SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
Annual Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
December 31, 1997
Commission file number
0-26694
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-0945003
(State or other jurisdiction (IRS employer identification no.)
of incorporation)
655 East Medical Drive, Bountiful, Utah 84010 (801) 298-3360
(Address of principal executive offices) (Registrant's telephone
number, 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 18, 1998, was $30,824,695. On that date, there were
12,271,440 outstanding shares of the registrant's common stock.
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SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-K
YEAR ENDED DECEMBER 31, 1997
PART I
Item 1. Business ...........................................................3
Item 2. Properties ........................................................16
Item 3. Legal Proceedings .................................................17
Item 4. Submission of Matters to a Vote of Security Holders ...............17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ..............................................18
Item 6. Selected Financial Data ...........................................20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................21
Item 8. Financial Statements and Supplementary Data .......................31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .........................................31
PART III
Item 10. Directors and Executive Officers of the Registrant ................31
Item 11. Executive Compensation ............................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management ....36
Item 13. Certain Relationships and Related Transactions ....................38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K .........................................................38
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PART I
Item 1. Business.
General
The Company is engaged principally in the development of
cost-effective, disposable, proprietary health care products designed to reduce
the incidence of accidental injury in the health care industry, and thus reduce
the spread of disease. The Company has created a portfolio of proprietary health
care products that are in various stages of production, pre-production,
development and research. At present, the Company is focusing its resources and
activities principally on marketing products currently available for sale,
preparing products nearing completion for manufacturing and marketing,
developing new products designed to reduce the risk of acquiring HIV/AIDS,
hepatitis B and other blood-borne diseases through accidental needlesticks and
the development of other medical products.
In August 1996, the Company entered into a distribution agreement (the
"BDSDS Distribution Agreement") with Becton Dickinson and Company Sharps
Disposal Systems ("BDSDS") whereby BDSDS is marketing and distributing the
Company's Safety Cradle(R) sharps containers. Safety Cradle(R) sharps containers
are used for the disposal of contaminated sharps (i.e., needles, syringes,
intravenous catheters, surgical blades, lancets, etc.). The Safety Cradle(R)
sharps containers covered by the BDSDS Distribution Agreement are redesigned
versions of an earlier container developed by the Company. In 1997, however,
BDSDS did not order the minimum required amount of product under the terms of
the BDSDS Distribution Agreement and, therefore, BDSDS' exclusive distribution
rights became nonexclusive. In addition, the Company gave notice of termination
of the BDSDS Distribution Agreement, as it was authorized to do in the case of
BDSDS' failure to purchase the minimum amount of product required by the BDSDS
Distribution Agreement. The parties subsequently agreed to extend the
termination date and exclusivity provision until May 26, 1998. Both BDSDS and
the Company are working diligently to negotiate a long term agreement with the
proper focus and strategy to accelerate sales of the Company's sharps containers
into the home healthcare market. In the meantime, BDSDS has the same opportunity
to sell sharps containers as under the terms of the original agreement.
The Company received approval to use the name ExtreSafe(R) as a
registered trademark in 1997. It plans to use this trademark in safety needle
and lancet products.
In May 1997, the Company entered into an agreement (the "License
Agreement") with Becton Dickinson and Company Infusion Therapy Division ("BDIT")
relating to a single application of the Company's ExtreSafe(R) safety needle
withdrawal technology (the "Technology"). Pursuant to the terms of the License
Agreement, BDIT made payments of $1,750,000 and $250,000 to the Company in June
and September 1997, respectively, and is required to make an additional payment
of $2,000,000 upon the earlier of the date of the first sales by BDIT of a
product utilizing the Technology or April 5, 1998. Of these total payments,
$3,750,000 represents advanced royalties for sales occurring before the year
2002 and the $250,000 represents a product development fee. BDIT is also
required to pay ongoing royalties to the Company based on sales of products
utilizing the Technology. In addition, beginning in BDIT's fiscal year 2002,
BDIT is required to pay minimum royalties in order to maintain exclusive rights
under the License Agreement.
The ExtreSafe(R) Lancet Strip has previously been assembled manually by
the Company with some automated assembly beginning in November 1997. The
automated production equipment is not yet in full operation. The costs of manual
assembly exceeded the related revenues from the minimal sales of the
ExtreSafe(R) Lancet Strip. The use of automated production equipment
substantially reduces the cost to manufacture the ExtreSafe(R) Lancet Strip and
increases manufacturing capacity.
In September 1997, the Company entered into an agreement (the "Alliance
Agreement") with New Alliance of Independent Medical Distributors, Inc. dba
Alliance Medical ("Alliance Medical") which provides for the Company to
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manufacture and Alliance Medical to market and sell the ExtreSafe(R) Lancet
Strip on an exclusive basis in hospitals, alternate site (e.g., homecare, plasma
centers and blood banks) and consumer markets in the United States. Effective
March 1, 1998, the Alliance Agreement was converted to a non-exclusive agreement
with no sales minimums so that the Company can pursue additional sources of
distribution. There is no assurance that the Company will realize significant
sales under the Alliance Agreement or that the Company will enter into any other
arrangements with respect to the marketing and distribution of ExtreSafe(R)
Lancet Strips.
In December 1997, the Company entered into a development and license
agreement (the "J&J Agreement") with Johnson & Johnson Medical, Inc. ("J&J") to
commercialize two applications of the ExtreSafe(R) safety needle technology. The
J&J Agreement provides for monthly development payments by J&J, sharing of field
related patent costs, payments for initial periods of low volume manufacturing,
an ongoing royalty stream and a J&J investment in molds, assembly equipment and
other capital costs related to commercialization of each product. The J&J
Agreement also provides for an ongoing joint cooperative program between the
Company and J&J which derives future funding directly from sales of Company
created products, low volume manufacturing revenue for the Company and an
ongoing royalty stream for additional safety products which are jointly approved
for development. In connection with the J&J Agreement, Johnson & Johnson
Development Corporation purchased $2,000,000 of Company securities in a private
placement that closed in January 1998.
The Company is developing a number of products using its ExtreSafe(R)
medical needle withdrawal technology. This technology allows a contaminated
needle to be retracted and immediately encapsulated without exposure of the
health care worker to the contaminated needle. Products under development that
incorporate the ExtreSafe(R) medical needle withdrawal technology include
ExtreSafe(R) phlebotomy devices, ExtreSafe(R) catheters and several different
ExtreSafe(R) syringe applications. Prototypes of the ExtreSafe(R) phlebotomy
device, and ExtreSafe(R) catheters have been completed. The FDA has granted one
510(k) clearance to market a product relating to the ExtreSafe(R) medical needle
withdrawal technology and a second 510(k) application with the FDA relating to
an additional application of the ExtreSafe(R) medical needle withdrawal
technology has been filed. The Company is planning to develop an intravenous
flow gauge and additional blood collection devices.
An affiliate of the Company is developing filmless digitized imaging
technology for which a prototype has been developed.
Company Background
The Company was incorporated in 1986 as a Utah corporation. The
Company's corporate domicile was changed to the State of Delaware, and its name
was changed to Russco, Inc., effective December 20, 1990, by merger into a then
newly created Delaware corporation. The Company had no operations until July 28,
1995. On that date, the Company acquired Specialized Health Products, Inc., a
Utah corporation ("SHP"), through a merger with a subsidiary of the Company (the
"Acquisition"). The Company changed its name to "Specialized Health Products
International, Inc." ("SHPI") and SHP became a wholly owned subsidiary of SHPI.
The persons serving as officers and directors of SHP immediately prior to the
consummation of the Acquisition were elected to the same offices with SHPI and
retained their positions as directors and officers of SHP. In addition, the
outstanding securities of SHP became outstanding securities of SHPI. Prior to
the Acquisition, neither SHP nor any affiliate of SHP had an interest in Russco,
Inc.
Products
Sharps Containers
In January 1994, SHP acquired the Sharp-Trap(R) name and all technology
developed by Sharp-Trap, Inc., a Michigan corporation, relating to a patented
container entry system designed to reduce the risk of accidental needlesticks
and exposure to contaminated needles, blades and instruments when disposing of
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such devices. At the time of SHP's purchase of the Sharp-Trap(R) technology,
Sharp-Trap, Inc. was manufacturing sharps container products in two
configurations, a 0.5 quart and a 1.5 quart (the "Sharp-Trap(R)" Containers).
Following additional research and discussions with medical product distributors
and end users, SHP designed an improved line of sharps containers (the Company's
"Safety Cradle(R)" line) which incorporated improvements to the basic container
closure technology to make them safer, higher quality, easier to use and less
costly to manufacture than the Sharp-Trap(R) Containers.
The self-closing Safety Cradle(R) sharps containers allow for the
disposal of sharps in containers that incorporate a self-closing sharps
containment flap and incorporate both a temporary and a permanent locking
mechanism. Especially adapted for alternate site use (alternate sites include
emergency vehicle, in-home and insurance testing), the Company's Safety
Cradle(R) sharps containers provide convenience and safety for home health care
and other portable applications. In addition, each of the Company's sharps
containers is designed to be used as a shipping container for the transport of
medical products. The containers then readily convert at the user's site into
safe and efficient sharps disposal containers. This special design feature
permits the Safety Cradle(R) container to fill a unique market niche. Made of
polypropylene material, the Safety Cradle(R) sharps container's novel, single
injection molded part lid fits three sizes of containers, allowing the Company
to offer products for a broad spectrum of sharps containment applications,
especially alternate site use. Because each Safety Cradle(R) sharps container is
formed from only two molded parts, unit manufacturing costs are low which
enhances the Company's competitive position.
The Safety Cradle(R) can be used for a variety of purposes, including:
Safety Cradle(R) Sharps Container - all three sizes (1.8, 3.4 and 5.3
quart) can be used as Safety Cradle(R) sharps containers for the disposal of
contaminated sharps.
Transporter - all three sizes are designed to be shipping containers
for new medical devices being sent to customers. Each Safety Cradle(R) sharps
container can then be utilized by the customer for sharps disposal.
Recycler - all three sizes are designed for use by medical product
manufacturers as secured containers, so that discarded sharps may be shipped
back to the manufacturer for recycling or to a sharps disposal facility.
BDSDS began marketing and distribution of the Safety Cradle(R) sharps
containers in the first quarter of 1997 pursuant to the BDSDS Distribution
Agreement pertaining to the Safety Cradle(R) product line. See "--Marketing and
Sales."
The ExtreSafe(R) Lancet Strip
Lancets are small devices containing needles or blades used to
penetrate the skin, usually a finger, to obtain a few drops of blood for
analysis. Lancets are used by health care workers on patients and by individuals
on themselves, such as by diabetics using insulin. The same safety concerns that
exist with handling needles exist with the handling of lancets, because lancets
become contaminated after coming into contact with blood.
There are a number of lancets on the market today. The most common is a
small "nail" type instrument which is pressed against the finger at which time
the "nail" penetrates the skin by hand pressure. Some lancets penetrate the skin
with a blade, which generally produces better blood flow. The nail type lancet
is often inserted into a spring loaded activation device, about the size of a
large pen. The device is pressed against the patient's finger which is
penetrated when the spring is triggered. After triggering, the activation device
must be emptied and then reloaded with another lancet for use on the next
patient. Activation devices currently marketed by other companies may become
contaminated by blood splattering when the finger is penetrated. To help prevent
contamination, activation devices should be sterilized or disposed of after each
use. However, while intended for use on multiple patients, these activation
devices are not designed or intended to be sterilized, thus increasing the risk
of cross contamination.
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The Company's management believes that the ExtreSafe(R) Lancet product
is easier and faster to use than existing lancets although only limited testing
has been conducted to verify this opinion. The product has been designed such
that it can only be used one time. ExtreSafe(R) Lancets are sold in cartridge
strips of six lancets per strip, a configuration that is patent protected. A
lancet strip is loaded into a convenient, low-cost, activation device (which
comes packaged with each box of ExtreSafe(R) Lancet Strips) that provides for
the safe and convenient triggering of each lancet. After a lancet is used once,
the blade automatically returns inside its protective housing and the mechanism
is disabled so that the lancet cannot be reused. The used lancet is then broken
off the strip and can be appropriately discarded into a sharps container which
provides additional protection. After using a strip of lancets, reloading the
activation device with another cartridge is a simple process. The blade of the
Company's ExtreSafe(R) Lancet Strip has a revolutionary design and its rotary
spring motion drives the blade both outward to lance and inward for retraction.
In the opinion of Company management, the ExtreSafe(R) Lancet Strip's design
makes it less painful than nail type lancets, although no formal comparison
testing has been conducted. It is also noteworthy that the part of the lancet in
contact with the patient's skin prior to lancing is sterile until contaminated
by the procedure.
Products Under Development
Company sponsored research activities resulted in expenses of
$1,191,857 for 1997, compared with $1,264,186 and $804,639 for 1996 and 1995,
respectively. Customers sponsored research activities relating to the
development of new products, services or techniques or the improvement of
existing products, services or techniques for which the Company earned revenue
of $250,000 during 1997 and $0 for the prior two years. The following products
are currently under development.
ExtreSafe(R) Phlebotomy Devices
The present method for drawing larger amounts of blood from patients
for blood tests involves insertion of a needle, which is attached to a barrel,
into a blood vessel. Blood is then obtained by way of vacuum pressure, most
often into a small evacuated tube-like container inserted into the barrel. (The
barrel is commonly known as a Vacutainer(R); Vacutainer(R) is not a trademark of
the Company.) After blood is drawn, the needle is manually removed from the
patient. While the health care worker continues attending to the patient, the
Vacutainer(R), barrel and needle are often placed on a tray, bed, table or
otherwise set aside. Afterward, the needle is usually unscrewed from the barrel
and discarded into a sharps container, while the barrel is often used again with
another patient (which increases the risk of cross contamination). The Company's
ExtreSafe(R) phlebotomy devices provide a safer method. The devices quickly
retract the needle from the patient directly into a safe housing, minimizing the
chance of an inadvertent stick by a contaminated needle. Retraction is initiated
by simply depressing a designated distortable portion of the housing which has
been designed to ensure that there is no action directed toward or away from the
patient which might affect the depth of needle penetration. Prototypes of the
ExtreSafe(R) phlebotomy device have been completed.
ExtreSafe(R) Catheters
Catheters are devices that are inserted into veins or other areas of
the body to allow blood or other fluids to be removed from or delivered into the
patient's body. Contemporary catheter use has problems similar to those faced in
drawing blood. Inserting a catheter involves a percutaneous (i.e., through the
skin) needlestick followed by threading the catheter over the needle into a
patient's vein or artery. This method can be unsafe in two respects. First, when
the needle is pulled out of the catheter, there is often a discharge of blood
which could contaminate the health care worker. Second, inadvertent needlesticks
can occur when the needle is withdrawn from the catheter because, in most
instances, the needle is temporarily left exposed while the patient is tended to
by the health care worker. Like the ExtreSafe(R) phlebotomy device, the
Company's ExtreSafe(R) catheters quickly retract the contaminated needle from
the patient and enclose it safely in a protective housing. Prototypes of the
ExtreSafe(R) catheter have been completed.
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ExtreSafe(R) Syringes
Another area where there is significant risk of needlesticks is in
syringe use. Generally, use of a needle for a medical procedure involves
removing a cap over the needle just prior to performing the procedure. In the
past, medical personnel attempted to achieve protection from accidental
needlesticks by replacing the needle cap after performing a procedure, but the
volume of accidental needlesticks related to needle cap replacement resulted in
such practice being prohibited. Medical personnel began using needles and
syringes having sheaths which could be extended over the exposed needle after a
procedure. Also, medical facilities began installing sharps containers in
patients rooms (they had previously been centrally located) and health care
workers began disposing of exposed needles after use in the sharps containers
found in the patient's room. The ExtreSafe(R) syringe provides an extendible
needle which is retracted into a safe housing in a manner similar to the
retraction of the ExtreSafe(R) phlebotomy devices and catheter systems described
above.
Filmless Digitized Imaging Technology
The procedure for taking a large area x-ray image having generally
acceptable resolution and presenting the x-ray to an attending physician for
interpretation has changed little over the past 40 years. The most common x-ray
image today is taken using film which requires development in a darkroom. The
physician personally handles the x-ray image, which is generally imprinted on a
14" x 17" plastic sheet. For record keeping purposes, hospitals usually retain
x-ray images for at least six years. X-ray storage and retrieval is a costly
problem for many medical facilities. While some filmless x-ray systems have been
introduced recently, none provide the resolution of standard x-rays.
In October 1995, SHP entered into a joint venture with Zerbec, Inc.
("Zerbec"), whereby Quantum Imaging Corporation ("QIC") was organized to
develop, manufacture, distribute and market products and technologies using a
patented, solid state, filmless digitized imaging technology. The filmless
digitized imaging technology involves a method of directly producing an
electrical signal from an image recorded on an x-ray plate. The signal is
instantly digitized and stored on a CD-ROM and the same x-ray plate is then
available for subsequent procedures. The filmless digitized imaging technology
eliminates film as the x-ray image recording medium and enables x-ray images to
be translated to a CD-ROM format to simplify their storage, retrieval and
handling. The Company believes that QIC's filmless digitized imaging technology
can improve the way in which x-ray images are obtained, interpreted and stored,
while also providing clearer images having higher resolutions that are more
easily interpreted than x-ray films. Furthermore, the Company believes that this
technology could be applicable for use in x-ray facilities in mobile medical
emergency units which has not been achieved to date in part because of the
necessity of carrying chemical handling equipment required for film processing.
Pursuant to the terms of the joint venture agreement, Zerbec assigned
patented filmless digitized imaging technology to QIC and will provide ongoing
support for the development and commercialization of the technology. The joint
venture agreement also provides that QIC is to finish the development and
commercialize the filmless digitized imaging technology. A prototype has been
produced to demonstrate image resolution compatible with breast cancer
diagnosis.
At present, SHP and Zerbec are equal owners of QIC, but Zerbec has an
option to acquire two-thirds of SHP's current fifty percent (50%) interest in
QIC for one dollar (the "Zerbec Option") because certain funding objectives were
not met. The parties are in the process of negotiating an arrangement so that
the Zerbec Option will be eliminated or its exercise will be subject to
substantial restriction. No assurance can be given, however, that an agreement
will be reached that eliminates or materially restricts the exercise of the
Zerbec Option or that if such agreement is reached that it will be on terms that
are favorable to the Company. The Company estimates that between $3,000,000 and
$6,000,000 in new funding will be required by QIC for it to achieve its
objectives.
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Company Strategy
The Company's primary objective is to establish itself as a leading
developer of safety medical products. To achieve this objective, the Company's
growth strategy is focused on the following five principal elements.
* Capturing significant market share of targeted segments of the
sharps container, lancet, phlebotomy device, catheter and
syringe markets.
* Broadening the Company's existing products lines and
developing new product lines to penetrate related markets.
* Seeking additional market opportunities based on the Company's
existing or new proprietary technologies.
* Developing marketing, license, distribution and development
agreements with large medical product organizations.
* Arranging generally for the manufacture of these products by
reputable manufacturers.
Sharps Containers
Consistent with the Company's objective of selling and/or licensing its
products to large medical product organizations, on August 26, 1996, the Company
entered into the BDSDS Distribution Agreement relating to the Company's Safety
Cradle(R) sharps container products. See "--Marketing and Sales." Manufacturing
of the Safety Cradle(R) sharps container is being performed by G&F Industries.
To date, substantially all of the Company's sales revenues have come from sales
of the Company's Safety Cradle(R) sharps container products to purchasers within
the United States. There is no assurance that the Company will realize
significant sales under the BDSDS Distribution Agreement.
ExtreSafe(R) Lancets
In September 1997, the Company entered into the Alliance Agreement with
Alliance Medical which provides for the Company to manufacture and Alliance
Medical to market and sell the ExtreSafe(R) Lancet Strip on an exclusive basis
in hospitals, alternate site (e.g., homecare, plasma centers and blood banks)
and consumer markets in the United States. Effective March 1, 1998, the Alliance
Agreement was converted to a non-exclusive agreement with no sales minimums so
that the Company can pursue additional sources of distribution. There is no
assurance that the Company will realize significant sales under the Alliance
Agreement or that the Company will enter into any other arrangements with
respect to the marketing and distribution of ExtreSafe(R) Lancet Strips. See
"--Marketing and Sales."
Products in Development
The Company's ExtreSafe(R) phlebotomy devices, ExtreSafe(R) catheters,
ExtreSafe(R) syringes, intravenous flow gauge, blood collection devices, other
ExtreSafe(R) medical needle withdrawal technology products and the Imaging
Technology are in various stages of research or development. The Company plans
to continue development of each of these products/systems assuming availability
of adequate capital resources. The necessary development, production equipment,
testing and government approvals, however, must be completed before such
products are brought to market.
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Future Market Opportunities
The Company intends to enter additional markets where it believes that
it can gain significant market share based on proprietary technology or by
capitalizing on the sales and distribution channels it establishes. There are a
number of possible future applications for the Company's technology, but there
can be no assurance that the Company will commence development of any such
products or that, if commenced, such development will be successful or
profitable.
Marketing and Sales
The Company currently plans to employ a limited number of sales and
marketing personnel; the precise number will depend on the extent to which the
Company contracts with third parties or forms strategic alliances with third
parties to market and sell its products. The Company will seek third parties to
market and distribute its products in the United States and selected foreign
countries. The Company may enter into contracts, licensing agreements and joint
ventures with such third parties whereby the Company would receive a licensing
fee and/or royalty payment based on the licensee's revenues from licensed
products. The Company would likely enter into such licensing arrangements with
several companies based on geographical regions and/or product types, but may
enter into exclusive arrangements with individual companies having a major
presence in the markets the Company seeks to penetrate. To date, substantially
all of the Company's revenue has come from sources within the United States.
There can be no assurance that the Company will be able to enter into contracts,
license agreements or joint ventures with third parties on terms acceptable to
the Company.
The Company intends to support the marketing of its products by, among
other things, attending trade shows and advertising in industry publications.
The Company intends to distribute samples of its products free of charge to
various health care institutions and professionals in the United States and in
selected foreign countries to introduce and attempt to create a demand for its
products in the marketplace.
Sharps Containers
In August 1996, the Company entered into the BDSDS Distribution
Agreement with BDSDS whereby BDSDS is marketing and distributing the Company's
Safety Cradle(R) sharps containers. Safety Cradle(R) sharps containers are used
for the disposal of contaminated sharps (i.e., needles, syringes, intravenous
catheters, surgical blades, lancets, etc.). The Safety Cradle(R) sharps
containers covered by the BDSDS Distribution Agreement are redesigned versions
of an earlier container developed by the Company. In 1997, however, BDSDS did
not order the minimum required amount of product under the terms of the BDSDS
Distribution Agreement and, therefore, BDSDS' exclusive distribution rights
became nonexclusive. In addition, the Company gave notice of termination of the
BDSDS Distribution Agreement, as it was authorized to do in the case of BDSDS'
failure to purchase the minimum amount of product required by the BDSDS
Distribution Agreement. The parties subsequently agreed to extend the
termination date and exclusivity provision until May 26, 1998. Both BDSDS and
the Company are working diligently to negotiate a long term agreement with the
proper focus and strategy to accelerate sales of the Company's sharps containers
into the home healthcare market. In the meantime, BDSDS has the same opportunity
to sell sharps containers as under the terms of the original agreement.
There is no assurance that the Company will be able to continue the
BDSDS Distribution Agreement after May 26, 1998 on satisfactory terms. In
addition, sales of the Company's Safety Cradle(R) sharps containers may be
minimal and there is no assurance that the Company will ever realize significant
sales of its Safety Cradle(R) sharps containers.
ExtreSafe(R) Lancets
The ExtreSafe(R) Lancet Strip has previously been assembled manually by
the Company with some automated assembly beginning in November 1997. The
automated production equipment is not yet in full operation. The costs of manual
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assembly exceeded the related revenues from the minimal sales of the
ExtreSafe(R) Lancet Strip. The use of automated production equipment
substantially reduces the cost to manufacture the ExtreSafe(R) Lancet Strip and
increases manufacturing capacity.
In September 1997, the Company entered into the Alliance Agreement with
Alliance Medical which provides for the Company to manufacture and Alliance
Medical to market and sell the ExtreSafe(R) Lancet Strip on an exclusive basis
in hospitals, alternate site (e.g., homecare, plasma centers and blood banks)
and consumer markets in the United States. Effective March 1, 1998, the Alliance
Agreement was converted to a non-exclusive agreement with no sales minimums so
that the Company can pursue additional sources of distribution. There is no
assurance that the Company will realize significant sales under the Alliance
Agreement or that the Company will enter into any other arrangements with
respect to the marketing and distribution of ExtreSafe(R) Lancet Strips.
Other Products
In May 1997, the Company entered into the License Agreement with BDIT
relating to a single application of the Company's ExtreSafe(R) safety needle
withdrawal technology. Pursuant to the terms of the License Agreement, BDIT made
payments of $1,750,000 and $250,000 to the Company in June and September 1997,
respectively, and is required to make an additional payment of $2,000,000 upon
the earlier of the date of the first sales by BDIT of a product utilizing the
Technology or April 5, 1998. Of these total payments, $3,750,000 represents
advanced royalties for sales occurring before the year 2002 and the $250,000
represents a product development fee. BDIT is also required to pay ongoing
royalties to the Company based on sales of products utilizing the Technology. In
addition, beginning in BDIT's fiscal year 2002, BDIT is required to pay minimum
royalties in order to maintain exclusive rights under the License Agreement.
In December 1997, the Company entered into the J&J Agreement with J&J
to commercialize two applications of the ExtreSafe(R) safety needle technology.
The J&J Agreement provides for monthly development payments by J&J, sharing of
field related patent costs, payments for initial periods of low volume
manufacturing, an ongoing royalty stream and a J&J investment in molds, assembly
equipment and other capital costs related to commercialization of each product.
The J&J Agreement also provides for an ongoing joint cooperative program between
the Company and J&J which derives future funding directly from sales of Company
created products, low volume manufacturing revenue for the Company and an
ongoing royalty stream for additional safety products which are jointly approved
for development. In connection with the J&J Agreement, Johnson & Johnson
Development Corporation also purchased $2,000,000 of Company securities in a
private placement that closed in January 1998.
The Company currently intends to market and sell its other products in
the United States and selected foreign countries through third parties. The
Company's plan for the sales and distribution of its products is to target major
segments of the respective markets for those products, including major hospital
and institutional buying groups, pharmaceutical companies, distributors and
wholesalers, and government and military agencies. The Company intends to market
and distribute its products through one or more companies that have a major
presence in these major segments. The Company may enter into contracts,
licensing agreements and joint ventures with such third parties whereby the
Company would receive a licensing fee and/or royalty payment based on the
licensee's revenues from licensed products.
License and distribution arrangements, such as those discussed above,
create certain risks for the Company, including (i) reliance for sales of
products on other parties, and therefore reliance on the other parties'
marketing ability, marketing plans and credit-worthiness; (ii) if the Company's
products are marketed under other parties' labels, goodwill associated with use
of the products may inure to the benefit of the other parties rather than the
Company; (iii) the Company may have only limited protection from changes in
manufacturing costs and raw materials costs; and (iv) if the Company is reliant
on other parties for all or substantially all of its sales, the Company may be
limited in its ability to negotiate with such other parties upon any renewals of
their agreements. Further, because such arrangements are generally expected to
10
<PAGE>
provide the Company's marketing partners with certain elements of exclusivity
with respect to the products to be marketed by those partners, the Company's
success will be highly dependent on the results obtained by its partners.
The Company is not permitted to sell products based on its ExtreSafe(R)
medical needle withdrawal technology for commercial use in the United States
until regulatory approval is obtained. The FDA has granted one "510(k)"
clearance to market a product relating to the ExtreSafe(R) medical needle
withdrawal technology and the Company has filed a second 510(k) application with
the FDA relating to an additional application of the ExtreSafe(R) medical needle
withdrawal technology. The Company must also comply with the laws and
regulations of the various foreign countries in which the Company sells its
products. Certain foreign countries may only require that the Company submit
evidence of the FDA's pre-market clearance of the relevant products prior to
selling those products in such countries. However, some foreign countries may
require additional testing and approval. See "--Government Regulation."
Industry
Market
Health care is one of the largest industries in the world and continues
to grow. There is increasing demand in the health care market for products that
are safer, more efficient and cost-effective. The Company's products target
segments of this market. While traditional, non-safety products in the market
segments which the Company seeks to address compete primarily on the basis of
price, the Company expects to compete generally on the basis of health care
worker safety, ease of use, reduced cost of disposal, patient comfort and
compliance with OSHA regulations, but not on the basis of purchase price.
However, the Company intends to be competitive on price with other safety
devices. The Company believes that when all indirect costs (disposal of needles,
and testing, treatment and workers compensation expense) related to needlestick
injuries are considered, the Company's products will compete effectively both
with "traditional" products and with the safety products of the Company's
competitors.
Accidental Needlesticks
Needles for hypodermic syringes, phlebotomy sets and intravenous
catheters are used for injecting drugs and other fluids into the body and for
drawing blood and other fluids from the body. Hypodermic needles are used for
the injection of drugs, phlebotomy sets for the drawing of blood and catheters
for the infusion of drugs and nutrients. There is an increasing awareness of the
potential danger of infections and illnesses that result from accidental
needlesticks and of the need for safer needle devices to reduce the number of
accidental needlesticks that occur.
Infections contracted as a result of accidental needlesticks are a
major concern to health care institutions, health care workers, sanitation and
environmental services workers and certain regulatory agencies. Accidental
needlesticks may result in the spread of infectious diseases such as hepatitis
B, HIV (which may lead to AIDS), diphtheria, gonorrhea, typhus, herpes, malaria,
rocky mountain spotted fever, syphilis and tuberculosis. One study found that
during clinical training twenty-two percent of medical students had received one
or more contaminated, penetrating sharps injuries. It has also been reported
that fifty percent of ward nurses, seventy-one percent of ward doctors and fifty
percent of emergency staff had received this type of injury during the previous
two years. Needlestick injury is a leading cause of exposure to life threatening
illnesses.
Needlesticks from blood-filled hollow-bore needles are the leading
cause of occupationally acquired hepatitis B and it has been reported that as
many as forty percent of healthcare workers who sustain needlestick injuries
become infected with hepatitis B. Accidental needlesticks also expose healthcare
workers to the hepatitis C for which no cure exists. Hepatitis C infections will
lead to chronic infections and intermittent viremia, which in turn can lead to
cirrhosis or cancer of the liver.
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<PAGE>
The majority of health care workers' adverse exposures to blood are
either product related (e.g., needlesticks) or could be prevented by the use of
appropriate products. The Company believes that pressure is increasing from the
government and private sectors for the health care industry to develop medical
devices that will provide a safer working environment for health care and
related workers and patients. The Company's products attempt to address the
demand for medical devices that reduce the risk of accidental exposure to
blood-borne diseases.
Disposal of Sharps
There is extensive everyday use of sharps by doctors, nurses and other
health care workers who are in danger of accidental exposure to transmittable
blood-borne diseases such as AIDS and hepatitis B. The most extensively used
sharp is the medical needle.
OSHA mandates the use of special containers for sharps disposal
purposes to reduce the incidence of accidental transmission of blood-borne
diseases. OSHA requires that the design of sharps containers meet certain
minimum standards of safety. It also makes recommendations with respect to the
safe handling of needles. Recapping and improper disposal of needles are causes
of needlestick injuries. OSHA regulations prohibit recapping or purposely
bending or breaking needles. OSHA recommends that after use, disposable
syringes, needles and other sharp items be placed in closable, disposable,
puncture-resistant containers that are leak proof on the sides and bottom and
labeled according to OSHA guidelines.
Patents and Proprietary Rights
The Company's policy is to seek patent protection for all developments,
inventions and improvements that are patentable and which have potential value
to the Company and to protect as trade secrets other confidential and
proprietary information. The Company intends to vigorously defend its
intellectual property rights to the extent its resources permit.
The Company owns six United States patents and has other patent
applications pending (in the United States and in other countries) which are
directly applicable to the Company's Safety Cradle(R) sharps container products.
The Company also owns three United States patents and allowed patent
applications relating to its ExtreSafe(R) Lancet Strip, and seven United States
patents and allowed patent applications relating to its ExtreSafe(R) medical
needle withdrawal technology. The Company has additional United States and
international patent applications pending. None of the patents referred to above
expires before April 1, 2006.
QIC owns three United States patents, and has three Canadian patents,
relating to its filmless digitized imaging technology. These patents expire in
May 2001, September 2002 and September 2005. The Company has filed for QIC an
additional United States patent application relating to the technology owned by
QIC.
The future success of the Company may depend upon the strength of its
intellectual property. The Company believes that the scope of its patents/patent
applications is sufficiently broad to prevent competitors from introducing
devices of similar novelty and design to compete with its current products and
that such patents and patent applications are or will be valid and enforceable.
There is no assurance, however, that if such patents are challenged, this belief
will prove correct. In addition, patent applications filed in foreign countries
and patents granted in such countries are subject to laws, rules and procedures
which differ from those in the United States. Patent protection in such
countries may be different from patent protection provided by U.S. laws and may
not be as favorable to the Company. The Company plans to timely file
international patents in all countries in which the Company is seeking market
share.
The Company is not aware of any patent infringement claims against it.
Litigation to enforce patents issued to the Company, to protect proprietary
information owned by the Company, or to defend the Company against alleged
infringement by the Company of the rights of others may occur. Such litigation
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would be costly, could divert resources of the Company from other planned
activities, and could have a material adverse effect on the Company's results of
operations and financial condition.
Manufacturing
The Company has designed, paid for the construction of, and owns
various molds and machinery used to manufacture its Safety Cradle(R) sharps
containers. The Company contracts for the manufacture of its Safety Cradle(R)
sharps containers with an unaffiliated manufacturing company. In the past,
polypropylene resin, the major plastic material used in the Company's Safety
Cradle(R) sharps containers, has been in short supply for limited periods of
time. While alternative manufacturers exist, changes in the Company's
manufacturer or an unforeseen shortage in the supply of polypropylene could
disrupt production schedules, increase the price of polypropylene, and could
materially and adversely affect the Company.
The Company's automated equipment that is used to manufacture the
ExtreSafe(R) Lancet Strip is currently being operated by the manufacturer. The
Company intends to transfer this automated equipment to another manufacturer for
use by such other manufacturer. The Company's other products are in various
stages of development and are not currently being manufactured. The materials
used to produce the Company's products are generally widely available. The
Company does not anticipate difficulty in obtaining such materials. At present,
there are a number of manufacturers that could produce lancet and needle
retraction products and a number of suppliers could supply the necessary parts
and materials.
Competition
The health care products market is highly competitive. Many of the
Company's competitors have longer operating histories and are substantially
larger, better financed and better situated in the market than the Company.
The leading suppliers in the sharps container market are Baxter
International, Inc., Becton Dickinson and Company, Devon Industries, Inc. and
Sage Products, Inc. There are also numerous smaller suppliers. A variety of
sharps disposal products have been introduced into the marketplace. Some of
these disposal containers accommodate only the needle while others accommodate
the needle, syringe and limited surgical instruments. The majority of the sharps
containers on the market, however, allow contaminated instruments to fall out
when the container is inverted. Many of these other products are unstable if not
supported by wall supports or other apparatus. The Company believes its products
are more stable, safer and more effective than competitively priced products on
the market. In addition, to the best of the Company's knowledge, there are no
sharps disposable transporters or recycler/transporter type products on the
market today.
The leading suppliers in the lancet market are Becton Dickinson and
Company, Surgicutt, Inc., Miles, Inc., Diagnostic Corporation, Boehringer
Mannheim, Inc. and Sherwood Medical Company, Inc. There are also numerous
smaller suppliers. To the best of the Company's knowledge, there are no safety
lancets on the market today that operate in a manner similar to the Company's
ExtreSafe(R) Lancet Strip (i.e., lances skin with a rotary spring driven blade
that drives the blade outward to lance and inward for retraction).
The leading suppliers of standard needles are Becton Dickinson and
Company, Sherwood Medical Company, Inc. and Terumo Medical Corporation of Japan.
The Company is aware of no products on the market today that are comparable to
its ExtreSafe(R) needle withdrawal devices (i.e., products that are transversely
activated to automatically extract a contaminated needle and which immediately
retract the needle into a safe housing). Applications for the Company's needle
retraction technologies may also be found in phlebotomy devices, percutaneous
catheter insertion devices, syringes, and other medical needle devices.
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<PAGE>
While traditional, non-safety products in the market segments which the
Company seeks to address compete primarily on the basis of price, the Company
expects to compete on the basis of health care worker safety, ease of use,
reduced cost of disposal, patient comfort and compliance with OSHA regulations,
but not on the basis of price except with respect to comparable safety products.
However, the Company believes that when all indirect costs (disposal of needles,
testing, treatment and workers' compensation expense) related to accidental
needlestick injuries are considered, the Company's products compete effectively
both with "traditional" products and with the safety products of the Company's
competitors.
Research and Development/Acquisition of Technology
The Company has devoted a substantial portion of its efforts to
acquiring and designing and developing health care products. Research and
development costs were $1,191,857, $1,264,186 and $804,639 for 1997, 1996 and
1995, respectively. The Company plans to attempt to acquire additional
technologies that it determines support its business strategy. In addition, the
Company plans to continue research and development on its current products and
with respect to possible new products. There is no assurance that the Company's
research and development activities will prove effective.
Government Regulation
The Company and its products are regulated by the FDA, pursuant to
various statutes, including the FD&C Act, as amended and supplemented by the
Medical Device Amendments of 1976 (the "1976 Amendments") and the Safe Medical
Devices Act of 1990. Pursuant to the 1976 Amendments, the FDA classifies medical
devices intended for use with humans into three classes, Class I, Class II and
Class III. The controls applied to the different classifications are those the
FDA believes are necessary to provide reasonable assurance that a device is safe
and effective. Many Class I devices have been exempted from pre-market
notification requirements by the FDA. These products can be adequately regulated
by the same types of controls the FDA has used on devices since the passage of
the FD&C Act in 1938. These "general controls" include provisions related to
labeling, producer registration, defect notification, records and reports and
good manufacturing practices. The good manufacturing practice regulation has
been recently replaced by a more comprehensive Quality System Regulation
("QSR"). QSRs include implementation of quality assurance programs, written
manufacturing specifications and processing procedures, written distribution
procedures and record keeping requirements. Class II devices are products for
which the general controls of Class I devices are deemed not sufficient to
assure the safety and effectiveness of the device and thus require special
controls. Special controls for Class II devices include performance standards,
post-market surveillance, patient registries and the use of FDA guidelines.
Standards may include both design and performance requirements. Class III
devices have the most restrictive controls and require pre-market approval by
the FDA. Generally, Class III devices are limited to life-sustaining,
life-supporting or implantable devices. The FDA has further established three
tiers or levels of scientific review - Tier 1, Tier 2, and Tier 3 within each
class. Submissions for Tier 1 devices receive limited review while submissions
for Tier 2 and 3 devices receive more comprehensive reviews.
Section 510(k) of the FD&C Act requires individuals or companies
manufacturing medical devices intended for use with humans to file a notice with
the FDA at least 90 days before introducing a product not exempted from
notification requirements into the marketplace. The notice (a "510(k)
Notification") must state the class in which the device is classified and the
actions taken to comply with performance standards or pre-market approval which
may be needed if the device is a Class II or Class III device, respectively. If
a company states the device is unclassified, it must explain the basis for that
determination.
In some cases obtaining pre-market approval can take several years.
Product clearance pursuant to a 510(k) Notification can be obtained in much less
time. In general, clearance of a 510(k) Notification for a Class II device may
be obtained if the Company can establish that the new device is "substantially
equivalent" to another device of that Class already on the market. This requires
the new device to have the same intended use as a legally marketed predicate
device and have the same technological characteristics as the predicate device.
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If the technological characteristics are different, the new device can still be
found to be "substantially equivalent" if information submitted by the applicant
(including clinical data if requested) supports a finding that the new device is
as safe and effective as a legally marketed device and does not raise questions
of safety or efficacy that are different from the predicate device.
The Company has received a 510(k) Notification from the FDA that its
Sharp-Trap(R) sharps containers are substantially equivalent to legally marketed
predicate devices. The Company's Safety Cradle(R) sharps containers are subject
to the general controls of the FD&C Act and the additional controls applicable
to Class II devices. The Company has received a clearance on a second 510(k)
Notification for its sharps containers which includes all areas of use for the
Safety Cradle(R) sharps container. The Company has received FDA clearance on a
510(k) notification on a phlebotomy device.
OSHA also requires, in part, that sharps containers be closable,
disposable, puncture-resistant, leak proof on the sides and bottom and
appropriately labeled. The Company's Safety Cradle(R) sharps containers are in
compliance with present OSHA regulations. Future regulations, however, may be
imposed which could have a material adverse effect on the Company.
The Company's ExtreSafe(R) Lancet Strip is a Class I Tier I device. The
ExtreSafe(R) Lancet Strip is exempt from pre-market notification requirements.
The Company must adhere to QSR regulations, however, in connection with its
manufacture of the ExtreSafe(R) Lancet Strip.
The Company's follow-on products (i.e., other products based on its
ExtreSafe(R) medical needle withdrawal technology, intravenous flow gauge and
blood collection device) are still in the development stage. In March 1995, the
FDA issued a draft guidance document on 510(k) Notifications for medical devices
with sharps injury prevention features, a category that would cover most of the
Company's ExtreSafe(R) technology products. The draft guidance provisionally
placed this category of products into Class II Tier 3 for purposes of 510(k)
review, meaning that such products will be subject to the FDA's most
comprehensive and rigorous review for 510(k) products. The draft guidance also
states that in most cases, FDA will accept, in support of a 510(k) Notification,
data from tests involving simulated use of such a product by health care
professionals, although in some cases the agency might require actual clinical
data.
The Company expects its other follow-on products (i.e., intravenous
flow gauge and blood collection device) to be categorized as Class II devices.
The Company also expects that these follow-on products will not require
pre-market approval applications but will be eligible for marketing clearance
through the 510(k) Notification procedure based upon their substantial
equivalence to previously marketed devices.
Although the 510(k) Notification clearance process is ordinarily
simpler and faster than the pre-market approval application process, there can
be no assurance that the Company will obtain 510(k) Notification clearance to
market its products, that the Company's products will be classified as set forth
above, or that, in order to obtain 510(k) Notification clearance, the Company
will not be required to submit additional data or meet additional FDA
requirements which could substantially delay sales and add to the Company's
expenses. Moreover, any 510(k) Notification clearance, if obtained, may be
subject to conditions on the marketing or manufacturing of the related products
which could impede the Company's ability to market or manufacture such products.
In addition to the requirements described above, the FD&C Act requires
that all medical device manufacturers and distributors register with the FDA
annually and provide the FDA with a list of those medical devices which they
distribute commercially. The FD&C Act also requires that all manufacturers of
medical devices comply with labeling requirements and manufacture devices in
accordance with QSRs. QSRs require that companies manufacture their products and
maintain their documents in a prescribed manner with respect to manufacturing,
testing, and quality control. The FDA's Medical Device Reporting regulation
requires that companies provide information to the FDA on death or serious
injuries alleged to have been associated with the use of their products, as well
15
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as product malfunctions that would likely cause or contribute to death or
serious injury if the malfunction were to recur. The FDA further requires that
certain medical devices not cleared with the FDA for marketing in the United
States have FDA approval before they are exported. The Company is registered as
a manufacturer with the FDA. To date, no incidents have occurred with Company
products that have necessitated submission of a Medical Device Report to the
FDA.
The FDA inspects medical device manufacturers and distributors, and has
broad authority to order recalls of medical devices, to seize noncomplying
medical devices, to enjoin and/or impose civil penalties on manufacturers and
distributors marketing non-complying medical devices, and to criminally
prosecute violators. Noncompliance with FDA regulations could have a material
adverse effect on the Company.
In addition to the laws and regulations enforced by the FDA and OSHA,
the Company is subject to government regulations applicable to all businesses,
including, among others, regulations related to occupational health and safety,
workers' benefits and environmental protection.
Distribution and sales of the Company's products in countries other
than the United States is subject to regulations in those countries. There can
be no assurance that the Company will be able to obtain the approvals necessary
to market its products outside the United States.
Seasonality of Business
Sales of the Company's products generally are not subject to seasonal
variations.
Backlog
There is no material backlog of unfilled orders of the Company's
products.
Employees
As of March 18, 1998, the Company employed sixteen people, including
seven research and development employees, three sales and marketing employees,
five accounting and administrative employees and one quality assurance employee.
The Company expects to add employees, principally in the areas of marketing and
research and development. The planned increase in personnel is based primarily
on expected increases in production and sales. The Company's employees are not
represented by any labor union, and the Company believes its relations with its
employees are good.
Item 2. Properties.
The Company's principal offices are located at 655 East Medical Drive,
Bountiful, Utah, under terms of a lease with an unaffiliated lessor which
expires in June 1998, with an annual rent of approximately $72,000. The lease
covers approximately 5,200 square feet of space which is too small for the
Company's needs. The Company has received notice that the lease will not be
renewed. The Company also leases approximately 1,000 square feet of additional
office space in Bountifil, Utah on a month-to-month basis at a rate of $1,800
annually.
With the expiration of the lease relating to the Company's primary
office facilities, the Company has located and anticipates entering into a five
year lease for 14,344 square feet of office space at an annual lease rate of
approximately $230,000 for the first year of the lease which rate will be
increase at a rate of four percent per year during the lease term. Management
has determined that an increase in the total space expected to be leased by the
Company is necessary to accommodate the expected growth of the Company, its
employees and activities. These increases are dictated by requirements of
existing and anticipated agreements which require expanded development and
related efforts, including low volume manufacturing. The Company believes that
the increase in space will be adequate to meet the needs of current and expected
growth for the forseeable future.
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The Company also owns production molds for the Safety Cradle(R) sharps
containers and ExtreSafe(R) Lancet Strip and related automated assembly
equipment. At present the molds and automated assembly equipment are not being
fully utilized. The Company anticipates, however, that it will be required to
purchase additional molds for various products that are under development.
Item 3. Legal Proceedings.
In April 1997, the Company entered into an agreement with Leerink Swann
& Company ("Leerink"), whereby Leerink agreed to assist the Company in raising
funds in a private placement of equity securities. Sufficient funding was
deposited into escrow to hold an initial closing, but the closing did not occur.
Leerink alleges that the Company refused to close on the placement. The Company
alleges that the closing did not occur because Leerink, as a condition precedent
to closing, made certain pre-closing demands that went far beyond the terms of
the agreement and which demands Company management believes were not in the best
interests of the Company or its stockholders. In August 1997, Leerink filed suit
in the United States District Court for the District of Massachusetts alleging
breach of contract and violation of M.G.L. c.93A, ss.11. Leerink is seeking
compensatory damages exceeding $230,000, 113,251 warrants to purchase 113,251
shares of the Company's Common Stock, treble damages and reasonable attorneys'
fees and costs.
In October 1997, the Company filed a counterclaim alleging breach of
contract and violation of M.G.L. c.93A, ss.11. The Company is seeking in excess
of $60,000 in money damages, treble damages, reasonable attorneys' fees and
costs.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders on December 10,
1997, at which meeting certain members of the Company's Board of Directors (the
"Board") were elected. The Company's Board is divided into three classes. One
class of directors is elected at each annual meeting of stockholders for a
three-year term. Each year a different class of directors is elected on a
rotating basis. The terms of Gale H. Thorne and Bradley C. Robinson expire in
2000, the term of Robert R. Walker expires in 1999 and the term of David A.
Robinson expires in 1998.
Gale H. Thorne and Bradley C. Robinson, both of whom are currently
directors of the Company, were nominated by the Board for election to the class
whose terms expire at the 2000 annual meeting. The stockholders then elected
Gale H. Thorne by a vote of 4,741,997 for and 22,000 withheld authority and
elected Bradley C. Robinson by a vote of 4,741,997 for and 22,000 withheld
authority.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Dividend Policy
To date, the Company has not paid dividends on its common stock. The
payment of dividends, if any, in the future is within the discretion of the
Board and will depend upon the Company's earnings, its capital requirements and
financial condition, and other relevant factors. See "Management's Discussion
and Analysis of Financial Condition and Operating Results." The Board does not
intend to declare any dividends in the foreseeable future, but instead intends
to retain all earnings, if any, for use in the Company's operations.
Share Price History
The Company's common stock (the "Common Stock") has been quoted on
Nasdaq Small-Cap Market since October 1995 under the trading symbol "SHPI." The
following table sets forth the high and low bid information of the Common Stock
for the periods indicated. On March 18, 1998, the reported high ask and low bid
prices of the Common Stock were $2.75 and $2.6875. Note that such
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and the quotations may not necessarily
represent actual transactions in the Common Stock.
Quarter Ended High Low
1996
March 31......................... $11.50 $7.375
June 30.......................... $11.75 $4.25
September 30..................... $4.625 $2.375
December 31...................... $3.5625 $2.50
1997
March 31......................... $3.5625 $2.75
June 30.......................... $3.3675 $2.00
September 30..................... $2.3125 $2.00
December 31...................... $2.1875 $1.00
1998
March 31 (through March 18)...... $3.125 $2.6875
Holders of Record
At March 18, 1998, there were 344 holders of record of the Company's
Common Stock. The number of holders of record was calculated by reference to the
Company's stock transfer agent's books.
Issuance of Securities
In January 1998, the Company completed a private placement (the
"January Private Placement") wherein it raised gross proceeds of $5,220,000
through an offering of units to accredited investors for $2 per unit. The
securities were issued under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). Each unit consisted
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of one share of Common Stock and one Series D Warrant. Pursuant to requirements
of the January Private Placement, the Company provided accredited investors in
the Company's March private placement with opportunity to exchange the
securities purchased in the March placement for a number of units the investor
could have purchased in the January Private Placement had the investment been
made under the January Private Placement terms rather than the March terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." In February 1998, all of the March
accredited investors elected to convert to the January Private Placement terms
in reliance on the registration exemption found in Sections 3(9), 4(2) of the
Securities Act and Rule 506 of Regulation D. As a result of the conversion, all
outstanding Series C Warrants were canceled and the Company issued 256,598
additional shares of Common Stock and 769,787 additional Series D Warrants. The
Company did not use an underwriter in connection with the January Private
Placement.
Pursuant to the requirements of the January Private Placement, Dr. Gale
H. Thorne, a director and vice-president of the Company, released the Company
from certain royalty obligations and the Company issued to Dr. Thorne and his
assigns warrants to purchase 750,000 of the Company's common stock. The Company
also issued 25,000 shares of Common Stock and 25,000 Series D Warrants to an
unaffiliated financial advisor in connection with the January Private Placement.
The securities referenced in this paragraph were issued under Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
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<TABLE>
<CAPTION>
Item 6. Selected Financial Data.
The following data have been derived from the Company's consolidated
financial statements. The information set forth below is not necessarily
indicative of the results of future operations and should be read in conjunction
with the consolidated financial statements and related notes appearing elsewhere
in this Form 10-K:
Period Ended
-----------------------------------------------------------------------------------
Nov. 19,
Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1993
1997 1996 1995 1994 (inception)
to Dec. 31,
1997
------------ ------------ ------------ ------------- -------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net product sales................ $ 182,363 $ 74,563 $ 447,844 $ 33,256 $ 738,026
Development fees................. 250,000 -- -- -- 250,000
------------ ------------ ------------ ------------- -------------
Total revenues.......... 432,363 74,563 447,844 33,256 988,026
Cost of product sales............ 141,857 70,257 294,171 21,669 527,954
------------ ------------ ------------ ------------- -------------
Gross profit............ 290,506 4,306 153,673 11,587 460,072
------------ ------------ ------------ ------------- -------------
Operating Expenses:
Selling, general and
administrative............. 3,311,222 2,901,434 2,133,021 620,022 8,969,149
Research and development.... 1,191,857 1,264,186 804,639 290,950 3,551,632
Write-off of operating 92,557 72,363 255,072 -- 419,992
assets....................
------------ ------------ ------------ ------------- -------------
Total operating expenses 4,595,636 4,237,983 3,192,732 910,972 12,940,773
------------ ------------ ------------ ------------- -------------
Operating loss.......... (4,305,130) (4,233,677) (3,039,059) (899,385) (12,480,701)
Net other income (expense)....... 31,127 140,289 119,570 (7,563) 283,423
------------ ------------ ------------ ------------- -------------
Net loss................ (4,274,003) (4,093,388) (2,919,489) (906,948) (12,197,278)
Dividends on preference stock.... -- -- (11,389) (16,780) (28,169)
------------ ------------ ------------ ------------- -------------
Net loss attributable to common
stockholders................... $ (4,274,003) $ (4,093,388) $ (2,930,878) $ (923,728) $(12,225,447)
============ ============ ============ ============= =============
Net loss per common share (basic
and diluted) (1).............. $ (.47) $ (.48) $ (.69) $ (.75)
============ ============ ============ =============
Weighted average common shares
outstanding (1)............. 9,170,541 8,589,952 4,269,131 1,224,074
========= ========= ========= =========
Balance Sheet Data (at period
end):
Working capital (deficit)........ $ 609,962 $ 30,754 $ 4,194,568 $ (287,723)
Total assets..................... 3,285,413 1,848,839 5,950,728 656,865
Long-term debt, less current
maturities..................... -- -- -- 458,333
Total stockholders' equity
(deficit)...................... 540,248 1,513,217 5,369,805 (355,878)
</TABLE>
(1) 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 common share.
20
<PAGE>
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 SHPI and SHP, on a consolidated basis,
except where the context clearly indicates to the contrary. Prior to the
Acquisition, SHPI had no operations.
Overview
From its inception, the Company has incurred losses from operations. As
of December 31, 1997, the Company had cumulative net losses totaling
$12,225,447. To date, the Company's principal focus has been the design,
development, testing, and evaluation of its Safety Cradle(R) sharps containers,
ExtreSafe(R) Lancet Strip, ExtreSafe(R) medical needle withdrawal technology,
intravenous flow gauge, 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 and ExtreSafe(R) Lancet Strip.
Financial Position
The Company had $1,441,556 in cash and cash equivalents as of December
31, 1997. This represented an increase of $1,188,862 from December 31, 1996.
Working capital as of December 31, 1997, also increased to $609,962 as compared
to $30,754 at December 31, 1996. These increases were largely due to the Company
raising $3,039,570 in funding from the private placement of Company securities
and receiving $1,750,000 in prepaid royalties and $250,000 in development fees
during 1997.
Years Ended December 31, 1997, 1996 and 1995
During the year ended December 31, 1997, the Company had total
operating revenues of $432,363, compared with total operating revenues of
$74,563 and $447,844 for the years ended December 31, 1996 and 1995,
respectively. Total operating revenues were comprised of product sales and
development fees. During 1997, BDIT paid the Company $250,000 in development
fees for services provided in 1997. There was no revenue from similar sources
during the prior years.
During the year ended December 31, 1997, the Company had net product
sales of $182,363, compared with net product sales of $74,563 and $447,844 for
the years ended December 31, 1996 and 1995, respectively. Substantially all of
the sales during these periods related to the Company's sharps containers. As
discussed below, the Company will look to several other sources for future sales
revenues.
The Company employs a limited number of sales people and seeks to
market and sell its products through third party distributors and/or licensees.
Consistent with this strategy, substantially all of the $447,844 sales during
1995 were generated by sales through or to third party distributors. During
1996, the Company began negotiating for the distribution of the Safety Cradle(R)
sharps containers by BDSDS. During such negotiations, which began during the
first quarter of 1996 and ended in August of 1996 when the BDSDS Distribution
Agreement was signed, the Company agreed not to enter into any exclusive
marketing or distribution agreements. Sales under the BDSDS Distribution
Agreement did not begin until 1997. The restrictions imposed by the negotiation
and execution of the BDSDS Distribution Agreement and certain improvements that
were made to the Safety Cradle(R) sharps containers that were completed during
the first quarter of 1996 had a substantial negative impact on the Company's
1996 sales of Safety Cradle(R) sharps containers.
21
<PAGE>
BDSDS began selling the Safety Cradle(R) sharps containers under the
BDSDS Distribution Agreement in the first quarter of 1997. During 1997, however,
BDSDS did not order the minimum required amount of product under the terms of
the BDSDS Distribution Agreement and, therefore, BDSDS' exclusive distribution
rights became nonexclusive. In addition, the Company gave notice of termination
of the BDSDS Distribution Agreement, as it is authorized to do in the case of
BDSDS' failure to purchase the minimum amount of product required by the BDSDS
Distribution Agreement. The parties subsequently agreed to extend the
termination date and exclusivity provision of the BDSDS Distribution Agreement
until May 26, 1998.
The Distribution Agreement provides that products may be sold, at BD's
option, either under the Company's name or under BD's label. The products will,
however, be imprinted with the Company's name. The sales price of the products
to BD under the Distribution Agreement can be adjusted under certain
circumstances for changes in raw material costs during the initial term of the
Distribution Agreement. The Company is not required to distribute any future,
unrelated products through BD.
Company management is disappointed with sales of the Safety Cradle(R)
sharps containers under the BDSDS Distribution Agreement and hopes to increase
sales in 1998 by negotiating a more favorable agreement with BDSDS or one or
more other distributors and/or licensees with the proper focus and strategy to
accelerate sales of the Company's sharps containers into the home healthcare
market. BDSDS and the Company are presently negotiating the terms of a new
distribution agreement. There is no assurance, however, that a favorable
distribution and/or license agreement will be negotiated between the Company and
BDSDS or any other party or that sales will improve.
In May 1997, the Company entered into the License Agreement relating to
a single application of the Company's ExtreSafe(R) safety needle withdrawal
technology. Pursuant to the terms of the License Agreement, BDIT made payments
of $1,750,000 and $250,000 to the Company in June and September 1997,
respectively, and is required to make an additional payment of $2,000,000 upon
the earlier of the date of the first sales by BDIT of a product utilizing the
Technology or April 5, 1998. Of these total payments, $3,750,000 represents
advanced royalties for sales occurring before the year 2002 and the $250,000
represents a product development fee. BDIT is also required to pay ongoing
royalties to the Company based on sales of products utilizing the Technology. In
addition, beginning in BDIT's fiscal year 2002, BDIT is required to pay minimum
royalties in order to maintain exclusive rights under the License Agreement.
Sales are expected to begin under the License Agreement in the second half of
1998.
The ExtreSafe(R) Lancet Strip has previously been assembled manually by
the Company with some automated assembly beginning in November 1997. The
automated production equipment is not yet in full operation. The costs of manual
assembly exceeded the related revenues from the minimal sales of the
ExtreSafe(R) Lancet Strip. The use of automated production equipment
substantially reduces the cost to manufacture the ExtreSafe(R) Lancet Strip and
increases manufacturing capacity.
In September 1997, the Company entered into the Alliance Agreement with
Alliance Medical which provides for the Company to manufacture and Alliance
Medical to market and sell the ExtreSafe(R) Lancet Strip on an exclusive basis
in hospitals, alternate site (e.g., homecare, plasma centers and blood banks)
and consumer markets in the United States. Effective March 1, 1998, the Alliance
Agreement was converted to a non-exclusive agreement with no sales minimums so
that the Company can pursue additional sources of distribution. There is no
assurance that the Company will realize significant sales under the Alliance
Agreement or that the Company will enter into any other arrangements with
respect to the marketing and distribution of ExtreSafe(R) Lancet Strips.
In December 1997, the Company entered into the J&J Agreement with J&J
to commercialize two applications of the ExtreSafe(R) safety needle technology
(the "J&J Products"). The J&J Agreement provides for monthly development
payments by J&J, sharing of field related patent costs, payments for initial
periods of low volume manufacturing, an ongoing royalty stream and a J&J
investment in molds, assembly equipment and other capital costs related to
commercialization of each product. The J&J Agreement also provides for an
ongoing joint cooperative program between the Company and J&J which derives
22
<PAGE>
future funding directly from sales of Company created products, payments for
initial periods of low volume manufacturing and an ongoing royalty stream for
additional safety products which are jointly approved for development. In
connection with the J&J Agreement, Johnson & Johnson Development Corporation
also purchased $2,000,000 of Company securities in a private placement that
closed in January 1998. In addition, beginning in the later of J&J's fiscal year
2000 or twelve months following FDA approval for sale of the J&J Products, J&J
is required to pay minimum royalties. Sales are expected to begin under the J&J
Agreement in the first half of 1999.
License and distribution arrangements, such as those discussed above,
create certain risks for the Company, including (i) reliance for sales of
products on other parties, and therefore reliance on the other parties'
marketing ability, marketing plans and credit-worthiness; (ii) if the Company's
products are marketed under other parties' labels, goodwill associated with use
of the products may inure to the benefit of the other parties rather than the
Company; (iii) the Company may have only limited protection from changes in
manufacturing costs and raw materials costs; and (iv) if the Company is reliant
on other parties for all or substantially all of its sales, the Company may be
limited in its ability to negotiate with such other parties upon any renewals of
their agreements. Further, because such arrangements are generally expected to
provide the Company's marketing partners with certain elements of exclusivity
with respect to the products to be marketed by those partners, the Company's
success will be highly dependent on the results obtained by its partners.
Research and development expenses were $1,191,857 for the year ended
December 31, 1997, compared with $1,264,186 and $804,639 for the years ended
December 31, 1996 and 1995, respectively. The Company's efforts during 1997
focused on completing final development of the ExtreSafe(R) Lancet Strip,
development relating to several products utilizing the ExtreSafe(R) medical
needle withdrawal technology and development work on the filmless digitized
imaging technology (which was performed by QIC, but which was funded by the
Company). The Company's efforts in 1996 focused on making certain improvements
to the Safety Cradle(R) sharps container products that were required by the
BDSDS Distribution Agreement and otherwise, development of the ExtreSafe(R)
Lancet Strip, ExtreSafe(R) medical needle withdrawal technology, intravenous
flow gauge and blood collection device. The Company's efforts in 1995 focused on
refining the design and molds for its Safety Cradle(R) sharps container
products, and upon the design and development of its ExtreSafe(R) Lancet Strip,
ExtreSafe(R) medical needle withdrawal technology, intravenous flow gauge and
blood collection device.
During the year ended December 31, 1997, the Company received $250,000
in development fees for services provided in 1997. There was no revenue from
similar sources during the prior years. It is anticipated that Company revenues
from development fees will increase during 1998 as a result of the J&J
Agreement.
Research and development expenses during 1995 through 1997 were limited
because of funding constraints. Funding constraints also set back the
anticipated dates on which the Company's products under development will be
brought to market. It is anticipated that if the Company has adequate funding
during 1998, research and development expenses will increase over 1997 levels.
Reductions in R&D expenditures are not anticipated unless funding constraints
require the Company to make such reductions. Reductions in R&D expenditures
would comprise primarily reductions in R&D staff. Such staff reductions could
have a material adverse effect on product development and on the Company.
Management does not intend to downsize.
Selling, general and administrative expenses were $3,311,222 for the
year ended December 31, 1997, compared to $2,901,434 and $2,133,021 for the
years ended December 31, 1996 and 1995, respectively. The increases in
expenditures between the 1997 and 1996 periods resulted primarily from an
increased number of employees, amounts paid to financial advisors and public
relations firms and legal and accounting fees. The increased costs between 1996
and 1995 resulted mainly from increases in the following expenditures. First,
selling and consulting costs increased as a result of increased efforts to
market and sell the Safety Cradle(R) sharps container products. Second, salaries
and benefits increased as a result of hiring additional product development,
sales and marketing personnel to support sales and commercialization of the
Company's products as well as pay increases made to certain of the Company's
employees. Third, consulting, legal and accounting fees increased as a result of
23
<PAGE>
the Company's entrance into the financial markets, the increased level of
operational sophistication and of the Company's reporting obligations under
applicable securities laws. Finally, travel and entertainment costs increased as
a result of expenses associated with financing, manufacturing, selling, and
marketing activities.
Net other income was $31,127 for the year ended December 31, 1997,
compared with net other income of $140,289 and $119,570 for the years ended
December 31, 1996 and 1995, respectively. The difference in net other income
between said periods relates mainly to interest earned on funds on deposit. Net
interest income varies in direct proportion to the amount of funds on deposit.
The Company anticipates that net interest income during 1998 will be greater
than net interest income during 1997 because the amount of funds on deposit is
expected to increase.
Liquidity and Capital Resources
To date, the Company has financed its operations principally through
private placements of equity securities, proceeds from the exercise of common
stock options, and advanced royalties and a development fee received under the
License Agreement. The Company generated $12,312,726 and $3,088,534 in net
proceeds through financing activities from inception through December 31, 1997
and in 1997, respectively. The Company used net cash in operating activities of
$1,389,016 during the year ended December 31, 1997. As of December 31, 1997, the
Company's liabilities totaled $2,745,165, which included $1,750,000 in deferred
royalty revenues relating to the License Agreement. The Company had working
capital as of December 31, 1997 of $609,962.
The Company's working capital and other capital requirements for the
foreseeable future will vary based upon a number of factors, including the costs
to complete development and bring the ExtreSafe(R) medical needle withdrawal
technology, intravenous flow gauge, blood collection device and other products
to commercial viability, and the level of sales of and marketing for the Safety
Cradle(R) sharps containers and ExtreSafe(R) Lancet Strip. At December 31, 1997,
the Company had committed to spend approximately $200,000 during 1998 on
automated assembly equipment. The Company believes that existing funds, the $2
million payment from BDIT under the License Agreement, development fees from J&J
under the J&J Agreement, license fees and funds generated from sales, will be
sufficient to support the Company's operations and planned capital expenditures
through 1998. See "--Years Ended December 31, 1997, 1996 and 1995." The Company
may, however, raise additional funds through a subsequent public or private
offering if, in the opinion of management, the Company is in need of additional
funding. There is no assurance that any such offering will be completed or that,
if completed, the terms of such offering will be favorable to the Company.
At March 18, 1998, the Company had 3,110,875 Series A Warrants,
1,290,375 Series B Warrants, 3,579,787 Series D Warrants and 800,000 other
warrants (the "SHPI Warrants") outstanding which are exercisable for the same
number of shares of Common Stock of the Company at $3.00 per share in the case
of Series A Warrants and $2.00 per share in the case of Series B Warrants,
Series D Warrants and SHPI Warrants. In the event that the closing price of the
Common Stock for any ten consecutive trading days exceeds $6.00 per share, and
subject to the availability of a current prospectus covering the underlying
stock, the Company may redeem the Warrants. The Series A, B and D Warrants
expire on the earlier of (a) two years from the date of effectiveness of a
registration statement under the Act covering the sale of the shares of Common
Stock underlying such warrants, which period shall be extended day-for-day for
any time that a prospectus meeting the requirements of the Act is not available,
or (b) the redemption date if such warrants are redeemed (subject to the right
of the holder to exercise the warrants within 20 days of notice of such
redemption). The SHPI Warrants expire on December 31, 2002. The exercise of all
the Warrants would result in an equity infusion to the Company of $20,672,949.
The Company presently intends to redeem the warrants when and if the necessary
conditions are met. The Series A and B Warrants were issued in July and August
1995, and a registration statement covering the resale of the shares of Common
Stock underlying the Series A and B Warrants became effective on July 19, 1996.
The Series D Warrants were issued in December 1997, January 1998 and February
1998. A registration statement covering the resale of the shares of Common Stock
24
<PAGE>
underlying the Series D Warrants and SHPI Warrants has not been filed. As of the
date hereof, no warrants have been exercised and there can be no assurance that
any warrants will ever be exercised.
On September 1, 1995, the Company adopted a non-qualified stock option
plan ("NQSOP") which, as amended, authorizes the Company to grant options to
purchase up to 1,500,000 shares of Common Stock. All NQSOP options must be
granted at exercise prices at least equal to the fair market value of the Common
Stock on the date of grant. As of March 18, 1998, the Company had granted stock
options to purchase 1,460,500 shares of Common Stock under the NQSOP. The
exercise of all the stock options issued under the NQSOP would result in an
equity infusion to the Company of $3,120,119.
In addition to the options outstanding under the NQSOP, there are
18,000 options outstanding that were issued under SHP's non-qualified stock
option plan (the "SHP NQSOP"). These options became obligations of the Company
pursuant to the terms of the Acquisition. The exercise of these stock options
will result in an equity infusion to the Company of $7,020.
In 1995, the Company entered into an agreement with a former Director;
the President and a Vice President of the Company, whereby these individuals
have the opportunity to receive up to an aggregate of 2,000,000 additional
shares of common stock. These individuals have the right to divide the earn-out
shares among themselves or their assigns, if earned, based on performance,
contributions to the Company and/or other factors relating to the business
success of the Company. 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, 1997, the
Company's common stock closed at $1.63.
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 1998 equals or exceeds $1,500,000, then an
aggregate of 350,000 earn-out shares 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 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 (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 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 (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. In addition, upon purchase, take over or change in control of
the Company in a hostile or friendly transaction in 1998, all of earn-out shares
shall become vested.
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 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 in which the compensation expense is recognized. As a result, the
Board is working with a compensation consulting firm to discuss equitable
modifications to the earn-out program to address this matter and expect to make
changes with respect thereto.
25
<PAGE>
On March 31, 1997, the Company completed a private placement wherein it
raised gross proceeds of $1,539,570 through an offering of units to accredited
investors for $45 per unit. Each unit consisted of 15 shares of Common Stock and
five Series C Warrants.
In January 1998, the Company completed the January Private Placement
wherein it raised gross proceeds of $5,220,000 through an offering of units to
accredited investors for $2 per unit. Each unit consisted of one share of Common
Stock and one Series D Warrant. Pursuant to requirements of the January Private
Placement, the Company provided each March private placement investor with the
opportunity to exchange the securities purchased in the March placement for a
number of units the investor could have purchased in the January Private
Placement had the investment been made under the January Private Placement terms
rather than the March terms. In February 1998, all of the March investors
elected to convert to the January Private Placement terms. As a result of the
conversion, all outstanding Series C Warrants were canceled and the Company
issued 256,598 additional shares of Common Stock and 769,787 additional Series D
Warrants. Pursuant to the requirements of the January Private Placement, Dr.
Gale H. Thorne released the Company from certain future royalty obligations and
the Company issued to Dr. Thorne and his assigns 750,000 SHPI Warrants. The
Company also issued 25,000 shares of Common Stock and 25,000 Series D Warrants
to a unaffiliated financial advisor in connection with the January Private
Placement.
At present, SHP and Zerbec are equal owners of QIC, but Zerbec has an
option to acquire two-thirds of SHP's current fifty percent (50%) interest in
QIC for one dollar because certain funding objectives were not met. The parties
are in the process of negotiating an arrangement so that the Zerbec Option will
be eliminated or its exercise will be subject to substantial restriction. No
assurance can be given, however, that an agreement will be reached that
eliminates or materially restricts the exercise of the Zerbec Option or that if
such agreement is reached that it will be on terms that are favorable to the
Company. The Company estimates that between $3,000,000 and $6,000,000 in new
funding will be required by QIC for it to achieve its objectives.
Inflation
The Company does not expect the impact of inflation on operations to be
significant.
Year 2000
Management is in the process of determining whether all of the
Company's accounting and operational systems are year 2000 compliant. Management
does not expect the costs associated with any required conversions of systems to
ensure year 2000 compliance to be in excess of $20,000.
Forward-Looking Statements
When used in this Form 10-K, in filings by the Company with the SEC, in
the Company's press releases or other public or stockholder communications, or
in oral statements made with the approval of an authorized executive officer of
the Company, the words or phrases "would be," "will allow," "intends to," "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based on
certain assumptions and expectations which may or may not be valid or actually
occur, and which involve various 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, changes in the regulation of safety health
care products, and other risks. Furthermore, manufacturing delays may result
from additional mold redesigns or delays may result from the failure to timely
obtain FDA approval to sell future products. In addition, sales and other
revenues may not commence as anticipated due to delays or otherwise. If and when
product sales commence, sales may not reach the levels anticipated. As a result,
the Company's actual results for future periods could differ materially from
those anticipated or projected.
Unless otherwise required by applicable law, the Company does not
undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
26
<PAGE>
Other Factors
The Company is subject to certain other risk factors due to its
development stage status, the industry in which it competes and the nature of
its operations. These risk factors include the following.
History of Losses/Profitability Uncertain. The Company is in the
development stage and has reported losses each year since 1993. At December 31,
1997, it had an accumulated deficit of $12,225,447. The Company's products are
in various stages of production, pre-production, development and research. The
Company has made only limited sales of its sharps container products and the
ExtreSafe(R) Lancet Strips, the only products it was selling as of December 31,
1997. Sales of the Company's Safety Cradle(R) sharps container products
commenced in March 1997 pursuant to the BDSDS Distribution Agreement. Limited
commercial sales of the ExtreSafe(R) Lancet Strip, which the Company is
producing manually until automated production equipment was put in place in
November 1997, also commenced in March 1997. There is no assurance that the
Company's products will be commercially viable and no assurance can be given
that the Company will become profitable. In addition, prospects for the
Company's profitability will be affected by expenses, operational difficulties
and other factors frequently encountered in the development of a business
enterprise in a competitive environment, many of which factors may be unforeseen
and beyond the Company's control.
Need for Additional Funds. Due to the development stage status of the
Company and the uncertainty of future profits, the Report of Independent Public
Accountants relating to the Company's 1997 audited financial statements,
attached hereto, contains a "going concern" explanatory paragraph. See
Consolidated Financial Statements and related Notes. The Company believes that
its existing funds, the $2 million payment from BDIT under the License Agreement
to be received in April 1998, license fees and funds generated from sales will
be sufficient to support the Company's operations and planned capital
expenditures through December 31, 1998. The Company's future need for capital
will depend on a number of factors, including the rate at which demand for
products expands, the level of sales and marketing activities for the Safety
Cradle(R) sharps container and ExtreSafe(R) Lancet Strip products, and the level
of expenditures needed to develop and commercialize the ExtreSafe(R) medical
needle withdrawal technology, intravenous flow gauge, blood collection devices,
and the Imaging Technology. Moreover, the Company's business plans may change or
unforeseen events may occur which affect the amount of additional funds required
by the Company. If additional funds are not obtained if and when required, the
lack thereof could have a material adverse effect on the Company. Further, there
is no assurance that the terms on which any funds obtained by the Company will
be favorable to stockholders of the Company at that time.
Manufacturing Strategy/Dependence on Single Manufacturers. The Company
intends to subcontract the manufacture of certain of its products. This strategy
could result in various problems that could have a materially adverse effect on
the Company. Further, the Company may not be able to arrange for the manufacture
of its products through other companies which could delay sales and result in
increased expenses if the Company establishes its own manufacturing capability.
This could have a material adverse effect on the Company. The Company's Safety
Cradle(R) sharps containers and ExtreSafe(R) Lancet Strip are its only products
currently available for sale. The Safety Cradle(R) sharps containers are
produced by a single manufacturer. The Company has made arrangements for the
manufacture of the ExtreSafe(R) Lancet Strip to be performed by a single
manufacturer. If one of the Company's manufacturers fails to perform its
obligations in a timely and satisfactory manner, or if there is a change in the
Company's manufacturers, it could have a material adverse effect on the Company.
There can be no assurance that the Company would be successful in replacing its
current manufacturers on terms favorable to the Company. Also, there can be no
assurance that the Company will be successful in finding additional
manufacturers to manufacture future products on favorable terms.
Negative Pricing Pressures on the Company's Safety Products. Prices for
the Company's safety products may be higher than for competing conventional
products which are not designed to provide the safety protection afforded by the
Company's products. The Company's prices, however, are expected to be
competitive with those of competing safety products. Continuing pressure from
third-party payors to reduce costs in the health care industry as well as
increasing competition from safety products made by other companies, could
27
<PAGE>
adversely affect the Company's selling prices. Reductions in selling prices
could adversely affect operating margins if the Company cannot achieve
corresponding reductions in manufacturing costs.
Rapidly Changing Technology. The Company is in various stages of
production, pre-production, development and research with respect to its Safety
Cradle(R) sharps containers, ExtreSafe(R) Lancet Strip, ExtreSafe(R) medical
needle retraction technology, intravenous flow gauge, blood collection devices,
filmless digitized imaging technology and other products. There is no assurance
that development of superior products by competitors or changes in technology
will not eliminate the need for the Company's products. The introduction of
competing products using different technology could adversely affect the
Company's attempts to develop and market its products.
Potential Lack of Market Acceptance. The use of safety medical
products, including the Company's products, is relatively new. The Company's
products may not be accepted by the market and their acceptance will depend in
large part on (i) the Company's ability (directly or through its marketing
partners) to demonstrate the operational advantages, safety, efficacy, and
cost-effectiveness of its products in comparison with competing products and
(ii) its ability to distribute its products through major medical products
companies. There can be no assurance that the Company's products will achieve
market acceptance or that major medical products companies will sell the
Company's products.
Dependence on Continued Research and Development. The ExtreSafe(R)
medical needle withdrawal technology, intravenous flow gauge, phlebotomy device
and Imaging Technology are still in various stages of development. The Company
is also exploring additional applications for all of its products. The continued
development of its products and development of additional applications and new
products is important to the long-term success of the Company. There can be no
assurance that such applications or products will be developed or, if developed,
that they will be successful.
Dependence on Patents and Proprietary Rights. The Company's future
success depends in part on its ability to protect its intellectual property and
maintain the proprietary nature of its technology through a combination of
patents and other intellectual property arrangements. There can be no assurance
that the protection provided by patents, if issued, will be broad enough to
prevent competitors from introducing similar products or that such patents, if
challenged, will be upheld by the courts of any jurisdiction. Patent
infringement litigation, either to enforce the Company's patents or defend the
Company from infringement suits, would be expensive and, if it occurs, could
divert Company resources from other planned uses. Any adverse outcome in such
litigation could have a material adverse effect on the Company. Patent
applications filed in foreign countries and patents in such countries are
subject to laws and procedures that differ from those in the United States.
Patent protection in such countries may be different from patent protection
under U.S. laws and may not be as favorable to the Company. The Company also
attempts to protect its proprietary information through the use of
confidentiality agreements and by limiting access to its facilities. There can
be no assurance that the Company's program of patents, confidentiality
agreements and restricted access to its facilities will be sufficient to protect
the Company's proprietary technology.
Ability to Manage Expanding Operations. The Company intends to pursue a
strategy of rapid growth although there can be no assurance that any growth will
be achieved. The Company plans to significantly expand its product lines and to
devote substantial resources to support operations, research and development,
marketing and administrative functions. There can be no assurance that the
Company will obtain sufficient manufacturing capacity on favorable terms,
arrange for the marketing and distribution of its products, attract qualified
personnel or effectively manage expanded operations. The failure to properly
manage growth could have a material adverse effect on the Company.
Competition/Potential Inability to Compete. The Company is engaged in a
highly competitive business and will compete directly with firms that have
longer operating histories, more experience, substantially greater financial
resources, greater size, more substantial research and development and marketing
organizations, established distribution channels and that are better situated in
the market than the Company. The Company's competitors and potential competitors
include Baxter International, Inc., Becton Dickinson and Company, Devon
Industries, Inc. Sage Products, Inc., Surgicutt, Inc., Miles, Inc., Diagnostic
Corporation, Boehringer Mannheim, Inc., Sherwood Medical Company, Inc. and
28
<PAGE>
Terumo Medical Corporation. See "Business - Competition." Such competitors may
use their economic strength to influence the market to continue to buy their
existing products. The Company does not have an established customer base and is
likely to encounter a high degree of competition in developing a customer base.
One or more of these competitors could use their resources to improve their
current products or develop new products that may compete more effectively with
the Company's products. New competitors may emerge and may develop products
which compete with the Company's products. No assurance can be given that the
Company will be successful in competing in this industry.
Product Liability. The sale of medical devices entails an inherent risk
of liability in the event of product failure or claim of harm caused by product
operation. There can be no assurance that the Company will not be subject to
such claims, that any claim will be successfully defended or, if the Company is
found liable, that the claim will not exceed the limits of the Company's
insurance. The Company's current insurance coverage is in the amount of $1
million per occurrence and $2 million in aggregate. There is no assurance that
the Company will maintain product liability insurance on acceptable terms in the
future or that such insurance will be available.
Product liability claims could have a material adverse effect on the Company.
Uncertainty in the Health Care Industry. The health care industry is
subject to changing political, economic and regulatory influences that may
affect the procurement practices and operations of health care facilities.
During the past several years, the health care industry has been subject to
increased government regulation of reimbursement rates and capital expenditures.
Among other things, third-party payors are increasingly attempting to contain
health care costs by limiting both coverage and reimbursement levels for health
care products and procedures. Because prices of the Company's products may
exceed the price of conventional products, the cost control policies of
third-party payors, including government agencies, may adversely affect use of
the Company's products. The Company believes that the costs associated with
accidental needlesticks, however, exceed the procurement costs of safety
products such as those of the Company.
There are numerous proposals to reform the U.S. health care system and
the health care systems of various states. Many of these proposals seek to
increase government involvement in health care, lower reimbursement rates,
contain costs and otherwise change the operating environment for the Company's
prospective customers. Health care providers may react to these proposals and
the uncertainty surrounding such proposals by curtailing or deferring
investments in new technology and new products, including those of the Company.
The Company cannot predict what impact, if any, such proposals or health care
reforms might have on the Company's financial condition and results of
operations.
Management/Dependence on Key Personnel/Board. The success of the
Company depends upon the skills, experience and efforts of its management and
other key personnel. Should the services of one or more members of its present
management or other key personnel become unavailable to the Company for any
reason, the business of the Company could be adversely affected. There is no
assurance that the Company will be able to retain existing employees or attract
new employees of the caliber needed to achieve the Company's objectives. The
Company has noncompetition agreements in place with its key personnel. The Board
currently consists of five members, four of whom are employed by the Company.
Market Volatility. Market prices of securities of medical technology
companies are highly volatile from time to time. The trading price of the
Company's securities may be significantly affected by factors such as the
announcement of new product or technical innovations by the Company or its
competitors, proposed changes in the regulatory environment, or by other factors
that may or may not relate directly to the Company. Sales of substantial amounts
of Common Stock (including stock which may be issued upon exercise of warrants
or stock options), or the perception that such sales may occur, could adversely
affect the trading price of the Common Stock.
No Assurance of Dividends. The Company has never paid dividends on its
Common Stock. The payment of dividends, if any, on the Common Stock in the
future is at the discretion of the Board and will depend upon the Company's
earnings, if any, capital requirements, financial condition and other relevant
factors. The Board does not intend to declare any dividends on the Common Stock
in the foreseeable future.
29
<PAGE>
Limitations on Director Liability. The Company's Certificate of
Incorporation provides, as permitted by Delaware law, that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for any action or failure to take any action, with certain
exceptions. These provisions may discourage stockholders from bringing suit
against a director for breach of duty and may reduce the likelihood of
derivative litigation brought by stockholders on behalf of the Company against a
director. In addition, the Company has agreed and its Certificate of
Incorporation and Bylaws provide, for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law and it has entered into
contracts with its directors and officers providing for such indemnification.
Anti-Takeover Provisions of Certificate and Bylaws. The Certificate of
Incorporation of the Company provides for the division of the Board into three
classes substantially equal in number. At each annual meeting of stockholders
one class of directors is to be elected for a three-year term. Amendments to
this provision must be approved by a two-thirds vote of all the outstanding
stock entitled to vote; the number of directors may be changed by a majority of
the entire Board or by a two-thirds vote of the outstanding stock entitled to
vote. Meetings of stockholders may be called only by the Board, the Chief
Executive Officer or the President of the Company, and stockholder action may
not be taken by written consent. These provisions could have the effect of (i)
discouraging attempts at non-negotiated takeovers of the Company which may
provide for stockholders to receive a premium price for their stock or (ii)
delaying or preventing a change of control of the Company which some
stockholders may believe is in their interest.
Effect of the Issuance of Preferred Stock. The Company has an
authorized class of preferred stock, shares of which may be issued with the
approval of its Board on such terms and with such rights, preferences and
designations as the Board may determine. Issuance of additional series of
preferred stock, depending upon the rights, preferences and designations
thereof, may have the effect of delaying, deterring or preventing a change in
control of the Company. In addition, certain "anti-takeover" provisions of the
Delaware General Corporation Law, among other things, may restrict the ability
of stockholders to effect a merger or business combination or obtain control of
the Company and may be considered disadvantageous by some stockholders.
Management of the Company presently does not intend to issue any shares of
preferred stock. Preferred stock may, however, be issued at some future date
which stock might have substantially more than one vote per share or other
provisions designed to deter a change in control of the Company. The issuance of
such stock to a limited group of management stockholders may vest in such
persons absolute voting control of the Company, including, among other things,
the ability to elect all of the directors, control certain matters submitted to
a vote of stockholders and prevent any change in management despite their
performance. Also, preferred stock may have the right to vote upon certain
matters as a separate class.
Current Litigation. In April 1997, the Company entered into an
agreement with Leerink Swann & Company ("Leerink"), whereby Leerink agreed to
assist the Company in raising funds in a private placement of equity securities.
Sufficient funding was deposited into escrow to hold an initial closing, but the
closing did not occur. Leerink alleges that the Company refused to close on the
placement. The Company alleges that the closing did not occur because Leerink,
as a condition precedent to closing, made certain pre-closing demands that went
far beyond the terms of the agreement and which demands Company management
believes were not in the best interests of the Company or its stockholders. In
August 1997, Leerink filed suit in the United States District Court for the
District of Massachusetts alleging breach of contract and violation of M.G.L.
c.93A, ss.11. Leerink is seeking compensatory damages exceeding $230,000,
113,251 warrants to purchase 113,251 shares of the Company's Common Stock,
treble damages and reasonable attorneys' fees and costs. In October 1997, the
Company filed a counterclaim alleging breach of contract and violation of M.G.L.
c.93A, ss.11. The Company is seeking in excess of $60,000 in money damages,
treble damages, reasonable attorneys' fees and costs.
The Company believes that Leerink's claims are without merit and that
the Company will ultimately prevail. The litigation is in the early stages, is
subject to all of the risks and uncertainties of litigation and the outcome
cannot presently be predicted. Specifically, there is no assurance that the
Company will be successful in this lawsuit or that the lawsuit will be resolved
on acceptable terms, and the Company may incur significant costs in asserting
its claims and defenses.
30
<PAGE>
Joint Venture Risks. On the date hereof, SHP and Zerbec are equal
owners of QIC, but Zerbec has an option to acquire two-thirds of SHP's current
fifty percent (50%) interest in QIC for one dollar because certain funding
objectives were not met. The parties are in the process of negotiating an
arrangement so that the Zerbec Option will be eliminated or its exercise will be
subject to substantial restriction. No assurance can be given, however, that an
agreement will be reached that eliminates or materially restricts the exercise
of the Zerbec Option or that if such agreement is reached that it will be on
terms that are favorable to the Company. The Company estimates that between
$3,000,000 and $6,000,000 in new funding will be required by QIC for it to
achieve its objectives. There is no assurance that additional funds will be
available for QIC to achieve its objectives, or that such funding, if available,
will be on terms that are favorable to QIC.
Item 8. Financial Statements and Supplementary Data
See index to financial statements and financial statement schedules
included herein as Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Set forth below is certain information concerning each of the directors
and executive officers of the Company as of March 18, 1998.
With the
Name Age Position Company Since
David A. Robinson (1) 54 President, Chairman of the Board, 1993
Chief Executive Officer and
Director
Bradley C. Robinson (1) 28 Vice President - Business 1993
Development and Director
Dr. Gale H. Thorne (1) 65 Vice President - Product 1994
Development and Director
Charles D. Roe 47 Vice President - Finance and 1997
Investor Relations, Chief
Financial Officer, Secretary
and Treasurer
Robert R. Walker 68 Director 1994
- ---------------
(1) Member of Executive Committee.
David A. Robinson. Mr. Robinson is the President, Chief Executive
Officer and Chairman of the Board of the Company. He has been a director and
officer of the Company since November 1993. From November 1992 to November 1993,
Mr. Robinson was President of EPC Products, Inc., a distribution company based
in Bountiful, Utah. From 1981 to 1992, Mr. Robinson was President of Royce
Photo/Graphics Supply, Inc., a distributor of photographic and graphic arts
equipment and supplies based in Glendale, California. He holds a Masters degree
31
<PAGE>
in Business Administration and a Masters degree in Management Science from the
University of Southern California. Mr. Robinson is an uncle of Bradley C.
Robinson, Vice President - Business Development and a director of the Company.
Bradley C. Robinson. Mr. Robinson is the Vice President - Business
Development of the Company. He has been a director and officer of the Company
since November 1993. From November 1992 to November 1993, Mr. Robinson was Vice
President of EPC Products, Inc., a distribution company based in Bountiful,
Utah. Mr. Robinson is a nephew of David A. Robinson, President, Chief Executive
Officer, Chairman of the Board and a director of the Company.
Dr. Gale H. Thorne. Dr. Thorne is the Vice President - Product
Development, for the Company. He has been a director since January 1995, and has
held his present position as Vice President - Product Development, since October
1994. From 1993 to 1994, Dr. Thorne was a Vice President - Engineering, of
Eneco, Inc., a Salt Lake City, Utah corporation engaged in the business of
developing cold-fusion products. During Dr. Thorne's tenure at Eneco, Inc., the
company was engaged primarily in the business of prosecuting patent applications
relating to the cold-fusion technology. From 1989 to 1993, Dr. Thorne was
employed as a patent consultant and patent agent with Foster & Foster, a Salt
Lake City intellectual property law firm. Dr. Thorne holds twenty-six patents
and has published numerous technical publications. He has been a technical
consultant and a member of the Board of the Small Business Innovation Program of
the State of Utah. Dr. Thorne manages all the patent and product development
work for the Company. He holds a Ph.D. in Biophysics from the University of
Utah. He is a past president of Thorne, Smith, Astill, Inc., an engineering
director for Becton, Dickinson and Company Immunochemistry Division and a vice
president and division manager for Varian and Diasonics Ultrasound.
Charles D. Roe. Mr. Roe is the Chief Financial Officer, Vice President
- - Finance and Investor Relations, Secretary and Treasurer. He was appointed to
his position as Chief Financial Officer and Vice-President in November 1997 and
has been with the Company since October 1997. Mr. Roe is a certified public
accountant licensed in the State of Utah and has principally been engaged in the
practice of public accounting since 1976, including four years with Arthur
Andersen LLP. Mr. Roe's public accounting emphasis has been related to the
performance of audit services to private and public enterprises along with
management and other general business and income tax related services. From June
1995 through October 1997, Mr. Roe worked in association with Jones, Jensen &
Co., a certified public accounting firm which is a member of the McGladrey
Network of accounting firms, specializing in audits of public companies. Mr. Roe
was employed by Wellshire Services, Inc. from June 1993 to June 1995 providing
various services to numerous public and private companies in the United States
and Europe. From 1987 to October 1997, Mr. Roe has owned and operated a public
accounting practice focusing on financial audits, individual and corporate
income tax consultation and preparation and other advisory services. Since 1987,
Mr. Roe has served on the board of directors and as secretary of Covington
Capital Corporation, a privately owned financing business. From June 1995
through November 1996, Mr. Roe was employed by the company providing management
services to various companies financed by Covington Capital Corporation. Mr. Roe
graduated from the University of Utah with a bachelors of arts degree in
accounting.
Robert R. Walker. Mr. Walker is a director of the Company. Mr. Walker
has been a director since March 1994. He is currently self-employed as a
consultant in the health care industry primarily in the area of start-up medical
device companies. From 1976 to 1992, Mr. Walker was employed by IHC Affiliated
Services Division of Intermountain Health Care, a regional hospital company,
from which he retired as President of IHC Affiliated Services. He is also a
former Chairman of the Board of AmeriNet, Inc., which is a national group
purchasing organization for hospitals, clinics, detox/drug centers, emergency,
nursing homes, private laboratories, psychiatric centers, rehabilitation
facilities, surgical centers and institutions such as schools and prisons. Mr.
Walker is a member of the American Hospital Association and the Hospital
Financial Management Association. He holds a Bachelor of Science degree in
Business Administration.
Executive officers of the Company are elected by the Board on an annual
basis and serve at the discretion of the Board.
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<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officer, directors and persons who beneficially own more
than 10% of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
("SEC"). Such persons are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the
Company and representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors and more than 10% stockholders were complied with during 1997.
Item 11. Executive Compensation.
The tables below 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 $100,000 (determined for the year
ended December 31, 1997) (the "Named Executive Officers"). The tables include
information related to stock options granted to the Named Executive Officers.
Summary Compensation Table. The following table provides certain
information regarding compensation paid by the Company to the Named Executive
Officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards
Restricted Stock All Other
Name and Salary Bonus Other Annual Stock Options/ LTIP Compensation
Principal Position Year ($)(1) ($)(2) Compensation($)(3) Awards ($) SAR(#) Payouts($) ($)(4)
------------------ ---- ------ ------ ------------------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David A. Robinson, 1995 193,590 25,000 --- 666,666(5) 300,000(6) --- 1,192
President, CEO, Chairman 1996 240,000 --- 8,000 --- --- --- 2,777
of the Board and 1997 240,000 --- 4,750 --- --- --- 4,150
Director
Bradley C. Robinson, VP, 1995 148,590 25,000 --- 666,666(5) 300,000(7) --- 374
Business Development and 1996 160,000 --- 5,333 --- --- --- 898
Director 1997 160,000 --- 4,750 --- --- --- 1,952
Dr. Gale H. Throne, VP 1995 128,333 25,000 --- --- 57,000(7) --- ---
Product Development and 1996 150,000 --- 4,640 --- 40,000(7) --- 72
Director 1997 150,000 --- 4,750 --- --- --- 429
- ---------------
</TABLE>
(1) All amounts paid as salary were paid pursuant to the Company's obligations
under employment contracts with the above individuals. These employment
contracts have been amended from time to time during the periods set forth
above. The annual salaries of the Named Executive Officers, as set forth in
their employment contracts, are $240,000 for Mr. David A. Robinson,
$160,000 for Mr. Bradley C. Robinson and $150,000 for Dr.
Gale H. Thorne.
(2) The cash bonuses were awarded by the Company in recognition of the
recipients' contributions toward completion of the Acquisition.
(3) These amounts represent payments by the Company into its 401(k) retirement
plan for the benefit of the Named Executive Officer.
(4) These amounts represent the amounts paid by the Company for term life
insurance on the lives of the Named Executive Officer with insurance
proceeds payable to the beneficiary designated by the Named Executive
Officer. These insurance policies have no cash surrender values.
33
<PAGE>
(5) These are earn-out shares.
(6) Options issued pursuant to the NQSOP; options to purchase 87,500 shares
were exercised on January 10, 1997.
(7) Options issued pursuant to the NQSOP.
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Fiscal Options/SARs at Fiscal
Shares Year-End Year-End($)
Acquired On Value (Exercisable/ (Exercisable/
Name Exercise (#) Realized ($) Unexercisable) Unexercisable)(1)
---- ------------ ------------ ------------------------ -----------------
<S> <C> <C> <C> <C>
David A. Robinson 87,500 $92,969(2) 212,500(3)/0 ---
Bradley C. Robinson --- --- 300,000(3)/0 ---
Dr. Gale H. Thorne --- --- 115,000(4)/0 $22,230/---
- ---------------
</TABLE>
(1) The closing price of the Company's Common Stock on December 31, 1997, was
$1.625 per share.
(2) Options exercisable for 87,500 shares of the Company's Common Stock at $2.00
per share were exercised on January 10, 1997, on which date the closing
price of the Common Stock was $3.0625 per share.
(3) Options exercisable at $2.00 per share.
(4) Represents 18,000 options currently exercisable at an exercise price of $.39
per share; 57,000 options currently exercisable at $2.00 per share; and
40,000 options currently exercisable at $2.625 per share. Does not include
SHPI Warrants to purchase 200,000 shares of Common Stock that were issued to
Dr. Thorne in January 1998. See "Certain Relationships and Related
Transactions."
Compensation of Directors
No cash fees or other consideration was paid to non-employee directors
of the Company by the Company for service on the Board during 1997. During 1994,
the non-employee members of the Board received shares of Common Stock as
compensation for serving on the Board of SHP. In 1995 and 1996, the Company
granted to non-employee directors under the NQSOP stock options to purchase
shares of Common Stock. The Company has made no other agreements regarding
compensation of non-employee 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
The Company has entered into employment agreements with each of Mr.
David A. Robinson, Mr. Bradley C. Robinson and Dr. Gale H. Thorne (collectively,
the "Senior Executives"). These employment agreements, which have been amended
from time to time, provide that (i) Mr. David A. Robinson receive a salary of
$240,000 per year, Mr. Bradley C. Robinson receive a salary of $160,000 per
year, and Dr. Gale H. Thorne receive a salary of $150,000 per year; (ii) the
Senior Executives' employment agreements are for terms of three years, expiring
on November 3, 2000; (iii) the Senior Executives are entitled to a reasonable
car allowance; (iv) if the employment of a Senior Executive is terminated by
reason of disability or other than for cause, the salary of such Senior
Executive will continue for the full term of the agreement; (v) if a Senior
Executive is terminated for cause, the salary of such Senior Executive ceases as
of the date of termination; (vi) the Company will provide each Senior Executive
34
<PAGE>
with up to $1,000,000 of term life insurance while the Senior Executive is
employed by the Company; and (vii) the Senior Executives shall keep all
proprietary information relating to the business of the Company confidential
both during and after the term of the agreements. With one exception, the
Company does not have employment agreements with any of its other executive
officers or key employees.
The Company has entered into indemnity agreements (the "Indemnity
Agreements") with each of its executive officers and directors pursuant to which
the Company has agreed to indemnify the officers and directors to the fullest
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 Indemnity Agreement. The Indemnity Agreements
obligate the Company to reimburse or advance expenses relating to any proceeding
arising out of an indemnifiable event. Under the Indemnity Agreements, the
officers and directors of the Company are presumed to have met the relevant
standards of conduct required by Delaware law for indemnification. Should the
Indemnity Agreements be held to be unenforceable, indemnification of these
officers and directors may be provided by the Company in certain cases at its
discretion.
401(k) Retirement Plan
Effective in 1996, the Company adopted a 401(k) retirement plan whereby
the Company contributes five percent of payroll compensation to the plan and
matches employee contributions to the plan on a dollar for dollar basis up to
the maximum contribution allowed by applicable tax law. The Named Executive
Officers have invested all of the funds in their 401(k) accounts in common stock
of the Company.
Indemnification for Securities Act Liabilities
Delaware 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. Indemnification for liabilities arising under the Act
may be permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing or otherwise. However, 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 Act and is,
therefore, unenforceable.
Stock Options and Warrants
During 1994, the Board of SHP approved the SHP NQSOP. Options granted
under the SHP NQSOP were required to have exercise prices not less than the fair
market value of the underlying stock at the date of grant as determined by SHP's
Board of Directors. The number of shares, terms and exercise period of options
granted under the SHP NQSOP were determined by the SHP Board of Directors on an
option-by-option basis. On the date of the Acquisition, all options issued under
the SHP NQSOP became obligations of the Company and the SHP NQSOP was
terminated. As of March 18, 1997, options to acquire an aggregate of 18,000
shares of Common Stock were outstanding in connection with the SHP NQSOP.
Options issued under the SHP NQSOP expire in 1999.
On September 1, 1995, the Company adopted the NQSOP and has reserved
1,500,000 shares of Common Stock for the possible exercise of options under the
plan. The exercise price of options granted under the NQSOP must be not less
than the fair market value of the underlying stock at the date of grant as
determined by the Board. Options granted under the NQSOP expire five years from
the date of grant. As of March 18, 1998, options to acquire an aggregate of
1,463,500 shares of Common Stock at exercise prices ranging from $2.00 to $2.625
per share had been granted and are presently outstanding (not including options
granted under the SHP NQSOP).
Possible Delisting of Securities from Nasdaq System.
The Company's common stock is currently traded on the Nasdaq Small-Cap
Market System. In order to continue to qualify its stock for quotation on the
Nasdaq Small-Cap Market under recently adopted rules, a company must have, among
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<PAGE>
other things, $2 million in net tangible assets, a market capitalization of $35
million or annual net income of $500,000. The Company is also required to have a
minimum of two independent directors and an audit committee, a majority of which
are independent directors, and a minimum bid price of at least $1. Except as
described below, the Company believes it is currently in compliance with Nasdaq
Small-Cap Market listing requirements. There is no assurance that the Company
will continue to qualify for listing.
The Company currently does not meet the Nasdaq Small-Cap Market listing
requirements because it has only one independent director and does not have an
audit committee. The Company intends to bring itself into compliance with the
listing requirements by bringing on an additional independent director and then
forming an audit committee, a majority of the members of which will be
independent directors. The Company is currently working with Nasdaq to develop a
time frame within which the Company must bring itself into compliance with such
listing requirements. If the Company is not able to bring itself into compliance
within such timeframe, it could be delisted. In the event of delisting, trading,
if any, in the Company's securities would be expected to be conducted in the
over-the-counter market in what is commonly referred to as the "pink sheets" or
the "Electronic Bulletin Board." As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the price of the
Company's securities. The loss of continued price quotations as provided by the
Nasdaq System could also cause a decline in the price of the Common Stock, a
loss of news coverage of the Company and difficulty in obtaining subsequent
financing.
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 Company as of March 18, 1998,
for: (i) each person who is known by the Company to beneficially own more than 5
percent of the Company's common stock, (ii) each of the Company's directors,
(iii) each of the Company's Named Executive Officers (defined below), and (iv)
all directors and executive officers as a group. As of March 18, 1997, the
Company had 12,271,440 shares of common stock outstanding.
Shares
Name and Address Beneficially Percentage of
of Beneficial Owner(1) Owned(2) Total(2) Position
David A. Robinson(3) 641,925 5% President, CEO, Chairman
of the Board and Director
Bradley C. Robinson(4) 639,541 5% Vice President - Business
Development and Director
Dr. Gale H. Thorne(5) 381,655 3% Vice President - Product
Development and Director
Robert R. Walker(6) 113,000 1% Director
Executive Officers and 1,776,121 14%
Directors as a Group
(five persons)
36
<PAGE>
John T. Clarke(7) 647,121 5%
Thatchetts Camp Road
Gerrards Cross
Buckinghamshire, England
Capital Growth 938,040 7%
International, LLC(8)
11601 Wilshire Boulevard,
Suite 500
Los Angeles, CA 90025
Johnson & Johnson 1,000,000 8%
Development Corporation(9)
One Johnson & Johnson
Plaza, New Brunswick, NJ
08933
Asdale Ltd(10) 750,000 6%
44 Lowndes Street
London, England
- --------------
(1) Except where otherwise indicated, the address of the beneficial owner is
deemed to be the same address as the Company.
(2) Beneficial ownership is determined in accordance with SEC rules and
generally includes holding voting and investment power with respect to the
securities. Shares of Common Stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for
computing the percentage of the total number of shares beneficially owned
by the designated person, but are not deemed outstanding for computing the
percentage for any other person.
(3) Includes 417,719 shares and stock options to purchase 212,500 shares. Also
includes 11,706 shares purchased through the Company's 401(k) plan. Does
not include the earn-out shares. See "--Long-Term Incentives and Executive
Compensation."
(4) Includes 330,219 shares and stock options to purchase 300,000 shares. Also
includes 9,322 shares purchased through the Company's 401(k) plan. Does not
include the earn-out shares. See "--Long-Term Incentives and Executive
Compensation."
(5) Includes 18,000 shares, stock options to purchase 115,000 shares, Series
A Warrants to purchase 15,000 shares and SHPI Warrants to purchase 200,000
shares. Also includes 25,000 shares that Dr. Thorne is deemed to
beneficially own through a trust and 8,655 shares purchased through the
Company's 401(k) plan. See "Certain Relationships and Related
Transactions."
(6) Includes stock options to purchase 50,000 shares. Also includes 63,000
shares that Mr. Walker is deemed to beneficially own through a trust.
(7) Includes 163,000 shares, stock options to purchase 300,000 shares and
Series A Warrants to purchase 3,000 shares. Also includes 123,465 shares,
Series A Warrants to purchase 18,000 shares and Series B Warrants to
purchase 21,841 shares owned by his spouse; and 18,000 shares owned by a
minor child, all of which he is deemed to beneficially own. Does not
include the earn-out shares. See Long-Term Incentives and Executive
Compensation.
(8) Includes Series B Warrants to purchase 918,040 shares and stock options to
purchase 20,000 shares.
(9) Includes 1,000,000 shares. Does not include 1,000,000 Series D Warrants
that are not exercisable until October 1, 1998.
(10) Includes 750,000 shares. Does not include 750,000 Series D Warrants that
are not exercisable until October 1, 1998.
The Company is not aware of any arrangements, the operation of which
may, at a subsequent date, result in a change in control of the Company.
37
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Dr. Gale H. Thorne, a director and officer of the Company, was entitled
to a royalty of two and one-half percent on the Company's gross revenues
received from the sale of products utilizing the ExtreSafe(R) medical needle
withdrawal, blood collection device and intravenous flow gauge technologies
(collectively, the "Thorne Products"). These royalties were agreed to in 1994 in
exchange for Dr. Thorne's assignment to the Company of intellectual property
rights he owned prior to his involvement with the Company, which intellectual
property rights relate to the Thorne Products. In addition, the Company was
required under the agreement to pay Dr. Thorne minimum royalty payments of not
less than $435,000 over a six year period beginning in 1998. Minimum royalty
payments in 1998 and 1999 totaled in the aggregate $195,000. As a condition of
the January Private Placement, in January 1998 Dr. Thorne released the Company
from all royalty obligations relating to Thorne Products in exchange for the
issuance of 750,000 SHPI Warrants to Dr. Thorne and his assigns.
The law firm of Blackburn & Stoll, LC provides legal services to the
Company. Eric L. Robinson, a member of that firm, is the brother of Bradley C.
Robinson.
In January 1997, David A. Robinson, a director and officer of the
Company exercised options to purchase 87,500 shares of the Company's common
stock in order to provide needed working capital for the Company. Mr. Robinson
obtained the funds to exercise the options by margining shares of the Company's
stock that he owned and all of the proceeds from the margin transaction went to
the Company. In August 1997, his margin was called and Mr. Robinson borrowed
$182,577 from the Company to pay the margin call. In December 1997, Mr. Robinson
repaid in full the $182,577 principal amount plus interest thereon at eight
percent per annum.
In December 1997, the Company entered into a development and license
agreement with Johnson & Johnson Medical, Inc. to commercialize two applications
of the ExtreSafe(R) safety needle technology. The J&J Agreement provides for
monthly development payments by J&J, sharing of field related patent costs,
payments for initial periods of low volume manufacturing, an ongoing royalty
stream and a J&J investment in molds, assembly equipment and other capital costs
related to commercialization of each product. The J&J Agreement also provides
for an ongoing joint cooperative program between the Company and J&J which
derives future funding directly from sales of Company created products, low
volume manufacturing revenue for the Company and an ongoing royalty stream for
additional safety products which are jointly approved for development. In
connection with the J&J Agreement, Johnson & Johnson Development Corporation
purchased $2,000,000 of Company securities in a private placement that closed in
January 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
Listed on page F-1.
(2) Financial Statement Schedules
None required.
(b) Reports on Form 8-K
38
<PAGE>
One report on Form 8-K, dated December 22, 1997, was filed on
February 10, 1998, reporting the J&J Agreement.
(c) Exhibits
Listed on page 41 hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
39
<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.
SPECIALIZED HEALTH PRODUCTS
INTERNATIONAL, INC.
(Registrant)
Date: March 30, 1998 By /s/ David A. Robinson
------------------- ----------------------
David A. Robinson
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities and 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.
Signature Title Date
/s/ David A. Robinson President, Chief Executive Officer March 30, 1998
- ---------------------- and Director (Principal Executive
David A. Robinson Officer
/s/ Bradley C. Robinson Director and Vice President March 30, 1998
- -----------------------
Bradley C. Robinson
/s/ Charles D. Roe Vice President, Chief Financial March 30, 1998
- ----------------------- Officer, Secretary and Treasurer
Charles D. Roe (Principal Financial and Accounting
Officer)
/s/ Gale H. Thorne Director and Vice President March 30, 1998
- -----------------------
Gale H. Thorne
/s/ Robert R. Walker Director March 30, 1998
- -----------------------
Robert R. Walker
40
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3(i).1 Restated Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit 3(i).1 of the
Company's current report on Form 8-K, dated July 28,
1995)
3(i).2 Certificate of Amendment of Certificate of Incorporation
of the Company. (Incorporated by reference to Exhibit
3(i).2 of the Company's Form 10-K, dated December 31,
1996).
3(i).3 Articles of Incorporation of Specialized Health Products,
Inc. ("SHP") (Incorporated by reference to Exhibit 3(i).2
of the Company's Form 10-K, dated December 31, 1995)
3(i).4 Articles of Amendment of SHP (Incorporated by reference
to Exhibit 3(i).3 of the Company's Form 10-K, dated
December 31, 1995)
3(ii).1 Second Amended and Restated Bylaws of the Company.
3(ii).2 Bylaws of SHP (Incorporated by reference to Exhibit
3(ii).2 of the Company's Form 10-K, dated December 31,
1995)
4.1 Form of Series A Warrant Certificate (Incorporated by
reference to Exhibit 4.1 of the Company's Annual Report
on Form 10-K, dated December 31, 1995).
4.2 Form of Series B Warrant Certificate (Incorporated by
reference to Exhibit 4.1 of the Company's Annual Report
on Form 10-K, dated December 31, 1995).
4.3 Form of Series D Warrant Certificate
4.4 Form of SHPI Warrant Certificate
10.1 Form of Employment Agreement with Executive Officers
(Incorporated by reference to Exhibit 10.3 of the
Company's Form 10-K, dated December 31, 1995)
10.2 Form of Indemnity Agreement with Executive Officers and
Directors (Incorporated by reference to Exhibit 10.4 of
the Company's Form 10-K, dated December 31, 1995)
10.3 Form of Confidentiality Agreement (Incorporated by
reference to Exhibit 10.5 of the Company's Form 10-K,
dated December 31, 1995)
10.4 Joint Venture Agreement between SHP and Zerbec, Inc.,
dated October 30, 1995 (Incorporated by reference to
Exhibit 10.6 of the Company's Form 10-K, dated December
31, 1995)
10.5 Distribution Agreement between SHP and Becton, Dickinson
and Company (Incorporated by reference to Exhibit 10.1 of
the Company's Current Report on Form 8-K, dated August
26, 1996)
10.6 License Agreement between SHP and Becton, Dickinson and
Company (Incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K, dated June 4, 1997)
10.7 Distribution and License Agreement between SHP and
Johnson and Johnson Medical, Inc. (Incorporated by
reference to Exhibit 10.1 of the Company's Current Report
on Form 8-K, dated December 22, 1997)
21.1 Schedule of subsidiaries (Incorporated by reference to
Exhibit 21.1 of the Company's Annual Report on Form 10-K,
dated December 31, 1995).
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
41
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
23.2 Consent of KPMG Peat Marwick LLP, Independent Certified
Public Accountants
27.1 Financial Data Schedule
42
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants - Arthur Andersen LLP.............F-2
Independent Auditors' Report - KPMG Peat Marwick LLP.......................F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996...............F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 and for the Period
from Inception to December 31, 1997......................................F-5
Consolidated Statements of Stockholders' Equity (Deficit) for
the Years Ended December 31, 1997, 1996 and 1995 and
for the Period from Inception to December 31, 1997.......................F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 and for the Period
from Inception to December 31, 1997......................................F-9
Notes to Consolidated Financial Statements.................................F-11
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Specialized Health Products International, Inc.:
We have audited the accompanying consolidated balance sheets of Specialized
Health Products International, Inc. (a Delaware corporation in the development
stage) and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from inception
(November 19, 1993) to December 31, 1997. 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 did not audit the
consolidated financial statements of Specialized Health Products International,
Inc. and subsidiary for the period from inception to December 31, 1995. Such
statements are included in the cumulative inception to December 31, 1997 totals
of the statements of operations, stockholders' equity (deficit) and cash flows
and reflect total revenues and net loss of 49 percent and 31 percent,
respectively, of the related cumulative totals. Those statements were audited by
other auditors whose reports have been furnished to us and our opinion, insofar
as it relates to amounts for cumulative totals, is based solely upon the reports
of the other auditors.
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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Specialized Health Products
International, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, and
for the period from inception to December 31, 1997, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring losses
from operations of $4,305,130, $4,233,677 and $3,039,059 and negative cash flows
from operating activities of $1,389,016, $3,558,778 and $2,605,616 during the
years ended December 31, 1997, 1996 and 1995, respectively. As of December 31,
1997, the Company had an accumulated deficit of $12,225,447. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
February 2, 1998
F-2
<PAGE>
Independent Auditors' Report
The Board or Directors and Stockholders
Specialized Health Products International, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit), and cash flows of Specialized Health Products
International, Inc. and subsidiary, (a company in the development stage), for
the year ended December 31, 1995 and for the period from November 19, 1993 (date
of inception) to December 31, 1995. 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 results of operations and cash flows of
Specialized Health Products International, Inc. and subsidiary for the year
ended December 31, 1995 and for the period from November 19, 1993 (date of
inception) to December 31, 1995, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah
February 2, 1996
F-3
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1997 1996
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,441,556 $ 252,694
Accounts receivable 34,328 1,159
Inventories 72,352 15,710
Prepaid expenses and other 56,891 96,813
----------- -----------
Total current assets 1,605,127 366,376
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Manufacturing molds 812,994 481,553
Office furnishings and fixtures 352,925 272,220
Assembly and manufacturing equipment 46,138 33,727
Construction-in-progress 546,372 564,502
----------- -----------
1,758,429 1,352,002
Less accumulated depreciation (308,000) (165,025)
----------- -----------
Net property and equipment 1,450,429 1,186,977
----------- -----------
OTHER ASSETS, net 229,857 295,486
----------- -----------
$ 3,285,413 $ 1,848,839
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 469,948 $ 100,686
Accrued liabilities 398,022 161,784
Amounts due to related parties 127,195 73,152
----------- -----------
Total current liabilities 995,165 335,622
----------- -----------
DEFERRED ROYALTY REVENUES 1,750,000 -
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1,3,4, 5 and 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares authorized, no shares
outstanding - -
Common stock, $.02 par value; 50,000,000 shares authorized, 10,129,842 and
8,656,653 shares outstanding, respectively
202,597 173,133
Common stock subscriptions receivable (209,200) (209,200)
Additional paid-in capital 12,113,346 9,540,928
Series C warrants to purchase common stock 310,994 -
Series D warrants to purchase common stock 388,158 -
Deferred consulting expense (40,200) (40,200)
Deficit accumulated during the development stage (12,225,447) (7,951,444)
----------- -----------
Total stockholders' equity 540,248 1,513,217
----------- -----------
$ 3,285,413 $ 1,848,839
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-4
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
Inception to
Year Ended December 31, December 31,
1997 1996 1995 1997 (Note 1)
----------- ----------- ----------- -------------
REVENUES:
<S> <C> <C> <C> <C>
Net product sales $ 182,363 $ 74,563 $ 447,844 $ 738,026
Development fees 250,000 - - 250,000
----------- ----------- ----------- ------------
432,363 74,563 447,844 988,026
COST OF PRODUCT SALES 141,857 70,257 294,171 527,954
----------- ----------- ----------- ------------
Gross profit 290,506 4,306 153,673 460,072
----------- ----------- ----------- ------------
OPERATING EXPENSES:
Selling, general and administrative
3,311,222 2,901,434 2,133,021 8,969,149
Research and development 1,191,857 1,264,186 804,639 3,551,632
Write-off of operating assets 92,557 72,363 255,072 419,992
----------- ----------- ----------- ------------
Total operating expenses 4,595,636 4,237,983 3,192,732 12,940,773
----------- ----------- ----------- ------------
LOSS FROM OPERATIONS (4,305,130) (4,233,677) (3,039,059) (12,480,701)
----------- ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income 18,236 108,701 135,428 262,602
Interest expense - - (15,858) (23,658)
Other, net 12,891 31,588 - 44,479
----------- ----------- ----------- ------------
Net other income 31,127 140,289 119,570 283,423
----------- ----------- ----------- ------------
NET LOSS (4,274,003) (4,093,388) (2,919,489) (12,197,278)
LESS PREFERENCE STOCK DIVIDENDS - - (11,389) (28,169)
----------- ----------- ----------- ------------
NET LOSS APPLICABLE TO COMMON SHARES $(4,274,003) $(4,093,388) $(2,930,878) $(12,225,447)
=========== =========== =========== ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (.47) $ (.48) $ (.69)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,170,541 8,589,952 4,269,131
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-5
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 3
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
Accumu-
lated
During
Common Deferred the
Stock Sub- Additional Consul- Develop-
Preferred Stock Common Stock scriptions Paid-in Series C Series D ting ment
Shares Amount Shares Amount Receivable Capital Warrants Warrants Expense Stage
------ ------ ------ ------ ---------- ------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock for cash
at inception - $ - 1,170,000 $ 1,300 $ - $ - $ - $ - $ - $ -
Net loss - - - - - - - - - (3,450)
--------- ---------- --------- -------- ---------- -------- ------- ------- ------- ---------
BALANCE as of
December 31, 1993 - - 1,170,000 1,300 - - - - - (3,450)
Issuance of
preferred stock
for cash 1,440,000 560,000 - - - - - - - -
Issuance of common
stock for
services and
stock
subscriptions
receivable - - 193,500 208,500 (198,500) - - - - -
Unpaid dividends on
preference stock - - - - - - - - - (16,780)
Net loss - - - - - - - - - (906,948)
--------- ---------- --------- -------- ---------- -------- ------- ------- ------- ---------
BALANCE as of
December 31, 1994 1,440,000 560,000 1,363,500 209,800 (198,500) - - - - (927,178)
Issuance of
preferred stock
for cash 362,403 604,001 - - - - - - - -
Issuance of
common stock for
stock
subscriptions
receivable - $ - 70,000 $ 1,400 $(140,000) $138,600 $ - $ - $ - $ -
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-6
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 3
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
Accumu-
lated
During
Common Deferred the
Stock Sub- Additional Consul- Develop-
Preferred Stock Common Stock scriptions Paid-in Series C Series D ting ment
Shares Amount Shares Amount Receivable Capital Warrants Warrants Expense Stage
------ ------ ------ ------ ---------- ------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reduction in stock
subscriptions
receivable (cash and
services) - $ - - $ - $ 288,500 $ - $ - $ - $ - $ -
Unpaid dividends on
preference stock - - - - - - - - - (11,389)
Exchange of debt
for common stock - - 396,500 386,000 - 99,000 - - - -
Issuance of
common shares
to stockholders
under antidilution
provisions - - 90,000 180,000 - (180,000) - - - -
Business combination (1,802,403) (1,164,001) 2,102,403 (696,752) - 1,860,753 - - - -
Issuance of
common stock for
cash, net of
expenses - - 4,256,250 85,125 - 7,193,935 - - - -
Exercise of
stock options for
common stock
subscriptions
receivable - - 288,000 5,760 (209,500) 203,740 - - - -
Net loss - - - - - - - - - (2,919,489)
---------- ------- ---------- -------- --------- ------- ----- ---- ----------------
BALANCE as of
December 31, 1995 - $ - 8,566,653 $171,333 $(259,500) $9,316,028 $ - $ - $ - $(3,858,056)
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-7
<PAGE>
<TABLE>
<CAPTION>
Page 3 of 3
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
Accumu-
lated
During
Common Deferred the
Stock Sub- Additional Consul- Develop-
Preferred Stock Common Stock scriptions Paid-in Series C Series D ting ment
Shares Amount Shares Amount Receivable Capital Warrants Warrants Expense Stage
------ ------ ------ ------ ---------- ------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash received for
stock
subscriptions
receivable - $ - - $ - $ 50,300 $ - $ - $ - $ - $ -
Exercise of common
stock options - - 45,000 900 - 16,650 - - - -
Exercise of common
stock warrants - - 45,000 900 - 74,250 - - - -
Grant of stock options
for consulting
services - - - - - 134,000 - - (40,200) -
Net loss - - - - - - - - - (4,093,388)
----- --- --------- -------- --------- -------- -------- -------- -------- -----------
BALANCE as of
December 31, 1996 - - 8,656,653 173,133 (209,200) 9,540,928 - - (40,200) (7,951,444)
Exercise of common stock
options - - 110,000 2,200 - 181,575 - - - -
Issuance of common
stock and common
stock warrants for
cash, net of
expenses (see
Note 7) - - 1,263,189 25,264 - 2,180,343 310,994 388,158 - -
Issuance of common stock
for services - - 100,000 2,000 - 210,500 - - - -
Net loss - - - - - - - - - (4,274,003)
----- --- -------- -------- -------- ----------- -------- -------- ------- -------------
BALANCE as of December
31, 1997 - $ - 10,129,842 $202,597 $(209,200) $12,113,346 $310,994 $388,158 $(40,200) $(12,225,447)
===== ==== ========== ======== ========= =========== ======== ======== ======== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-8
<PAGE>
<TABLE>
<CAPTION>
Page 1 of 2
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Period from
Inception to
Year Ended December 31, December 31,
1997 1996 1995 1997 (Note 1)
----------- ----------- ---------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss $ (4,274,003) $(4,093,388) $(2,919,489) $(12,197,278)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 220,276 203,523 74,542 527,658
Common stock issued for services 212,500 - 8,500 18,500
Noncash consulting expense 147,000 93,800 - 453,300
Loss on disposition of assets 92,557 72,363 256,363 421,283
Changes in operating assets and liabilities:
Accounts receivable (33,169) 349,559 (346,247) (34,328)
Inventories (56,642) 612 (16,322) (72,352)
Prepaid expenses and other 39,922 (62,796) (28,581) (56,891)
Amounts due from related parties - 122,850 (122,850) -
Accounts payable 369,262 (33,763) 49,794 477,748
Accrued liabilities 89,238 (284,690) 438,674 243,222
Amounts due to related parties 54,043 73,152 - 127,195
Deferred royalty revenues 1,750,000 - - 1,750,000
------------ ----------- ----------- ------------
Net cash used in operating activities
(1,389,016) (3,558,778) (2,605,616) (8,341,943)
------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (510,656) (580,468) (794,434) (2,173,081)
Purchase of patents and technology - (2,644) (64,750) (356,146)
------------ ----------- ----------- ------------
Net cash used in investing activities
$ (510,656) $ (583,112) $ (859,184) $ (2,529,227)
------------ ----------- ----------- ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-9
<PAGE>
<TABLE>
<CAPTION>
Page 2 of 2
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Period from
Inception to
Year Ended December 31, December 31,
1997 1996 1995 1997 (Note 1)
----------- ----------- ---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C> <C>
Proceeds from issuance of common stock $2,389,382 $ 92,700 $7,279,060 $ 9,762,442
Proceeds from issuance of common stock warrants
699,152 - - 699,152
Proceeds from stock subscriptions - 50,300 280,000 330,300
Proceeds from issuance of preferred stock - - 604,001 1,164,001
Proceeds from issuance of redeemable preference
stock - - - 240,000
Payments on redeemable preference stock and
dividends - - (268,169) (268,169)
Net (repayments) borrowings on stockholder loans
- - (167,833) 385,000
Bank overdraft - - (10,675) -
---------- ----------- ---------- ---------
Net cash provided by financing
activities 3,088,534 143,000 7,716,384 12,312,726
---------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH 1,188,862 (3,998,890) 4,251,584 1,441,556
CASH AT BEGINNING OF THE PERIOD 252,694 4,251,584 - -
---------- ----------- ---------- ---------
CASH AT END OF THE PERIOD $1,441,556 $ 252,694 $4,251,584 $ 1,441,556
========== =========== ========== ===========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
During the year ended December 31, 1995 and for the period from inception to
December 31, 1997, the Company made cash payments for interest of $15,858
and $23,658, respectively.
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
During the year ended December 31, 1995 and for the period from inception to
December 31, 1997, the Company recorded in-kind dividends on the redeemable
preferred stock of $11,389 and $28,169, respectively.
During the year ended December 31, 1995 and for the period from inception to
December 31, 1997, the Company issued common stock for subscriptions
receivable of $349,500 and $548,000, respectively.
During the year ended December 31, 1995 and for the period from inception to
December 31, 1997, the Company converted certain stockholder loans and
amounts due to stockholders to common stock totaling $485,000 and $485,000,
respectively.
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-10
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS AND BUSINESS COMBINATION
Nature of Operations
Specialized Health Products International, Inc. ("SHPI") and its wholly owned
subsidiary, Specialized Health Products, Inc. ("SHP") (collectively, the
"Company") is a development stage company which is primarily engaged in
developing cost-effective, disposable, proprietary healthcare products designed
to limit or prevent the risk of accidental needle sticks which may cause the
spread of blood-borne diseases such as HIV/AIDS and hepatitis B, and secondarily
develops other products for use in the healthcare industry. The Company's
activities since inception have focused on research and development of products,
obtaining financing, recruiting personnel and identifying and contracting with
manufacturers and distributors. The Company has a portfolio of proprietary,
safety healthcare products that are in various stages of production,
pre-production, development and research. The Company principally intends to use
third parties to manufacture, market and distribute its products worldwide.
Development Stage Presentation
The Company is in the development stage and from its inception has incurred
losses from operations. During the years ended December 31, 1997, 1996 and 1995,
the Company experienced losses from operations of $4,305,130, $4,233,677 and
$3,039,059, respectively, and negative cash flows from operating activities of
$1,389,016, $3,558,778 and $2,605,616, respectively. As of December 31, 1997,
the Company had an accumulated deficit of $12,225,447. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's continued existence is dependent upon several factors including
the Company's success in raising sufficient funding, bringing its products to
commercialization, reducing costs and entering into favorable contracts with
third-party manufacturers and distributors.
As discussed in Note 12, on January 20, 1998, the Company closed a private
placement offering wherein the Company raised net proceeds of approximately
$4,948,500, of which approximately $3,583,300 was received subsequent to
December 31, 1997. The Company believes that the funds generated from the
private placement offering, funds from potential product sales, and funds to be
generated from development fees and prepaid royalty arrangements (see Note 4),
will be sufficient to support the Company's operations through December 31,
1998.
The Company's operating plan includes the possibility of raising additional
funds through issuing common stock upon the potential exercise of outstanding
warrants and/or through public or private offerings of securities in order for
commercialization of its products under development to not be further delayed.
Management has negotiated agreements with third parties to assist in the
development, financing, manufacturing and distribution of its products under
development or near commercialization. In addition, management believes it has
the ability to further reduce certain operating costs. Nonetheless, the
Company's inability to obtain additional funding, as required, could severely
impair its business operations and there can be no assurance that the Company's
operating plan will be successful.
The Company is subject to certain other risk factors due to its development
stage status, the industry in which it competes and the nature of its
operations. Many of these factors may be unforeseen and beyond the Company's
control. These risk factors include:
a) The Company has experienced limited sales of its Safety Cradle(R) sharps
container and ExtreSafe(R) Lancet Strip products, the Company's only
commercialized products. There is no assurance that other products will be
commercially viable and no assurance can be given that the Company will
have sufficient sales or a sufficient customer base to become profitable.
F-11
<PAGE>
The business prospects of the Company will be affected by expenses,
operational issues and uncertainties frequently encountered in the
development of a business enterprise in a competitive environment.
b) The Company's need for capital during the next year or more will vary based
upon a number of factors, including the rate at which demand for products
expands, the level of sales and marketing activities for the Safety
Cradle(R) sharps container and ExtreSafe(R) Lancet Strip products and the
level of effort needed to develop and commercialize other products
utilizing the Company's ExtreSafe(R) medical needle withdrawal technology.
If additional funds are not successfully raised, the lack of liquidity will
likely have a material adverse effect on the Company.
c) The Company's Safety Cradle(R) sharps container and ExtreSafe(R) Lancet
Strip products are each produced by a single manufacturer. If one of the
Company's manufacturers fails to perform its obligations in a timely and
satisfactory manner or if there is a change in the Company's manufacturers,
it could have a material adverse effect on the Company. There can be no
assurance that the Company would be successful in replacing its current
manufacturers on terms favorable to the Company. Likewise, there can be no
assurance that the Company will be successful in finding additional
manufacturers to manufacture its products on favorable terms should product
demand increase. The Company, however, owns the molds and automated
equipment which can be moved to different manufacturers.
d) The Company is dependent on one distributor for the distribution of its
Safety Cradle(R) sharps container products and one for its ExtreSafe(R)
Lancet Strip, and anticipates that it will be dependent on third parties
for the distribution of follow-on products.
e) The Company uses polypropylene and other resins in the manufacture of its
products. Prices are subject to fluctuations caused in part by changes in
supply and demand. Significant increases in the prices of these resins
could have a material adverse effect on the Company's ability to produce
cost effective products.
f) The Company operates in a very competitive market and there is no assurance
that development of superior competing products and changes in technology
will not eliminate the need for the Company's products. The introduction of
competing products could adversely affect the Company's attempts to develop
and market its products successfully.
g) The Company's safety medical products may not be accepted by the market.
Market acceptance of the Company's products will depend in large part upon
the Company's ability to demonstrate the operational advantages, safety,
efficacy, and cost-effectiveness of its products compared to competing
products and its ability to distribute through major medical distributors.
h) The Company's future success depends in part on its ability to protect its
intellectual property and maintain the proprietary nature of its technology
through a combination of patents and other intellectual property
arrangements. Currently, the Company owns six Safety Cradle(R) related
patents, two patents associated with its ExtreSafe(R) Lancet Strip and six
patents which protect its ExtreSafe(R) needle withdrawal technology. There
can be no assurance that the protection provided by patents will be broad
enough to prevent competitors from introducing similar products or that
such patents, if challenged, will be upheld by the courts of any
jurisdiction.
i) The sale of medical devices entails an inherent risk of liability in the
event of product failure or claim of harm caused by product operation.
There can be no assurance that the Company will not be subject to such
claims, that any claims will be successfully defended or if the Company is
found liable, that the claim will not exceed the limits of the Company's
insurance. The Company currently maintains product liability insurance;
however, there is no assurance that the Company will be able to maintain
adequate product liability insurance with acceptable terms in the future.
F-12
<PAGE>
j) Regulation is a significant factor in the development and marketing of the
Company's products and in the Company's ongoing manufacturing and research
and development activities. The Company and its products are regulated, in
part, by the Federal Food, Drug, and Cosmetic Act which is administered by
the United States Food and Drug Administration. The process of obtaining
required regulatory clearances or approvals for products can be
time-consuming and expensive.
k) The Company is highly dependent upon the efforts and abilities of certain
of its senior management personnel. The loss of any of these individuals
could have a material adverse effect on the Company, its operations and its
prospects.
Business Combination
SHP 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. SHP entered into a business combination in July 1995 with
Russco, Inc. ("Russco") wherein it became a wholly owned subsidiary of Russco
and Russco's name was changed to Specialized Health Products International, Inc.
Russco was organized in February 1986 as a public 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 business.
At the closing of the business combination, 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 Russco issued 3,602,403
shares of its common stock for all of the issued and outstanding shares of SHP's
common stock and preferred stock. The business combination was treated as a
reverse merger for accounting purposes. SHP was determined to be the acquiring
company even though Russco issued its common shares to acquire SHP because the
stockholders of SHP received the significant majority of the outstanding common
stock of the Company. In addition, management of SHP became the management of
the Company. Because Russco had limited operations, the business combination was
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 SHP.
Contemporaneously with the business combination, SHP engaged in a private
placement of securities wherein 4,376,250 shares of the Company's common stock
were issued for consideration of approximately $7,519,100, net of offering
costs, as more fully discussed in Note 7.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of SHPI
and its wholly owned subsidiary, SHP. All material intercompany balances and
transactions have been eliminated in consolidation.
Pervasiveness 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash
Cash is comprised of checking and money market accounts at a bank. As of
December 31, 1997 and 1996, the Company had demand deposits at a bank in excess
of the $100,000 limit for insurance by the Federal Deposit Insurance
Corporation.
F-13
<PAGE>
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined
using the first-in, first-out method.
Inventory consisted of the following at December 31, 1997 and 1996:
1997 1996
------- -------
Raw materials $19,973 $ -
Work in process 4,555 15,710
Finished goods 47,824 -
------- -------
$72,352 $15,710
======= =======
Property and Equipment
Property and equipment are stated at cost and consist primarily of manufacturing
molds and equipment, office furniture and fixtures and construction-in-progress.
Manufacturing molds and equipment are depreciated using the straight-line method
over seven years or the units-of-production method, whichever is greater. All
other property and equipment are depreciated using the straight-line method
based on the estimated useful lives of the related assets which is five years.
Maintenance and repairs are charged to expense as incurred and costs of
improvements and betterments are capitalized. Upon disposal or sale, the related
asset costs and accumulated depreciation are removed from the accounts and
resulting gains or losses are reflected in current operations.
Costs incurred in connection with the fabrication and construction of
manufacturing molds and equipment are capitalized as construction-in-progress.
No depreciation is recognized on these assets until they are placed in service.
Other Assets
Other assets consist primarily of purchased technology rights and patents, and
related patent costs such as outside legal fees. These costs are being amortized
on a straight-line basis over seven years. Accumulated amortization totaled
approximately $221,000 and $155,400 at December 31, 1997 and 1996, respectively.
Management evaluates the recoverability of these costs on a periodic basis,
based on sales of the product related to the technology, existing or expected
sales contracts, revenue trends and projected cash flows.
Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No.
121"). SFAS No. 121 requires that long-lived assets be reviewed for impairment
when events or changes in circumstances indicate that the book value of an asset
may not be recoverable. The Company evaluates, at each balance sheet date,
whether events and circumstances have occurred that indicate possible
impairment. In accordance with SFAS No. 121, the Company uses an estimate of
future undiscounted net cash flows of the related asset over the remaining life
in measuring whether the assets are recoverable. As of December 31, 1997, the
Company does not consider any of its long-lived assets to be impaired.
Revenue Recognition
Sales are recognized when product is shipped to the customer, development fees
are recognized in the period related services are performed and deferred royalty
revenues are recognized as revenues as sales of the related products are made.
Research and Development Costs
Research and development costs are expensed as incurred.
F-14
<PAGE>
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the consolidated financial statements that will result in
taxable or deductible amounts in future years when the reported amounts of the
assets and liabilities are recovered or settled.
Fair Value of Financial Instruments
The book value of the Company's financial instruments approximates fair value.
The estimated fair values have been determined using appropriate market
information and valuation methodologies.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130") and No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") effective for financial statements issued for
periods beginning after December 15, 1997. SFAS No. 130 requires an
"all-inclusive" approach which specifies that all revenues, expenses, gains and
losses recognized during the period be reported in income regardless of whether
they are considered to be results of operations of the period. SFAS No. 131
establishes new standards for public companies to report information about their
operating segments, products and services, geographic areas and major customers.
The Company will present its financial statements in accordance with these
pronouncements in 1998.
Basic and Diluted Net Loss Per Common Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," as a result of the Company incurring net losses for all
periods presented, both basic and diluted net loss per common share are 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 of diluted net loss per common share because their inclusion would
be antidilutive, thereby reducing the net loss per common share.
Reclassifications
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the current year presentation.
(3) INVESTMENT
In October 1995, the Company entered into a Joint Venture Agreement (the
"Agreement") with Zerbec, Inc. ("Zerbec"), a Texas corporation. Under the terms
of the Agreement, the Company and Zerbec formed Quantum Imaging Corporation (the
"Venture" or "QIC"), a Utah corporation, to develop, manufacture, distribute and
market products and technologies using a patented solid state filmless digitized
imaging system. For a 50 percent interest in the Venture (before dilution by
potential financing investors), the Company was obligated to pay the Venture
$15,000 a month, which in turn was paid to Zerbec to perform research and
development on the Venture's behalf through March 31, 1997. The Company was also
obligated to pay the general and administrative expenses of the Venture up to
$15,000 per month through March 31, 1997. Subsequent to March 31, 1997, the
Company continued to pay certain research and development and general and
administrative expenses of the Venture. The Company contributed total capital to
the Venture of approximately $237,300 and $435,200 during 1997 and 1996,
respectively, all of which the Company expensed and the Venture used to fund
research and development and to cover administrative expenses. The Company
accounts for the Venture using the equity method. Assets and liabilities of the
Venture were insignificant as of December 31, 1997 and 1996.
At present, the Company and Zerbec are equal owners of QIC, but Zerbec has an
option to acquire two-thirds of the Company's current fifty percent interest in
QIC for one dollar (the "Zerbec Option") because certain funding objectives were
F-15
<PAGE>
not met. The parties are in the process of negotiating an arrangement so that
the Zerbec Option will be eliminated or its exercise will be subject to
substantial restriction. No assurance can be given, however, that an agreement
will be reached that eliminates or materially restricts the exercise of the
Zerbec Option or that if such agreement is reached that it will be on terms that
are favorable to the Company. The Company estimates that between $3,000,000 and
$6,000,000 in new funding will be required by QIC for it to achieve its
objectives.
(4) SIGNIFICANT DISTRIBUTION AND LICENSE AGREEMENTS
Becton, Dickinson and Company Distribution and License Agreements
In August 1996, the Company entered into an exclusive distribution agreement
with Becton Dickinson and Company Sharps Disposal Systems ("BDSDS") relating to
the Company's Safety Cradle(R) sharps container products. The agreement granted
BDSDS an exclusive worldwide right to market and distribute the Company's sharps
containers products for an initial term of three years. The first sales pursuant
to the agreement occurred in the first quarter of 1997; however, as a result of
BDSDS's failure to meet minimum purchase requirements set forth in the
agreement, the Company notified BDSDS of its intent to terminate the agreement
during 1997. In November 1997, the agreement was amended whereby the term was
extended to May 1998, upon which date the agreement will again be terminated
unless otherwise agreed in writing. Sales of the Safety Cradle(R) sharps
containers through December 31, 1997 have been minimal.
In May 1997, the Company entered into an exclusive license agreement with Becton
Dickinson and Company Infusion Therapy Division ("BDIT") relating to a single
application of the Company's ExtreSafe(R) safety needle withdrawal technology
(the "Technology"). Pursuant to the terms of the agreement, BDIT paid $1,750,000
to the Company in June 1997, $250,000 in September 1997 and is required to make
an additional payment of $2,000,000 upon the earlier of the date of the first
sales by BDIT of a product utilizing the Technology or April 5, 1998. Of these
total payments, $3,750,000 represents prepaid royalties and $250,000 represents
a one-time product development fee. BDIT is also required to pay ongoing
royalties to the Company based on sales of products utilizing the Technology. In
addition, beginning in BDIT's fiscal year 2002, BDIT is required to pay minimum
royalties in order to maintain exclusive rights under the agreement.
Alliance Medical Distribution Agreement
The Company entered into a distribution agreement with New Alliance of
Independent Medical Distributors, Inc., dba Alliance Medical, effective
September 9, 1997. The agreement provided for the Company to manufacture and
Alliance Medical to market and sell the ExtreSafe(R) Lancet Strip on an
exclusive basis in hospitals, alternate sites and consumer markets in the United
States. The initial term of the agreement is for a period of three years with
annual renewal terms thereafter. Effective March 1, 1998, the agreement was
converted to a non-exclusive agreement with no sales minimums so that the
Company can pursue additional sources of distribution. There is no assurance
that the Company will realize significant sales under the agreement or that the
Company will enter into any other arrangements with respect to the marketing and
distribution of ExtreSafe(R) Lancet Strips. Manual production and sales of the
ExtreSafe(R) Lancet Strip began in the first quarter of 1997 and automated
production is projected to commence in 1998. Sales of the ExtreSafe(R) Lancet
Strips through December 31, 1997 have been minimal.
Johnson & Johnson Medical, Inc. Development and License Agreement
On December 22, 1997, the Company entered into an agreement (the "Development
and License Agreement") with Johnson & Johnson Medical, Inc. ("J&J") to
commercialize two applications of the Company's ExtreSafe(R) Safety needle
technology in one restricted field-of-application of the technology. The
Development and License Agreement provides for monthly development payments by
J&J, sharing of field related patent costs, payments for initial periods of low
volume manufacturing, an ongoing royalty stream and a J&J investment in molds,
assembly equipment and other capital costs related to commercialization of each
product.
F-16
<PAGE>
The Development and License Agreement also provides for an ongoing joint
cooperative program between J&J and the Company which derives future funding
directly from sales of Company created products, low volume manufacturing
revenue for the Company and an ongoing royalty stream for additional safety
products which are jointly approved for development.
(5) COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases office space, equipment, and vehicles under noncancelable
operating leases. The following summarizes future minimum lease payments under
operating leases at December 31, 1997:
Year Ending December 31,
1998 $64,400
1999 16,000
-------
$80,400
=======
Rental expense for the years ended December 31, 1997, 1996 and 1995 totaled
approximately $80,300, $72,000 and $67,100, respectively.
Royalty Agreements
In connection with acquiring technology rights and patents, the Company entered
into various royalty agreements. Generally, the agreements call for royalties to
be paid based on various percentages of revenues generated from the related
technologies or patents.
In order to maintain certain licenses, the Company is obligated to pay future
minimum royalties, which royalties may be used to satisfy percentage royalty
requirements. The following summarizes future minimum royalties at December 31,
1997:
Year Ending December 31,
1998 $ 45,000
1999 25,000
2000 25,000
2001 25,000
2002 25,000
--------
$145,000
========
As the Company has not generated any revenue from licensed technology rights and
patents at December 31, 1997, no royalties have been accrued or paid.
Subsequent to December 31, 1997, the Company issued 750,000 common stock
warrants with an exercise price of $2.00 to a director and officer of the
Company and his assigns in consideration of the Company's release from its
obligations under certain royalty agreements (see Notes 11 and 12). Therefore,
those royalty obligations are not included in the future minimum royalties
above.
Employment Agreements
The Company has entered into employment agreements with three of its key
executives. The agreements are each for a term of three years and provide for an
annual aggregate base salary of $550,000 to be reviewed annually by the Board of
Directors and adjusted as deemed appropriate. Upon termination of employment
without cause, salary and certain benefits will continue to be paid through the
expiration of the applicable agreement. The agreements have customary provisions
for other benefits and include noncompetition clauses.
F-17
<PAGE>
Litigation
In April 1997, the Company entered into an agreement with Leerink Swann &
Company ("Leerink"), whereby Leerink agreed to assist the Company in raising
funds in a private placement of equity securities. Sufficient funding was
deposited into escrow to hold an initial closing, but the closing did not occur.
Leerink alleges that the Company refused to close on the placement. The Company
alleges that the closing did not occur because Leerink, as a condition precedent
to closing, made certain pre-closing demands that went far beyond the terms of
the agreement and which demands Company management believes were not in the best
interest of the Company or its stockholders. In August 1997, Leerink filed suit
in the United States District Court for the District of Massachusetts alleging
breach of contract. Leerink is seeking money damages, warrants to purchase
shares of the Company's common stock, attorneys' fees and costs. Thereafter, the
Company filed a counterclaim also alleging breach of contract. The Company is
seeking money damages, attorneys' fees and costs. The Company believes that
Leerink's claims are without merit and that the Company will ultimately prevail.
The litigation is in the early stages, is subject to all of the risks and
uncertainties of litigation and thus there is no assurance that the Company will
be successful in this lawsuit or that the lawsuit will be resolved on acceptable
terms, and the Company may incur significant costs in asserting its claims and
defenses. As of December 31, 1997, management, after consultation with legal
counsel, believes that the potential liability to the Company under such action
will not materially affect the Company's consolidated financial position or
results of operations.
(6) STOCK OPTIONS
During 1994, the Board of Directors of SHP approved a nonqualified stock option
plan (the "SHP Option Plan") for its officers, directors and employees, and
authorized 396,000 shares of common stock for issuance. During 1994, options to
acquire 396,000 common shares were granted at prices ranging from $.39 to $1.11
per share. The exercise prices of the options were equivalent to the estimated
fair market value of the underlying stock as determined by SHP's Board of
Directors at the dates of grant. No options were exercised or lapsed during
1994. On the date of the business combination, as discussed in Note 1, all of
the options issued under the SHP Option Plan became outstanding obligations of
the Company. On September 1, 1995, options to acquire 288,000 shares were
exercised, primarily by directors and officers of the Company, from which the
Company received $209,500 in non-interest bearing common stock subscriptions
receivable. All common stock subscriptions receivable are due upon demand.
During 1996, options to acquire 45,000 shares were exercised at $.39 per share
and 22,500 options were canceled. The remaining 40,500 options became
exercisable during 1997, of which 22,500 were exercised at $.39 per share. As of
December 31, 1997, 18,000 options are exercisable at $.39 per share.
Effective September 1, 1995, the Company's Board of Directors approved the
adoption of the Specialized Health Products International, Inc. Stock Option
Plan (the "Option Plan"). The Option Plan is a nonqualified stock option plan
and is administered by the Board of Directors. The Option Plan provides for the
issuance of 1,500,000 shares of common stock to officers, directors, other key
employees and consultants which number may be adjusted from time to time by the
Board of Directors. The options will be granted at not less than 100 percent of
the fair market value of the underlying common stock on the date of grant. The
options are exercisable for the period as defined by the Board of Directors at
the date granted; however, no stock option will be exercisable more than five
years from the date of grant.
As permitted by Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), the Company applies APB Opinion No. 25 ("APB No. 25") and related
interpretations in accounting for certain aspects of its stock-based
compensation plans. Accordingly, no compensation cost has been recognized for
stock options granted to officers, directors and other key employees as options
were granted at the intrinsic fair market value.
The Company recognized $147,000, $93,800 and $0 of consulting expense during
1997, 1996 and 1995, respectively, related to certain options and warrants
granted to nonemployee consultants in accordance with SFAS No. 123.
F-18
<PAGE>
Had compensation cost been determined based on the fair value at the grant date
for awards under its plans consistent with the method prescribed by SFAS No.
123, the Company's net loss and basic and diluted net loss per common share
would have been increased to the pro forma amounts presented below:
1997 1996 1995
---------- ---------- -------
Net loss: As reported $(4,274,003) $(4,093,388) $(2,930,878)
Pro forma (4,445,885) (4,130,140) (3,841,677)
Basic and diluted net loss
per common share: As reported (.47) (.48) (.69)
Pro forma (.48) (.48) (.90)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
A summary of the status of the Company's plans as of December 31, 1997, 1996 and
1995, and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Shares Prices Shares Prices Shares Prices
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year
1,531,500 $2.10 1,279,810 $1.95 396,000 $ .67
Granted 60,000 2.16 319,190 2.63 1,171,810 2.00
Exercised (110,000) .88 (45,000) .39 (288,000) .73
Forfeited - (22,500) .39 -
---------- ---------- --------
Outstanding at
end of year 1,481,500 2.11 1,531,500 2.10 1,279,810 1.95
========== ========== ==========
Exercisable at
end of year 1,217,405 2.06 1,187,000 2.04 1,117,000 2.00
========== ========== ==========
Weighted average
fair value of
options granted $ 1.00 $ 1.24 $ .82
========== ========== ==========
<CAPTION>
The following table summarizes information about the stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
Number Wtd. Avg. Number
Range of Outstanding Remaining Wtd. Avg. Exercisable Wtd. Avg.
Exercise at December Contractual Exercise at December Exercise
Prices 31, 1997 Life Price 31, 1997 Price
------------- ----------- ----------- --------- ----------- -------
<S> <C> <C> <C> <C> <C>
$ .39 18,000 1.57 years $ - 18,000 $ .01
2.00 1,084,310 2.67 1.46 1,056,905 1.74
2.06 50,000 4.79 .07 - -
2.63 329,190 3.78 .58 142,500 .31
--------- ----- --------- -----
$.39 to 2.63 1,481,500 2.97 years $2.11 1,217,405 $2.06
========= ===== ========= =====
</TABLE>
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995: risk-free interest rate of
6.0 percent, 5.95 percent and 5.95 percent, respectively; expected lives of 3
years, 2.3 years and 2.3 years, respectively; expected dividend yields of zero
percent in all years; expected volatility of 68 percent in all years.
F-19
<PAGE>
(7) COMMON AND PREFERRED STOCK
In connection with the business combination discussed in Note 1, SHP 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. Each common and preferred share of SHP was converted into one
common share of the Company. In addition, the Company issued 90,000 shares of
common stock to non-affiliated stockholders existing at the time of the private
placement under antidilutive provisions.
The Company completed a private placement of securities in July 1995, wherein
860.25 units were sold at $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 common stock subscriptions
receivable of $140,000. Each unit consisted of 5,000 shares of the Company's
common stock and Series A warrants to purchase an aggregate of 3,000 shares of
common stock at $3.50 per share. The private placement was completed
contemporaneously with the business combination. Through this private placement,
the Company sold an aggregate of 4,301,250 shares of the Company's $.02 par
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 covering the issuance of the
shares of common stock underlying such warrants which two year period shall be
extended day-for-day for any time that a registration statement is not
available, 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.
During 1995, the Company issued warrants to a nonaffiliated stockholder of the
Company to purchase 45,000 shares of common stock at $1.67 per share. The
warrants were exercised in full during 1996. There were no other Series A or
Series B warrants exercised during 1997 or 1996.
On March 31, 1997, the Company closed a private placement offering wherein the
Company raised $1,539,570, net of expenses, through offering Units to certain
accredited investors at $45 per Unit. Each Unit consisted of 15 shares of the
Company's common stock and Series C warrants to purchase five shares of the
Company's common stock at a price of $3.00 per share. The Company allocated
$1,228,576 of the total net proceeds to the common stock issued and $310,994 to
the Series C warrants issued.
On January 20, 1998, the Company completed a private placement offering in which
it sold 2,610,000 units at $2.00 per unit for total consideration of
approximately $4,948,500, net of expenses. Each unit consists of one share of
the Company's $.02 par value common stock and one Series D warrant to purchase
one share of common stock at a price of $2.00. As of December 31, 1997, net
proceeds of approximately $1,365,200 had been received, of which approximately
$977,000 was allocated to the 750,000 shares of common stock issued and
approximately $388,200 was allocated to the Series D warrants issued (see Note
12).
The Series C and Series D warrants are exercisable for a period of two years
from the effective date of a registration statement covering the resale of the
shares of common stock underlying the Series C and Series D warrants by the
holder, which period shall be extended day-for-day for any time that a
prospectus meeting the requirements of the Securities Act of 1933 is not
F-20
<PAGE>
available. The Company may accelerate the expiration of the Series C and Series
D warrants in the event that the average market price of the Company's common
stock exceeds $6.00 per share for ten consecutive trading days. In the event the
Company accelerates the expiration of the Series C and Series D warrants, the
holders of the Series C and Series D warrants would be permitted to exercise the
Series C and Series D warrants during a period of not less than 20 days
following notice of such event.
During 1997, the Company issued 100,000 shares of its common stock to a
nonaffiliated stockholder of the Company for consulting and other services
provided. The Company recorded consulting expense of $212,500, which was equal
to the fair market value of the stock on the date of issue.
In 1995, the Company entered into an agreement with a former Director; the
President and a Vice President of the Company, whereby these individuals have
the opportunity to receive up to an aggregate of 2,000,000 additional shares of
common stock. These individuals have the right to divide the earn-out shares
among themselves or their assigns, if earned, based on performance,
contributions to the Company and/or other factors relating to the business
success of the Company. 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, 1997, the
Company's common stock closed at $1.63.
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 1998 equals or exceeds $1,500,000, then an aggregate of
350,000 earn-out shares 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 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 (if any) from 1,100,000,
provided that only one issuance of the earn-out shares will be made based on the
$5,000,000 level of Adjusted PTNI.
If Adjusted PTNI for 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 (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. In addition, upon purchase, take over or change the in control
of the Company in a hostile or friendly transaction in 1998, all of the earn-out
shares shall become vested.
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 an expense to the
Company in the year or years the shares are earned, in an amount equal to the
fair market value of the shares. This expense could have a substantial negative
impact on the earnings of the Company in the year or years in which the
compensation expense is recognized.
F-21
<PAGE>
(8) REDEEMABLE PREFERENCE STOCK
Prior to the business combination, SHP 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 December 31, 1994. Each redeemable
preference share was entitled to a cumulative annual dividend of nine percent 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 was redeemed and
related dividends were paid in cash at the time of the business combination.
(9) INCOME TAXES
The Company recognized no income tax expense in 1997, 1996 and 1995, due to net
operating losses. The Company did not record the expected tax benefit related to
the net operating losses and other deferred tax assets as these assets are being
offset by a valuation allowance. Significant components of the Company's
deferred income tax assets and deferred income tax liabilities as of December
31, 1997 and 1996, are comprised of the following:
1997 1996
----------- --------
Deferred income tax assets:
Net operating loss carryforwards $ 4,299,506 $2,803,220
Accrued vacation 48,870 33,649
Patent costs 44,120 30,983
Other 35,064 8,257
----------- ----------
Total gross deferred income tax assets 4,427,560 2,876,109
Less valuation allowance (4,249,264) (2,794,882)
----------- ----------
Net deferred income tax assets 178,296 81,227
Deferred income tax liability -
Property and equipment (178,296) (81,227)
----------- ----------
Net deferred income tax liability $ - $ -
=========== ==========
The net change in the total valuation allowance for the years ended December 31,
1997 and 1996, was an increase of $1,454,382 and $1,345,758, respectively.
At December 31, 1997, the Company had total tax net operating losses of
$11,526,826 that can be carried forward to reduce federal income taxes. If not
utilized, the tax net operating loss carryforwards begin to expire in 2009. As
defined in Section 382 of the Internal Revenue Code, the Company has undergone a
greater than 50 percent ownership change. Consequently, a certain amount of the
Company's tax net operating loss carryforwards 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.
(10) EMPLOYEE BENEFIT PLAN
Effective January 1, 1996, the Company adopted the Specialized Health Products
401(k) Plan (the "Plan"). Employees who are 21 years of age are eligible for
participation in the Plan and may elect to make contributions to the Plan. The
Company matches 100 percent of such contributions up to five percent of the
individual participant's compensation. The Company's combined contribution to
the Plan was approximately $52,100 and $37,100 for the years ended December 31,
1997 and 1996, respectively.
(11) RELATED-PARTY TRANSACTIONS
During 1997 and 1996, the Company advanced approximately $7,600 and $121,800,
respectively, to a former director and stockholder of the Company. The advances
are due on demand and are non-interest bearing. In addition, the Company paid to
an entity, owned in part by this same former director and stockholder,
F-22
<PAGE>
approximately $100,300 and $203,100 (including reimbursement of costs) during
1997 and 1996, respectively, for consulting and professional services rendered
on behalf of the Company. As of December 31, 1997 and 1996, the net amount owed
by the Company under these arrangements was approximately $81,100 and $73,200,
respectively.
The Company had entered into certain license agreements with a director and
officer of the Company as a result of the acquisition of certain technology
rights and patents. Under the terms of the agreements, the Company was obligated
to pay minimum royalty payments totaling $435,000 over the next six years.
Subsequent to December 31, 1997, the Company issued 750,000 common stock
warrants with an exercise price of $2.00 as consideration for a release from its
obligations under these royalty agreements (see Notes 5 and 12).
During 1997, the Company made a loan of approximately $182,500 to one of its
directors and officers. The loan bore interest at 8 percent and was repaid in
full prior to year end.
In December 1997, the Company borrowed $45,000 from one of its directors and
officers to assist in the cash flow needs of the Company. The loan bore interest
at 10 percent and was repaid in full in January 1998.
In January 1998, 1,000,000 shares of the Company's $.02 par value common stock
and 1,000,000 Series D common stock warrants were issued to Johnson & Johnson
Development Corporation ("Johnson & Johnson") in conjunction with the private
placement offering closed on January 20, 1998. Such stock ownership represents
an 8.3 percent ownership of the Company by Johnson & Johnson.
(12) SUBSEQUENT EVENTS
On January 15, 1998, the Company issued 750,000 common stock warrants to a
director and officer of the Company and his assigns in consideration of the
Company's release from its obligations under certain royalty agreements (see
Notes 5 and 11). Each warrant is redeemable for one share of the Company's $.02
par value common stock at a price of $2.00 per share. The warrants are currently
exercisable and expire on December 31, 2002.
On January 20, 1998, the Company completed a private placement offering in which
it sold 2,610,000 units at $2.00 per unit for total consideration of
approximately $4,948,500, net of expenses. In connection with the J&J Agreement
discussed in Note 4, Johnson & Johnson Development Corporation purchased
$2,000,000 of Company securities as part of this private placement. Each unit
consists of one share of the Company's $.02 par value common stock and one
Series D warrant to purchase one share of common stock at a price of $2.00. Of
the total net proceeds, approximately $1,365,200 was received prior to December
31, 1997 and approximately $3,583,300 was received subsequent to December 31,
1997. The Company allocated approximately $1,350,800 of the total proceeds to
the Series D warrants based on their relative fair values. Of the total units,
750,000 were sold prior to December 31, 1997 and 1,860,000 were sold subsequent
to December 31, 1997. The Series D warrants are exercisable for a period of two
years from the effective date of a registration statement covering the resale of
the shares of common stock underlying the Series D warrants by the holder, which
period shall be extended day-for-day for any time that a prospectus meeting the
requirements of the Securities Act of 1933 is not available. The Company may
accelerate the expiration of the Series D warrants in the event that the average
market price of the Company's common stock exceeds $6.00 per share for ten
consecutive trading days. In the event the Company accelerates the expiration of
the Series D warrants, the holders of the Series D warrants would be permitted
to exercise the warrants during a period of not less than 20 days following
notice of such event.
Pursuant to requirements of the private placement offering that closed on
January 20, 1998, the Company provided accredited investors in the Company's
March 1997 private placement with the opportunity to exchange the securities
purchased in the March placement for a number of units the investor could have
purchased in the January placement had the investment been made under the
January private placement terms rather than the March terms. In February 1998,
all of the March accredited investors elected to convert to the January private
placement terms in reliance on the registration exemption found in Sections 3(9)
F-23
<PAGE>
and 4(2) of the Securities Act and Rule 506 of Regulation D. As a result of the
conversion, all outstanding Series C warrants were canceled and the Company
issued 256,598 additional shares of common stock and 769,787 additional Series D
warrants.
On January 26, 1998, the Company issued 175,000 Series D common stock warrants
to a nonaffiliated individual in exchange for consulting services rendered
during 1997. The fair market value of each warrant was valued at $.84 and
accordingly, the Company recorded consulting expense of $147,000 in the
accompanying statement of operations for the year ended December 31, 1997.
In March 1998, the Company issued 25,000 shares of common stock and 25,000
Series D warrants to an unaffiliated financial advisor in connection with the
January private placement offering. Such shares and options were offset against
the gross private placement proceeds as offering costs.
F-24
SECOND AMENDED AND RESTATED
BYLAWS
OF
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
ARTICLE I - OFFICES
Section 1. Registered Office. The registered office of the Corporation
in the State of Delaware shall be at 1013 Centre Road, Wilmington, Delaware
19805-1297.
The registered agent in charge thereof shall be CSC Networks.
Section 2. Other Offices. The Corporation may also have offices at such
other places as the Board of Directors may from time to time appoint or the
business of the Corporation may require.
ARTICLE II - SEAL
Section 1. Seal. The corporate seal shall have inscribed thereon the
name of the Corporation, the year of its organization and the words "Corporate
Seal, Delaware".
ARTICLE III - STOCKHOLDERS' MEETINGS
Section 1. Place of Meetings. Meetings of stockholders shall be held at
the registered office of the Corporation in this state or at such place, either
within or without this state, as may be selected from time to time by the Board
of Directors.
Section 2. Annual Meetings. The annual meeting of the stockholders
shall be held on such date as is determined by the Board of Directors for the
purpose of electing directors and for the transaction of such other business as
may properly be brought before the meeting.
Section 3. Election Of Directors. Elections of the directors of the
Corporation shall be by written ballot.
<PAGE>
Section 4. Special Meetings. Special meetings of the stockholders may
be called at any time by the Board of Directors, the Chairman of the Board, the
Chief Executive Officer or the President of the Corporation, but such special
meetings may not be called by any other person or persons. At any time, upon
written request of any person or persons who have duly called a special meeting,
it shall be the duty of the Secretary to fix the date of the meeting, to be held
not more than sixty days after receipt of the request, and to give due notice
thereof. If the Secretary shall neglect or refuse to fix the date of the meeting
and give notice thereof, the person or persons calling the meeting may do so.
Business transacted at all special meetings shall be confined to the
objects stated in the call and matters germane thereto, unless all stockholders
entitled to vote are present and consent.
Written notice of a special meeting of stockholders stating the time
and place and object thereof, shall be given to each stockholder entitled to
vote thereat at least ten days before such meeting, unless a greater period of
notice is required by statute in a particular case.
Section 5. Quorum. A majority of the outstanding shares of the
corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of the
outstanding shares entitled to vote is represented at a meeting, a vote of
one-third of the shares so represented may adjourn the meeting from time to time
without further notice. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. The stockholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
Section 6. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the Corporation generally. All
proxies shall be filed with the Secretary of the meeting before being voted
upon.
Section 7. Notice Of Meetings. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called.
2
<PAGE>
Unless otherwise provided by law, written notice of any meeting shall
be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting.
Section 8. Consent in Lieu of Meetings. Any action required to be taken
at any annual or special meeting of stockholders of a Corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Section 9. List of Stockholders. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. No share of stock upon which any installment is due and unpaid
shall be voted at any meeting. The list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
ARTICLE IV - DIRECTORS
Section 1. Powers; Number and Term of Office. The business and affairs
of this Corporation shall be managed by its Board of Directors. The number of
directors of the Corporation shall be fixed from time to time by resolution of
the Corporation's Board of Directors, but in no event shall be less than three.
Until otherwise determined by resolution of the Corporation's Board of
Directors, the number of directors shall be five. The directors shall be divided
into classes in the manner provided in the Certificate of Incorporation. The
directors need not be residents of this state or stockholders in the
Corporation. They shall be elected by the stockholders of the Corporation or in
the case of a vacancy by remaining directors, and each director shall be elected
until his successor shall be elected and shall qualify or until his earlier
resignation or removal.
Section 2. Regular Meetings. Regular meetings of the Board shall be
held without notice other than this Bylaw immediately after, and at the same
3
<PAGE>
place as, the annual meeting of stockholders. The directors may provide, by
resolution, the time and place for the holding of additional regular meetings
without other notice than such resolution.
Section 3. Special Meetings. Special Meetings of the Board may be
called by the President or any director upon two day notice. The person or
persons authorized to call special meetings of the directors may fix the place
for holding any special meeting of the directors called by them.
Section 4. Quorum. A majority of the total number of directors shall
constitute a quorum for the transaction of business.
Section 5. Consent In Lieu Of Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
The Board of Directors may hold its meetings, and have an office or offices,
outside of this state.
Section 6. Conference Telephone. One or more directors may participate
in a meeting of the Board, of a committee of the Board or of the stockholders,
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other;
participation in this manner shall constitute presence in person at such
meeting.
Section 7. Compensation. Directors as such, shall not receive any
stated salary for their services, but by resolution of the Board, a fixed sum
and expenses of attendance, if any, may be allowed for attendance at each
regular or special meeting of the Board PROVIDED, that nothing herein contained
shall be construed to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor.
Section 8. Removal. A director may be removed from office for cause
only and, subject to such removal, death, resignation, retirement or
disqualification, shall hold office until the annual meeting for the year in
which his term expires and until his successor shall be elected and qualified.
ARTICLE V - OFFICERS
Section 1. Officers. The executive officers of the Corporation shall be
chosen by the directors and shall be a President, Secretary and Treasurer. The
Board of Directors may also choose a Chairman, one or more Vice Presidents and
such other officers as it shall deem necessary. Any number of offices may be
held by the same person.
4
<PAGE>
Section 2. Salaries. Salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors.
Section 3. Term Of Office. The officers of the Corporation shall hold
office until his successor is elected or until his earlier resignation or
removal. Any officer or agent elected or appointed by the Board may be removed
by the Board of Directors whenever in its judgment the best interest of the
Corporation will be served thereby.
Section 4. President. The President shall be the chief executive
officer of the Corporation; he shall preside at all meetings of the stockholders
and directors; he shall have general and active management of the business of
the Corporation, shall see that all orders and resolutions of the Board are
carried into effect, subject, however, to the right of the directors to delegate
any specific powers, except such as may be by statute exclusively conferred on
the President, to any other officer or officers of the Corporation. He shall
execute bonds, mortgages and other contracts requiring a seal, under the seal of
the Corporation. He shall be EX-OFFICIO a member of all committees, and shall
have the general power and duties of supervision and management usually vested
in the office of President of a corporation.
Section 5. Secretary. The Secretary shall attend all sessions of the
Board and all meetings of the stockholders and act as clerk thereof, and record
all the votes of the Corporation and the minutes of all its transactions in a
book to be kept for that purpose, and shall perform like duties for all
committees of the Board of Directors when required. He shall give, or cause to
be given, notice of all meetings of the stockholders and of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or President, and under whose supervision he shall be. He shall
keep in safe custody the corporate seal of the Corporation, and when authorized
by the Board, affix the same to any instrument requiring it.
Section 6. Treasurer. The Treasurer shall have custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation, and shall keep the moneys
of the Corporation in a separate account to the credit of the Corporation. He
shall disburse the funds of the Corporation as may be ordered by the Board,
taking proper vouchers for such disbursements, and shall render to the President
and directors, at the regular meetings of the Board, or whenever they may
require it, an account of all his transactions as Treasurer and of the financial
condition of the Corporation.
ARTICLE VI - VACANCIES
Section 1. Power to Fill Vacancies. Any vacancy occurring in any office
of the Corporation by death, resignation, removal or otherwise, shall be filled
by the Board of Directors. Vacancies and newly created directorships resulting
5
<PAGE>
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. If at any time, by reason of death or resignation or
other cause, the Corporation should have no directors in office, then any
officer or any stockholder or an executor, administrator, trustee or guardian of
a stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of stockholders in
accordance with the provisions of these Bylaws.
Section 2. Resignations Effective at Future Date. When one or more
directors shall resign from the Board, effective at a future date, a majority of
the directors then in office, including those who have so resigned, shall have
power to fill such vacancy or vacancies, the vote thereon to take effect when
such resignation or resignations shall become effective.
ARTICLE VII - CORPORATE RECORDS
Section 1. Inspection. Any stockholder of record, in person or by
attorney or other agent, shall, upon written demand under oath stating the
purpose thereof, have the right during the usual hours for business to inspect
for any proper purpose the Corporation's stock ledger, a list of its
stockholders, and its other books and records, and to make copies or extracts
therefrom. A proper purpose shall mean a purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or other
agent shall be the person who seeks the right to inspection, the demand under
oath shall be accompanied by a power of attorney or such other writing which
authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the Corporation at its registered
office in this state or at its principal place of business.
ARTICLE VIII - STOCK CERTIFICATES, DIVIDENDS, ETC.
Section 1. Certificates. The stock certificates of the Corporation
shall be numbered and registered in the share ledger and transfer books of the
Corporation as they are issued. They shall bear the corporate seal and shall be
signed by the President and Secretary of the Corporation.
Section 2. Transfers. Transfers of shares shall be made on the books of
the Corporation upon surrender of the certificates therefor, endorsed by the
person named in the certificate or by attorney, lawfully constituted in writing.
No transfer shall be made which is inconsistent with law.
Section 3. Lost Certificate. The Corporation may issue a new
certificate of stock in the place of any certificate theretofore signed by it,
alleged to have been lost, stolen or destroyed, and the Corporation may require
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the owner of the lost, stolen or destroyed certificate, or his legal
representative to give the Corporation a bond sufficient to indemnify it against
any claim that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
Section 4. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. If no record
date is fixed:
(a) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(b) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is expressed.
(c) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
(d) A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
Section 5. Dividends. The Board of Directors may declare and pay
dividends upon the outstanding shares of the Corporation, from time to time and
to such extent as they deem advisable, in the manner and upon the terms and
conditions provided by statute and the Certificate of Incorporation.
Section 6. Reserves. Before payment of any dividend there may be set
aside out of the net profits of the Corporation such sum or sums as the
directors, from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
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repairing or maintaining any property of the Corporation, or f or such other
purpose as the directors shall think conducive to the interests of the
Corporation, and the directors may abolish any such reserve in the manner in
which it was created.
ARTICLE IX - MISCELLANEOUS PROVISIONS
Section 1. Checks. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
Section 2. Fiscal Year. The fiscal year shall begin on the first day of
January.
Section 3. Notice. Whenever written notice is required to be given to
any person, it may be given to such person, either personally or by sending a
copy thereof through the mail, or by telegram, charges prepaid, to his address
appearing on the books of the Corporation, or supplied by him to the Corporation
for the purpose of notice. If the notice is sent by mail or by telegraph, it
shall be deemed to have been given to the person entitled thereto when deposited
in the United States mail or with a telegraph office for transmission to such
person. Such notice shall specify the place, day and hour of the meeting and, in
the case of a special meeting of stockholders, the general nature of the
business to be transacted.
Section 4. Waiver Of Notice. Whenever any written notice is required by
statute, or by the Certificate or the Bylaws of this Corporation a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice. Except in the case of a special meeting of
stockholders, neither the business to be transacted at nor the purpose of the
meeting need be specified in the waiver of notice of such meeting. Attendance of
a person either in person or by proxy, at any meeting shall constitute a waiver
of notice of such meeting, except where a person attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting was not lawfully called or convened.
Section 5. Resignations. Any director or other officer may resign at
any time, such resignation to be in writing and to take effect from the time of
its receipt by the Corporation, unless some time be fixed in the resignation and
then from that date. The acceptance of a resignation shall not be required to
make it effective.
ARTICLE X - ANNUAL STATEMENT
Section 1. Annual Statement. The President and the Board of Directors
shall present at each annual meeting a full and complete statement of the
business and affairs of the Corporation for the preceding year. Such statement
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shall be prepared and presented in whatever manner the Board of Directors shall
deem advisable and need not be verified by a Certified Public Accountant.
ARTICLE XI - INDEMNIFICATION AND INSURANCE
Section 1. (a) Right to Indemnification. Each person who was or is made
a party or is threatened to be made a party or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer,
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that, except
as provided in paragraph (b) hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition: provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Section or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
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(b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of
this Section is not paid in full by the Corporation within thirty days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the Delaware General Corporation law for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard or conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard or conduct.
(c) Non-Exclusivity of Rights. Notwithstanding any limitation to the
contrary contained in sub-paragraphs (a) and (b) of this section, the
Corporation shall, to the fullest extent permitted by Section 145 of the General
Corporation Law of the State of Delaware, as the same may be amended and
supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any Bylaw, agreement,
vote of stockholders or disinterested Directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(d) Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
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ARTICLE XII - AMENDMENTS
Section 1. Amendment of Bylaws. These Bylaws may be amended or repealed
by the vote of directors.
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SERIES "D" WARRANTS
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE COMMON STOCK ISSUABLE UPON
EXERCISE OF THE WARRANTS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY
BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT
PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR IF AN EXEMPTION
FROM SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
Incorporated Under the Laws of the State of Delaware
No. D - _________ _________ Series D Common Stock
Purchase Warrants
CERTIFICATE FOR SERIES "D" COMMON STOCK
PURCHASE WARRANTS
1. Warrant. This Warrant Certificate certifies that
___________________, or registered assigns (the "Registered Holder"), is the
registered owner of the above indicated number of Warrants expiring on the
Expiration Date, as hereinafter defined. One (1) Warrant entitles the Registered
Holder to purchase one (1) share of the common stock, $.02 par value (a
"Share"), of Specialized Health Products International, Inc., a Delaware
corporation (the "Company"), from the Company at a purchase price of Two Dollars
and no/100 ($2.00) (the "Exercise Price") at any time during the Exercise
Period, as hereinafter defined, upon surrender of this Warrant Certificate with
the exercise form hereon duly completed and executed and accompanied by payment
of the Exercise Price at the principal office of the Company.
Upon due presentment for transfer or exchange of this Warrant
Certificate at the principal office of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued in exchange for this Warrant Certificate, subject to
the limitations provided herein, upon payment of any tax or governmental charge
imposed in connection with such transfer. Subject to the terms hereof, the
Company shall deliver Warrant Certificates in required whole number
denominations to Registered Holders in connection with any transfer or exchange
permitted hereunder.
2. Restrictive Legend. Each Warrant Certificate and each certificate
representing Shares issued upon exercise of a Warrant, unless such Shares are
then registered under the Securities Act of 1933, as amended (the "Act"), shall
bear a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR
THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY BE
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OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT
TO RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES OR
BLUE SKY LAWS OR IF AN EXEMPTION FROM SUCH REGISTRATION OR
QUALIFICATION IS APPLICABLE.
3. Exercise. Subject to the terms hereof, the Warrant evidenced by this
Warrant Certificate may be exercised at the Exercise Price in whole or in part
at any time during the period (the "Exercise Period") commencing on October 1,
1998 (except that upon a notice of redemption by the Company as described
herein, the warrants become immediately exercisable) and terminating at the
close of business on that day (the "Expiration Date") which is the second
anniversary of the date on which a registration statement filed pursuant to the
Act covering the resale of the Shares to be issued upon exercise of this Warrant
is declared effective by the Securities and Exchange Commission, provided that
the Exercise Period shall be extended and the Expiration Date delayed by one
business day for each business day subsequent to such effectiveness on which a
prospectus meeting the prospectus delivery requirements of the Act and covering
the resale of such Shares by the Registered Holder hereof or the successors in
interest to such Registered Holder is not available. The Exercise Period may
also be extended by the Company's Board of Directors.
A Warrant shall be deemed to have been exercised immediately prior to
the close of business on the date (the "Exercise Date") of the surrender to the
Company at its principal executive offices of this Warrant Certificate with the
exercise form attached hereto executed by the Registered Holder and accompanied
by payment to the Company, by wire transfer, or by official bank or certified
check, of an amount equal to the aggregate Exercise Price, in lawful money of
the United States of America.
The person entitled to receive the Shares issuable upon exercise of a
Warrant or Warrants ("Warrant Shares") shall be treated for all purposes as the
holder of such Warrant Shares as of the close of business on the Exercise Date.
The Company shall not be obligated to issue any fractional share interests in
Warrant Shares issuable or deliverable on the exercise of any Warrant or scrip
or cash with respect thereto, and such right to a fractional share shall be of
no value whatsoever. If more than one Warrant shall be exercised at one time by
the same Registered Holder, the number of full Shares which shall be issuable on
exercise thereof shall be computed on the basis of the aggregate number of full
shares issuable on such exercise.
Promptly, and in any event within ten business days after the Exercise
Date, the Company shall cause to be issued and delivered to the person or
persons entitled to receive the same, a certificate or certificates for the
number of Warrant Shares deliverable on such exercise.
The Company may deem and treat the Registered Holder of the Warrants at
any time as the absolute owner thereof for all purposes, and the Company shall
not be affected by any notice to the contrary. The Warrants shall not entitle
the Registered Holder thereof to any of the rights of shareholders or to any
dividend declared on the Shares unless the Registered Holder shall have
exercised the Warrants and thereby purchased the Warrant Shares prior to the
record date for the determination of holders of Shares entitled to such dividend
or other right.
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4. Reservation of Shares and Payment of Taxes. The Company covenants
that it will at all times reserve and have available from its authorized Common
Stock such number of shares as shall then be issuable on the exercise of
outstanding Warrants. The Company covenants that all Warrant Shares which shall
be so issuable shall be duly and validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof.
The Registered Holder shall pay all documentary, stamp or similar taxes
and other government charges that may be imposed with respect to the issuance,
transfer or delivery of any Warrant Shares on exercise of the Warrants. In the
event the Warrant Shares are to be delivered in a name other than the name of
the Registered Holder of the Warrant Certificate, no such delivery shall be made
unless the person requesting the same has paid the amount of any such taxes or
charges incident thereto.
5. Registration of Transfer. The Warrant Certificates may be
transferred in whole or in part, provided any such transfer complies with all
applicable federal and state securities laws and, if requested by the Company,
the Registered Holder delivers to the Company an opinion of counsel to that
effect, in form and substance reasonably acceptable to the Company. Warrant
Certificates to be transferred shall be surrendered to the Company at its
principal office. The Company shall execute, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the transfer shall be entitled to receive.
The Company shall keep transfer books at its principal office or at the
office of its warrant agent which shall register Warrant Certificates and the
transfer thereof. On due presentment of any Warrant Certificate for registration
of transfer at such office, the Company shall execute, issue and deliver to the
transferee or transferees a new Warrant Certificate or Certificates representing
an equal aggregate number of Warrants. All Warrant Certificates presented for
registration of transfer or exercise shall be duly endorsed or be accompanied by
a written instrument or instruments of transfer in form satisfactory to the
Company. The Company may require payment of a sum sufficient to cover any tax or
other government charge that may be imposed in connection therewith.
All Warrant Certificates so surrendered, or surrendered for exercise,
or for exchange in case of mutilated Warrant Certificates, shall be promptly
canceled by the Company and thereafter retained by the Company until the
Expiration Date. Prior to due presentment for registration of transfer thereof,
the Company may treat the Registered Holder of any Warrant Certificate as the
absolute owner thereof (notwithstanding any notations of ownership or writing
thereon made by anyone other than the Company), and the Company shall not be
affected by any notice to the contrary.
6. Loss or Mutilation. On receipt by the Company of evidence
satisfactory as to the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate, the Company shall execute and deliver,
in lieu thereof, a new Warrant Certificate representing an equal aggregate
number of Warrants. In the case of loss, theft or destruction of any Warrant
Certificate, the individual requesting issuance of a new Warrant Certificate
shall be required to indemnify the Company in an amount satisfactory to the
Company. In the event a Warrant Certificate is mutilated, such Certificate shall
be surrendered and canceled by the Company prior to delivery of a new Warrant
Certificate. Applicants for a new Warrant Certificate shall also comply with
such other regulations and pay such other reasonable charges as the Company may
prescribe.
7. Call Option. So long as the closing bid price or last trade in the
principal market in which, or on the principal exchange on which, the Shares
trade exceeds Six Dollars ($6.00) for the ten (10) consecutive trading days
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preceding but not including the date of the notice of such call, the Company
shall have the right and option, upon no less than twenty (20) trading days'
written notice to the Registered Holder, to call, and thereafter to redeem and
acquire all of the Warrants remaining outstanding and unexercised at the date
fixed for such redemption in such notice (the "Redemption Date"), which
Redemption Date shall be at least 20 trading days after the date of such notice,
for an amount equal to One-Tenth of One Cent ($.001) per Warrant; provided,
however, that the Registered Holder shall have the right during the period
between the date of such notice and the Redemption Date to exercise the Warrants
in accordance with the provisions of Section 3 hereof and provided further that
a prospectus meeting the prospectus delivery requirements of the Act and
covering the resale of the Shares to be issued upon exercise of this Warrant by
the Registered Holder hereof or the successors in interest to such Registered
Holder is available during the entire period between such notice and the
Redemption Date. Said notice of redemption shall require the Registered Holder
to surrender to the Company, not later than on the Redemption Date, at the
principal executive offices of the Company, his certificate or certificates
representing the Warrants to be redeemed. Notwithstanding the fact that any
Warrants called for redemption have not been surrendered for redemption and
cancellation on the Redemption Date, after the Redemption Date such Warrants
shall be deemed to be expired and all rights of the Registered Holder of such
unsurrendered Warrants shall cease and terminate, other than the right to
receive the redemption price of $.001 per Warrant for such Warrants, without
interest.
In connection with any call hereunder, the Company shall have no
obligation to call any other stock purchase warrant or warrants, whether or not
having similar terms, and no call made pursuant to any other stock purchase
warrant shall obligate the Company to exercise its right and option to make a
call hereunder.
8. Adjustment of Shares. The number and kind of securities issuable
upon exercise of a Warrant shall be subject to adjustment from time to time upon
the happening of certain events, as follows:
(a) Stock Splits, Stock Combinations and Certain Stock
Dividends. If the Company shall at any time subdivide or combine its
outstanding Shares, or declare a dividend in Shares or other securities
of the Company convertible into or exchangeable for Shares, a Warrant
shall, after such subdivision or combination or after the record date
for such dividend, be exercisable for that number of Shares and other
securities of the Company that the Registered Holder would have owned
immediately after such event had the Warrant been exercised immediately
before such event. Any adjustment under this Section 8 (a) shall become
effective at the close of business on the date the subdivision,
combination or dividend becomes effective.
(b) Adjustment for Reorganization, Consolidation, Merger. In
case of any reorganization of the Company (or any other corporation the
stock or other securities of which are at the time receivable upon
exercise of a Warrant) or in case the Company (or any such other
corporation) shall merge into or with or consolidate with another
corporation or convey all or substantially all of its assets to another
corporation or enter into a business combination of any form as a
result of which the Shares or other securities receivable upon exercise
of a Warrant are converted into other stock or securities of the same
or another corporation, then and in each such case, the Registered
Holder of a Warrant, upon exercise of the purchase right at any time
after the consummation of such reorganization, consolidation, merger,
conveyance or combination, shall be entitled to receive, in lieu of the
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Shares or other securities to which such Registered Holder would have
been entitled had he exercised the purchase right immediately prior
thereto, such stock and securities which such Registered Holder would
have owned immediately after such event had the Warrant been exercised
immediately prior to such event.
In the event that any of the foregoing occurs, a corresponding
adjustment to the exercise price of the Warrant shall be made. In each case of
an adjustment in the exercise price or the number of Shares or other securities
receivable upon the exercise of a Warrant, the Company shall promptly notify the
Registered Holder of such adjustment. Such notice shall set forth the facts upon
which such adjustment is based.
9. Reduction in Exercise Price at Company's Option. The Company's Board
of Directors may, at its sole discretion, reduce the Exercise Price of the
Warrants in effect at any time either for the life of the Warrants or any
shorter period of time determined by the Company's Board of Directors. The
Company shall promptly notify the Registered Holders of any such reduction in
the Exercise Price.
10. Registration Rights.
(a) Certain Definitions. As used in this Section 10, the following
definitions shall apply:
"Commission" means the Securities and Exchange Commission or any other
federal agency at the time administering the Act.
"Holder" means any holder of a Warrant or outstanding Registerable
Securities.
"Registerable Securities" means the Warrant Shares issued or issuable
upon the exercise of a Warrant, provided, however, that Registerable Securities
shall not include any Shares and other securities which have previously been
registered and sold to the public.
"Registration Expenses" means all expenses incurred by the Company in
complying with Section 10(b) including, without limitation, all registration,
qualification and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and the expense of any
special audits incident to or required in connection with any such registration.
Registration Expenses shall not include selling commissions, discounts or other
compensation paid to underwriters or other agents or brokers to effect the sale.
The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Act (and any post-effective amendments filed in connection
therewith), and the declaration of the effectiveness of such registration
statement.
(b) Registration. The Company shall:
(i) Following the original issuance of the Warrants
represented by this Warrant Certificate at such time as the Company
first prepares and files with the Commission a registration statement
on an appropriate form that would permit inclusion of the Registerable
Securities in such registration statement or a pre-effective amendment
to such a registration statement, include the Registrable Securities
among the securities being registered pursuant to such registration
statement. The Company shall diligently prosecute such registration
statement to effectiveness. Such registration statement shall cover the
resale of such Warrant Shares by the Holder. The Company will promptly
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notify the Holder regarding (i) the filing of such registration
statement and all amendments thereto, (ii) the effectiveness of such
registration statement and any post-effective amendments thereto, (iii)
the occurrence of any event or condition that causes the prospectus
that is part of such registration statement no longer to comply with
the requirements of the Act, and (iv) any request by the Commission for
any amendment or supplement to such registration statement or any
prospectus relating thereto;
(ii) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and current and to comply with the provisions of
the Act with respect to the resale of the Registerable Securities,
including such amendments and supplements as may be necessary to
reflect the intended method of disposition by the Holder, but for no
longer than one hundred eighty (180) days subsequent to the Expiration
Date or the Redemption Date;
(iii) Furnish to each Holder such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as such Holder may
reasonably request in order to facilitate the public sale or other
disposition of the Registerable Securities by such Holder;
(iv) Use its best efforts to comply with all applicable rules
and regulations of the Commission, including without limitation the
rules and regulations relating to the periodic reporting requirements
under the Securities Exchange Act of 1934, as amended; and
(v) Make available for inspection by the Holder or by any
underwriter, attorney, accountant or other agent acting for such Holder
in connection with the disposition of Registrable Securities, in each
case upon receipt of an appropriate confidentiality agreement, all
corporate records, documents and properties as may be reasonably
requested.
(c) Expenses of Registration. All Registration Expenses incurred in
connection with the registration, qualification or compliance pursuant to
Section 10(b) hereof shall be borne by the Company. The Holder shall be
responsible for all costs and expenses associated herewith that are not
Registration Expenses.
(d) Indemnification. In the event any of the Registerable Securities
are included in a registration statement under this Section 10:
(i) The Company will indemnify each Holder, each of such
Holder's officers and directors and partners and each person
controlling such Holder within the meaning of Section 15 of the Act,
and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, or other document,
or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, or any
violation by the Company of any rule or regulation promulgated under
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the Act applicable to the Company in connection with any such
registration, qualification or compliance, and the Company will
reimburse the Holder, each of its officers and directors and partners
and each person controlling such Holder, each such underwriter and each
person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, provided
that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement or omission or alleged untrue statement
or omission, made in reliance upon and in conformity with written
information furnished to the Company by such Holder or underwriter for
use therein.
(ii) In order to include Registerable Securities in a
registration statement under this Section 10, a Holder will be required
to indemnify the Company, each of its directors and officers, its legal
counsel and independent accountants, each underwriter, if any, of the
Company's securities covered by such registration statement, each
person who controls the Company or such underwriter within the meaning
of Section 15 of the Act, and each other selling shareholder, each of
such other selling shareholder's officers and directors and partners
and each person controlling such selling shareholder within the meaning
of Section 15 of the Act, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on
any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading and will
reimburse the Company, such holders, such directors, officers, counsel,
accountants, persons, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, in each
case to the extent, but only to the extent, that such untrue statement
(or alleged untrue statement) or omission (or alleged omission) is made
in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information
furnished to the Company by the Holder for use therein.
(iii) Each party entitled to indemnification under this
Section (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and shall permit the Indemnifying Party
to assume the defense of any such claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party (which approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at
such Indemnified Party's expense. No Indemnifying Party, in the defense
of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation.
(iv) If the indemnification provided for in this Section is
held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any loss, liability, claim, damage or
expense referred to herein, then the Indemnifying Party, in lieu of
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indemnifying the Indemnified Party, shall contribute to the amount paid
or payable by such Indemnified Party with respect to such loss,
liability, claim, damage or expense in the proportion that is
appropriate to reflect the relative fault of the Indemnifying Party and
the Indemnified Party in connection with the statements or omissions
that resulted in such loss, liability, claim, damage or expense, as
well as any other relevant equitable considerations. The relative fault
of the Indemnifying Party and the Indemnified Party shall be determined
by reference to, among other things, whether the untrue or alleged
untrue statement of material fact or the omission to state a material
fact relates to information supplied by the Indemnifying Party or by
the Indemnified Party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission.
(e) Information by Holder. Each Holder of Registerable Securities
included in any registration shall furnish to the Company such information
regarding such Holder, such securities and the distribution proposed by such
Holder as the Company may request in writing.
11. Notices. All notices, demands, elections, or requests (however
characterized or described) required or authorized hereunder shall be deemed
given sufficiently if in writing and sent by registered or certified mail,
return receipt requested and postage prepaid, or by facsimile or telegram to the
Company, at its principal executive office, and to the Registered Holder, at the
address of such holder as set forth on the books maintained by the Company.
12. General Provisions. This Warrant Certificate shall be construed and
enforced in accordance with, and governed by, the laws of the State of Delaware.
Except as otherwise expressly stated herein, time is of the essence in
performing hereunder. The headings of this Warrant Certificate are for
convenience in reference only and shall not limit or otherwise affect the
meaning hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of the ____ day of ________, 1997.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
By _________________________________ By ______________________________
J. Clark Robinson, Secretary David A. Robinson, President
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SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
The following abbreviations, when used in the inscription on the face
of this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JR TEN - as joint tenants with right of survivorship and not as tenants
in common
UNIF TRANS MIN ACT - __________ (Custodian for Minor) as custodian for
__________ (name of minor) under the Uniform Transfers to Minors Act
Additional abbreviations may also be used though not in the above list.
FORM OF ASSIGNMENT
(To be Executed by the Registered Holder if He or She
Desires to Assign Warrants Evidenced by the
Within Warrant Certificate)
FOR VALUE RECEIVED ___________________________ hereby sells, assigns
and transfers unto _____________________________ _________________________
(_______) Warrants, evidenced by the within Warrant Certificate, and does hereby
irrevocably constitute and appoint _____________________ __________________
Attorney to transfer the said Warrants evidenced by the within Warrant
Certificates on the books of the Company, with full power of substitution.
Dated:____________________ _____________________________
Signature
Notice: The above signature must correspond with the name as written
upon the face of the Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever.
Signature Guaranteed: __________________________________________
SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE
FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK
EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE.
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FORM OF ELECTION TO PURCHASE
(To be Executed by the Holder if Holder Desires to Exercise
Warrants Evidenced by the Warrant Certificate)
To Specialized Health Products International, Inc.
The undersigned hereby irrevocably elects to exercise
___________________________ (______) Warrants, evidenced by the within Warrant
Certificate for, and to purchase thereunder, _____________ _______________
(______) full shares of Common Stock issuable upon exercise of said Warrants and
delivery of $_________ and any applicable taxes.
The undersigned requests that certificates for such shares be issued in
the name of:
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
---------------------------------
---------------------------------
(Please print name and address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If said number of Warrants shall not be all the Warrants evidenced by
the within Warrant Certificate, the undersigned requests that a new Warrant
Certificate evidencing the Warrants not so exercised be issued in the name of
and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(SIGNATURES CONTINUED ON FOLLOWING PAGE)
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Dated: _____________________ Signature:__________________________
NOTICE: The above signature must correspond with the name as written
upon the face of the within Warrant Certificate in every
particular, without alteration or enlargement or any change
whatsoever, or if signed by any other person the Form of
Assignment hereon must be duly executed and if the certificate
representing the shares or any Warrant Certificate
representing Warrants not exercised is to be registered in a
name other than that in which the within Warrant Certificate
is registered, the signature of the holder hereof must be
guaranteed.
Signature Guaranteed: ___________________________________________
SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE
FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK
EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE.
11
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE COMMON STOCK ISSUABLE UPON
EXERCISE OF THE WARRANTS HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY
BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT
PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR IF AN EXEMPTION
FROM SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
Incorporated Under the Laws of the State of Delaware
No. - _________ _________ Common Stock
Purchase Warrants
CERTIFICATE FOR COMMON STOCK
PURCHASE WARRANTS
1. Warrant. This Warrant Certificate certifies that ______________, or
registered assigns (the "Registered Holder"), is the registered owner of the
above indicated number of Warrants expiring on the Expiration Date, as
hereinafter defined. One (1) Warrant entitles the Registered Holder to purchase
one (1) share of the common stock, $.02 par value (a "Share"), of Specialized
Health Products International, Inc., a Delaware corporation (the "Company"),
from the Company at a purchase price of Two Dollars and no/100 ($2.00) (the
"Exercise Price") at any time during the Exercise Period, as hereinafter
defined, upon surrender of this Warrant Certificate with the exercise form
hereon duly completed and executed and accompanied by payment of the Exercise
Price at the principal office of the Company.
Upon due presentment for transfer or exchange of this Warrant
Certificate at the principal office of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued in exchange for this Warrant Certificate, subject to
the limitations provided herein, upon payment of any tax or governmental charge
imposed in connection with such transfer. Subject to the terms hereof, the
Company shall deliver Warrant Certificates in required whole number
denominations to Registered Holders in connection with any transfer or exchange
permitted hereunder.
2. Restrictive Legend. Each Warrant Certificate and each certificate
representing Shares issued upon exercise of a Warrant, unless such Shares are
then registered under the Securities Act of 1933, as amended (the "Act"), shall
bear a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT
OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND
<PAGE>
MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED
PURSUANT TO RELEVANT PROVISIONS OF FEDERAL AND STATE
SECURITIES OR BLUE SKY LAWS OR IF AN EXEMPTION FROM SUCH
REGISTRATION OR QUALIFICATION IS APPLICABLE.
3. Exercise. Subject to the terms hereof, the Warrant evidenced by this
Warrant Certificate may be exercised at the Exercise Price in whole or in part
at any time during the period (the "Exercise Period") commencing on the date
hereof and terminating at the close of business on December 31, 2002 (the
"Expiration Date"). The Exercise Period may also be extended by the Company's
Board of Directors.
A Warrant shall be deemed to have been exercised immediately prior to
the close of business on the date (the "Exercise Date") of the surrender to the
Company at its principal executive offices of this Warrant Certificate with the
exercise form attached hereto executed by the Registered Holder and accompanied
by payment to the Company, by wire transfer, or by official bank or certified
check, of an amount equal to the aggregate Exercise Price, in lawful money of
the United States of America.
The person entitled to receive the Shares issuable upon exercise of a
Warrant or Warrants ("Warrant Shares") shall be treated for all purposes as the
holder of such Warrant Shares as of the close of business on the Exercise Date.
The Company shall not be obligated to issue any fractional share interests in
Warrant Shares issuable or deliverable on the exercise of any Warrant or scrip
or cash with respect thereto, and such right to a fractional share shall be of
no value whatsoever. If more than one Warrant shall be exercised at one time by
the same Registered Holder, the number of full Shares which shall be issuable on
exercise thereof shall be computed on the basis of the aggregate number of full
shares issuable on such exercise.
Promptly, and in any event within ten business days after the Exercise
Date, the Company shall cause to be issued and delivered to the person or
persons entitled to receive the same, a certificate or certificates for the
number of Warrant Shares deliverable on such exercise.
The Company may deem and treat the Registered Holder of the Warrants at
any time as the absolute owner thereof for all purposes, and the Company shall
not be affected by any notice to the contrary. The Warrants shall not entitle
the Registered Holder thereof to any of the rights of shareholders or to any
dividend declared on the Shares unless the Registered Holder shall have
exercised the Warrants and thereby purchased the Warrant Shares prior to the
record date for the determination of holders of Shares entitled to such dividend
or other right.
4. Reservation of Shares and Payment of Taxes. The Company covenants
that it will at all times reserve and have available from its authorized Common
Stock such number of shares as shall then be issuable on the exercise of
outstanding Warrants. The Company covenants that all Warrant Shares which shall
be so issuable shall be duly and validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof.
The Registered Holder shall pay all documentary, stamp or similar taxes
and other government charges that may be imposed with respect to the issuance,
transfer or delivery of any Warrant Shares on exercise of the Warrants. In the
event the Warrant Shares are to be delivered in a name other than the name of
the Registered Holder of the Warrant Certificate, no such delivery shall be made
unless the person requesting the same has paid the amount of any such taxes or
charges incident thereto.
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5. Registration of Transfer. The Warrant Certificates may be
transferred in whole or in part, provided any such transfer complies with all
applicable federal and state securities laws and, if requested by the Company,
the Registered Holder delivers to the Company an opinion of counsel to that
effect, in form and substance reasonably acceptable to the Company. Warrant
Certificates to be transferred shall be surrendered to the Company at its
principal office. The Company shall execute, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the transfer shall be entitled to receive.
The Company shall keep transfer books at its principal office or at the
office of its warrant agent which shall register Warrant Certificates and the
transfer thereof. On due presentment of any Warrant Certificate for registration
of transfer at such office, the Company shall execute, issue and deliver to the
transferee or transferees a new Warrant Certificate or Certificates representing
an equal aggregate number of Warrants. All Warrant Certificates presented for
registration of transfer or exercise shall be duly endorsed or be accompanied by
a written instrument or instruments of transfer in form satisfactory to the
Company. The Company may require payment of a sum sufficient to cover any tax or
other government charge that may be imposed in connection therewith.
All Warrant Certificates so surrendered, or surrendered for exercise,
or for exchange in case of mutilated Warrant Certificates, shall be promptly
canceled by the Company and thereafter retained by the Company until the
Expiration Date. Prior to due presentment for registration of transfer thereof,
the Company may treat the Registered Holder of any Warrant Certificate as the
absolute owner thereof (notwithstanding any notations of ownership or writing
thereon made by anyone other than the Company), and the Company shall not be
affected by any notice to the contrary.
6. Loss or Mutilation. On receipt by the Company of evidence
satisfactory as to the ownership of and the loss, theft, destruction or
mutilation of this Warrant Certificate, the Company shall execute and deliver,
in lieu thereof, a new Warrant Certificate representing an equal aggregate
number of Warrants. In the case of loss, theft or destruction of any Warrant
Certificate, the individual requesting issuance of a new Warrant Certificate
shall be required to indemnify the Company in an amount satisfactory to the
Company. In the event a Warrant Certificate is mutilated, such Certificate shall
be surrendered and canceled by the Company prior to delivery of a new Warrant
Certificate. Applicants for a new Warrant Certificate shall also comply with
such other regulations and pay such other reasonable charges as the Company may
prescribe.
7. Call Option. So long as the closing bid price or last trade in the
principal market in which, or on the principal exchange on which, the Shares
trade exceeds Six Dollars ($6.00) for the ten (10) consecutive trading days
preceding but not including the date of the notice of such call, the Company
shall have the right and option, upon no less than twenty (20) trading days'
written notice to the Registered Holder, to call, and thereafter to redeem and
acquire all of the Warrants remaining outstanding and unexercised at the date
fixed for such redemption in such notice (the "Redemption Date"), which
Redemption Date shall be at least 20 trading days after the date of such notice,
for an amount equal to One-Tenth of One Cent ($.001) per Warrant; provided,
however, that the Registered Holder shall have the right during the period
between the date of such notice and the Redemption Date to exercise the Warrants
in accordance with the provisions of Section 3 hereof and provided further that
a prospectus meeting the prospectus delivery requirements of the Act and
covering the resale of the Shares to be issued upon exercise of this Warrant by
the Registered Holder hereof or the successors in interest to such Registered
Holder is available during the entire period between such notice and the
Redemption Date. Said notice of redemption shall require the Registered Holder
to surrender to the Company, not later than on the Redemption Date, at the
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<PAGE>
principal executive offices of the Company, his certificate or certificates
representing the Warrants to be redeemed. Notwithstanding the fact that any
Warrants called for redemption have not been surrendered for redemption and
cancellation on the Redemption Date, after the Redemption Date such Warrants
shall be deemed to be expired and all rights of the Registered Holder of such
unsurrendered Warrants shall cease and terminate, other than the right to
receive the redemption price of $.001 per Warrant for such Warrants, without
interest.
In connection with any call hereunder, the Company shall have no
obligation to call any other stock purchase warrant or warrants, whether or not
having similar terms, and no call made pursuant to any other stock purchase
warrant shall obligate the Company to exercise its right and option to make a
call hereunder.
8. Adjustment of Shares. The number and kind of securities issuable
upon exercise of a Warrant shall be subject to adjustment from time to time upon
the happening of certain events, as follows:
(a) Stock Splits, Stock Combinations and Certain Stock
Dividends. If the Company shall at any time subdivide or combine its
outstanding Shares, or declare a dividend in Shares or other securities
of the Company convertible into or exchangeable for Shares, a Warrant
shall, after such subdivision or combination or after the record date
for such dividend, be exercisable for that number of Shares and other
securities of the Company that the Registered Holder would have owned
immediately after such event had the Warrant been exercised immediately
before such event. Any adjustment under this Section 8 (a) shall become
effective at the close of business on the date the subdivision,
combination or dividend becomes effective.
(b) Adjustment for Reorganization, Consolidation, Merger. In
case of any reorganization of the Company (or any other corporation the
stock or other securities of which are at the time receivable upon
exercise of a Warrant) or in case the Company (or any such other
corporation) shall merge into or with or consolidate with another
corporation or convey all or substantially all of its assets to another
corporation or enter into a business combination of any form as a
result of which the Shares or other securities receivable upon exercise
of a Warrant are converted into other stock or securities of the same
or another corporation, then and in each such case, the Registered
Holder of a Warrant, upon exercise of the purchase right at any time
after the consummation of such reorganization, consolidation, merger,
conveyance or combination, shall be entitled to receive, in lieu of the
Shares or other securities to which such Registered Holder would have
been entitled had he exercised the purchase right immediately prior
thereto, such stock and securities which such Registered Holder would
have owned immediately after such event had the Warrant been exercised
immediately prior to such event.
In the event that any of the foregoing occurs, a corresponding
adjustment to the exercise price of the Warrant shall be made. In each case of
an adjustment in the exercise price or the number of Shares or other securities
receivable upon the exercise of a Warrant, the Company shall promptly notify the
Registered Holder of such adjustment. Such notice shall set forth the facts upon
which such adjustment is based.
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<PAGE>
9. Reduction in Exercise Price at Company's Option. The Company's Board
of Directors may, at its sole discretion, reduce the Exercise Price of the
Warrants in effect at any time either for the life of the Warrants or any
shorter period of time determined by the Company's Board of Directors. The
Company shall promptly notify the Registered Holders of any such reduction in
the Exercise Price.
10. Registration Rights.
(a) Certain Definitions. As used in this Section 10, the
following definitions shall apply:
"Commission" means the Securities and Exchange Commission or any other
federal agency at the time administering the Act.
"Holder" means any holder of a Warrant or outstanding Registerable
Securities.
"Registerable Securities" means the Warrant Shares issued or issuable
upon the exercise of a Warrant, provided, however, that Registerable Securities
shall not include any Shares and other securities which have previously been
registered and sold to the public.
"Registration Expenses" means all expenses incurred by the Company in
complying with Section 10(b) including, without limitation, all registration,
qualification and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and the expense of any
special audits incident to or required in connection with any such registration.
Registration Expenses shall not include selling commissions, discounts or other
compensation paid to underwriters or other agents or brokers to effect the sale.
The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Act (and any post-effective amendments filed in connection
therewith), and the declaration of the effectiveness of such registration
statement.
(b) Registration. The Company shall:
(i) Following the original issuance of the Warrants
represented by this Warrant Certificate at such time as the Company
first prepares and files with the Commission a registration statement
on an appropriate form that would permit inclusion of the Registerable
Securities in such registration statement or a pre-effective amendment
to such a registration statement, include the Registrable Securities
among the securities being registered pursuant to such registration
statement. The Company shall diligently prosecute such registration
statement to effectiveness. Such registration statement shall cover the
resale of such Warrant Shares by the Holder. The Company will promptly
notify the Holder regarding (i) the filing of such registration
statement and all amendments thereto, (ii) the effectiveness of such
registration statement and any post-effective amendments thereto, (iii)
the occurrence of any event or condition that causes the prospectus
that is part of such registration statement no longer to comply with
the requirements of the Act, and (iv) any request by the Commission for
any amendment or supplement to such registration statement or any
prospectus relating thereto;
(ii) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and current and to comply with the provisions of
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the Act with respect to the resale of the Registerable Securities,
including such amendments and supplements as may be necessary to
reflect the intended method of disposition by the Holder, but for no
longer than one hundred eighty (180) days subsequent to the Expiration
Date or the Redemption Date;
(iii) Furnish to each Holder such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as such Holder may
reasonably request in order to facilitate the public sale or other
disposition of the Registerable Securities by such Holder;
(iv) Use its best efforts to comply with all applicable rules
and regulations of the Commission, including without limitation the
rules and regulations relating to the periodic reporting requirements
under the Securities Exchange Act of 1934, as amended; and
(v) Make available for inspection by the Holder or by any
underwriter, attorney, accountant or other agent acting for such Holder
in connection with the disposition of Registrable Securities, in each
case upon receipt of an appropriate confidentiality agreement, all
corporate records, documents and properties as may be reasonably
requested.
(c) Expenses of Registration. All Registration Expenses incurred in
connection with the registration, qualification or compliance pursuant to
Section 10(b) hereof shall be borne by the Company. The Holder shall be
responsible for all costs and expenses associated herewith that are not
Registration Expenses.
(d) Indemnification. In the event any of the Registerable Securities
are included in a registration statement under this Section 10:
(i) The Company will indemnify each Holder, each of such
Holder's officers and directors and partners and each person
controlling such Holder within the meaning of Section 15 of the Act,
and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, or other document,
or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, or any
violation by the Company of any rule or regulation promulgated under
the Act applicable to the Company in connection with any such
registration, qualification or compliance, and the Company will
reimburse the Holder, each of its officers and directors and partners
and each person controlling such Holder, each such underwriter and each
person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, provided
that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement or omission or alleged untrue statement
or omission, made in reliance upon and in conformity with written
information furnished to the Company by such Holder or underwriter for
use therein.
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(ii) In order to include Registerable Securities in a
registration statement under this Section 10, a Holder will be required
to indemnify the Company, each of its directors and officers, its legal
counsel and independent accountants, each underwriter, if any, of the
Company's securities covered by such registration statement, each
person who controls the Company or such underwriter within the meaning
of Section 15 of the Act, and each other selling shareholder, each of
such other selling shareholder's officers and directors and partners
and each person controlling such selling shareholder within the meaning
of Section 15 of the Act, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on
any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading and will
reimburse the Company, such holders, such directors, officers, counsel,
accountants, persons, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, in each
case to the extent, but only to the extent, that such untrue statement
(or alleged untrue statement) or omission (or alleged omission) is made
in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information
furnished to the Company by the Holder for use therein.
(iii) Each party entitled to indemnification under this
Section (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and shall permit the Indemnifying Party
to assume the defense of any such claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party (which approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at
such Indemnified Party's expense. No Indemnifying Party, in the defense
of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation.
(iv) If the indemnification provided for in this Section is
held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any loss, liability, claim, damage or
expense referred to herein, then the Indemnifying Party, in lieu of
indemnifying the Indemnified Party, shall contribute to the amount paid
or payable by such Indemnified Party with respect to such loss,
liability, claim, damage or expense in the proportion that is
appropriate to reflect the relative fault of the Indemnifying Party and
the Indemnified Party in connection with the statements or omissions
that resulted in such loss, liability, claim, damage or expense, as
well as any other relevant equitable considerations. The relative fault
of the Indemnifying Party and the Indemnified Party shall be determined
by reference to, among other things, whether the untrue or alleged
untrue statement of material fact or the omission to state a material
fact relates to information supplied by the Indemnifying Party or by
the Indemnified Party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission.
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(e) Information by Holder. Each Holder of Registerable Securities
included in any registration shall furnish to the Company such information
regarding such Holder, such securities and the distribution proposed by such
Holder as the Company may request in writing.
11. Notices. All notices, demands, elections, or requests (however
characterized or described) required or authorized hereunder shall be deemed
given sufficiently if in writing and sent by registered or certified mail,
return receipt requested and postage prepaid, or by facsimile or telegram to the
Company, at its principal executive office, and to the Registered Holder, at the
address of such holder as set forth on the books maintained by the Company.
12. General Provisions. This Warrant Certificate shall be construed and
enforced in accordance with, and governed by, the laws of the State of Delaware.
Except as otherwise expressly stated herein, time is of the essence in
performing hereunder. The headings of this Warrant Certificate are for
convenience in reference only and shall not limit or otherwise affect the
meaning hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of the ____ day of ________, 1998.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
By _________________________________ By _______________________________
Charles D. Roe, Secretary David A. Robinson, President
8
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
The following abbreviations, when used in the inscription on the face
of this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JR TEN - as joint tenants with right of survivorship and not as tenants
in common
UNIF TRANS MIN ACT - ___________ (Custodian for Minor) as custodian for
__________ (name of minor) under the Uniform Transfers to Minors Act
Additional abbreviations may also be used though not in the above list.
FORM OF ASSIGNMENT
(To be Executed by the Registered Holder if He or She
Desires to Assign Warrants Evidenced by the
Within Warrant Certificate)
FOR VALUE RECEIVED ___________________________ hereby sells, assigns
and transfers unto _____________________________ _________________________
(_______) Warrants, evidenced by the within Warrant Certificate, and does hereby
irrevocably constitute and appoint _____________________ __________________
Attorney to transfer the said Warrants evidenced by the within Warrant
Certificates on the books of the Company, with full power of substitution.
Dated:____________________ _____________________________
Signature
Notice: The above signature must correspond with the name as written
upon the face of the Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever.
Signature Guaranteed: __________________________________________
SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE
FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK
EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE.
9
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be Executed by the Holder if Holder Desires to Exercise
Warrants Evidenced by the Warrant Certificate)
To Specialized Health Products International, Inc.
The undersigned hereby irrevocably elects to exercise
___________________________ (______) Warrants, evidenced by the within Warrant
Certificate for, and to purchase thereunder, _____________ _______________
(______) full shares of Common Stock issuable upon exercise of said Warrants and
delivery of $_________ and any applicable taxes.
The undersigned requests that certificates for such shares be issued in
the name of:
PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER:
- -------------------------------------
- -------------------------------------
- -------------------------------------
(Please print name and address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If said number of Warrants shall not be all the Warrants evidenced by
the within Warrant Certificate, the undersigned requests that a new Warrant
Certificate evidencing the Warrants not so exercised be issued in the name of
and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(SIGNATURES CONTINUED ON FOLLOWING PAGE)
10
<PAGE>
Dated: _____________________ Signature:__________________________
NOTICE: The above signature must correspond with the name as written
upon the face of the within Warrant Certificate in every
particular, without alteration or enlargement or any change
whatsoever, or if signed by any other person the Form of
Assignment hereon must be duly executed and if the certificate
representing the shares or any Warrant Certificate
representing Warrants not exercised is to be registered in a
name other than that in which the within Warrant Certificate
is registered, the signature of the holder hereof must be
guaranteed.
Signature Guaranteed: ___________________________________________
SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE
FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK
EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE.
11
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K, into Specialized Health
Products International, Inc.'s previously filed Registration Statement on Form
S-3 File No. 333-23535.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 25, 1998
Consent of Independent Certified Public Accountants
The Board of Directors and Stockholders
Specialized Health Products International, Inc.:
We consent to incorporation by reference in the Registration Statement (No.
333-23535) on Form S-3 of Specialized Health Products, Inc. of our report dated
February 2, 1996, relating to the consolidated statements of operations,
stockholders' equity, (deficit), and cash flows of Specialized Health Products
International, Inc. for the year ended December 31, 1995, and for the period
from November 19, 1993 (date of inception) to December 31, 1995, which report
appears in this Form 10-K of Specialized Health Products International, Inc.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Salt Lake City, Utah
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> $1,441,556
<SECURITIES> 0
<RECEIVABLES> 34,328
<ALLOWANCES> 0
<INVENTORY> 72,352
<CURRENT-ASSETS> 1,605,127
<PP&E> 1,758,429
<DEPRECIATION> (308,000)
<TOTAL-ASSETS> 3,285,413
<CURRENT-LIABILITIES> 995,165
<BONDS> 0
0
0
<COMMON> 202,597
<OTHER-SE> 337,651
<TOTAL-LIABILITY-AND-EQUITY> 3,285,413
<SALES> 182,363
<TOTAL-REVENUES> 432,363
<CGS> 141,857
<TOTAL-COSTS> 4,595,636
<OTHER-EXPENSES> 12,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,236
<INCOME-PRETAX> (4,274,003)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,274,003)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,274,003)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
