parent.
The Merger Agreement provided that each option to purchase shares of
common stock and each warrant to purchase shares of common stock, in each case
outstanding immediately prior to the consummation of the Offer, whether or not
then exercisable, was either (1) cancelled immediately prior to the effective
time of the Merger (the "Effective Time") in exchange for an amount in cash,
payable at the time of such cancellation, equal to the product of (x) the number
of shares subject to such stock option or warrant immediately prior to the
Effective Time and (y) the excess of the price per share to be paid in the Offer
over the
29
<PAGE>
per share exercise price of such stock option or warrant (the "Net Amount") or
(2) converted immediately prior to the Effective Time into the right solely to
receive the Net Amount.
The Merger Agreement provided that during the term of the Merger
Agreement, the Company would carry on its business in the ordinary course and
use all reasonable efforts to preserve intact its business organization, keep
available the services of its current officers and employees and preserve its
relationships with customers, suppliers, licensors, licensees, distributors and
others having business dealings with it. Pursuant to the Merger Agreement, the
Company was prohibited from taking certain actions prior to the Effective Time
without the Parent's prior written consent, including, but not limited to,
making capital expenditures in excess of certain amounts and entering into any
agreements or understandings relating to the distribution, sale or marketing by
third parties of the Company's products.
Simultaneously with entering into the Merger Agreement, Dr. Blum,
CVCA, CIBC, the Parent and the Purchaser entered into the Stockholder Agreement.
Pursuant to the Stockholder Agreement, each of Dr. Blum, CVCA and CIBC agreed to
sell or tender pursuant to the Offer, and the Purchaser agreed to purchase, all
3,331,608 shares of common stock owned by them, representing approximately 37%
of the outstanding shares on February 10, 1997, at a price per share equal to
$13.75. The Purchaser acquired from Dr. Blum, CVCA and CIBC an aggregate of
3,331,608 shares of common stock on or about March 18, 1997, pursuant to the
terms of the Stockholder Agreement.
CVCA, CIBC and SBIC, have agreed to pay to Dr. Blum, in cash,
$119,500, $46,800 and $33,700, respectively, to compensate Dr. Blum for certain
tax liabilities to be incurred by him as a result of the Merger Agreement and
the transactions contemplated thereby. Such payments were to be made following
consummation of the Merger.
The Board unanimously approved the Merger Agreement, the Offer and all
transactions contemplated thereby. The Company has filed a
Solicitation/Recommendation Statement on Schedule 14D-9 on February 18, 1996
(the "Schedule 14D-9") with the SEC. The Company hereby incorporates by
reference the descriptions of the Merger Agreement, the Stockholder Agreement
and the disclosure in Items 2 and 3 of the Schedule 14D-9. The foregoing
summaries of the Merger Agreement and the Stockholder Agreement are qualified in
their entirety by reference to the Merger Agreement and the Stockholder
Agreement filed with the SEC. See "INDEX TO EXHIBITS."
Effective July 19, 1996, the Company and Dr. Blum entered into a
Put/Call Agreement. This Agreement provided for the sale by Dr. Blum and his
permitted assigns to the Company and for the purchase by the Company from Dr.
Blum of an aggregate of 85,000
30
<PAGE>
shares of the Company's common stock. The exercise price for the put and call
under such Agreement was $9.81 per share. The Put/Call Agreement was scheduled
to expire on September 10, 1997, however, the Board and Dr. Blum agreed to
terminate the Put/Call Agreement on February 10, 1997. The Board of Directors
terminated such Agreement because it determined that the Company's liquidity
could be adversely affected if the put to the Company under such Agreement were
exercised by Dr. Blum in the event that the Merger failed to occur and the stock
price of the common stock decreased.
On October 15, 1996, the Company consummated the purchase of the Prism
Warrant to acquire 15% of the outstanding units of Prism and the purchase of the
Prism Option to acquire all of the outstanding equity interests of Prism. Prism
is a newly created entity which owns a United States patent and has filed two
patent applications for lenses which are surgically implanted in the eye and are
designed to improve central field loss, a cause of blindness. The Company paid
to Prism a purchase price of $1,165,000 for the Prism Warrant, which is
exercisable at any time on or before December 31, 2001, at an exercise price of
$150. The purchase price for the Prism Option was $400,000, and, if exercised,
will require the payment of $5,000,000 for the acquisition by the Company of all
of the outstanding equity interests of Prism. The exercise of the Prism Option
is not conditioned upon the exercise of the Prism Warrant. The purchase price
for the Prism Option and the Prism Warrant is required to be used solely by
Prism for development and commercialization of Prism's proprietary technology.
Dr. Gupta, the Executive Vice President of Engineering, Research and
Development, and a director of the Company, and his wife are the owners of
approximately 46% of the outstanding equity interests of Prism. The Company
permits Dr. Gupta to allocate approximately 20% of his business time to the
operations of Prism. Under the terms of the Merger Agreement, the Company may
not exercise the Prism Option without the Parent's consent until the earlier of
the termination of the Merger Agreement and the consummation of the Merger.
In 1996, the Company issued an aggregate of 880,943, 1,122 and 561
shares of common stock to CVCA, Dr. Blum and Mr. Padula, respectively, in
connection with the exercise of warrants for an effective total exercise price
of $6,965, $89 and $44, respectively.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. See Index to Financial Statements included
on page F-1.
2. Financial Statement Schedules. All financial statement schedules
are omitted, as the required information is inapplicable or the
information is presented in the financial statements or related
notes thereto.
3. List of Exhibits. See Index to Exhibits included on page E-1.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1996, the Company filed a
Current Report on Form 8-K on October 10, 1996, with respect to the signing of a
letter of intent to acquire the Prism Warrant and the Prism Option. In addition,
the Company filed a Current Report on Form 8-K on October 18, 1996, with respect
to the consummation of the acquisition of the Prism Warrant and the Prism
Option.
The Company filed a Current Report on Form 8-K on November 26, 1996,
with respect to the Company's independent auditors updating 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 updated independent auditors' report removed 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 was revised
to remove the discussion of management's plans regarding the Company's ability
to continue as a going concern and to reflect that the Company had consummated a
public offering of 3,000,000 shares of its common stock on March 20, 1996.
On February 26, 1997, the Company filed a Current Report on Form 8-K
announcing the Merger Agreement and on March 24, 1997, the Company filed a
Current Report on Form 8-K announcing the consummation of the Merger.
32
<PAGE>
All of the matters described above were reported under Item 5 in the
Current Reports on Forms 8-K.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INNOTECH, INC.
/s/ Ronald D. Blum
By:_________________________
Ronald D. Blum, O.D.
Chairman of the Board,
Chief Executive Officer
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Ronald D. Blum Chairman of the Board, Chief March 28, 1997
- ---------------------------- Executive Officer, Secretary and
Ronald D. Blum, O.D. Director (Principal Executive
Officer)
/s/ Jo Ann Swasey Chief Financial Officer, March 28, 1997
- ---------------------------- Treasurer and Controller
Jo Ann Swasey (Principal Financial and
Accounting Officer)
Director March 28, 1997
- ----------------------------
Peter S. Galloway
/s/ James R. Hilton Director March 28, 1997
- ----------------------------
James R. Hilton
<PAGE>
INNOTECH, INC.
Index to Financial Statements
================================================================================
PAGE
Independent Auditors' Report ........................................ F-2
Financial Statements:
Balance Sheets as of December 31, 1996 and 1995 ................. F-3
Statements of Loss for the years ended December 31,
1996, 1995 and 1994 .......................................... F-5
Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1996, 1995 and 1994 ................. F-6
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 ............................. F-10
Notes to Financial Statements ................................... F-12
================================================================================
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Innotech, Inc. :
We have audited the accompanying balance sheets of Innotech, Inc. as of December
31, 1996 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, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1996 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, 1996 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Roanoke, Virginia
February 7, 1997, except as
to note 15, which is as of
March 21, 1997
F-2
<PAGE>
INNOTECH INC.
Balance Sheets
December 31, 1996 and 1995
================================================================================
<TABLE>
<CAPTION>
December 31,
--------------------------
Assets 1996 1995
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 13) $13,246,273 $ 4,921,700
Accounts receivable, net (notes 2, 5 and 11):
Trade, net of allowance for doubtful accounts of $88,367
and $92,367 at December 31, 1996 and 1995, respectively 2,550,892 2,135,568
Other 82,420 28,709
----------- -----------
Total accounts receivable, net 2,633,312 2,164,277
----------- -----------
Inventories (note 5):
Raw materials 1,752,148 891,306
Work-in-process 83,021 274,794
Finished goods 4,693,663 1,454,667
----------- -----------
Total inventories 6,528,832 2,620,767
----------- -----------
Prepaid expenses and other current assets 498,942 241,950
----------- -----------
Total current assets 22,907,359 9,948,694
----------- -----------
Property and equipment, net (notes 4,5 and 6) 3,528,897 1,790,075
Investment in Prism Ophthalmics, L.L.C. (notes 12 and 13) 1,565,000 --
Deferred public offering charges (note 14) -- 333,430
Other assets, net of accumulated amortization (note 5):
Organization costs 10,790 18,882
Patents and technology rights 1,603,166 1,337,387
Debt issuance costs 50,315 72,677
Deferred loss on sale/leaseback (note 6) 15,575 25,958
----------- -----------
Total other assets 1,679,846 1,454,904
----------- -----------
Total assets $29,681,102 $13,527,103
============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
================================================================================
<TABLE>
<CAPTION>
December 31,
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------ ------------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt (notes 5 and 13) $ 16,668 $ 63,332
Current installments of obligations under capital leases (note 6) 190,841 182,804
Accounts payable 1,982,785 2,034,560
Accrued expenses and other current liabilities (note 12) 1,334,696 772,510
Customer deposits 54,068 149,439
Liability to financing companies (note 12) 10,494 61,076
Option payment (note 12) -- 1,500,000
------------- ------------
Total current liabilities 3,589,552 4,763,721
Long-term debt, net of unamortized discount of $207,929 at
December 31, 1996 and $300,341 at December 31, 1995,
excluding current installments (notes 5 and 13) 2,492,071 2,416,327
Obligations under capital leases, excluding current installments
(note 6) 172,723 364,903
------------- ------------
Total liabilities 6,254,346 7,544,951
------------- ------------
Common stock subject to put/call agreement (85,000 shares) (notes 7 and 15) 834,063 --
Stockholders' equity (notes 5,7, 8, 11, 12, 14 and 15):
Series A convertible, redeemable preferred stock, $.001 par value.
Authorized 850,000 shares at December 31, 1995; issued and
outstanding none at December 31, 1996 and 700,000 shares at -- 8,080,207
December 31, 1995
Series B convertible, redeemable preferred stock, $.001 par value.
Authorized 152,500 shares at December 31, 1995; issued and
outstanding none at December 31, 1996 and 152,500 shares
at December 31, 1995 -- 1,510,260
Series D convertible, redeemable preferred stock, $.001 par value.
Authorized 2,150,000 shares at December 31, 1995; issued and
outstanding none at December 31, 1996 and 1,999,999 shares at -- 13,011,157
December 31, 1995
Common stock, $.001 par value. Authorized 70,000,000 shares;
issued and outstanding 8,870,603 and 772,991 shares at December 31,
1996 and 1995, respectively 8,871 773
Common stock warrants, 102,481 and 1,207,052 issued and outstanding
at December 31, 1996 and 1995, respectively 78,552 7,878,377
Additional paid-in capital 64,179,883 5,844,007
Deferred compensation (1,474,233) (1,937,453)
Accumulated deficit (40,200,380) (28,405,176)
------------ ------------
Total stockholders' equity 22,592,693 5,982,152
Commitments and contingencies (notes 5,6,7, 8, 12 and 15)
------------ ------------
Total liabilities and stockholders' equity $ 29,681,102 $ 13,527,103
</TABLE>
================================================================================
F-4
<PAGE>
INNOTECH, INC.
Statements of Loss
Years Ended December 31, 1996, 1995 and 1994
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Net sales (notes 11 and 12) $ 10,120,640 $ 6,438,202 $ 4,104,571
Cost of sales 7,635,812 5,368,238 3,963,276
------------ ------------ -----------
Gross profit 2,484,828 1,069,964 141,295
Selling, general and administrative expenses (note 12) 11,433,842 8,129,907 6,327,822
Research and development costs, net of revenues of
$160,000 earned on a development agreement for
the year ended December31, 1995 (note 10) 2,186,006 1,830,079 1,732,118
------------ ------------ -----------
Operating loss (11,135,020) (8,890,022) (7,918,645)
Other income (deductions):
Interest expense (517,462) (1,192,596) (624,255)
Interest income 840,243 112,766 25,893
Other, net (note 10) (10,213) (10,382) 349,274
------------ ------------ -----------
Other income (deductions), net 312,568 (1,090,212) (249,088)
------------ ------------ -----------
Loss before extraordinary item (10,822,452) (9,980,234) (8,167,733)
Extraordinary item - loss on extinguishment of debt
(note 5) -- (612,538) --
------------ ------------ -----------
Net loss $(10,822,452) $(10,592,772) $(8,167,733)
============ ============ ===========
Net loss per common share (pro forma for 1995, unaudited) $ (1.44) $ (1.70)
============ ============
Weighted average number of common shares outstanding
(pro forma for 1995, unaudited) 7,492,608 6,223,932
============ ============
</TABLE>
================================================================================
See accompanying notes to financial statements.
F-5
<PAGE>
INNOTECH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
================================================================================
<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 31,1993 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 (note 7) -- -- -- -- (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 $0.79 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
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Total
Series D Common Additional Stockholders'
Convertible, Redeemable Common Stock Paid-in Deferred Accumulated Equity
Preferred Stock Stock Warrants Capital Compensation Deficit (Deficit)
- ----------------------- ----------------- ---------------------- ------------- ------------ ----------- -------------
Equivalent
Shares Amount Shares Amount Shares Amount
- ----------- ----------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $ -- 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) --
</TABLE>
(CONTINUED)
F-7
<PAGE>
<TABLE>
<CAPTION>
INNOTECH, INC.
Statements of Stockholders' Equity (Deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
Series A Series B Series C
Convertible, Redeemable Convertible, Redeemable Convertible, Redeemable
Preferred Stock Preferred Stock Preferred Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
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 -- --
Issuance of Series D Convertible,
Redeemable Preferred Stock in
satisfaction of option payment
liability (note 12) -- -- -- -- -- --
Exchange of Series A Convertible,
Redeemable Preferred Stock for
common stock (cash paid in lieu of
16.8 fractional shares of common
stock at $10 per share) (note 7) (700,000) (8,242,069) -- -- -- --
Exchange of Series B Convertible,
Redeemable Preferred Stock for
common stock (cash paid in lieu of
10.4 fractional shares of common
stock at $10 per share) (note 7) -- -- (152,500) (1,547,141) -- --
Exchange of Series D Convertible,
Redeemable Preferred stock for
common stock (cash paid in lieu
of 43.6 fractional shares of
common stock at $10 per share)
(note 7) -- -- -- -- -- --
Issuance of common stock for cash
($10 per share, less issuance
costs of $3,758,103; cash paid
in lieu of 52.9 fractional
shares of common stock at $10
per share) (note 14) -- -- -- -- -- --
Exercise of common stock options
(12,204 shares at $.0079 per
share, 19,146 shares at $.079
per share and 9,454 shares at
$6.556 per share) (note 8) -- -- -- -- -- --
Exercise of common stock
warrants (1,047,018 shares at
$.0079 per share and 79,561
shares at $.079 per share)
(note 8) -- -- -- -- -- --
Expiration and forfeiture of
common stock warrants (note 8) -- -- -- -- -- --
Conversion of preferred stock
warrants to common stock
warrants (note 8) -- -- -- -- -- --
Reclassification of common
stock subject to put/call
agreement (note 7) -- -- -- -- -- --
Accretion on convertible,
redeemable preferred stock
(note 7) -- 21,844 -- 6,377 -- --
Undeclared dividends on
convertible, redeemable
preferred stock (note 7) -- 140,018 -- 30,504 -- --
Amortization of deferred
compensation (note 8) -- -- -- -- -- --
Net loss -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- $ -- -- $ -- -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Total
Series D Common Additional Stockholders'
Convertible, Redeemable Common Stock Paid-in Deferred Accumulated Equity
Preferred Stock Stock Warrants Capital Compensation Deficit (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
Equivalent
Shares Amount Shares Amount Shares Amount
- ------------------------- -------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- $ 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
150,000 1,500,000 - - - - - - - 1,500,000
- - 426,136 426 - - 8,241,475 - - (168)
- - 159,042 159 - - 1,546,878 - - (104)
(2,149,999) (15,285,166) 3,430,104 3,430 - - 15,281,300 - - (436)
- - 2,999,947 3,000 - - 26,238,368 - - 26,241,368
- - 40,804 41 - - 62,992 - - 63,033
- - 1,126,579 1,127 (1,126,579) (7,799,825) 7,798,841 - - 143
- - - - (1,407) - - - - -
- - - - 23,415 - - - - -
- - (85,000) (85) - - (833,978) - - (834,063)
- 374,092 - - - - - - (402,313) -
- 399,917 - - - - - - (570,439) -
- - - - - - - 463,220 - 463,220
- - - - - - - - (10,822,452) (10,822,452)
- ------------------------------------------------------------------------------------------------------------------------------------
- $ - 8,870,603 $ 8,871 102,481 $ 78,552 $64,179,883 $(1,474,233) $(40,200,380) $ 22,592,693
====================================================================================================================================
</TABLE>
F-9
<PAGE>
INNOTECH, INC.
Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
====================================================================================================================================
Years Ended December 31,
--------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (10,822,452) $(10,592,772) $(8,167,733)
Adjustments to reconcile net loss to net cash used in
operating activities:
Extraordinary item - loss on
extinguishment of debt (note 5) -- 612,538 --
Depreciation and amortization of
property and equipment 394,266 320,706 311,269
Amortization of other assets 128,240 177,296 161,999
Amortization of discounts on borrowings under
line of credit and long-term debt 92,412 328,064 141,019
Amortization of deferred compensation (note 8) 463,220 683,909 48,536
Loss on sale of equipment 12,720 10,382 --
Loss on litigation settlement (note 12) -- 111,892 650,000
Professional services received in exchange
for common stock (note 12) -- 331,213 --
Provision for doubtful accounts 25,432 75,000 100,398
Net (increase) decrease in:
Temporary investments -- -- 401,488
Accounts receivable, net (494,467) (1,309,891) 158,643
Note receivable from officer (note 3) -- -- 11,964
Inventories (3,908,065) (831,988) (418,876)
Prepaid expenses and other current assets (256,992) (65,397) (76,757)
Net increase (decrease) in:
Accounts payable (51,775) (302,709) 368,096
Accrued expenses and other current liabilities 562,186 350,959 227,464
Customer deposits (95,371) (173,348) (501,020)
Liability to financing companies (50,582) (279,704) 340,780
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (14,001,228) (10,553,850) (6,242,730)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (2,146,413) (533,712) (531,067)
Proceeds from sale of equipment 12,300 500,000 --
Investment in Prism Ophthalmics, L.L.C. (note 12) (1,565,000) -- --
Additions to other assets (363,565) (212,135) (467,346)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,062,678) (245,847) (998,413)
- ----------------------------------------------------------------------------------------------------------------------------
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 -- 900,000 5,055,732
Payments on long-term debt and capital leases (248,787) (1,049,148) (10,724)
Proceeds from issuance of common stock, net
of issuance costs 26,638,503 2,110 440,068
Proceeds from issuance of preferred stock
and common stock warrants, net of issuance costs -- 15,157,397 905,674
(Continued)
</TABLE>
F-10
<PAGE>
INNOTECH, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Proceeds from option payment (note 12) $ -- $ 1,500,000 $ -
Deferred public offering charges (note 14) -- (333,430) -
Cash paid in lieu of fractional shares of common stock (1,237) - -
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 26,388,479 15,601,929 6,965,750
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 8,324,573 4,802,232 (275,393)
Cash and cash equivalents, beginning of year 4,921,700 119,468 394,861
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $13,246,273 $ 4,921,700 $ 119,468
=====================================
Supplemental disclosures of cash flows information:
Cash paid for interest $ 518,047 $ 1,193,251 $ 474,413
=====================================
</TABLE>
Noncash transactions:
Capital lease obligations of $1,312, $608,576 and $105,003 were incurred in
1996, 1995 and 1994 when the Company entered into several leases for
equipment.
150,000 shares of Series D Convertible, Redeemable Preferred Stock were
issued in 1996 to satisfy the option payment liability (note 12).
700,000 shares, 152,500 shares and 2,149,999 shares of Series A, Series B
and Series D Convertible, Redeemable Preferred Stock, respectively, with
accrued dividends thereon, were exchanged for 4,015,282 total shares of
common stock in 1996.
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.
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.
55,725 shares of common stock and a note payable for $240,000 were issued in
1995 to satisfy accrued litigation costs (note 12).
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.
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.
See accompanying notes to financial statements.
F-11
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
December 31, 1996 and 1995 and
Years Ended December 31, 1996, 1995 and 1994
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Innotech, Inc. (the Company) develops, manufactures and sells lens products
and desk-top 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.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or
less at the time of purchase to be cash equivalents. At December 31, 1996
and 1995, the Company had cash equivalents totaling $13,528,829 and
$5,176,206, respectively, comprised of money market funds and overnight
investments with two financial institutions.
INVENTORIES
Inventories are valued at the lower of cost (determined on the first-in,
first-out basis) or market.
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.
INVESTMENT IN PRISM OPHTHALMICS, L.L.C.
The investment in Prism Ophthalmics, L.L.C. is accounted for using the cost
method, which approximates the equity method (see note 12).
(Continued)
F-12
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(1) (CONTINUED)
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 were charged against the gross proceeds of the public
offering.
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. 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.
CUSTOMER DEPOSITS
Customer deposits reflect deposits made when purchase orders are placed.
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.
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.
NET LOSS PER COMMON SHARE
Net loss per common share is computed based on the weighted average number
of shares of common stock outstanding during the year. Convertible,
redeemable preferred stock has been considered converted into common stock
on the respective original dates of issuance. Common stock options and
common stock warrants have been excluded in the calculation of weighted
average number of common shares outstanding as their effect would be anti-
dilutive.
(Continued)
F-13
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(1) (CONTINUED)
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for its stock options in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense was recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (Statement 123), which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, Statement 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net income or loss and pro forma net income or loss per common share
disclosures for stock option grants made in 1995 and future years as if the
fair-value-based method defined in Statement 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of Statement 123.
(Continued)
F-14
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(1) (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of (Statement 121), on January 1,
1996. Statement 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. Adoption of
Statement 121 in 1996 did not have a material impact on the Company's
financial position, results of operations or liquidity.
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the changes in the allowance for doubtful accounts follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, beginning of year $ 92,367 $ 16,000 $ 16,000
Provision for doubtful accounts 25,432 75,000 100,398
Recoveries of accounts written off - 1,367 -
Accounts written off (29,432) - (100,398)
- --------------------------------------------------------------------------------------------
Balances, end of year $ 88,367 $ 92,367 $ 16,000
============================================================================================
</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 $11,964 of bonus
expense related to these loans for the year ended December 31, 1994.
(Continued)
F-15
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(4) PROPERTY AND EQUIPMENT, NET
A summary of property and equipment, net follows:
December 31,
-----------------------------
1996 1995
- --------------------------------------------------------------------------
Equipment (note 6) $ 3,651,200 $ 1,464,770
Furniture and fixtures 146,926 109,452
Leasehold improvements 491,381 320,196
Construction in progress 58,400 347,335
- --------------------------------------------------------------------------
4,347,907 2,241,753
Less accumulated depreciation and
amortization (819,010) (451,678)
- --------------------------------------------------------------------------
Property and equipment, net $ 3,528,897 $ 1,790,075
==========================================================================
(5) LONG-TERM DEBT AND BORROWINGS UNDER LINE OF CREDIT
Long-term debt consists of the following:
December 31,
-------------------------
1996 1995
- -------------------------------------------------------------------------------
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 $ 2,700,000 $ 2,700,000
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 16,668 80,000
- -------------------------------------------------------------------------------
Total long-term debt 2,716,668 2,780,000
Less unamortized discount (207,929) (300,341)
- -------------------------------------------------------------------------------
Total long-term debt, net of unamortized discount 2,508,739 2,479,659
Less current installments of long-term debt (16,668) (63,332)
- -------------------------------------------------------------------------------
Long term debt, excluding current installments $ 2,492,071 $ 2,416,327
===============================================================================
(Continued)
F-16
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(5) (CONTINUED)
At December 31, 1996, long-term debt matures as follows:
Years Ending December 31,
- -------------------------------------------------------------------
1997 $ 16,668
1998 -
1999 2,700,000
- -------------------------------------------------------------------
Total $ 2,716,668
===================================================================
The promissory notes contain restrictive provisions prohibiting the payment
of dividends and certain covenants relative to other nonfinancial matters.
During 1995, 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.
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
paid in full and expired during 1995.
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 1994, detachable warrants to purchase 18,506 shares of the Company's
common stock were issued in connection with a 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.
(Continued)
F-17
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(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:
December 31,
----------------------------
1996 1995
- --------------------------------------------------------------------------
Equipment under capital leases $ 690,819 $ 713,579
Less accumulated amortization (207,989) (121,742)
- --------------------------------------------------------------------------
Equipment under capital leases, net $ 482,830 $ 591,837
==========================================================================
At December 31, 1996, minimum rental payments due under capital and
operating leases with original terms in excess of one year are as follows:
Capital Operating
Leases Leases
- ---------------------------------------------------------------------------
Years Ending December 31,
1997 $ 215,275 $ 132,431
1998 164,491 135,742
1999 13,323 139,814
2000 - 144,009
2001 - 148,329
Thereafter - 839,923
- ---------------------------------------------------------------------------
Total minimum lease payments 393,089 $ 1,540,248
===========
Less imputed interest (rates ranging from 8%
through 24%) (29,525)
- ---------------------------------------------------------
Present value of net minimum lease payments 363,564
Less current installments of obligations under
capital leases (190,841)
- ---------------------------------------------------------
Obligations under capital leases, excluding
current installments $ 172,723
=========================================================
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.
(Continued)
F-18
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(6) (CONTINUED)
Total rent expense under operating leases was $185,565, $171,050 and
$112,498 for the years ended December 31, 1996, 1995 and 1994,
respectively. Taxes, insurance and maintenance expenses relating to all
leases are obligations of the Company.
(7) STOCKHOLDERS' EQUITY
Common Stock Subject to Put/Call Agreement:
Effective July 19, 1996, the Company and its Chairman and Chief Executive
Officer (CEO) entered into a Put/Call Agreement (the Agreement). The
Agreement provides for the sale by the Company's CEO and his permitted
assigns to the Company and for the purchase by the Company from the
Company's CEO of an aggregate of 85,000 shares of common stock. The
exercise price for the put and call is $9.8125 per share, based on the
average of the closing sales prices of the Company's common stock for the
ten days immediately preceding the date on which the CEO gave notice with
respect to the exercise price. The put and call options of the Company's
CEO and the Company pursuant to such Agreement expire on September 10, 1997
(see note 15). The aggregate exercise price of $834,063 has been removed
from stockholders' equity and reflected as common stock subject to put/call
agreement on the December 31, 1996 balance sheet.
Common Stock:
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 this stock split.
At December 31, 1996 and 1995, there were 70,000,000 authorized shares of
common stock, $.001 par value. Of the shares authorized but unissued at
December 31, 1996 and 1995, approximately 2,010,000 shares and 6,725,000
shares, respectively, 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 were converted into common stock.
Preferred Stock:
The Company had authorized a total of 5,000,000 shares of preferred stock,
of which 850,000 shares were authorized for Series A Convertible,
Redeemable Preferred Stock (Series A Stock), 152,500 shares were authorized
for Series B Convertible, Redeemable Preferred Stock (Series B Stock) and
2,150,000 shares were authorized for Series D Convertible, Redeemable
Preferred Stock (Series D Stock) (collectively Preferred Stock). On March
20, 1996, upon the
(Continued)
F-19
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(7) (CONTINUED)
consummation of the Company's initial public offering of common stock (see
note 14), all outstanding shares of Preferred Stock and accrued dividends
thereon, as defined, were converted into common stock. In addition, the
Company filed an amendment to its Amended and Restated Certificate of
Incorporation which deleted the provisions regarding the rights,
preferences and privileges of the Preferred Stock, and replaced them with a
provision that enables the Board of Directors of the Company to issue up to
an authorized total of 5,000,000 shares of preferred stock at its
discretion.
Prior to the conversion of the Preferred Stock, the Company was 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 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 was
being accreted by periodic charges to accumulated deficit over the life of
the issue.
The holders of the Preferred Stock were entitled to receive cumulative
dividends at the rate of 9 percent per annum accruing from the date of
issuance. In the event of a liquidation and with respect to the payment of
dividends, the Series D Stock was senior in rank to the common stock, the
Series A Stock and the Series B Stock. All accrued dividends were to 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 were 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 were to 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 Series D
Stock (on a common stock equivalent basis) were to share in any remaining
payments, pro rata based upon their respective stockholdings.
(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.
(Continued)
F-20
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(8) (CONTINUED)
The aggregate number of shares under option pursuant to these agreements
follows:
<TABLE>
<CAPTION>
Number Weighted Average Option Price
of Shares Exercise Price Per Share
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at December 31, 1993 106,204 $00.0158-16.4260
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 $00.0158-16.4260
Granted 1,256,058 $06.0156 $00.0079-17.2964
Exercised (253) $06.7088 $06.5552-15.9695
Expired (33,830) $10.0374 $08.6877-15.9695
- -------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1995 1,363,269 $05.9721 $00.0079-16.4260
Granted 309,028 $09.0307 $08.0000-09.6250
Exercised (40,804) $01.5873 $00.0079-06.5560
Expired (34,243) $05.1502 $00.0200-15.5000
- -------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1996 1,597,250 $10.0464 $00.0790-16.4260
=================================================================================================
</TABLE>
Generally, options vest within one to five years of the grant date (see
note 15). Options exercisable at December 31, 1996 and 1995 approximated
1,154,343 and 418,772, respectively, with weighted average exercise prices
of $12.41 and $5.99, respectively.
Of the options outstanding at December 31, 1995, 833,518 options had an
exercise price of $8.69 per share until August 31, 1996. On the first day
of each calendar quarter thereafter, the exercise price was to be increased
at a rate of 7.5 percent per quarter. Upon the consummation of the public
offering (see note 14), the exercise price was increased to $15.50 per
share and the 7.5 percent price increase was 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.
The per share weighted-average fair values of stock options granted during 1996
and 1995 were $6.76 and $2.04 on the various dates of grant using the Black-
Scholes option-pricing model with the following weighted-average assumptions:
1996 - expected dividend yield of 0 percent, risk-free interest rate of 6.4
percent, expected volatility of 72.2 percent and an expected life of 10 years;
1995 - expected dividend yield of 0 percent, risk-free interest rate of 6.6
percent, expected volatility of 0 percent and an expected life of 8.6 years.
The Company uses the intrinsic value method of APB Opinion No. 25 for
recognizing stock-based compensation in the financial statements. Had the
Company determined compensation cost based on the fair value at the grant
date for its stock options under the
(Continued)
F-21
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(8) (CONTINUED)
provisions of Statement 123, the Company's net loss and net loss per common
share would have been increased to the pro forma amounts indicated below:
Years Ended December 31,
-------------------------------------
1996 1995
- -----------------------------------------------------------------------
Net loss:
As reported $ (10,822,452) $ (10,592,772)
Pro forma $ (11,803,046) $ (10,611,151)
Net loss per common share:
As reported $ (1.44)
Pro forma $ (1.58)
- -------------------------------------------------
Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under Statement 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
options' vesting periods and compensation cost for options granted prior to
January 1, 1995 is not considered.
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 $463,220, $683,909 and $48,536 for the years ended December 31,
1996, 1995 and 1994, respectively.
Deferred compensation at December 31, 1996 will be amortized as
compensation expense, based on vesting provisions, as follows:
Years Ending December 31,
- -----------------------------------------------------------------
1997 $ 421,043
1998 392,738
1999 392,738
2000 267,714
- -----------------------------------------------------------------
$ 1,474,233
Total
=================================================================
The stock option agreements contain certain accelerated vesting provisions
which provide for 100 percent vesting upon certain types of terminations or
a change in control, as defined.
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
(Continued)
F-22
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(8) (CONTINUED)
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 Convertible, Redeemable Preferred
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.
A summary of detachable warrants outstanding at December 31, 1996 (see note
15) follows:
Exercise
Warrant Equivalent Price per Expiration
Class Type Shares Share Date
- --------------------------------------------------------------------------
B Common Stock 23,415 $ 21.35 January 30, 1999
D Common Stock 63,308 $ 6.56 March 31, 2004
G Common Stock 992 $ 0.0079 September 23, 2004
I Common Stock 10,546 $ 0.0079 March 29, 2005
J Common Stock 4,220 $ 9.64 September 30, 2004
- --------------------------------------------------------------------------
(9) INCOME TAXES
The Company had no income tax benefit for the years ended December 31,
1996, 1995 and 1994, 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,
-------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" income tax benefit $ (3,679,634) $ (3,601,542) $ (2,777,029)
Reduction of (increase in) income tax benefit
resulting from:
Increase in beginning-of-the-year balance
of the valuation allowance for deferred
tax assets 4,301,818 3,990,558 3,075,923
State tax benefit, net of federal tax impact (432,986) (416,296) (320,881)
Other, net (189,198) 27,280 21,987
- -----------------------------------------------------------------------------------------------------
Total $ - $ - $ -
=====================================================================================================
</TABLE>
(Continued)
F-23
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(9) (CONTINUED)
The significant components of deferred income tax benefit for the years
ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<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 $ (4,301,818) $ (3,990,558) $ (3,075,923)
Increase in beginning-of-the-year balance of the
valuation allowance for deferred tax assets 4,301,818 3,990,558 3,075,923
- ---------------------------------------------------------------------------------------------------------------------------
Total $ - $ - $ -
===========================================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1996 and 1995 are
presented below:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 12,308,403 $ 8,075,017
Organization costs, principally due to capitalization
for tax purposes 104,896 174,827
Defered compensation, principally due to amortization
for financial reporting purposes 671,757 495,919
Accrued expenses, principally due to accrual of bonuses
and vacation for financial reporting purposes 164,491 146,603
Other 33,544 45,943
- ---------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 13,283,091 8,938,309
Less valuation allowance (13,240,127) (8,938,309)
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 42,964 -
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liability:
Property and equipment, principally due to
differences in depreciation (42,964) -
- ---------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liability (42,964) -
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ - $ -
===========================================================================================================================
</TABLE>
(Continued)
F-24
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(9) (CONTINUED)
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, 1996, the Company had net operating loss (NOL)
carryforwards of $32,424,666 for income tax purposes available to offset
future taxable income. These NOL carryforwards expire in various amounts
from September 30, 2006 through December 31, 2011.
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 NOL carryforwards 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 change in ownership provisions of Section 382 do not have any impact on
the expiration dates of the NOL carryforwards.
(10) DEVELOPMENT AGREEMENTS
In 1995, the Company entered into an agreement to jointly develop a
technology for manufacturing lenses made of standard and advanced lens
materials. Under the terms of the agreement, the other party agreed to pay
the Company development fees, subject to development thresholds. The
agreement was terminated in 1996. The Company received no development fees
under this agreement for the year ended December 31, 1996. The Company
offset research and development costs by $160,000 received under this
agreement for the year ended December 31, 1995.
The Company previously 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. In connection with
options to purchase commercially salable Systems, the purchasers received
exclusivity privileges and were required to make advance deposits.
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.
(11) BUSINESS AND CREDIT CONCENTRATIONS
The Company's customers are located primarily throughout the United States.
For the years ended December 31, 1996 and 1995, international sales
accounted for 36 and 13 percent, respectively, of net sales. International
sales accounted for less than 10 percent of net sales for the year ended
December 31, 1994.
(Continued)
F-25
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(11) (CONTINUED)
For the year ended December 31, 1996, the Company had net sales to one
customer (Vision Express), which accounted for more than 5 percent of the
Company's net sales, aggregating approximately $3,064,000, or 30 percent of
net sales. For the year ended December 31, 1995, the Company had net sales
to two customers (National Vision Associates Ltd. (NVA) and Vision
Express), 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 9 percent). For the year ended December
31, 1994, the Company had net sales to two customers (Texas State Optical,
Inc. (TSO) and NVA), 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 (TSO 22 percent and NVA 6 percent).
At December 31, 1996, the Company had no customers with accounts receivable
balances exceeding 5 percent of total stockholders' equity. 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 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
On October 15, 1996, the Company consummated the purchase of a warrant (the
Warrant) to acquire 150,000 units (representing approximately 15 percent of
the outstanding units) of Prism Ophthalmics, L.L.C. (Prism) and the
purchase of an option (the Option) to acquire all of the outstanding equity
interests of Prism. The Company paid to Prism a purchase price of
$1,165,000 for the Warrant, which is exercisable at any time on or before
December 31, 2001, at the exercise price of $.001 per unit. The purchase
price for the Option was $400,000 and, if exercised, will require an
additional payment of $5,000,000 for the acquisition by the Company of all
of the outstanding equity interests of Prism. The Executive Vice President
of Engineering, Research and Development and member of the Board of
Directors of the Company, together with his wife, owns approximately 46
percent of the outstanding units of Prism.
The Company has entered into an agreement with Secured Funding Source
(Secured) to provide for nonrecourse leasing of the Systems by Secured to
potential customers. Under the terms of the agreement, the Company sells
Systems to Secured, who in turn leases the Systems
(Continued)
F-26
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(12) (CONTINUED)
to its customers. In 1995, the terms of the agreement required Secured to
provide advance funding to the Company to be used as working capital; this
provision was eliminated in 1996. In addition to the leasing arrangement
with Secured, the Company had a "power lease" program. Under this program,
the Company sold Systems to the financing company, on a nonrecourse basis,
and was 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) was
recorded as a reduction of the net sales price (sales discount) and as a
liability to financing companies at the time of sale. The Company
terminated the power lease program during 1996 and replaced it with a new
program, under which the Company agrees to pay, on behalf of approved lease
customers, the interest (fixed rate of 12 percent) on the customer's total
lease liability to Secured. The total interest amount is recorded as a
reduction of the net sales price (sales discount) and as a liability to
Secured at the time of sale. Under both the current agreement with Secured
and the former 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
interest payments, advance funding and the power lease payments, was
$10,494 and $40,015 at December 31, 1996 and 1995, respectively. In
addition, the Company was obligated at December 31, 1995 for power lease
payments of $21,061 to other financing companies.
The Company and certain of its stockholders, optionholders and
warrantholders entered into an option agreement with an affiliate of
Johnson & Johnson (the 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
received 150,000 shares of Series D Stock in satisfaction of the option
payment liability on the effective date of the registration statement for
the initial public offering of the Company's common stock (see notes 14 and
15).
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 a then aggregate value of $111,892 to certain
preferred stockholders consistent with an anti-dilution provision.
(Continued)
F-27
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(12) (CONTINUED)
The Company is subject to environmental laws and regulations at both the
federal and state levels. At December 31, 1996, 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.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments (Statement 107), requires the Company to
disclose the estimated fair values of certain of its financial instruments.
Statement 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 certain financial instruments: The carrying amounts reported in the
balance sheets for cash and cash equivalents, investment in Prism and long-
term debt approximate fair value. The fair value of the Company's
investment in Prism approximates its original cost due to the proximity of
the date of the Company's investment to the balance sheet date. 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 $26,241,000.
(15) SUBSEQUENT EVENT
On February 10, 1997, the Company entered into an Agreement and Plan of
Merger (the Merger Agreement) with Johnson & Johnson (the Parent) and INO
Acquisition Corp., a wholly-owned subsidiary of Johnson & Johnson (the
Purchaser), which provided for the acquisition of all of the common stock
of the Company at a price of $13.75 per share, payable in cash. Under the
terms of the Merger Agreement, on February 18, 1997, the Purchaser
commenced a tender offer to purchase all of the outstanding shares of the
Company's common stock not already owned by the Parent, the Purchaser or
any other subsidiary of the Parent, at a cash price of $13.75 per share
(the Tender Offer). The Merger Agreement provided that,
(Continued)
F-28
<PAGE>
INNOTECH, INC.
Notes to Financial Statements
(15) (CONTINUED)
subject to the satisfaction of certain conditions, the Tender Offer would
be followed by a merger of the Purchaser with and into the Company, in
which case those shares that were not purchased in the Tender Offer (other
than shares held in the Company's treasury, by the Parent, the Purchaser or
any other subsidiary of the Parent, or by stockholders duly exercising
appraisal rights as provided by Delaware law) would be converted into the
right to receive in cash the price paid per share pursuant to the Tender
Offer (the Merger). The Tender Offer terminated on March 17, 1997, and the
Purchaser acquired and paid for an aggregate of 8,422,121 shares of common
stock pursuant to the terms of the Tender Offer. Following the termination
of the Tender Offer, the Parent owned indirectly approximately 99 percent
of the outstanding common stock, including shares previously owned by
another subsidiary of the Parent. In accordance with the Merger Agreement
and the Delaware General Corporation Law, the Purchaser merged with and
into the Company on March 21, 1997, and the Company became a wholly-owned
subsidiary of the Parent.
The Merger Agreement provided that each option to purchase shares of common
stock and each warrant to purchase shares of common stock (see note 8), in
each case outstanding immediately prior to the consummation of the Tender
Offer, whether or not then exercisable, would either (1) be canceled
immediately prior to the effective time of the Merger (the Effective Time)
in exchange for an amount in cash, payable at the time of such
cancellation, equal to the product of (x) the number of shares subject to
such stock option or warrant immediately prior to the Effective Time and
(y) the excess of the price per share to be paid in the Tender Offer over
the per share exercise price of such stock option or warrant (the Net
Amount) or (2) be converted immediately prior to the Effective Time into
the right solely to receive the Net Amount.
The Put/Call Agreement (see note 7) was terminated by the Company and its
CEO on February 10, 1997. The Company, with the concurrence of its CEO,
terminated such Agreement because it determined that the Company's
liquidity could be adversely affected if the put to the Company under such
Agreement were exercised by the CEO in the event the Merger failed to occur
and the stock price of the Company's common stock decreased.
F-29
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description Page
- ------ ----------- ----
2.1 Agreement and Plan of Merger, dated as of February 10, 1997,
by and among Johnson & Johnson, INO Acquisition Corp. and the
Registrant (1)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, as amended (2)
3.2 First Amended and Restated By-Laws of the Registrant (2)
4.1 Specimen certificate representing the Common Stock, $.001 par
value, of the Registrant (3)
4.2 Loan Agreement, dated March 23, 1994, as amended among the
Registrant, Sirrom Capital Corporation ("Sirrom") and Vedcorp
L.C. ("Vedcorp"), as amended (2)
4.3 Security Agreement, dated March 23, 1994, by the Registrant,
in favor of Sirrom, as collateral agent (2)
10.1 Real Property Lease, dated as of December 5, 1996, between the
Registrant and Geoffrey M. Ottoway
10.2 Lease Agreement, dated August 24, 1995, between the Registrant
and Titmus Optical, Inc. (2)
10.3 Letter of City of Petersburg, Virginia, dated March 14, 1996,
to the Registrant
10.4 Master Lease Agreement, dated as of November 15, 1994, between
the Registrant and Phoenix Leasing Incorporated (2)
10.6 Second Amended and Restated Registration Rights Agreement, dated
as of March 1, 1995, among the Registrant and the investors named
therein, as amended (4)
10.6 Registration Rights Agreement, dated August 23, 1995, among the
Registrant and the investors named therein, as amended (2)
10.7 Employment Agreement, dated as of March 22, 1994, between the
Registrant and Ronald D. Blum, as amended (2)
E-1
<PAGE>
Exhibit
No. Description Page
- ------ ----------- ----
10.8 Amendment to Employment Agreement, dated October 16, 1996,
between the Registrant and Dr. Ronald D. Blum (5)
10.9 Amended and Restated Employment Agreement, dated as of September
15, 1993, between the Registrant and Amitava Gupta, as amended (2)
10.10 Amendment to Amended and Restated Employment Agreement, dated
October 16, 1996, between the Registrant and Dr. Amitava Gupta (5)
10.11 Third Amended and Restated Employment Agreement, dated October
16, 1996, between the Registrant and Steven A. Bennington(5)
10.12 Amended and Restated Employment Agreement, dated September 19,
1996, between the Registrant and Robert P. Padula (5)
10.13 Employment Agreement, dated as of August 23, 1995, between the
Registrant and Horace N. Hudson, Jr. (2)
10.14 Amendment to Employment Agreement, dated October 16, 1996,
between the Registrant and Horace N. Hudson, Jr. (5)
10.15 Employment Agreement, dated October 2, 1995, between the
Registrant and Sunder H. Malkani (5)
10.16 Employment Agreement, dated April 1, 1996, between the
Registrant and Jo Ann Swasey (5)
10.17 Performance Equity Plan (6)
10.18 Directors' Stock Option (4)
10.19 1992 Performance Equity Plan (2)
10.20 1992 Outside Directors' Stock Option Plan (2)
10.21 1996 Equity Incentive Plan (7)
10.22 Form of Employee Base Stock Option Agreement (4)
10.23 Form of Success Stock Option Agreement (6)
11.1 Computation of Pro Forma Net Loss Per Common Share
E-2
<PAGE>
Exhibit
No. Description Page
- ------ ----------- ----
23.1 Consent of
KPMG Peat Marwick LLP
27.1 Financial Data Schedule
99.1 Stockholder Agreement, dated as of February 10, 1997, by and among
Johnson & Johnson, INO Acquisition Corp., Chase Venture Capital
Associates, L.P., CIBC Wood Gundy Ventures, Inc. and
Ronald D. Blum, O.D. (1)
99.2 Items 2 and 3 to the Solicitation/Recommendation Statement pursuant to
Section 14(d)(9) of the Securities Exchange Act of 1934 of the
Registrant (5)
- --------------------
(1) Previously filed with the Securities and Exchange Commission (the "SEC")
as an exhibit to the Schedule 14D-1 and Schedule 13D of INO Acquisition
Corp. and Johnson & Johnson, filed on February 18, 1997, and
incorporated herein by reference.
(2) Previously filed with the SEC as an exhibit to the Registrant's
Registration Statement on Form S-1 (No. 33-80789), filed on December 22,
1995 (the "Form S-1"), and incorporated herein by reference.
(3) Previously filed with the SEC as an exhibit to the Registrant's
Amendment No. 2 to the Form S-1, filed on February 8, 1996, and
incorporated herein by reference.
(4) Previously filed with the SEC as an exhibit to the Registrant's
Amendment No. 1 to the Form S-1, filed on January 19, 1996, and
incorporated herein by reference.
(5) Previously filed with the SEC as an exhibit to or as part of the
Registrant's Solicitation/Recommendation Statement pursuant to Section
14(d)(4) of the Securities Exchange Act of 1934 filed on February 18,
1997, and incorporated herein by reference.
(6) Previously filed with the SEC as an exhibit to the Registrant's
Amendment No. 3 to the Form S-1, filed on February 21, 1996, and
incorporated herein by reference.
(7) Previously filed with the SEC as an exhibit to the Registrant's
Registration Statement on Form S-8 (No. 333-16959), filed on November
27, 1996, and incorporated herein by reference.
E-3
<PAGE>
EXHIBIT 10.1
LEASE
THIS LEASE AGREEMENT, entered into this 5th day of December, 1996, by and
--- --------------
between Geoffrey M. Ottaway, herein called "Landlord", and Innotech,
------------------- --------
Incorporated, herein called "Tenant", and Waldvogel, Poe & Cronk Real Estate
- ------------
Group, Inc., herein called "Leasing Agent".
WHEREAS, the parties hereto entered into that certain Lease, dated March 1,
1993, with the termination date of February 28, 1997, for the Leased premises
described therein; and
WHEREAS, the parties desire to enter into this new Lease Agreement for the
purposes described hereinafter, and in contemplation of improvements to the
Leased Premises and the construction by Landlord of a new shell warehouse
facility to enhance Tenant's operations.
WITNESSETH:
NOW THEREFORE, that for and in consideration of the rents and covenants
hereinafter set forth, Landlord hereby agrees to Lease, and Tenant hereby rents
from Landlord, the following described premises together with all improvements
heretofore constructed and to be constructed thereon, called the "Leased
Premises", to-wit: That property situated on approximately 6.383 acres as shown
------------------------------------------------------------
on the attached Preliminary Plan for Innotech Building Addition and Parking Lot
- -------------------------------------------------------------------------------
Expansion Project, dated October 28, 1996, by Lumsden & Associates, Inc.,
- -------------------------------------------------------------------------
(Exhibit A) and more commonly known as 5568 Airport Road Roanoke, Virginia
- --------------------------------------------------------------------------
24012. TO HAVE AND TO HOLD said Leased Premises and the privileges and
- -----
appurtenances thereunto belonging unto the Tenant, its successors and assigns,
for the terms hereinafter provided, and upon the following terms and conditions,
to which the parties mutually covenant and agree:
(1) TERM
(A) The term of this Lease shall commence on December 5, 1996
----------------
and end on February 28, 2007.
-----------------
(B) Either party desiring to terminate this Lease at the end of
its term shall give the other party written notice of its intention to terminate
this Lease at least 120 days before the end of the original or any renewal
---
period of this Lease, provided that until terminated by such notice this Lease
shall renew itself from Month to Month at the highest rental rate and subject to
----- -----
all covenants, provisions and conditions herein contained.
(C) Except where the context clearly requires otherwise, the word
"term" whenever used in this Lease with reference to the duration hereof, shall
be construed to include any renewal terms as well as the original term.
(2) BASE RENT - SEE ADDENDUM "A" (ADJUSTMENTS TO ANNUAL BASE RENT)
(A) During the term of November 1, 1996 to February 28, 1997,
Tenant covenants to pay an Annual Base Rent to Landlord of One hundred thirty
------------------
two thousand four hundred thirty one and 22/100 Dollars ($132,431.22), payable
- ----------------------------------------------- ----------
in monthly installments in advance on the first day of each month in the amount
of Eleven thousand thirty five and 94/100 Dollars ($11,035.94). On March 1,
-------------------------------------- ---------
1997, and thereafter during the term of this Lease, the Annual Base Rent shall
be
1
<PAGE>
adjusted as set forth in ADDENDUM "A", which is attached hereto and shall be
incorporated herein by this reference. In the event rent payments are late and
any installment of the rent is not paid within five days after it becomes due, a
late fee of five (5%) percent of the monthly rent shall be charged for each
----
monthly installment not paid on time.
(B) If the original term does not commence on the first day of
the month, Tenant shall pay for the period from the commencement date to the
first day of the following calendar month a sum equal to one-thirtieth (1/30) of
the monthly rental due hereunder for each day of such period. All rents
thereafter shall be payable when due to:
Waldvogel, Poe & Cronk Real Estate Group, Inc.
Professional Arts Building
30 West Franklin Road, Suite 800
Roanoke, Virginia 24011
or such place as Landlord may designate in writing to Tenant.
(3) SECURITY
The Tenant has deposited with the Landlord $ -0- as security for
-----
Tenant's full and faithful performance of all the terms of this Lease. Landlord
shall return such sum when this Lease expires if Tenant has fully and faithfully
carried out all of its terms. If there is a bona fide sale of the property of
which the Leased Premises are a part, Landlord shall transfer to the purchaser
the security to be held under the terms of this lease, and the Landlord shall be
released from all liability for the return of such security to the Tenant.
(4) ADDITIONAL RENT
Additional rent (hereinafter referred to as "Additional Rent") is the
amount of any payment referred to as such in any provision of this Lease or in
any Addendum hereto which accrues while this Lease is in effect.
(5) USE OF LEASED PREMISES
Tenant shall use the Leased Premises for corporate offices. warehousing,
-------------------------------
assemblage, manufacturing, and for eyewear research and as a development
- ------------------------------------------------------------------------
laboratory and in strict accordance with all applicable laws and regulations of
- ----------
governmental authorities. Tenant shall use the Leased Premises for no other
purpose without the prior written consent of Landlord. Tenant will not use or
permit or suffer the use of the Leased Premises for any unlawful or offensive
business or purpose. Tenant will not, without prior written consent of Landlord,
use or permit the outside walls, fences or roof of the Leased Premises to be
used for advertising purposes.
(6) CONDITION OF LEASED PREMISES - SEE ADDENDUM "A" (LANDLORD'S
CASH ALLOWANCE)
Tenant has examined and knows the present condition of the Leased
Premises and the equipment thereon, if any. No representation, either verbally
or written, has been made to Tenant, or Tenant's agents, by Landlord, or
Landlord's agents, concerning the condition of the Leased Premises and the
equipment thereon, if any, or that any particular use can be made thereof except
2
<PAGE>
as specifically set forth in writing in this Lease or any Addendum hereto.
Neither Landlord nor Leasing Agent shall be under any duty to instruct Tenant or
others as to the use of any equipment on the Leased Premises.
(7) WRITTEN NOTICE AS TO DEFECTS
Attached hereto as ADDENDUM "B" is a written statement of all defects in
the property existing as of the commencement of the Lease. Said Addendum shall
be signed by both parties. If no such signed Addendum exists, the parties
acknowledge that the property is accepted "as is" as of the commencement of the
Lease and the parties agree that the property is accepted with no defects
existing as of the date of the commencement of the Lease.
(8) TENANT'S ACCEPTANCE OF PROPERTY
At the commencement of the term, the Tenant shall accept the building,
improvements, and any equipment on or in the Leased Premises, in their existing
condition. No representation, statement, or warranty, express or implied, has
been made by or on behalf of the Landlord as to such condition, or as to the use
that may be made of such property. In no event shall the Landlord be liable for
any defect in such property or for any limitation on its use.
(9) ASSIGNMENT, SUBLETTING AND MORTGAGING
Tenant shall not assign this Lease nor sublet the Leased Premises, in
whole or in part, without Landlord's prior written consent which shall not be
unreasonably withheld. If consent to assign or sublease is obtained, no such
assignment or sublease shall in any way release or relieve Tenant from any of
its covenants or undertakings contained in this Lease, and in all cases under
this paragraph Tenant shall remain liable on this Lease during the original and
all renewal terms.
(10) UTILITIES
Tenant shall promptly pay all fuel, water, gas, electricity, sewage,
telephone and other utility bills, as the same become due, it being understood
and agreed that the Tenant shall promptly make all required deposits for meters
and utilities services. Charges for the foregoing shall commence on the date of
the commencement of the original term of this Lease. Landlord shall not be
liable for any interruption or failure in the supply of any utility to the
Leased Premises for any reason whatsoever.
(11) INSURANCE AND INDEMNIFICATION
(11.1) INCREASE IN RISK - The Tenant
(A) shall not do or permit to be done any act or thing as a
result of which either (i) any policy of insurance of any kind covering any or
all of the Leased Premises or any liability of the Landlord in connection
therewith may become void or suspended, or (ii) the insurance risk under any
such policy would (in the opinion of the insurer thereunder) be made greater;
and
(B) shall pay as Additional Rent the amount of any increase in
any premium for such insurance resulting from any breach of such covenant, or
shall pay Landlord for any loss sustained by Landlord as a result of any
uninsured loss caused by Tenant's breach of covenants.
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(11.2) INSURANCE TO BE MAINTAINED BY TENANT
(A) The Tenant shall maintain at its expense, throughout the
term, and all extensions thereof, insurance against loss on liability in
connection with bodily injury and destruction, property damage, personal injury
and destruction, occurring within the Leased Premises or arising out of the use
thereof by the Tenant or its agents, employees, officers or invitees, visitors
or guest under one or more policies of general public liability insurance having
such limits as are reasonably required by Landlord from time to time (but in any
event not less than $2,000,000.00 general aggregate, $2,000,000.00
products-comp/ops aggregate, $1,000,000.00 personal and advertising injury,
$1,000,000.00 each occurrence, $50,000.00 fire damage (any one fire) and
$5,000.00 medical expense (any one person)). Such policies shall name the
Landlord, Leasing Agent and Tenant (and at Landlord's request, any mortgagee) as
insured parties, shall provide that they shall not be cancelable without at
least sixty (60) days prior written notice to the Landlord and Landlord's Agent
(and at the Landlord's request any mortgagee) and shall be issued by a company
with a rating of at least class VIII and an excellent rating from A.M. Best
Insurance Reporting.
(B) The Tenant shall maintain at Tenant's expense a plate glass
insurance policy, for coverage of all glass contained in the Leased Premises.
(C) If Tenant shall not comply with this covenant to maintain
insurance as provided herein, Landlord may, at its option, cause insurance as
aforesaid to be issued and in such event, Tenant shall pay when due the premiums
for such insurance as Additional Rent hereunder.
(D) Tenant will pay all excess insurance premiums (i.e., premiums
in excess of the usual premiums for a nonhazardous risk) required to be paid by
Landlord on the Leased Premises by reason of Tenant's use or occupancy thereof.
(11.3) INSURANCE TO BE MAINTAINED BY LANDLORD
The Landlord shall maintain throughout the term of the Lease and
extensions thereof, replacement cost coverage, with the agreed amount of
endorsed (no co-insurance) risk of direct physical loss coverage insurance with
respect to the Leased Premises.
(11.4) WAIVER OF SUBROGATION
In the event of loss or other perils named in the replacement cost
coverage, with the agreed amount endorsed (no co-insurance) risk of direct
physical loss coverage insurance, neither Landlord nor tenant shall have or
exercise any right of subrogation against each other, either through themselves
or through any subrogation right under any policy of replacement cost coverage
covering material or consequential loss and each of the parties agrees to
instruct their insurance company to have their polices endorsed to waive the
right of subrogation by the insurance company against either of them.
(11.5) LIABILITY OF PARTIES
Except to the extent that any party is released from liability to the
other party hereto pursuant to the provisions of subsection 11.4:
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(A) The Landlord shall be responsible for, and shall indemnify
and hold harmless the Tenant against and from any, and all liability arising out
of, any injury or death of any person or damage to any property, occurring
anywhere upon the Leased Premises, if, and only if to the extent that such
injury, death or damage is proximately caused by gross negligence or
intentionally tortious act or omission of the Landlord. Landlord is not
obligated to and specifically does not indemnify and hold harmless the Tenant
against or from any liability for any such injury, death or damage occurring
anywhere upon the Leased Premises, by reason of the Tenant's occupancy or use of
the Leased Premises because of fire, windstorm, act of God or other cause unless
proximately caused by such gross negligence or intentionally tortious act or
omission, as aforesaid.
(B) Subject to the operation and effect of the foregoing
provisions of this subsection, the Tenant shall be responsible for, and shall
indemnify and hold harmless the Landlord against and from, any and all liability
arising out of any injury to or death of any person or damage to the property,
occurring within the Leased Premises or as the result of Tenant's use and
occupancy of the Leased Premises.
(12) TAXES AND ASSESSMENTS
(A) Tenant agrees that as Additional Rent for the Leased
Premises, it will during each calendar year of all the original and all renewal
terms, reimburse Landlord for its pro- rated share of all real estate taxes,
charges and assessments levied or assessed during the original and all renewal
terms upon and against the Leased Premises. If the original rent paid included
the taxes, Tenant shall only be responsible, as Additional Rent, for any
increase in said taxes which may occur after the base year of the Lease. The
parties acknowledge that the base year taxes are not included in the first
year's rental.
(B) Tenant shall promptly pay when due all taxes and assessments
levied by any public authority on its trade fixtures, equipment and other
property of Tenant located on or about the Leased Premises and all other taxes
occasioned by its business or use of the Leased Premises.
(C) It shall be the Landlord's responsibility to furnish this
information to the Agent if the Agent is to collect taxes as Additional Rent
from Tenant.
(13) PERSONAL PROPERTY
Tenant covenants that the furniture, fixtures and all other personal
property (except that used to sell in the usual course of trade) which Tenant
places on the Leased Premises are owned by Tenant, are fully paid for, and are
not encumbered except as expressly disclosed in writing to Landlord prior to the
execution of this Lease. Except by sale in the usual course of trade, Tenant
shall not remove furniture, fixtures or property from the Leased Premises
without first obtaining the consent of Landlord, which consent shall not be
unreasonably withheld; and in addition to all the other remedies provided by
law, Landlord shall have a lien against all personal property and fixtures on
the Leased Premises, and insurance, if any, collected therefore, as security for
the payment of rent and default in obligations hereunder. Tenant shall repair or
reimburse Landlord for the cost of repairing any damages to the Leased Premises
resulting from the installation or removal of Tenant's personal property and
fixtures.
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(14) REPAIRS & ALTERATIONS - SEE ADDENDUM "A" (LANDLORD AND TENANT
IMPROVEMENTS)
(14.1) Tenant shall keep and maintain the Leased Premises in good
repair and condition; keep in good running order the heating and air
conditioning systems, electric wiring, toilets, water pipes, water, gas and
electric fixtures; replace all locks and deliver keys to Landlord after
replacement of locks; replace trimmings, glass and plate glass broken during the
tenancy, regardless of the manner in which same may have been broken; and unstop
all water fixtures that may become choked and repair all water pipes and
plumbing that may burst. If any elevators, escalators, lifts, machinery or
appliances (herein called "equipment") are situate on the Leased Premises,
Tenant shall care for, maintain and repair same, and shall indemnify and save
harmless Landlord from any liability or claims for damages or injuries to
persons and property arising therefrom. Tenant shall not make any alterations
of, additions to or changes in the Leased Premises or equipment without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld, and all alterations, changes and improvements, by whomsoever made,
shall be the property of Landlord.
(14.2) Tenant agrees that all additions and improvements and
attached equipment and fixtures installed in or on the Leased Premises by the
Tenant, including but not being limited to, electric wiring, electric fixtures,
show window reflectors, screens, screen doors, awnings, awning frames, floor
coverings, landscaping, furnaces and air conditioning machinery and equipment,
shall immediately become the property of the Landlord and shall not be removed
by Tenant at the termination of this Lease, unless requested to do so by the
Landlord, in which event Tenant agrees to do so and to repair promptly any
damage caused by such removal.
(14.3) Nothing contained in this Lease shall be construed as
requiring Landlord to make any repairs, except of a structural nature. Landlord
shall maintain and make all necessary structural repairs to the foundations,
load bearing walls and roof. This does not include the repairing of any glass or
moving parts such as passage and overhead doors. The Tenant shall maintain the
exterior grounds, parking area, and sidewalks..
(14.4) Tenant shall, on the last day of the original or renewal
term, or upon the sooner termination of this Lease, peaceably and quietly
surrender the Leased Premises and equipment to Landlord, broom-clean, including
all improvements, alterations, rebuildings, replacements, changes or additions
placed by Tenant thereon, in as good condition and repair as the same were in at
the commencement of the original term, normal wear and tear excepted; provided,
however, Tenant shall not be required to return the Leased Premises and
equipment in as good condition as aforesaid if the same are damaged or destroyed
by fire or otherwise, unless caused by Tenant's fault or negligence which is not
adequately covered by insurance.
(14.5) Tenant shall maintain a preventative maintenance contract
on all HVAC units contained in the Leased Premises. The contract is to be
maintained with a licensed and qualified HVAC contractor. Maintenance on the
HVAC is to be performed on a minimum of four (4) times per year. Tenant shall
furnish Landlord evidence that this contract is being maintained and the
maintenance is being performed as required.
(14.6) Tenant shall keep the Leased Premises, including the
storefront thereof, in good repair, but Tenant shall not paint or change the
decorative or architectural treatment of the storefront, the interior or the
exterior of the Leased Premises without Landlord's written consent.
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Tenant shall promptly remove upon order from the Landlord any decoration or
architectural change which has been applied to or installed upon the Leased
Premises without Landlord's written consent or take such other action with
reference thereto as Landlord may direct.
(14.7) Tenant shall not place or permit to be placed or
maintained any sign, awning, advertising matter, decoration, lettering, or other
item of any kind on the interior or the exterior of the Leased Premises or on
the glass of any window or door of the Leased Premises without first obtaining
Landlord's written approval thereof. Tenant shall promptly remove upon receipt
of any order from Landlord, any sign, awning, advertising matter or other thing
of any kind which has been applied to or installed upon the interior or exterior
of Leased Premises without Landlord's written consent or take such other action
with reference thereto as Landlord may direct.
(14.8) Landlord shall upon full execution of this Lease
Agreement, promptly contract for replacement of the existing roof.
(14.9) Landlord and Tenant have agreed to certain improvements to
the Leased Premises, as set forth in ADDENDUM "A", including, without
limitation, improvements to the existing structure, parking lot, and landscape
and the construction of a new warehouse facility on the Leased Premises. Said
improvements shall be further delineated in the Plans and Specifications, which
shall be attached hereto and incorporated herein by this reference upon
completion and approval by Landlord and Tenant.
(15) DESTRUCTION OF LEASED PREMISES
(A) If the Leased Premises are damaged or destroyed by fire or
other casualty covered by insurance, then (1) if totally destroyed or so that
the Leased Premises are rendered unleaseable, this Lease shall terminate as of
the date of such destruction and Tenant shall be liable for the rent only to the
date of such destruction and awards for the Leased Premises shall belong to and
be payable to Landlord; or (2) if only partially destroyed and still leaseable,
Landlord shall, within a reasonable time, repair the Leased Premises with a
reasonable reduction in rent from the date of such partial destruction until
there be again premises substantially similar in value to Tenant as the Leased
Premises partially destroyed. Landlord's obligation to repair or restore the
Leased Premises are stated herein as conditioned upon (a) all insurance proceeds
and award for the Leased Premises being paid to Landlord, which are sufficient
to cover the cost of said repairs and restorations, and (b) there remaining at
least twenty four (24) months in the then existing term of this Lease. If
Landlord does not repair the Leased Premises because either conditions (a) or
(b) are not met, Landlord shall notify Tenant and this Lease shall terminate as
of the date of such partial destruction and Tenant shall be liable for rent only
to the date of such partial destruction.
(B) If the Leased Premises shall be damaged or destroyed by any
hazard not covered by insurance, Landlord shall have the option to cancel this
Lease by giving written notice of such cancellation to Tenant within thirty (30)
days after the happening of such damage or destruction, but if such option not
be exercised and if such damage is not the result of the act or omission of the
Tenant, Tenant's employee or agent or invitee, then Landlord at its own expense
shall proceed with due diligence to repair and restore the Leased Premises to
their condition as existed before such damage or destruction with rent being
reduced pro rata in proportion to the decrease in usefulness of the Leased
Premises during repairs and restoration. If such damage is the result of the act
or omission of the Tenant or Tenant's employee or agent or invitee, then
Landlord at it's
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option may repair or restore the Leased Premises; the cost of which shall be
paid for by Tenant in installments or in whole upon notice thereof being given
to Tenant by Landlord.
(C) Tenant shall give immediate written notice to Landlord or
Leasing Agent of any damage or destruction of the Leased Premises whether it be
total or partial.
(16) INSPECTION BY LANDLORD
Tenant shall permit Landlord, its agents, or employees to inspect the
Leased Premises and all parts thereof during normal business hours and to
enforce and carry out any provision of this Lease and for the future purpose of
showing the Leased Premises to prospective tenants and purchasers and
representatives of lending institutions. During the last three (3) months of the
original term and all renewals or extensions thereof, Landlord shall have the
right to place "For Rent" and/or "For Sale" signs in conspicuous places on the
Leased Premises and to otherwise advertise the Leased Premises "For Rent" and/or
"For Sale", in addition to having the rights of entry and inspection set forth
herein. Tenant shall do no act or omission which interferes with Landlord's
rights to re-entry and inspection.
(17) EMINENT DOMAIN
(17.1) RIGHT TO AWARD
(A) If any or all of the Leased Premises are taken by the
exercise of any power of eminent domain or are conveyed to or at the direction
of any governmental entity under a threat of any such taking (each of which is
hereinafter referred to as a "Condemnation"), the Landlord shall be entitled to
collect from the condemning authority thereunder the entire amount of any award
made in any such proceeding or as consideration for such Deed, without deduction
therefrom for any leasehold or other estate held by the Tenant by virtue of this
Lease.
(B) The Tenant hereby (i) assigns to the Landlord all of the
Tenant's right, title and interest, if any, in and to any such award; (ii)
waives any right which it may otherwise have in connection with such
Condemnation, against the Landlord or such condemning authority, to any payment
for (a) the value of the then unexpired portion of the term, (b) leasehold
damages, and (c) any damage to or diminution of the value of the Tenant's
leasehold interest hereunder or any portion of the Premises not covered by such
Condemnation; and (iii) agrees to execute any and all further documents which
may be required in order to facilitate the Landlord's collection of any and all
such awards.
(C) Subject to the operation and effect of the foregoing
provisions of this section, the Tenant may seek, in a separate proceeding, a
separate award on account of any damages or costs incurred by the Tenant as a
result of such Condemnation, so long as such separate award in no way diminishes
any award or payment which the Landlord would otherwise receive as a result of
such Condemnation.
(17.2) EFFECT OF CONDEMNATION
(A) If (i) all of the Leased Premises are covered by a
Condemnation, or (ii) if any part of the Leased Premises is covered by a
Condemnation and the remainder thereof is insufficient for the reasonable
operation therein of the Tenant's business, or (iii) any of the Leased Premises
is
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covered by a Condemnation and, in the Landlord's reasonable opinion, it would
be impractical to restore the remainder thereof, then, in any such event, the
Lease shall terminate on the date upon which possession of so much of the Leased
Premises as is covered by such Condemnation is taken by the condemning authority
thereunder, and all rent (including, by way of example rather than of
limitation, any Additional Rent payable pursuant to any Addendum regarding
Additional Rent), taxes, and other charges payable hereunder shall be prorated
and paid to such date.
(B) If there is a Condemnation and the Tenant does not terminate
pursuant to the foregoing provisions of this subsection, the operation and
effect of this Lease shall be unaffected by such Condemnation, except that the
Base Rent and the Additional Rent shall be reduced in proportion to the square
footage of floor area, if any, of the Leased Premises covered by such
Condemnation.
(17.3) If there is Condemnation, the Landlord shall have no
liability to the Tenant on account of any (i) interruption of the Tenant's
business upon the Leased Premises, (ii) diminution in the Tenant's ability to
use the Leased Premises, or (iii) other injury or damage sustained by the Tenant
as a result of such Condemnation.
(17.4) Except for any separate proceeding brought by the Tenant
under the provisions of paragraph 17.1 (C), the Landlord shall be entitled to
conduct any such Condemnation proceeding and any settlement thereof free of
interference from the Tenant, and the Tenant hereby waives any right it might
otherwise have to participate therein.
(18) DEFAULTS BY THE TENANT
(18.1) DEFINITION. As used in the provisions of this Lease, each
of the following events shall constitute, and is hereunder referred to as, an
"Event of Default":
(A) If the Tenant (i) fails to pay the Base Rent, Additional
Rent, or any other sum which the Tenant is obligated to pay by any provision of
this Lease, when and as it is due and payable hereunder and without demand
therefor, or (ii) in any respect violates any of the terms, conditions or
covenants set forth in the provisions of this Lease; or
(B) If the Tenant (i) applies for or consents to the appointment
of a receiver, trustee or liquidator of the Tenant or of all or a substantial
part of its assets, (ii) files a voluntary petition in bankruptcy or admits in
writing its inability to pay its debts as they come due, (iii) makes an
assignment for the benefit of its creditors, (iv) files a petition or an answer
seeking a reorganization or an arrangement with creditors, or seeks to take
advantage of any insolvency law, or (v) performs any other act of bankruptcy,
reorganization or insolvency proceeding; or
(C) If (i) an order, judgment or decree is entered by any court
of competent jurisdiction adjudicating the Tenant a bankrupt or an insolvent,
approving a petition seeking such a reorganization, or appointing a receiver,
trustee or liquidator of the Tenant or of all or a substantial part of its
assets, or (ii) there otherwise commences with respect to the Tenant or any of
its assets any proceeding under any bankruptcy, reorganization, arrangement,
insolvency, readjustment, receivership or similar law, and if such order,
judgment, decree or proceeding continues in effect for more than sixty (60)
consecutive days after the expiration of any stay thereof; or
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(D) If the Tenant vacates the Leased Premises or Tenant
advertises in any manner that would indicate or lead the public to believe that
Tenant was going out of business or intending to vacate Leased Premises.
(18.2) NOTICE TO TENANT; GRACE PERIOD
Anything contained in the provisions of this section to the contrary
notwithstanding, upon the occurrence of an Event of Default the Landlord shall
not exercise any right or remedy which it holds under any provision of this
Lease or under applicable law unless and until:
(A) The Landlord has given written notice thereof to the
Tenant; and
(B) If such Event of Default consists of failure to pay money,
the Landlord has given five (5) days written notice thereof to the Tenant and
the Tenant has failed to make such payment in said five (5) day period of time
or, if such Event of Default consists of something other then failure to pay
money, the Landlord has given thirty (30) days notice of the default and the
Tenant has failed to proceed to diligently and in good faith to cure such Event
of Default.
(C) No such notice shall be required, and the Tenant shall be
entitled to no such grace period, (i) if the Event of Default has occurred more
than twice during any twelve (12) month period, or (ii) if the Tenant has
substantially terminated or is in the process of substantially terminating its
continuous occupancy and use of the Leased Premises for the purpose set forth in
the provisions of Paragraph 5, or (iii) if any Event of Default enumerated in
the provisions of Paragraphs 18.1 (B) or 18.1 (C) has occurred, or (iv) if the
Event of Default constitutes an eminent danger to the destruction or diminution
of value of the Landlord's property, real or personal, or to that of any other
Tenant or adjoining property owner.
(18.3) LANDLORD'S RIGHTS UPON EVENT OF DEFAULT
Upon the occurrence of any Event of Default, the Landlord may:
(A) Re-enter and repossess the Leased Premises and any
and all improvements thereon and additions thereto without necessity of judicial
proceedings;
(B) Declare the entire balance of the Base Rent and Additional
Rent, if any, for the remainder of the Term to be due and payable, and collect
such balance in any manner not inconsistent with applicable law;
(C) Relet any or all of the Leased Premises for the Tenant's
account for any or all of the remainder of the Term as hereinabove defined, or
for a period exceeding such remainder, in which event the Tenant shall pay to
the Landlord any deficiency in the Base Rent and Additional Rent resulting, with
respect to such remainder, from such releting, as well as the cost to the
Landlord of any attorney's fees which fees the tenant is hereby deemed to agree
are reasonable or of any repairs or other action (including those taken in
exercising the Landlord's rights under any provisions of this Lease) taken by
the Landlord on account of such Event of Default. The parties agree that the sum
of 33-1/3% of the unpaid rental shall be deemed to be reasonable attorney's fees
pursuant to the provisions of this Lease; or
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(D) Pursue any combination of such remedies and/or any other
remedy available to the Landlord on account of such Event of Default under
applicable law.
(18.4) LANDLORD'S RIGHT TO CURE
Upon the occurrence of an Event of Default, the Landlord shall be
entitled (but shall not be obligated), in addition to any other rights which it
may have hereunder or under applicable law as a result thereof, and after giving
the Tenant written notice of the Landlord's intention to do so except in the
case of emergency, to cure such Event of Default, and the Tenant shall reimburse
the Landlord for all expenses incurred by the Landlord in doing so, plus
interest thereon at the highest rate then permitted on account thereof by
applicable law, which expenses and interest shall be Additional Rent and shall
be payable by the Tenant immediately upon demand therefore by the Landlord.
(19) SEVERABILITY
If any provision of this Lease or any application thereof shall be
invalid or unenforceable, the remainder of this Lease and any other application
of such provision shall not be affected thereby.
(20) RELATIONSHIP OF PARTIES
Landlord and Tenant shall not be considered or deemed to be joint
venturers or partners and neither shall have the power to bind or obligate the
other except as set forth herein.
(21) RULES AND REGULATIONS
Intentionally Deleted
(22) NO REPRESENTATIONS BY LANDLORD
Neither Landlord nor its agents have made any representations or
promises with respect to the building, the land, or the Leased Premises except
as expressly set forth herein. No rights, easements, or licenses are acquired by
Tenant by implication or otherwise except as expressly set forth in the
provisions of this Lease. The taking possession of the Leased Premises by Tenant
shall be conclusive evidence as against it, that Tenant accepts the Leased
Premises and improvements thereon and that they were in good and satisfactory
condition when possession was so taken.
(23) LEASING AGENT
(A) In consideration of the Leasing Agent's services in procuring
this Lease, Landlord covenants with and for the benefit of the Leasing Agent as
follows: The Leasing Agent is to receive a commission of six percent ( 6 %) of
--- ---
the Base Rent during the original term and all renewals, extensions or
expansions thereof or any new Lease of the Leased Premises between any person
and "Tenant, its successors or assigns" (such phrase used herein to include such
entity in which Tenant, its successors or assigns may have an interest as a
stockholder, partner, lender of money or otherwise); and no sale, transfer,
assignment, cancellation or release, excluding a sale or conveyance to Tenant,
its successors or assigns, shall affect the Leasing Agent's right to such
commission which is hereby made a lien on the Leased Premises and all equipment
thereon, if any.
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The Leasing Agent shall have the right to collect all rents due hereunder so
that its commission may be paid in installments as the Base Rent is received,
and retained by the Leasing Agent before remitting the Base Rent (less
commissions) to Landlord, but if any act be done to deprive the Leasing Agent of
its right to collect the rents, then the whole amount of its commission then
unpaid shall, at the Leasing Agent's option, immediately become due and payable.
(B) Landlord further covenants with and for the benefit of the
Leasing Agent that if Tenant, its successors or assigns shall at any time during
the original term and all renewals or extensions thereof (or during any new
Lease of the Leased Premises between Landlord, his heirs, successors or assigns
and Tenant, its successors or assigns), purchase the Leased Premises, the
Leasing Agent shall receive on the date of the Leased Premises are transferred a
commission of six percent ( 6 %) of the gross amount of the purchase price.
--- ---
(C) Such a sales commission shall be in addition to the rental
commissions provided for in the immediately preceding paragraph up to the
transfer of said property and is hereby made a lien on the Leased Premises.
(D) In connection with all acts done or suffered by the Leasing
Agent for Landlord concerning the Leased Premises, Landlord further agrees to
indemnify and save the Leasing Agent harmless from all fines, judgments, suits,
claims, demands and actions of any kind (including any costs and attorney's
fees), and from liability suffered by an employee or contractor (not in the
permanent employ of the Leasing Agent) engaged by the Leasing Agent for the
benefit of Landlord.
(24) SUBORDINATION
Tenant accepts this Lease subject and subordinate to the present state
of the Leased Premises and to any recorded mortgage, deed of trust or any other
lien presently existing upon the Leased Premises and to any renewal, extension
or modification thereof. Tenant agrees upon demand to execute such instruments
subordinating this Lease to any future mortgage, deed of trust or other security
instruments as Landlord may request, provided such further subordination shall
be upon the express condition that this Lease shall be recognized by the
mortgagee and that the rights of Tenant shall remain in full force and effect
during the term of this Lease, so long as Tenant shall continue to perform all
of the covenants hereof.
(25) SUCCESSORS AND ASSIGNS
All parties to this Lease agree that all of the provisions hereof shall
bind and inure to the benefit of the parties hereto, their heirs, legal
representatives, successors and assigns.
(26) TENANT'S OBLIGATION TO COMPLY WITH APPLICABLE LAWS - TENANT TO OBTAIN
NECESSARY LICENSE
Tenant, at its expense, shall promptly comply with all federal, state,
and municipal laws, orders, and regulations, and with all lawful directives of
public officers, which impose any duty upon it or Landlord with respect to the
leased property. The Tenant, at its expense, shall obtain all required licenses
or permits for the conduct of its business within the terms of this Lease, or
for the making of repairs, alterations, improvements, or additions, and the
Landlord, when necessary, will join with the Tenant in applying for all such
permits or licenses.
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(27) APPLICABLE LAW; CONSTRUCTION
(A) This Lease shall be construed in accordance with the laws of
the Commonwealth of Virginia.
(B) Whenever used the singular number shall include the plural,
the singular, and the use of any gender shall include all other genders.
(28) ENVIRONMENTAL REQUIREMENTS
Tenant shall not cause, commit or allow to exist or to continue any
violation of any environmental requirement imposed by any local, federal or
state agency with respect to the Leased Premises or any use or activity on the
Leased Premises. Tenant will not place, install, dispose of or release or cause,
permit or allow to be placed, installed, disposed of or released any Hazardous
Material on the leased premises. If any Hazardous Material is discovered on the
Leased Premises at any time, which Hazardous Material has been placed thereon by
Tenant, its employees or agents, Tenant shall promptly, at Tenant's sole risk
and expense, remove, treat and dispose of the Hazardous Material in compliance
with all applicable environmental regulations and laws.
(29) NOTICES
(A) Whenever in this Lease it shall be required or permitted that
notice or demand be given or served by either party to this Lease to or on the
other, such notices or demand shall be given or served and shall not be deemed
to have been given or served unless in writing and forwarded by registered or
certified mail addressed as follows:
(B) TO LANDLORD:
Geoffrey M. Ottaway
-------------------
5536 Airport Road
-----------------
Roanoke, VA 24012
-----------------
(C) TO LEASING AGENT:
Waldvogel, Poe & Cronk
Real Estate Group, Inc.
800 Professional Arts Building
30 West Franklin Road
Roanoke, Virginia 24011
(D) TO TENANT:
Steven A. Bennington, President
-------------------------------
Innotech, Incorporated
----------------------
5568 Airport Road
-----------------
Roanoke, VA 24012-1311
----------------------
(30) FINAL UNDERSTANDING
This Lease represents the final understanding between Landlord, Tenant
and Leasing Agent, and the obligations of each party hereunder cannot be changed
or modified unless by written
13
<PAGE>
Addendum signed by the parties whose obligations are to be modified and endorsed
hereon or attached hereto.
(31) AGENCY DISCLOSURE
Unless otherwise disclosed in writing, all parties acknowledge that
WALDVOGEL, POE & CRONK REAL ESTATE GROUP, INC., is the Agent of the Landlord not
the Tenant. Waldvogel, Poe & Cronk Real Estate Group, Inc.'s fiduciary duties of
loyalty and faithfulness are owed to the Landlord who is their principal. All
commissions will be paid by the Landlord and not the Tenant.
(32) SPECIAL PROVISIONS
Special provisions of this Lease are attached hereto as part hereof as
Addendum to pages numbered 1 through 2 .
--- ---
(33) CANCELLATION OF PRIOR LEASE
The prior Lease Agreement by and between the parties hereto, dated March
1, 1993, is deemed canceled upon the execution of this Lease, and all the
rights, obligations, and interests of the parties accruing under said former
Lease are hereby merged and superseded by the terms, conditions, rights,
obligations, and interests created hereby.
14
<PAGE>
WITNESS the following signatures and seals:
By /s/Geoffrey M. Ottaway (SEAL)
-------------------------------------------------
Geoffrey M. Ottaway, LANDLORD
Innotech, Incorporated,
By /s/Horace N. Hudson (SEAL)
-------------------------------------------------
TENANT
WALDVOGEL, POE & CRONK REAL ESTATE GROUP, INC.
By /s/Dennis Cronk (SEAL)
-------------------------------------------------
LEASING AGENT
STATE OF VIRGINIA
CITY/COUNTY OF ROANOKE, TO-WIT: (LANDLORD)
-------
I, the undersigned, a Notary Public in and for the City, aforesaid, in
the State of Virginia, do hereby certify that Geoffrey M. Ottaway, whose name is
-------------------
signed to the foregoing Lease bearing date of 5th day of December, 1996, have
--- -------- ----
acknowledged the same before me. Given under my hand this 9th day of December,
--- --------
l996.
- ----
My commission expires: October 31, 2000
----------------------------
/s/Anita Wheeler
----------------------------
Notary Public
STATE OF VIRGINIA
CITY/COUNTY OF ROANOKE, TO-WIT: (TENANT)
-------
I, the undersigned, a Notary Public in and for the Commonwealth of
---------------
Virginia, aforesaid, in the State of Virginia, do hereby certify that Horace N.
- -------- ---------
Hudson, whose name is signed to the foregoing Lease bearing date of 6 day of
- ------ ---
December, 1996, have acknowledged the same before me.
- -------- ----
Given under my hand this 6 day of December, l996.
--- -------- ----
My commission expires: November 30, 1999
----------------------------
/s/Evelyn G. Blake
----------------------------
Notary Public
15
<PAGE>
STATE OF VIRGINIA
CITY/COUNTY OF ROANOKE, TO-WIT: (LEASING AGENT)
-------
I, the undersigned, a Notary Public in and for the Commonwealth of
---------------
Virginia, aforesaid, in the State of Virginia, do hereby certify that Dennis
- -------- ------
Cronk, whose name is signed to the foregoing Lease bearing date of 6 day of
- ----- ---
December, 1996, have acknowledged the same before me. Given under my hand this 6
- -------- ---- --
day of December, l996.
-------- ----
My commission expires: November 30, 1999
----------------------------
/s/Evelyn G. Blake
----------------------------
Notary Public
16
<PAGE>
ADDENDUM "A"
THIS ADDENDUM "A" constitutes the first addendum to that certain Lease
Agreement, dated of even date herewith, by and between Geoffrey M. Ottaway,
Landlord, and Innotech, Incorporated, Tenant, and Waldvogel, Poe & Cronk Real
Estate Group, Inc., Leasing Agent, to-wit:
The following provisions, conditions and terms shall be an integral part of the
aforesaid Lease Agreement as if set forth verbatim therein:
ADJUSTMENTS TO ANNUAL BASE RENT
(This provision supplements, but does not supersede, Paragraph (2) BASE RENT.)
The Annual Base Rent shall be adjusted upon the issuance of a Certificate of
Occupancy for the new warehouse facility contemplated in this Lease. Adjustments
to the Base Rent shall be based upon the total cost of development of new
facility and improvements to the existing Leased Premises, capitalized by a
factor of twelve percent (12.0%). The cost associated with the replacement of
the existing roof shall be paid for by the Landlord and shall be excluded from
the calculation of adjustments to Base Rent. The monthly installments of Base
Rent paid thereafter shall be 1/12th of the then-adjusted Annual Base Rent. The
ultimate Annual Base Rent, as adjusted, shall escalate annually by three percent
(3.0%) on each anniversary date of the Lease, beginning March 1, 1998. The
following example reflects how the adjusted Annual Base Rent will be calculated,
including the annual escalation's:
A. March 1, 1997 Annual Base Rent................... $ 136,404.16
B. Capitalization of total cost of new facility
and improvements to existing
Leased Premises ($1,100,000 x 12%)*.............. $ 132,000.00
--------------
C. Total Adjusted Annual Base Rent.................. $ 268,404.16
D. 3% Annual Escalation beginning 3/1/98............ $ 8,052.12
--------------
E. Total Annual Base Rent effective 3/1/98.......... $ 276,456.28
*The parties hereto contemplate that the cost for the development of the new
facility shall be in conformity with the Plans and Specifications hereafter
agreed to by Landlord and Tenant. The cost of improvements to the existing
Leased Premises, coupled with the new facility costs, shall constitute the
amount by which the 12.0% capitalization factor shall be applied, as set forth
by example in B. above; provided, however, Landlord shall pay the cost of a new
roof for the current Leased Premises without any adjustment to the Annual Base
Rent.
LANDLORD AND TENANT IMPROVEMENTS
LANDLORD IMPROVEMENTS:
- ---------------------
Landlord agrees to make the following additions and improvements, which shall
constitute the complete Leased Premises under the Lease:
. Construct a 30,000 square feet warehouse shell building with two
(10'x10') overhead doors, one (8'x8') overhead door and three personnel
doors, ceiling height of eighteen feet, 6" insulation in roof, and 4"
insulation in side walls;
1
<PAGE>
. Landscaping and pavement to provide adequate parking for a minimum of
200 automobiles, around new facility;
. Restroom facilities;
. Sprinkler system;
. Three-phase electrical service including necessary panel boxes;
. Water and sewer lines to new warehouse shell building;
. New pavement and landscaping around existing building; and
. Improvements to the exterior of the existing building.
Landlord additions and improvements shall be subject to the final approval of
design Plans and Specifications by both Landlord and Tenant. Said Plans and
Specifications shall be prospectively attached to, and incorporated in, the
Lease.
TENANT IMPROVEMENTS:
- -------------------
Tenant improvements shall include all improvements beyond which are described in
above Landlord Improvements, for both the existing building and the new
warehouse facility. Such Tenant improvements shall include:
. HVAC systems;
. Overhead lighting; and
. Office partitions
LANDLORD'S CASH ALLOWANCE
Landlord agrees to provide Tenant with a cash allowance of Ten Thousand Dollars
($10,000.00) for the purpose of replacing an HVAC system in the existing
facility. Landlord agrees that said allowance shall be due and payable by
Landlord within ten (10) days following receipt by Landlord of an invoice marked
paid for replacement of such HVAC unit. Such invoice shall be in an amount equal
to or greater than Ten Thousand Dollars ($10,000.00).
CONDITIONS
The parties further agree that the full implementation of this Lease is
contingent upon two events, namely (1) that the City of Roanoke grants final
approval for the construction of a new road along the west side of the property,
delineated as the "Future Road by Roanoke City" in Exhibit "A" attached hereto,
and (2) that the City of Roanoke shall grant approval of the site plan for the
property, which plan provides, in part, for the establishment of an acceptable
waste water management plan.
Should any such approval prevent the contemplated construction and improvements
to the Premises, this Lease may be terminated following receipt of written
notice at least 120 days before any proposed termination date.
All remaining terms, conditions, and provisions of the Lease of even date shall
continue unchanged and in full force and effect.
2
<PAGE>
WITNESS the following signatures this 6th day of December, 1996:
---
/s/Geoffrey M. Ottaway
------------------------------
Geoffrey M. Ottaway
Innotech, Incorporated
By: /s/Horace N. Hudson
---------------------------
Vice Pres. Mfg.
-----------------------
Waldvogel, Poe & Cronk Real Estate Group, Inc.
By: /s/Dennis Cronk
---------------------------
3
<PAGE>
EXHIBIT 10.3
[LETTERHEAD OF
CITY OF PETERSBURG]
VIA FACSIMILE
March 14, 1996
Mr. Cliff Grushow
Innotech Plant Manager
N. Dunlop Street
Petersburg, Virginia
Dear Mr. Grushow:
This letter serves as documentation of the City of Petersburg's intent
relating to your occupancy and possession of the property Innotech presently
occupies and rents from the City of Petersburg located on N. Dunlop Street.
While the present lease arrangement with your company extends for a
one-year initial period, it has always been the City's understanding that both
your company and the City desire a long-term relationship in this regard.
Accordingly, the City Administration supports lease arrangements that would
extend to your company for up to a five-year period, at your discretion. Rental
terms would be similar to those presently in place.
While final action of Council is required to finalize lease commitments
of this type, your company should understand the City Administration's position
relating to your company's long-term use of this facility. Your company's
location in Petersburg is an important part of our economic development effort,
and we look forward to your company's presence in Petersburg for many more
productive years.
Very truly yours,
/s/ Michael R. Packer
City Attorney
cc: Valerie A. Lemmie, City Manager
Vandy V. Jones III, Dir. of Economic Dev.
<PAGE>
EXHIBIT 11.1
INNOTECH, INC.
Computation of Net Loss and Pro Forma Net Loss
Per Common Share
Years Ended December 31, 1996 and 1995
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Weighted average shares of common
stock outstanding 7,492,608 704,285
Common stock issued during 1995,
deemed to be outstanding for entire
period (1) -- 68,706
Convertible, redeemable preferred
stock (2)(3) -- 3,954,370
Common stock warrants (1)(4) -- 999,340
Common stock options (1)(4) -- 497,231
------------ ------------
Weighted average number of common
shares outstanding (pro forma for 1995) 7,492,608 6,223,932
============ ============
Net loss $(10,822,452) $(10,592,772)
============ ============
Net loss per common share (pro forma
for 1995) $ (1.44) $(1.70)
============ ============
</TABLE>
(1) For the year ended December 31, 1995, common stock, common stock warrants
and common stock options issued within a one-year period prior to the
initial filing of the registration statement related to the initial public
offering have been treated as outstanding for the entire period. In the
case of common stock warrants and common stock options, the treasury stock
approach has been utilized. Common stock warrants and common stock options
issued prior to one year before the initial filing date have not been
considered as their effect would be anti-dilutive.
(2) For the year ended December 31, 1995, convertible, redeemable preferred
stock issued within a one-year period prior to the initial filing of the
registration statement related to the initial public offering has been
treated as outstanding for the entire period. In addition, convertible,
redeemable preferred stock issued prior to one year before the initial
filing date was considered converted into common stock on the respective
original dates of issuance.
(3) For the year ended December 31, 1996, convertible, redeemable preferred
stock was considered converted into common stock on the respective original
dates of issuance.
(4) For the year ended December 31, 1996, common stock warrants and common stock
options have not been considered as their effect would be anti-dilutive.
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Innotech, Inc.:
We consent to incorporation by reference in the registration statement (No. 333-
16959) on Form S-8 of Innotech, Inc. of our report dated February 7, 1997,
except as to note 15, which is as of March 21, 1997, relating to the balance
sheets of Innotech, Inc. as of December 31, 1996 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, 1996, which report appears
in the December 31, 1996 Annual Report on Form 10-K of Innotech, Inc.
KPMG Peat Marwick LLP
Roanoke, Virginia
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 13,246
<SECURITIES> 0
<RECEIVABLES> 2,721
<ALLOWANCES> 88
<INVENTORY> 6,529
<CURRENT-ASSETS> 22,907
<PP&E> 4,348
<DEPRECIATION> 819
<TOTAL-ASSETS> 29,681
<CURRENT-LIABILITIES> 3,590
<BONDS> 2,665
0
0
<COMMON> 9
<OTHER-SE> 22,584
<TOTAL-LIABILITY-AND-EQUITY> 29,681
<SALES> 10,121
<TOTAL-REVENUES> 10,961
<CGS> 7,636
<TOTAL-COSTS> 21,256
<OTHER-EXPENSES> 10
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 517
<INCOME-PRETAX> (10,822)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,822)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,822)
<EPS-PRIMARY> (1.44)
<EPS-DILUTED> (1.44)
</TABLE>
