SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K/A
(Amendment No. 1)
Annual Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(FEE REQUIRED)
For the fiscal year ended
December 31, 1995
Commission file number
0-26694
Specialized Health Products International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 87-0431035
(State or other jurisdiction of (IRS employer identification
incorporation) no.)
655 East Medical Drive, (801) 578-3580
Bountiful, Utah 84010
(Address of principal executive (Registrant's telephone number,
offices) including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which
registered
Common Stock, $.02 Par Value 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. [x] Yes 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 registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of voting stock held by non-
affiliates of the registrant at March 26, 1996, was $78,023,231.
On that date, there were 8,566,653 outstanding shares of the
registrant's common stock.
<PAGE> 2
Item 6. Selected Financial Data.
The following data have been derived from the
Company's consolidated financial statements that have been
audited by KPMG Peat Marwick LLP, independent auditors. The
information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction
with the Financial Statements and related Notes appearing
elsewhere herein:
<TABLE>
<CAPTION>
Period Ended (1)
Nov.
19, Dec. 31, Dec.
1993 1994 31,
(incept 1995
ion) to
Dec. 31
, 1993
<S> <C> <C> <C>
Statement of Operations Data:
Sales $ _ 33,256 447,844
Cost of sales _ 21,669 294,171
------------------------------------
Gross profit _ 11,587 153,673
Expenses:
Research and development _ 290,950 804,639
Selling, general and 3,450 620,022 2,133,021
administrative
Write off of operating assets _ _ 255,072
------------------------------------
Total expenses 3,450 910,972 3,192,732
------------------------------------
Operating loss (3,450) (899,385)(3,039,059)
Net other income (expense) _ (7,563) 119,570
------------------------------------
Net loss (3,450) (906,948)(2,919,489)
Dividends on preference stock _ (16,780) (11,389)
------------------------------------
Net loss attributable to common $ (3,450) (923,728)(2,930,878)
stockholders =====================================
Net loss per common share $ _ (.75) (.69)
=====================================
Weighted average number of shares
used for net loss per share 1,170,000 1,224,074 4,269,131
computation (2) =====================================
Balance Sheet Data (at period
end):
Working capital $ (12,150) (287,723) 4,194,568
Total assets 16,550 656,865 5,950,728
Long-term debt, less current _ 458,333 _
maturities
Total stockholders equity (2,150) (355,878) 5,369,805
(deficit)
__________________________________________________________
Notes:
<F1>
(1) Excludes Specialized Health Products
International, Inc. (formerly, Russco, Inc.) which had no
operations prior to the acquisition on July 28, 1995 wherein
the Company acquired Specialized Health Products, Inc. (the
"Acquisition"), and is immaterial.
<F2>
(2) Net loss per common share is based on the
weighted average number of common shares outstanding. Stock
options and warrants, and preferred shares prior to
conversion, are not included in the calculation because this
inclusion would be anti-dilutive and reduce the net loss per
share amount.
</TABLE>
<PAGE> 3
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis provides information
which management believes is relevant to an assessment and
understanding of the Company's consolidated results of operations
and financial condition. The discussion should be read in
conjunction with the consolidated financial statements and notes
thereto. Wherever in this discussion the term "Company" is used,
it should be understood to refer to the Company and SHP, on a
consolidated basis, except where the context clearly indicates to
the contrary. Prior to the Acquisition wherein the Company
acquired SHP (See note 1 to the consolidated financial
statements) the Company had no operations.
Overview
From its inception, the Company has incurred losses from
operations. As of December 31, 1995, the Company had cumulative
net losses totaling $3,858,056. To date, the Company's principal
focus has been the design, development, testing, and evaluation
of its Safety Cradle(R) sharps containers, SafetyStrip(TM)
lancet, ExtreSafe(TM) medical needle technology, intravenous flow
gauge system, blood collection device, and other products, and
the design and development of its molds and production processes
relating to its Safety Cradle(R) sharps containers.
In 1994, the Company had limited sales of its sharps
containers due, in part, to the fact the molds used to produce
the sharps containers had not been completed and come on line.
Certain of the Company's Safety Cradle(R) sharps container molds
were completed in the first half of 1995, and additional Safety
Cradle(R) sharps container molds were completed in the second
half of 1995. As molds were completed, the Company's sales
increased from $33,256 for 1994 to $447,844 for 1995. During the
fourth quarter of 1995 the Company had sales of $5,503. The
decrease in sales during the fourth quarter of 1995 was related
to the Company's inability to use the molds during a good part of
the fourth quarter of 1995 due to improvements that were being
made to the molds. Said improvements were completed in the first
quarter of 1996 and will affect sales during the first quarter of
1996.
During the fourth quarter of 1995, the aggregate effect of
year end adjustments, which relate to prior quarters, increased
the net loss by approximately $457,000. These adjustments were
primarily the result of a write off of operating assets and
amounts capitalized as research and development and adjustments
to consulting and expense reimbursement.
The Company anticipates that commercial production of its
SafetyStrip(TM) lancet, will commence in 1996. Provided the
necessary FDA approvals are obtained, of which there is no
assurance, the Company anticipates commercial production of the
ExtreSafe(TM) catheter, ExtreSafe(TM) phlebotomy device and
ExtreSafe(TM) syringe will commence in 1997. The Company's
other ExtreSafe(TM) medical needle technology products,
intravenous flow gauge and blood collection device are conceptual
ideas in the research stage. No assurance can be given, however,
that the Company will be able to adhere to these time frames or
that such products will ever go to market.
Years Ended December 31, 1995 and December 31, 1994
The Company had sales of $447,844 for the year ended
December 31, 1995, and sales of $33,256 for the year ended
December 31, 1994. These revenues were derived largely from the
sale of sharps containers that were produced on a limited basis
during 1994. Commercial manufacture and sale of additional sizes
and versions of the Company's sharps containers were introduced
in the third and fourth quarters of 1995. At present, the only
product the Company is selling is its Safety Cradle(R) sharps
container products. Moreover, during 1995 $418,509 or ninety-
three percent of the Company's sales were through Moore Medical
Corp., a non-exclusive distributor for the Safety Cradle(R)
sharps container products. The Company does not have and has not
had a distribution agreement with Moore Medical Corp. requiring
Moore Medical Corp. to buy or sell any of the Company's products.
The Company's trade accounts receivable were $350,718 at
December 31, 1995, compared with $4,471 at December 31, 1994. Of
the $350,718 amount, $348,266 was owed to the Company by a single
distributor of the Company's sharps container products. The
$348,266 was collected in full from the distributor on March 15,
1996. The Company believes the remaining trade accounts
receivable owing as of December 31, 1995 are collectible.
<PAGE> 4
Research and development expenses were $804,639 for the year
ended December 31, 1995, compared with $290,950 for the year
ended December 31, 1994. The Company's efforts in the year ended
December 31, 1995, were focused on refining the design and molds
for its Safety Cradle(R) sharps container products, and upon the
design and development of its SafetyStrip(TM) and ExtreSafe(TM)
medical needle technology, intravenous flow gauge system, and
blood collection device. The Company's efforts in the year ended
December 31, 1994, were focused on refining the design and
producing molds for its Safety Cradle(R) sharps container
products.
General and administrative expenses were $2,133,021 for the
year ended December 31, 1995, compared to $620,022 for the year
ended December 31, 1994. The increased costs resulted largely
from the following increases in expenditures. First, selling
costs increased from $4,563 for the year ended December 31, 1994
to $360,694 for the year ended December 31, 1995. The increase
in selling costs were primarily a result of an increase in the
expenditures made by the Company to market and sell its Safety
Cradle(R) sharps container products. Next, salaries and benefits
increased from $201,328 for the year ended December 31, 1994 to
$592,642 for the year ended December 31, 1995. The increase
resulted primarily from the hiring of additional product
development, sales and marketing personnel to support sales and
commercialization of the Company's products as well as pay
increases granted to certain of the Company's employees. Next,
legal, accounting and other professional and consulting fees
increased from $179,674 for the year ended December 31, 1994 to
$548,034 for the year ended December 31, 1995. The increase in
costs was primarily from accounting and legal expenses associated
with the Acquisition, the filing of a Form S-1 registration
statement, increased financing activities and expenses associated
with litigation. Finally, travel and entertainment costs
increased from $56,812 for the year ended December 31, 1994 to
$182,989 for the year ended December 31, 1995. The increase
resulted primarily from increased costs associated with
financing, manufacturing, selling and marketing activities.
Net other income was $119,570 for the year ended December
31, 1995, compared with net other expense of $7,563 for the year
ended December 31, 1994. The other income for year ended
December 31, 1995, relates primarily to interest earned on funds
derived from the sale of the Company's equity securities in a
private placement which closed in August 1995 wherein the Company
raised gross proceeds of $8,602,500 (net proceeds of $7,519,060).
Net other expense was $7,563 for the year ended December 31,
1994. The other expense relates to the accrued interest on
certain notes payable and the interest on the Company's line of
credit.
Year Ended December 31, 1993
SHP was formed in November of 1993. SHP had no revenues
from inception to December 31, 1993. The principal activity of
SHP during this period was negotiation and acquisition of the
certain intellectual property relating to the sharps containers.
SHP had no research and development or financing expenses. The
general and administrative expenses of SHP totaled $3,450, which
were devoted largely to activities relating to the acquisition of
the Sharp-Trap(R) patents, (See "Business") patent applications
and related intellectual property.
During the periods prior to November 1993, the Company (not
including SHP) had no operations and its financial results were
immaterial
Liquidity and Capital Resources
The Company's need for funds has increased from period to
period as it has increased its research and development
activities, expanded staff, and commenced the purchase and
construction of molds and production equipment. To date the
Company has financed its operations principally through
borrowings and private placements of equity securities and debt.
Through December 31, 1995, the Company had received net cash from
financing activities approximately $9,100,000 through financing
activities. The bulk of the proceeds from the Company's
financing activities resulted from the sale of equity securities.
As of December 31, 1995, the Company's liabilities totaled
$580,923. All of these liabilities are current liabilities. The
Company had working capital at the year ended December 31, 1995
of $4,194,568 and the Company used net cash in operating
activities of $2,605,616 in 1995.
<PAGE> 5
The Company has 3,110,875 Series A Warrants and
1,290,375 Series B Warrants outstanding which are exercisable for
shares of Common Stock of the Company at a price of $3.00 per
share in the case of Series A Warrants and $2.00 per share in the
case of Series B Warrants, and expire on the earlier of (a) two
years from the date of effectiveness of a registration statement
under the Securities Act covering the Common Stock underlying
such Warrants, which period shall be extended day-for-day for any
time that a prospectus meeting the requirements of the Securities
Act is not available, or (b) the date specified in a notice of
redemption from the Company (subject to the prior right of the
holder to exercise the Warrants for at least 20 days following
the date of such notice) in the event that the closing price of
the Common Stock for any ten consecutive trading days preceding
such notice exceeds $6.00 per share and subject to the
availability of a current prospectus covering the underlying
stock. Thus, the Company may accelerate the expiration of the
Warrants in the event that the average market price of the Common
Stock exceeds $6.00 per share, in which event the holders of the
Warrants would be permitted to exercise the Warrants during a
period of not less than 20 days following notice of such an
event. The exercise of all the Series A and Series B Warrants
would result in a gross cash inflow to the Company of
$11,913,375. The Company presently intends to accelerate the
expiration of the Warrants when and if such conditions are met.
All of the Warrants are currently outstanding. There can be no
assurance, however, that any of the Warrants will be exercised.
Prior to the Acquisitions, SHP issued to a
nonaffiliated shareholder a warrant to purchase 45,000 shares of
Common Stock at $1.67 per share. Said warrant was issued by SHP
in exchange for cash. This warrant expires in 1996 and became an
outstanding obligation of the Company, rather than of SHP, on
July 28, 1995 (the date of the Acquisition).
On September 1, 1995, the Company adopted a Company's non-
qualified stock option plan ("NQSOP") wherein the Company is
authorized to grant options to purchase up to 1,284,998 shares of
Common Stock of the Company. Pursuant to the NQSOP, in September
1995, the Company granted stock options to purchase 1,151,810
shares of Common Stock, and in November , the Company issued
stock options to purchase 20,000 shares of Common Stock. All of
these stock options are immediately exercisable. These options
expire in 2000.
In addition to the options outstanding under the NQSOP, the
Company also has 108,000 options outstanding that were issued
under the SHP NQSOP and that became obligations of the Company
pursuant to the terms of the Acquisition. The SHP NQSOP options
allows the holders thereof to purchase 108,000 shares of the
Company's common stock at $0.39 per share. In April 1996, 22,500
of options issued under the SHP NQSOP expired and 22,500 such
options were exercised. The remaining 63,000 outstanding SHP
NQSOP options expire in 2004.
The Company also gave certain officers and directors of the
Company the opportunity to receive up to an aggregate of
2,000,000 shares of Common Stock (the "Earn-Out Shares"). Any
issuance of Earn-Out Shares would be based upon the level of pre-
tax consolidated net income, adjusted to exclude any expense
arising from the obligation to issue or the issuance of the Earn-
Out Shares and any income or expense associated with non-
recurring or extraordinary items as determined in accordance with
generally accepted accounting principles ("Adjusted PTNI").
The Company expects that the issuance of Earn-Out Shares
will be deemed to be the payment of compensation to the
recipients and will result in a charge to the earnings of the
Company in the year or years the Earn-Out Shares are earned, in
an amount equal to the fair market value of the Earn-Out Shares.
This charge to earnings could have a substantial negative impact
on the earnings of the Company in the year or years in which the
compensation expense is recognized.
<PAGE> 6
The effect of the charge to earnings associated with the
issuance of Earn-Out Shares could place the Company in a net loss
position for the relevant year, even though the Adjusted PTNI was
at a level requiring the issuance of Earn-Out Shares. Because
Earn-Out Shares are issuable based on the results of a single
year, the Adjusted PTNI in a particular year could require the
issuance of Earn-Out Shares even thought he cumulative Adjusted
PTNI for the three years 1996, 1997 and 1998, or any combination
of those years, could reflect a lower amount of Adjusted PTNI
that would not require the Company to issue such Earn-Out Shares
or even a loss at the Adjusted PTNI. There is no assurance that
years subsequent to the year or years in which Earn-Out Shares
are issued will produce the same level of Adjusted PTNI or will
be profitable. The management of the Company may have the
discretion to accelerate or defer certain transactions that could
shift revenue or expense between years or otherwise affect the
Adjusted PTNI in any year or years.
The Company has agreed to file a registration statement
under the Securities Act with respect to the Earn-Out Shares,
when issued. The issuance of the Earn-Out Shares, or the
perception that the issuance of such stock may occur, could
adversely affect prevailing market prices for the Common Stock.
In October, 1995, the Company entered into an agreement with
a third party to form a joint venture (the "Venture"), in the
form of a corporation (Quantum Imaging Corporation) to develop an
improved filmless digitized imaging system. For a fifty percent
interest in the Venture (before dilution by financing investors),
the Company is obligated to pay the Venture $15,000 per month for
a twelve month period. The Company contributed total capital of
$83,624 to the Venture during 1995. The Company's obligations to
the Venture are cancelable upon thirty (30) days written notice
or failure of the other Venture partner to meet requirements as
specified in the Venture agreement. In the opinion of Company
management, in order to be successful the Venture must raise
between $3,000,000 and $6,000,000. The Company contributed total
capital of $83,624 to the Venture during 1995. It is anticipated
that at least one-third of the outstanding shares of the Venture
will be sold to fund development through initial production of
related filmless digitized imaging systems. No assurance can be
given that the system will find profitable acceptance in the
marketplace. See "Business _ Products Under Development."
The Company's working capital and other capital requirements
during the next year or more will vary based upon a number of
factors, including the cost to complete development and bring the
SafetyStrip(TM) and ExtreSafe(TM) medical needle technology,
intravenous flow gauge system, phlebotomy device and other
products to commercial viability, the cost and effort needed to
complete production of the Sharp-Trap(R) molds, the level of
sales and marketing for the Safety Cradle(R) sharps containers,
and the resources that will be expended in SHP's lawsuit against
Mold Threads, Inc. t present, the Company has committed to spend
$103,805 during fiscal 1996 on projects relating to the
development and manufacture of its products. The Company
believes that the funds described above and funds generated from
the sale of its Safety Cradle(R) sharps container products, will
be sufficient to support the Company's operations and planned
capital expenditures at least through fiscal 1996. The Company's
failure either to produce or sell sufficient quantities of Safety
Cradle(R) sharps container products could materially and
adversely affect the Company's cash flows. In addition, the
Company's business plans may change or unforeseen events may
occur which require the Company to raise additional funds.
Inflation
The Company does not expect the impact of inflation on
operations to be significant.
Backlog
There are no material backlog of unfilled orders of the
Company's products.
Future Results
This document contains both historical facts and forward-
looking statements. Any forward-looking statements involves
risks and uncertainties, including but not limited to risk of
product demand, market acceptance, economic conditions,
competitive products and pricing, difficulties in product
development, commercialization, and technology, and other risks.
As a result, the Company's actual future operations could differ
significantly from those discussed in the forward-looking
statements.
<PAGE> 7
PART III
Item 11. Executive Compensation.
Included below are tables which set forth certain
information concerning compensation paid by the Company to its
Chief Executive Officer and all other executive officers with
annual compensation in excess of $100,000 (determined as of
December 31, 1995) (the "Named Executive Officers"). The tables
include columns related to stock options.
Summary Compensation Table. The following table provides
certain summary information regarding compensation paid by the
Company to the Named Executive Officers. The amounts set forth
were paid by SHP for services rendered to SHP. The Company had
no operations and paid no compensation to management prior to
July 28, 1995, when the Company acquired SHP. On that date, the
previous management of the company resigned and the current
management, as described herein, assumed their present positions.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long-Term Compensation
Awards
Restr Stock All
Name and Other icted Optio LTIP Other
Principal Salary Bonus Annual Stock ns/ Payou Compe
Position Year ($)(1) ($)(2) Compens Awards SAR(#) ts($) nsation
ation($) ($) ($)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David A. 1993 --- --- --- --- --- --- ---
Robinson, 1994 120,000 --- --- --- 90,000(4) --- ---
President, 1995 193,590 25,000 --- 666,666(3) 300,000(5) --- 1,876
CEO, Chairman
of the Board
and Director
Bradley C. 1993 --- --- --- --- --- --- ---
Robinson, VP, 1994 89,128 --- --- --- 90,000(4) --- ---
Operations 1995 148,590 25,000 --- 666,666(3) 300,000(5) --- 625
and Investor
Relations and
Director
Dr. Gale H. 1993 --- --- --- --- --- --- ---
Throne, VP 1994 16,958 --- --- --- 36,000(6) --- ---
Product 1995 128,333 25,000 --- --- 57,000(5) --- 2,758
Development
and
Director
_______________
<F1>
(1) All amounts paid to as salary were paid pursuant to the
Company's obligations under employment contracts with the above
referenced individuals. Said employment contracts were amended
from time to time during the periods set forth above. The annual
salaries of the Named Executive Officers for 1996, as set forth
in their employment contracts, are $240,000 for Mr. David A.
Robinson, $160,000 for Mr. Brad C. Robinson and $150,000 for Dr.
Gale H. Thorne.
<F2>
(2) The cash bonuses were awarded by the Company in recognition
of the recipients' contributions toward the successful
Acquisition.
<F3>
(3) These are Earn-Out shares. David A. Robinson, Bradley C.
Robinson and John T. Clarke, who are respectively the President,
Chief Executive Officer, Chairman of the Board and a Director; a
Vice President and Director; and a former Director of the Company
have the opportunity to receive up to an aggregate of 2,000,000
additional shares of common stock. Any issuance of Earn-Out
Shares would be based upon the level of pre-tax consolidated net
income, adjusted to exclude any expense arising from the
obligation to issue or the issuance of the Earn-Out Shares and
any income or expense associated with non-recurring or
extraordinary items as determined in accordance with generally
accepted accounting principles ("Adjusted PTNI"). At the date
the Earn-Out Shares agreement was adopted the value of the Common
Stock was $2.00 per share. At December 31, 1995, the Company's
common stock was trading at $8.63.
<PAGE> 8
The Earn-Out Shares have not vested. No dividends will
be paid on the Earn-Out Shares unless and until they vest.
The Earn-Out Shares will vest as follows. If Adjusted PTNI
for 1996, 1997 or 1998 equals or exceeds $1,500,000, then an
aggregate of 350,000 Earn-Out Share will be issued, but only
one issuance of 350,000 Earn-Out Shares will be made based on
the $1,500,000 level of Adjusted PTNI.
If Adjusted PTNI for 1996, 1997 or 1998 equals or exceeds
$5,000,000 then there will be issued that aggregate number of
Earn-Out Shares calculated by subtracting the number of Earn-
Out Shares previously issued or issuable based on the
attainment of a lesser Adjusted PTNI in the same year (if any)
from 1,100,000, provided that only one issuance of Earn-Out
Shares will be made based on the $5,000,000 level of Adjusted
PTNI.
If Adjusted PTNI for 1996, 1997 and 1998 equals or
exceeds $8,000,000, then there will be issued that aggregate
number of Earn-Out Shares calculated by subtracting the number
of Earn-Out Shares previously issued or issuable based on the
attainment of a lesser Adjusted PTNI in the same year (if any)
from 2,000,000, provided that in no event will an aggregate of
more than 2,000,000 Earn-Out Shares be issued.
<F4>
(4) These options were exercised on September 1, 1995 and were
issued under the SHP NQSOP.
<F5>
(5) These options were issued pursuant to the NQSOP.
<F6>
(6) Options to purchase 18,000 shares of the Company's Common
Stock were exercised on September 1, 1995 and options to purchase
18,000 shares of the Company's Common Stock become exercisable in
July 1996. Said options were issued under the SHP NQSOP.
<F7>
(7) These amounts represent the amounts paid by the Company for
term life insurance for the benefit of the Named Executive
Officer. The related insurance policies have no cash surrender
values.
</TABLE>
Option Grants in Fiscal Year 1995. The following table sets
forth certain information with respect to stock option grants
during the year ended December 31, 1995 to Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
(Adjusted to Reflect a Recapitalization of the Company's Common Stock)
<TABLE>
<CAPTION>
Individual Grants
Potential
Number Percent Realizable
of of Total Exerc Value at
Shares Options ise Assumed Annual
Underlyi Granted or Expira Rate of Stock
ng to Base tion Price
Options Employee Price Appreciation
s in for Option
Term
Name Granted Fiscal Date 5% 10%
(#) Year ($/Sh)
<S> <C> <C> <C> <C> <C> <C> <C>
David A. 300,000 25.6% 2.00 9/1/2000 $165,769 $366,306
Robinson
Bradley C. 300,000 25.6% 2.00 9/1/2000 $165,769 $366,306
Robinson
Dr. Gale H. 57,000 4.9% 2.00 9/1/2000 $ 31,496 $ 69,598
Thorne
_______________
<F1>
(1) These options were issued pursuant to the NQSOP and were
exercisable on the date of grant.
</TABLE>
<PAGE> 9
Option Exercises and Year-End Holdings. The following table
sets forth certain information with respect to stock option
exercises during the year ended December 31, 1995, and the number
of shares of stock covered by both exercisable and unexercisable
stock options held by each of the Named Executive Officers.
<TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Shares Options/SARs at Fiscal
Acquired Value at Fiscal Year-End($)
Name On Realized Year-End($)
Exercise ($) Exercisable/ Exercisable/
(#) Unexercisable Unexercisable(3)
<S> <C> <C> <C> <C>
David A. 90,000 180,000 300,000(1) $2,100,000
Robinson
Bradley C. 90,000 180,000 300,000(1) $2,100,000
Robinson
Gale H. 18,000 36,000 57,000(1)/18,000(2) $675,000
Thorne
_______________
<F1>
(1) Options exercisable at $2.00 per share.
<F2>
(2) Options become exercisable in July, 1996 at an exercise
price of $.39 per share.
<F3>
(3) The trading price of the Company's common stock on December
31, 1995 was $9.00 per share.
</TABLE>
Compensation of Directors
During 1994, the non-employee members of the Board of
Directors received a total of 9,000 shares of common stock as
compensation for serving as directors of SHP. For 1995, the
Company granted stock options under the NQSOP to purchase 20,000
shares of Common Stock for $2.00 per share to the non-executive
members of the Board of Directors. The Company has made no other
agreements regarding the compensation of non-executive members of
the Board of Directors. Directors of the Company who are also
officers of the Company receive no additional compensation for
their service as directors. All directors are entitled to
reimbursement for reasonable expenses incurred in the performance
of their duties as Board members.
Employment and Indemnity Agreements
On September 1, 1995, the Company entered into employment
agreements with each of Mr. David A. Robinson, Mr. Bradley C.
Robinson and Dr. Gale H. Thorne (collectively, the "Senior
Executives"). The terms of these employment agreements provide
that (i) Mr. David Robinson receive a salary of $240,000 per
year, Dr. Gale Thorne receive a salary of $150,000 per year and
Mr. Bradley Robinson receive a salary of $160,000 per year; (ii)
the Senior Executives' employment agreements are for terms of
three years, expiring on September 1, 1998; (iii) the Senior
Executives are entitled to a reasonable car allowance; (iv) if
the Senior Executives are terminated by reason of disability or
for other than cause, the salary of such Senior Executives will
continue for the full term of the agreement; (v) if a Senior
Executive is terminated for cause, the salary of such Senior
Executive cease as of the date of termination; (vi) the Company
will provide the Senior Executives with $1,000,000 of term life
insurance while employed by the Company; and (vii) the Senior
Executives shall keep all proprietary information relating to the
business confidential both during and after the term of the
agreements.
<PAGE> 10
The Company does not currently have employment agreements
with any of its other executive officers or key employees. The
Company has entered into Indemnity Agreements with each of its
executive officers and directors pursuant to which the Company
agrees to indemnify the officers and directors to the full extent
permitted by law for any event or occurrence related to the
service of the indemnitee as an officer or director of the
Company that takes place prior to or after the execution of the
agreement. The Indemnity Agreements obligate the Company to
reimburse or advance expenses relating to any proceeding arising
out of an indemnifiable event. Under these agreements, the
officers and directors of the Company are presumed to have met
the relevant standards of conduct required by Delaware law for
indemnification. In the absence of the Indemnity Agreements,
indemnification of these officers and directors may be
discretionary in certain cases.
Indemnification for Securities Act Liabilities
The Delaware General Corporation Law authorizes, and the
Company's Bylaws and Indemnity Agreements provide for,
indemnification of the company's directors and officers against
claims, liabilities, amounts paid in settlement and expenses in a
variety of circumstances. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to
directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore,
unenforceable.
Stock Options and Warrants
During 1994 the Board of Directors of SHP approved a non-
qualified stock option plan for its officers, directors and key
employees ("SHP NQSOP"). The exercise price of the options is
equivalent to the estimated fair market value of the stock as
determined by the Board of Directors at the date of grant. The
number of shares, terms and exercise period are determined by the
Board of Directors on an option-by-option basis. As of November
15, 1995, options to acquire an aggregate of 63,000 shares of
Common Stock at $.39 per share were outstanding under the SHP
NQSOP. Also, in February 1995 (prior to the Acquisition) SHP
issued to Max Lewinsohn, a nonaffiliated shareholder of the
Company, a warrant to purchase 45,000 shares of Common Stock at
$1.67 per share. Said warrant were issued to Mr. Lewinsohn in
consideration for funds paid to SHP. The options issued under
the SHP NQSOP expire in 1999 and the warrant issued to Mr.
Lewinsohn expires in 1996.
On September 1, 1995, the Company adopted the NQSOP. In
addition, on the date of the Acquisition, all of the options
issued under SHP's NQSOP become outstanding obligations of the
Company and the SHP NQSOP was terminated. As of April 15, 1996,
options to acquire an aggregate of 1,171,810 shares of Common
Stock at $2.00 per share had been granted and are presently
outstanding, including the options granted to David A. Robinson,
Bradley C. Robinson and Gale H. Thorne.
Compensation Committee Interlocks and Insider Participation
No executive officers of the Company serve on the
Compensation Committee (or in a like capacity) for the Company or
any other entity.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth certain information with
respect to the beneficial ownership of the common stock of the
Registrant as of April 1, 1996, for: (i) each person who is known
by the Registrant to beneficially own more than 5 percent of the
Registrant's common stock, (ii) each of the Registrant's
directors, (iii) each of the Registrant's Named Executive
Officers, and (iv) all directors and executive officers as a
group. As of April 1, 1996 the Company had 8,589,153 shares of
common stock outstanding.
<PAGE> 11
<TABLE>
<CAPTION>
Name and Shares Percentage of
Address Beneficially Shares Position
of Beneficial Owned(2) Beneficially
Owner(1) Owned
<S> <C> <C> <C>
David A. 630,219 7% President, Chief
Robinson(3) Executive Officer,
Chairman of the
Board and Director
Bradley C. 630,219 7% Vice President,
Robinson(3) Operations and
Director
Gale H. 149,700 2% Vice President,
Thorne(4) Product Development
and Director
J. Clark 245,000 3% Vice President ,
Robinson(5) Chief Financial
Officer, Treasurer,
Secretary and
Director
Gary W. 86,000 1% Director
Farnes(6)
Robert R. 83,000 1% Director
Walker(7)
Executive 1,824,138 20%
Officers and
Directors as a
Group (6
Persons)
John T. 647,465 7%
Clarke(8)
4 Butterworth
Gardens
Woodford,
Essex, England
Capital Growth
International(9)
11601 Wilshire
Boulevard, 1,915,500 18%
Suite 500
Los Angeles, CA
90025
__________________________
<F1>
(1) Except where otherwise indicated, the address of the
beneficial owner is deemed to be the same address as the
Registrant.
<F2>
(2) Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally
includes voting and investment power with respect to the
securities. Shares of common stock subject to options or
warrants currently exercisable, or exercisable within sixty
(60) days, are deemed outstanding for computing the percentage
of the person holding such options but are not deemed
outstanding for computing the percentage of any other person.
<F3>
(3) Includes 330,219 shares and stock options to purchase
300,000 shares for each of these two persons. Does not
include 666,666 Earn-Out Shares for each of these two persons
which shares have not vested.
<F4>
(4) Includes 63,000 shares, stock options to purchase 57,000
shares and Series A Warrants to purchase 27,000 shares. Also
includes 2,700 shares that Mr. Thorne is deemed to
beneficially own as a result of their being owned in joint
tenancy with his spouse. Does not include stock options to
purchase 18,000 shares that become exercisable in July, 1996.
<PAGE> 12
<F5>
(5) Includes 90,000 shares and stock options to purchase
75,000 shares. Also includes 50,000 shares and Series A
Warrants to purchase 30,000 shares that Mr. Robinson is deemed
to beneficially own as a result of their being owned by a
controlled entity.
<F6>
(6) Includes 61,500 shares, stock options to purchase 20,000
shares and Series A Warrants to purchase 4,500 shares.
<F7>
(7) Includes stock options to purchase 20,000 shares. Also
includes 63,000 shares of which Mr. Walker is deemed to be the
beneficial owner as a result of their ownership by a trust of
which he is a trustor.
<F8>
(8) Includes 231,362 shares, stock option to purchase 300,000
shares and Series A Warrants to purchase 21,000 shares. Also
includes 18,000 shares that Mr. Clarke is deemed to
beneficially own as a result of their being owned by a
controlled entity, 59,103 shares owned by his spouse, and
18,000 shares owned by a minor child, which he is deemed to
beneficially own. Does not include 666,666 Earn-Out Shares
which shares have not vested.
<F9>
(9) Includes 75,000 shares, stock options to purchase 20,000
shares, Series A Warrants to purchase 530,125 shares and
Series B Warrants to purchase 1,290,375, of which 430,125
Series A Warrants are to be transferred to distributors that
assisted Capital Growth in the private placement completed on
August 18, 1995, and as to which Capital Growth disclaims
beneficial ownership.
</TABLE>
The Registrant is not aware of any arrangements, the
operation of which may at a subsequent date result in a change in
control of the Registrant.
Item 13. Certain Relationships and Related Transactions.
In September 1994 (prior to the Acquisition), certain
shareholders of SHP made direct loans to SHP in the amount of
approximately $385,000 under a bridge loan agreement.
Subscriptions under the bridge loan were offered proportionately
to shareholders of SHP based on the number of shares held. The
subscribers to the bridge loan were issued warrants permitting
them to acquire up to an aggregate of 346,500 shares of common
stock at $1.11 per share on or before December 31, 1995. These
warrants were exercised in July, 1995 in consideration for the
conversion of this loan.
Stanley Hollander, a former director of the Company, is an
officer and director of the corporate managing member of Capital
Growth, which holds 75,000 shares of Common Stock 530,125 Series
A Warrants, 1,290,375 Series B Warrants and options to purchase
20,000 shares of the Company's Common Stock. Capital Growth
received the Common Stock, Series A Warrants and Series B
Warrants, together with a gross fee of $860,251, as consideration
for placement agent services rendered on behalf of the Company
during 1995.
<PAGE> F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1994, and
1995 F-3
Consolidated Statements of Operations for the period from
November 19, 1993 (date of inception) to December 31, 1993,
and for the years ended December 31, 1994 and 1995 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
period from November 19, 1993
(date of inception) to December 31, 1993, and for the years
ended December 31, 1994 and 1995 F-5
Consolidated Statements of Cash Flows for the period from
November 19, 1993 (date of
inception) to December 31, 1993, and for the years ended
December 31, 1994 and 1995 F-6
Notes to Consolidated Financial Statements F-8
<PAGE> F-2
Independent Auditors' Report
The Board of Directors and Stockholders
Specialized Health Products International, Inc.:
We have audited the accompanying consolidated balance sheets of
Specialized Health Products International, Inc. and subsidiary as
of DecemberE31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit), and
cash flows for the years then ended and for the period from
November 19, 1993 (date of inception) to DecemberE31, 1993.
These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Specialized Health Products International, Inc. and
subsidiary as of December 31, 1994 and 1995, and the results of
their operations and their cash flows for the years then ended
and for the period from November 19, 1993 (date of inception) to
December 31, 1993, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah
February 2, 1996
<PAGE> F-4
<TABLE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
Consolidated Balance Sheets
December 31, 1994 and 1995
<CAPTION>
Assets 1994 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - 4,251,584
Trade Accounts receivable 4,471 350,718
Related party receivable (note 11) - 122,850
Inventories - 16,322
Prepaid expenses and other 5,436 34,017
----------------------------
Total current assets 9,907 4,775,491
----------------------------
Equipment and furnishings, net of accumulated
depreciation of $1,753 in 1994 and 285,770 812,049
and $8,196 in 1995 (note 3)
Other assets, net of accumulated amortization
of $27,564 in 1994 and $90,314 in 1995 361,188 363,188
----------------------------
$ 656,865 5,950,728
============================
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Bank overdraft $ 10,675 -
Accounts payable 84,655 134,449
Accrued expenses 7,800 446,474
Due to stockholders (note 11) 194,500 -
----------------------------
Total current liabilities 297,630 580,923
Stockholder loans (note 4) 358,333 -
Due to stockholders - long-term (note 11) 100,000 -
----------------------------
Total liabilities 755,963 580,923
----------------------------
9% cumulative redeemable preference stock,
$1.50 par value. Authorized 250,000 shares; 256,780 -
160,000 shares issued and outstanding in 1994
1994 (liquidation value $256,780) (note 8)
Stockholders' equity (deficit) (notes 6 and 7):
Preferred stock, $.389 par value in 1994
and $.001 par value in 1995. Authorized
5,000,000 shares; 1,440,000 560,000 -
shares issued and outstanding in 1994
(liquidation value $560,000) and no shares
issued and outstanding as of
December 31, 1995
Common stock, no par value in 1994 and $.02
par value in 1995. Authorized 50,000,000
shares;issued and 209,800 171,333
outstanding 1,363,500 shares in 1994 and
8,566,653 shares in 1995
Common stock subscriptions receivable (198,500) (259,500)
(note 6)
Additional paid-in capital - 9,316,028
Accumulated deficit (927,178) (3,858,056)
------------------------------
Total stockholders' equity (deficit) (355,878) 5,369,805
------------------------------
Commitments and contingencies (notes 2, 5, 7,
10, and 12)
$ 656,865 5,950,728
===============================
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE> F-4
<TABLE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
Consolidated Statements of Operations
For the period from November 19, 1993 (date of inception) to
December 31, 1993,
and for the years ended December 31, 1994 and 1995
1993 1994 1995
------------------------------------
<S> <C> <C> <C>
Sales $ - 33,256 447,844
Cost of sales - 21,669 294,171
Gross profit - 11,587 153,673
Expenses:
Research and development - 290,950 804,639
Selling, general and administrative 3,450 620,022 2,133,021
Write off of operating assets - - 255,072
--------------------------------------
Total expenses 3,450 910,972 3,192,732
-------------------------------------
Operating loss (3,450) (899,385) (3,039,059)
Other Income (expense):
Interest income - 237 135,428
Interest expense - (7,800) (15,858)
---------------------------------------
Total other income (expense) - (7,563) 119,570
---------------------------------------
Net loss (3,450) (906,948) (2,919,489)
Dividends on preference stock - (16,780) (11,389)
Net loss attributable to common $ (3,450) (923,728) (2,930,878)
stockholders =======================================
Net loss per common share $ - (.75) (.69)
=======================================
Weighted average number of shares used
for net loss per share 1,170,000 1,224,074 4,269,131
computation =======================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> F-5
<TABLE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
For the period from November 19, 1993 (date of inception) to
December 31, 1993,
and for the years ended December 31, 1994 and 1995
<CAPTION>
Common
stock Addit Net stock
subsc ional Accumu- holders'
Preferred Stock Common Stock ription paid-in lated equity
Shares Amount Shares Amount recei capital deficit (deficit)
vable
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock - - 1,170,000 1,300 - - - 1,300
for cash at
inception
Net Loss - - - - - - (3,450) (3,450)
--------------------------------------------------------------------------------------------
Balances at - $ - 1,170,000 $ 1,300 - - (3,450) (2,150)
December 31,
1993
Issuance of
preferred 1,440,000 560,000 - - - - - 560,000
stock for cash
Issuance of
common stock
for services - - 193,500 208,500 (198,500) - - 10,000
and stock
subscription
receivable
Unpaid - - - - - - (16,780) (16,780)
dividends on
preference
stock
Net loss - - - - - - (906,948) (906,948)
--------------------------------------------------------------------------------------------
Balances at 1,440,000 560,000 1,363,500 209,800 (198,500) - (927,178) (355,878)
December 31,
1994
Issuance of
preferred 362,403 604,001 - - - - - 604,001
stock for cash
Cash received
for stock - - - - 190,000 - - 190,000
subscriptions
receivable
Services
provided for - - - - 8,500 - - 8,500
stock
subscriptions
receivable
Unpaid dividends
on preference - - - - - - (11,389) (11,389)
stock
Conversion of
debt for common - - 346,500 385,000 - - - 385,000
stock (note 4)
Issuance of
additional
common shares - - 90,000 180,000 - (180,000) - -
to stockholders
under
antidilution
provisions
Business (1,802,403) (1,164,001) 2,102,403 (696,752) - 1,860,753 - -
combination
(note 1)
Issuance of
common stock - - 4,256,250 85,125 - 7,193,935 - 7,279,060
for cash net of
expenses (note 7)
Conversion of
debt for common - - 50,000 1,000 - 99,000 - 100,000
stock (note 7)
Issuance of
common stock
for subscription - - 70,000 1,400 (140,000) 138,600 - -
receivable (note 7)
Cash received for
stock subscription
receivable - - - - 90,000
Exercise of
stock options
for common - - 288,000 5,760 (209,000) 203,740 - -
stock
subscription
receivable
----------------------------------------------------------------------------------------------
Balances at - $ - 8,566,653 $ 171,333 (259,500) 9,316,028 (3,858,056) 5,369,805
December 31, 1995 ==============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> F-6
<TABLE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
For the period from November 19, 1993 (date of inception) to
December 31, 1993,
and for the years ended December 31, 1994 and 1995
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,450) (906,948) (2,919,489)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization - 29,317 74,542
Common stock issued for services - 10,000 8,500
Loss on sale of equipment - - 1,291
Write off of operating assets - - 255,072
Changes in operating assets and
liabilities:
Increase in trade accounts receivable - (4,471) (346,247)
Increase in prepaid expenses and other (146) (5,290) (28,581)
assets
Decrease (increase) in inventories (6,104) 6,104 (16,322)
Increase in related party receivable - - (122,850)
Increase in accounts payable and accrued - 92,455 488,468
expenses -------------------------------
Net cash used in operating activities (9,700) (778,833) (2,605,616)
-------------------------------
Cash flows from investing activities:
Proceeds from the sale of equipment - - 2,943
Capital expenditures - (287,523) (797,377)
Payments to acquire patents and technology (10,000) (278,752) (64,750)
Net cash used in investing activities (10,000) (566,275) (859,184)
Cash flows from financing activities:
Borrowings on due to stockholders - 194,500 -
Payments on due to stockholders - - (194,500)
Proceeds from issuance of stockholder loans 18,700 339,633 44,167
Payments on stockholder loans - - (17,500)
Proceeds from issuance of common stock 1,300 - 7,279,060
Proceeds from issuance of preferred stock - 560,000 604,001
Proceeds from issuance of redeemable - 240,000 -
preference stock
Payments on redeemable preference stock and - - (268,169)
dividends
Proceeds (payments) on bank overdraft - 10,675 (10,675)
Proceeds from stock subscriptions - - 280,000
receivable -----------------------------
Net cash provided by financing activities 20,000 1,344,808 7,716,384
-----------------------------
Net increase (decrease) in cash 300 (300) 4,251,584
Cash at beginning of year - 300 -
-----------------------------
Cash at end of year $ 300 - 4,251,584
==============================
<PAGE> F-7
Supplemental Disclosure of Cash Flow
Information
Cash paid during the year for interest $ - - 15,858
Supplemental Disclosures of Noncash
Investing and Financing Activities
Dividends on redeemable preference stock $ - 16,780 11,389
Common stock issued for subscription - 198,500 349,500
receivable
Conversion of stockholder loans and due to - - 485,000
stockholders to common stock
Acquisition of purchased technology and
patents for stockholder payable - 100,000 -
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> F-8
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
For the period from November 19, 1993 (date of inception) to
December 31, 1993,
and for the years ended December 31, 1994 and 1995
(1)Summary of Significant Accounting Policies
(a)Organization and Business Description
Specialized Health Products, Inc. (Specialized Health)
was organized November 19, 1993, with a commercial
objective to develop, manufacture, and market safe, easy-
to-use and cost-effective products for the health care
industry. Initial development has focused on products
that limit or prevent the spread of blood-borne diseases.
The Company has several products currently in the
production or development stage. The sharps container is
the only product which is currently in the production
stage. This device is designed to provide means for
disposing of sharps in order to reduce the potential for
accidental needle sticks. The other two major product
lines are the lancet and the needle withdrawal
technology; both are in the development stage. The
lancet device is designed to provide a nonreusable,
safer, and less painful way of obtaining small blood
samples from patients. The needle withdrawal technology
is designed to automatically retract needles while
providing permanent and safe containment of the needle.
Specialized Health's activities since inception have
principally consisted of obtaining financing, recruiting
personnel, conducting research and development,
developing products, and identifying and contracting with
manufacturers. The Company conducts its operations
primarily in the Continental United States.
Specialized Health entered into a business combination in
July 1995 with Russco, Inc. (Russco) wherein Specialized
Health became a wholly-owned subsidiary of Russco and
Russco's name was changed to Specialized Health Products
International, Inc. (the Company). Russco was organized
in February 1986 as a public blind pool company to
evaluate, structure, and complete a merger with, or
acquisition of, any privately held business seeking to
obtain the perceived advantages of being a publicly owned
Company. Russco had no significant operations and
minimal capital with which to conduct its operations.
At the closing of the business combination, (a) the
300,000 shares of Russco's common stock previously
outstanding (as adjusted for a reverse stock split)
remained outstanding as common stock of the Company and
(b) Russco issued 3,602,403 shares of its common stock
for all of the issued and outstanding shares of
Specialized Health's common stock and preferred stock.
The business combination has been treated for accounting
purposes as a "reverse merger" wherein Specialized Health
has been shown as the acquiring company even though
Russco issued its common shares to acquire Specialized
Health because the stockholders of Specialized Health
received the significant majority of the outstanding
common stock of the Company and management of Specialized
Health became the management of the Company. Because
Russco had limited operations, the business combination
has been accounted for as a purchase transaction with the
net assets of Russco (which were insignificant) being
recorded at their fair value at the date of closing and
operating results of Russco prior to the business
combination not being included with the historical
operating results of Specialized Health.
Contemporaneously with the business combination,
Specialized Health engaged in a private placement of
securities wherein 4,376,250 shares of the Company's
common stock were issued, net of offering costs, for
consideration of $7,519,060, as more fully discussed in
note 7.
<PAGE> F-9
The accompanying consolidated financial statements
subsequent to the business combination include the
accounts of the Company and its wholly-owned subsidiary
Specialized Health. All intercompany accounts and
transactions have been eliminated in consolidation.
Prior to the business combination Specialized Health had
no subsidiary.
(b)Cash and Cash Equivalents
Cash and cash equivalents are comprised of a checking and
money market account. The Company considers all
investments with original maturities of three months or
less to be cash equivalents.
(c)Inventories
Inventories which consist primarily of finished
goods are stated at the lower of cost or market. Cost is
determined using the first-in first-out method.
(d) Other Assets
The Company has included in other assets at December
31, 1994 and 1995, the cost of purchased technology and
patents, and related patent costs amounting to $388,752
and $453,502, respectively, which is being amortized
using the straight-line method over seven years. These
assets include the following technologies: acquisitions
from third parties include a catheter closure patent;
lancet patent; the sharps container technology acquired
from Sharp-Trap, Inc.; and an Automatic Needle
Withdrawing and Securing System purchased from Gale H.
Thorne, a director and employee. Management evaluates
the recoverability of these costs on a periodic basis,
based on sales of the product related to the technology,
revenue trends, and projected cash flows based on
estimates of future sales.
(e)Equipment and Furnishings
Equipment and furnishings are stated at cost and consist
primarily of manufacturing molds and equipment, and
office furniture and fixtures. Depreciation is computed
using the straight-line method based on the estimated
useful lives of the related assets which is 5 years with
the exception of manufacturing equipment which is
depreciated on the straight-line method over 7 years or
the units-of-production method whichever is greater.
(f) Revenue Recognition
Revenues are recognized upon shipment of products.
Sales recorded in the year ended DecemberE31, 1994,
relate primarily to products received upon acquisition of
technology and patents.
<PAGE> F-10
(g) Research and Development Costs
Research and development costs are expensed as
incurred.
(h)Income Taxes
Income taxes are recorded using the asset and liability
method for all periods presented in accordance with the
provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. Deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the
financial statement carrying amounts of existing assets
and liabilities and their respective tax basis, and
operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years 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
income in the period that includes the enactment date.
(i)Net Loss Per Common Share
Net loss per common share is based on the weighted
average number of common shares outstanding. Stock
options, warrants, and preferred shares prior to
conversion are not included in the calculation because
their inclusion would be antidilutive and reduce the net
loss per share amount.
(j)Reclassification
Certain amounts in 1994 have been reclassified to conform
with 1995 classifications.
(k)Fair Value Disclosure
At December 31, 1995, the book value of the CompanyOs
financial instruments approximates fair value.
(l)Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that effect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
<PAGE> F-11
(2)Investments
In October 1995, the Company entered into an agreement with a
third party to form a joint venture Quantum Imaging
Corporation (Venture) to develop an improved filmless X-Ray
system. For a fiftyEpercent interest in the Venture (before
dilution by financing investors), the Company is obligated to
pay to the Venture $15,000 a month, which is paid to the
other Venture partner to perform research and development on
the VentureOs behalf. Additionally, the Company is obligated
to pay the general and administrative expenses of the Venture
up to $15,000 per month. These obligations continue through
September of 1996, and are cancelable only upon 30 days
written notice and failure of the other Venture partner to
meet requirements as specified in the Venture agreement.
Unless this agreement is terminated, the Company is obligated
at December 31, 1995 for a minimum of $135,000 and up to an
additional $135,000 as general and administrative expenses
are incurred by the Venture. In managementOs opinion, for
the Venture to be successful, it must raise between
$3,000,000 and $6,000,000. The Company contributed total
capital of $83,624 to the joint venture during 1995, all of
which the Company expensed and the Venture used to fund
research and development and administrative expenses. Assets
and liabilities as of December 31, 1995 were immaterial.
(3) Equipment and Furnishings
Equipment and furnishings consist of the following:
1994 1995
------------------
Assembly and manufacturing equipment $ 750 33,605
Manufacturing molds 276,370 245,753
Office furnishings and fixtures 10,403 144,992
Construction-in-progress - 395,895
------------------
287,523 820,245
Less accumulated depreciation (1,753) (8,196)
------------------
$ 285,770 812,049
During 1995, operating assets comprised primarily of
manufacturing molds totaling $255,072 were written off. The
molds became obsolete due to design changes in the sharp
container technology.
<PAGE> F-12
(4)Stockholders' Loans
During 1994 and 1995, prior to the business combination
certain existing stockholders made direct loans to
Specialized Health aggregating $385,000 and bearing interest
at ten percent under a bridge loan agreement. Subscriptions
under the bridge loan agreement were offered proportionately
to stockholders based on the number of shares held. The
subscribers to the bridge loan agreement were issued a total
of 346,500 warrants permitting them to acquire an equal
number of shares of common stock at $1.11Eper share on or
before DecemberE31, 1996. No value was ascribed to the
warrants. In connection with the business combination
discussed in note 1, the 346,500 warrants were exercised
through conversion of the outstanding loans.
(5)Leases
The Company leases office space, equipment, and vehicles
under noncancelable operating leases. Future minimum lease
payments under these leases are as follows:
Fiscal year ending December 31:
1996 $ 107,972
1997 93,132
1998 38,718
-----------
$ 239,822
Rent expense was $1,881 for the period from November 19, 1993
(date of inception) to December 31, 1993, $52,051 in 1994,
and $67,091 in 1995.
(6) Stock Options
In 1995, the Company adopted a nonqualified stock option plan
whereby it has reserved 1,284,998 shares of its common stock
for issuance to officers, directors, and employees. At the
time of adoption, the Company granted options to acquire
1,171,810 shares of common stock at $2.00 per share of which
1,117,000 vested immediately, and 54,810 vest at various
times over the next three years. The options expire five
years from date of grant.
During 1994, the Board of Directors of Specialized Health
approved a nonqualified stock option plan for its officers,
directors, and employees and authorized 396,000 shares of
common stock for issuance upon the exercise of options
granted under this plan. The exercise price of the options
is equivalent to the estimated fair market value of the stock
as determined by the Board of Directors at the date of grant.
The number of shares, terms, and exercise period are
determined by the Board of Directors on an option-by-option
basis. During 1994, options to acquire 396,000 common shares
were granted at a price range of $.39 to $1.11 per share. No
options were exercised or lapsed during 1994. On
SeptemberE1, 1995, options to acquire 288,000 shares were
exercised from which the Company received $209,500 in a
common stock subscription receivable. All common stock
subscription receivables are due within one year. The
remaining 108,000 shares will become exercisable over the
next eighteen months, have an option price of $.39 per share,
and expire in 2004.
<PAGE> F-13
(7)Preferred and Common Stock
The Company has authorized 50,000,000 shares of common stock
with $.02 par value and 5,000,000 shares of preferred stock
with a par value of $.001 per share.
In connection with the business combination discussed in note
1, Specialized Health completed a 9 for 1 forward stock split
of both its common and preferred stock. The number of common
and preferred shares and per share amounts presented in the
accompanying consolidated financial statements have been
restated for the effect of this split. In addition, the
Company issued 90,000 shares of common stock to non-
affiliated shareholders existing at the time of the private
placement under antidilutive provisions.
Specialized Health and the Company engaged in a private
placement of securities in JulyE1995, wherein 860.25 units
were sold for $10,000 per unit for total consideration, net
of expenses of $7,519,060. This consideration was comprised
of $7,279,060 of cash, $100,000 of debt converted to common
stock, and a common stock subscription receivable of
$140,000. The private placement was completed
contemporaneously with the business combination. In the
private placement, the Company sold an aggregate of 4,301,250
shares of the Company's $.02Epar value common stock and
Series A warrants to purchase an aggregate of 2,580,750
shares of the Company's common stock at a price of $3.00 per
share, exercisable for a period of two years from the date of
effectiveness of a registration statement covering the
issuance of the shares of common stock underlying the Series
A warrants.
For services provided in connection with the private
placement of securities, the underwriter received a
commission of $860,251 in cash, 75,000 shares of common
stock, Series A warrants to purchase 530,125 shares of common
stock for $3.00 per share, and Series B warrants to purchase
1,290,375 shares of common stock for $2.00 per share. The
warrants expire on the earlier of (a) two years from the
effective date of a registration statement under the
Securities Act covering the issuance of the shares of common
stock underlying such warrants or (b) the date specified in a
notice of redemption from the Company in the event that the
closing price of the common stock for any ten consecutive
trading days preceding such notice exceeds $6.00 per share
and subject to the availability of a current prospectus
covering the underlying shares. The Company may redeem all
or a portion of the warrants, in each case at $.001 per
warrant upon at least 20 days prior written notice to the
warrant holders. The warrants may only be redeemed if a
current prospectus is available with respect to the issuance
of shares of common stock upon the exercise thereof. At
December 31, 1995 the Company has a common stock subscription
receivable amounting to $50,000 from the underwriter.
The underwriter had a continuing relationship with the
Company pursuant to which the underwriter was to provide
financial advisory and investment banking services to the
Company through July 1997. The Company was to pay the
underwriter $4,000 per month for such services.
Additionally, the underwriter had the right of first refusal
to undertake any financings of the Company during this
period. Subsequent to year end, the Company amended their
agreement with the underwriter canceling the monthly service
fees and the underwriters right of first refusal. The
Company signed a new agreement with PaineWebber to act as its
exclusive financial advisor and to assist in the development
of strategic alliances.
Also, during 1995 the Company issued a warrant to a
nonaffiliated stockholder of the Company to purchase 45,000
shares of common stock at $1.67 per share. This warrant
expires in 1996.
<PAGE> F-14
Each preferred and common share of Specialized Health was
converted into one common share of the Company in connection
with the business combination.
The Company has granted to a director and certain officers
the right to receive up to an aggregate of 2,000,000
additional shares of common stock based upon the level of pre-
tax consolidated net income (PTNI) for 1996, 1997, or 1998.
If PTNI equals of exceeds $1,500,000, $5,000,000, or
$8,000,000 in any of these years these individuals will
receive an aggregate of 350,000, 1,100,000, or 2,000,000
common shares, respectively, less shares previously received
but no more than an aggregate of 2,000,000 shares.
The Company expects that the issuance of such shares will be
deemed to be the payment of compensation to the recipients
and will result in a charge to the earnings of the Company in
the year or years the shares are earned, in an amount equal
to the fair market value of the shares. This charge to
earnings could have a substantial negative impact on the
earnings of the Company in the year or years in which the
compensation expense is recognized.
The effect of the charge to earnings associated with the
issuance of the shares could place the Company in a net loss
position for the relevant year, even though the PTNI was at a
level requiring the issuance of the shares. Because the
shares are issuable based on the results of a single year,
the PTNI in a particular year could require the issuance of
shares even though the cumulative PTNI for the three years
1996, 1997, and 1998, or any combination of those years,
could reflect a lower amount of PTNI that would not require
the Company to issue such shares or even a pre-tax net loss.
(8)Redeemable Preference Stock
Specialized Health had authorized 250,000 shares of
redeemable preference stock with a par value of $1.50 per
share, of which 160,000 shares were issued and outstanding at
DecemberE31, 1994. Each redeemable preference share was
entitled to a cumulative annual dividend of nineEpercent of
the par value from the date of original issue. Dividends
were payable when and as declared by the Board of Directors.
The preference stock and related dividends were paid in cash
at the time of the business combination.
<PAGE> F-15
(9)Income Taxes
There was no income tax expense in 1993, 1994, and 1995, due
to net operating losses. The difference between the expected
tax benefit and the actual tax benefit is primarily
attributable to the effect of start-up costs and net
operating losses being offset by an increase in the Company's
valuation allowance. The tax effects of temporary
differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at
DecemberE31, 1994 and December 31, 1995, are presented below:
1994 1995
Deferred tax assets:
Organization costs $ 5,138 3,854
Start-up costs 1,030 720
Patent costs - 19,244
Net operating loss carryforwards 275,843 1,374,198
Accrued compensation 57,629 -
Accrued vacation - 19,894
----------------------
Total gross deferred tax assets 339,640 1,417,910
Less valuation allowance (339,579) (1,417,910)
----------------------
Net deferred tax assets 61 -
Deferred tax liability - equipment,
principally due to differences in 61 -
depreciation ------------------------
Total gross deferred tax 61 -
liability ------------------------
Net deferred tax liability $ - -
========================
The net change in the total valuation allowance for the years
ended December 31, 1994 and 1995, was an increase of $338,292
and $1,078,331, respectively. Subsequently recognized tax
benefits relating to the valuation allowance for deferred tax
assets will be recognized as an income tax benefit to be
reported in the statement of operations.
At December 31, 1995, the Company had total tax net operating
losses of approximately $3,684,177, that can be carried
forward to reduce federal income taxes. If not utilized, the
tax loss carryforwards expire beginning in 2009.
Under the rules of the Tax Reform Act of 1986, the Company
has undergone a greater than 50Epercent change of ownership.
Consequently, a certain amount of the Company's net operating
loss carryforward available to offset future taxable income
in any one year may be limited. The maximum amount of
carryforwards available in a given year is limited to the
product of the Company's value on the date of ownership
change and the federal long-term tax-exempt rate, plus any
limited carryforwards not utilized in prior years.
<PAGE> F-16
(10) Commitments and Contingencies
The Company is party to litigation and claims arising in the
normal course of business. Management, after consultation
with legal counsel, believes that such matters will not have
a material impact on the Company's financial position or
results of operations.
As a result of the acquisition of certain product rights and
related patents the Company is required to pay a specified
royalty on future sales of products related to these rights
and patents.
(11) Related Party Transactions
Related party receivables at December 31, 1995 represent
advances to certain related parties. During 1995 the Company
paid to an entity, owned in part by a shareholder of the
Company, $231,475 as reimbursement for expenses it expended
on behalf of the Company and as consulting fees.
Amounts due to stockholders in 1994 consisted of unpaid
consulting expenses of $154,500 and a $40,000 note payable.
The note payable was replaced subsequent to year-end with a
line of credit from a commercial bank in the amount of
$100,000 due November 1995 bearing interest at prime plus two
percent. Long-term amounts due to a stockholder related to
the acquisition of purchased technology, and are non-interest
bearing. These amounts were repaid in 1995, and as of
December 31, 1995 there were no remaining amounts due.
(12) Business and Credit Concentrations
During 1995, the CompanyOs revenues were solely from the sale
of the sharps container of which $418,509 represented sales
to a single distributor. At December 31, 1995, the Company
had $348,266 of trade accounts receivable due from this
customer for which payment was received subsequent to year-
end.
The Company currently buys all of its sharp containers, the
CompanyOs only device in production, from one supplier.
Although there are a limited number of manufacturers who
could manufacture this device, management believes that other
suppliers could provide similar services on comparable terms.
A change in suppliers, however, could cause a delay in
manufacturing and a possible loss of sales.
Additionally, the Company has a limited direct sales force
and no third party agreements to distribute its products
which may result in limited sales of the CompanyOs products.
(13) Fourth Quarter Results
During the fourth quarter, the aggregate effect of year end
adjustments, which related to prior quarters, increased the
net loss approximately $457,000.
(14) Accounting Standards Issued Not Yet Adopted
In March of 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121
Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of (FASB 121). The Company
is required to adopt the provisions of this statement for
years beginning after December 15, 1995. This statement
requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. The impact
of FASB 121 is not expected to have a material affect on the
Company.
In October of 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation (FASB 123). The
Company is required to adopt the provisions of this statement
for years beginning after December 15, 1995. This statement
encourages all entities to adopt a fair value based method of
accounting for employee stock options or similar equity
instruments. However, it also allows an entity to continue
to measure compensation cost for those plans using the
intrinsic-value method of accounting prescribed by APB
opinion No. 25, Accounting for Stock Issued to Employees (APB
25). Entities electing to remain with the accounting in APB
25 must make pro forma disclosures of net income and earnings
per share as if the fair value based method of accounting
defined in this statement had been applied. It is currently
anticipated that the Company will continue to account for
employee stock options or similar equity instruments in
accordance with APB 25 and provide the disclosures required
by FASB 123.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
Specialized Health Products
International, Inc.
(Registrant)
Date: April 23 1996 By /s/ David A. Robinson
David A. Robinson
President, Chief Executive
Officer, Chairman of the Board
and Director
Pursuant to the requirements of the Securities Act of 1933,
this report has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates
indicated.
Signature Title Date
/s/ David A. Robinson President, Chief Executive April 23
Officer, Chairman of the Board 1996
David A. Robinson and Director (Principal Executive
Officer)
/s/ Bradley C. Director and Vice President April 23
Robinson 1996
Bradley C. Robinson
/s/ J. Clark Director, Vice President, Chief April 23
Robinson Financial Officer and Secretary 1996
J. Clark Robinson (Principal Financial and
Accounting Officer)
/s/ Gale H. Director and Vice President April 23
Thorne 1996
Gale H. Thorne
/s/ Robert R. Director April 23
Walker 1996
Robert R. Walker
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARCY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEAR ENDED ECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,251,584
<SECURITIES> 0
<RECEIVABLES> 350,718
<ALLOWANCES> 0
<INVENTORY> 16,322
<CURRENT-ASSETS> 4,775,491
<PP&E> 820,245
<DEPRECIATION> 8,196
<TOTAL-ASSETS> 5,950,728
<CURRENT-LIABILITIES> 580,923
<BONDS> 0
0
0
<COMMON> 171,333
<OTHER-SE> 5,198,472
<TOTAL-LIABILITY-AND-EQUITY> 5,950,728
<SALES> 447,844
<TOTAL-REVENUES> 583,272
<CGS> 294,171
<TOTAL-COSTS> 3,502,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,930,878)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,930,878)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,930,878)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> (.69)
</TABLE>
