FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
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 of (IRS Employer Identification No.)
incorporation or organization)
585 West 500 South, Bountiful, Utah 84010
(Address of principal executive offices)
(Zip Code)
(801) 298-3360
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of November 10, 1999
----- -----------------------------------
Common Stock, $.02 par value 12,356,440
<PAGE>
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS September 30, December 31,
1999 1998
------------------ -------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 581,649 $ 2,480,083
Accounts receivable 220,368 494,484
Unbilled receivables on contracts - 142,414
Inventories - 2,520
Prepaid expenses and other 40,142 44,756
Amounts due from related parties 11,859 24,808
------------------ -------------------
Total current assets 854,018 3,189,065
------------------ -------------------
PROPERTY AND EQUIPMENT, at cost:
Manufacturing molds 474,633 474,633
Office furnishings and fixtures 552,882 531,215
Assembly and manufacturing equipment 339,356 339,356
Leasehold improvements 132,326 132,326
Automated assembly equipment 142,600 152,599
------------------ -------------------
1,641,797 1,630,129
Less accumulated depreciation and amortization (644,542) (442,331)
------------------ -------------------
Net property and equipment 997,255 1,187,798
------------------ -------------------
OTHER ASSETS 36,596 39,680
------------------ -------------------
$ 1,887,869 $ 4,416,543
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,723 $ 17,238
Accrued liabilities 101,734 322,765
------------------ -------------------
Total current liabilities 110,457 340,003
------------------ -------------------
DEFERRED ROYALTY REVENUES - 3,750,000
------------------ -------------------
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,
12,356,440 shares outstanding 247,129 247,129
Common stock subscriptions receivable (125,800) (200,200)
Additional paid-in capital 14,885,499 14,788,373
Series D warrants to purchase common stock 1,954,452 1,954,452
Deficit accumulated during the development stage (15,143,668) (16,423,014)
Deferred consulting expense (40,200) (40,200)
------------------ -------------------
Total stockholders' equity 1,777,412 326,540
------------------ -------------------
$ 1,887,869 $ 4,416,543
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Period from
----------------------------------------- Inception to
September 30, September 30, September 30,
1999 1998 1999
------------------ ------------------- -------------------
REVENUES:
<S> <C> <C> <C>
Net product sales $ - $ 1,144 $ 748,228
Development fees 170,282 249,882 2,228,525
License fees - - 3,750,000
------------------ ------------------- -------------------
Total revenues 170,282 251,026 6,726,753
------------------ ------------------- -------------------
COST OF REVENUES:
Cost of product sales - 915 536,002
Cost of development fees 140,451 199,906 1,593,601
------------------ ------------------- -------------------
Total cost of revenues 140,451 200,821 2,129,603
------------------ ------------------- -------------------
Gross margin 29,831 50,205 4,597,150
------------------ ------------------- -------------------
OPERATING EXPENSES:
Selling, general and administrative 635,691 804,533 14,053,038
Research and development 173,604 205,600 5,023,109
Write-off of operating assets - - 1,181,063
------------------ ------------------- -------------------
Total operating expenses 809,295 1,010,133 20,257,210
------------------ ------------------- -------------------
LOSS FROM OPERATIONS (779,464) (959,928) (15,660,060)
------------------ ------------------- -------------------
OTHER INCOME (EXPENSE):
Interest income 11,200 55,384 515,213
Interest expense - - (23,658)
Other income 533 809 53,006
------------------ ------------------- -------------------
Total other income, net 11,733 56,193 544,561
------------------ ------------------- -------------------
NET LOSS (767,731) (903,735) (15,115,499)
LESS PREFERENCE STOCK DIVIDENDS - - (28,169)
------------------ ------------------- -------------------
NET LOSS APPLICABLE TO COMMON SHARES
$ (767,731) $ (903,735) $ (15,143,668)
================== =================== ===================
BASIC AND DILUTED NET LOSS PER COMMON SHARE
$ (.06) $ (.07)
================== ===================
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
12,356,440 12,338,886
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Period from
----------------------------------------- Inception to
September 30, September 30, September 30,
1999 1998 1999
------------------ ------------------- -------------------
REVENUES:
<S> <C> <C> <C>
Net product sales $ - $ 10,090 $ 748,228
Development fees 949,591 768,525 2,228,525
License fees 3,750,000 - 3,750,000
------------------ ------------------- -------------------
Total revenues 4,699,591 778,615 6,726,753
------------------ ------------------- -------------------
COST OF REVENUES:
Cost of product sales - 8,115 536,002
Cost of development fees 770,455 614,820 1,593,601
------------------ ------------------- -------------------
Total cost of revenues 770,455 622,935 2,129,603
------------------ ------------------- -------------------
Gross margin 3,929,136 155,680 4,597,150
------------------ ------------------- -------------------
OPERATING EXPENSES:
Selling, general and administrative 2,137,167 2,021,964 14,053,038
Research and development 562,429 872,277 5,023,109
Write-off of operating assets 6,268 - 1,181,063
------------------ ------------------- -------------------
Total operating expenses 2,705,864 2,894,241 20,257,210
------------------ ------------------- -------------------
INCOME (LOSS) FROM OPERATIONS 1,223,272 (2,738,561) (15,660,060)
------------------ ------------------- -------------------
OTHER INCOME (EXPENSE):
Interest income 53,324 165,517 515,213
Interest expense - - (23,658)
Other income 2,750 5,107 53,006
------------------ ------------------- -------------------
Total other income, net 56,074 170,624 544,561
------------------ ------------------- -------------------
NET INCOME (LOSS) 1,279,346 (2,567,937) (15,115,499)
LESS PREFERENCE STOCK DIVIDENDS - - (28,169)
------------------ ------------------- -------------------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES
$ 1,279,346 $ (2,567,937) $ (15,143,668)
================== =================== ===================
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE $ 0.10 $ (.21)
================== ===================
BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 12,356,440 12,082,760
================== ===================
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 12,365,910 12,082,760
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
Nine Months Ended Period from
------------------------------------- Inception to
September 30, September 30, September 30,
1999 1998 1999
----------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 1,279,346 $ (2,567,937) $ (15,115,499)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 205,295 202,299 1,163,268
Common stock issued for services - - 231,000
Noncash consulting expense 97,126 7,200 361,626
Loss on disposition of assets 8,268 3,073 1,184,354
Changes in operating assets and liabilities:
Accounts receivable, net 274,116 (538,268) (220,368)
Unbilled receivables on contracts 142,414 - -
Inventories 2,520 19,981 -
Prepaid expenses and other 4,614 (17,373) (40,142)
Amounts due from related parties 12,949 (7,926) (11,859)
Other assets - (27,000) (27,000)
Accounts payable (8,515) (426,364) 8,723
Accrued liabilities (221,031) 3,942 101,734
Amounts due to related parties - (127,195) -
Deferred royalty revenues (3,750,000) 2,000,000 -
----------------- ---------------- ----------------
Net cash used in operating activities (1,952,898) (1,475,568) (12,364,163)
----------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (19,936) (520,394) (2,902,844)
Purchase of short-term investments - (2,745,399) (356,146)
Proceeds from the sale of assets - - 4,517
----------------- ---------------- ----------------
Net cash used in investing activities (19,936) (3,265,793) (3,254,473)
----------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 2,725,359 12,487,801
Proceeds from issuance of common stock warrants - 1,078,800 1,777,952
Proceeds from collection of stock subscriptions 74,400 9,000 413,700
Proceeds from issuance of preferred stock - - 1,164,001
Proceeds from issuance of redeemable
preference stock - - 240,000
Payments on redeemable preference stock
and dividends - - (268,169)
Net borrowings on stockholder loans - - 385,000
----------------- ---------------- ----------------
Net cash provided by financing activities 74,400 3,813,159 16,200,285
----------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(1,898,434) (928,202) 581,649
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,480,083 1,441,556 -
----------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 581,649 $ 513,354 $ 581,649
================= ================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Interim Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows as
of the dates and for the periods presented herein have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's December 31,
1998 Annual Report on Form 10-K. The results of operations for the three and
nine months ended September 30, 1999, are not necessarily indicative of the
operating results that may result for the year ending December 31, 1999. The
accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements in its December 31, 1998 Annual
Report on Form 10-K.
(2) Basic and Diluted Net Income (Loss) Per Common Share
Net loss per common share is based on the weighted average number of
common shares outstanding. Stock options, warrants and preferred shares prior to
conversion are not included in the calculation of net loss per common share
because their inclusion would be antidilutive, thereby reducing the net loss per
common share. Therefore, there is no difference between basic and diluted net
loss per common share for periods presented in which the Company incurs net
losses. Basic and diluted net income per common share are equivalent for the
nine months ended September 30, 1999 due to the minimal impact from outstanding
options and warrants. The Company has common stock options and warrants
outstanding at September 30, 1999 that, if exercised, would result in the
issuance of an additional 6,052,287 shares of common stock.
(3) Reclassifications
Certain reclassifications have been made in the prior periods'
consolidated financial statements to conform to the current periods'
presentation.
(4) Cash Equivalents
Cash equivalents at September 30, 1999 include investments in
commercial paper having maturity dates of October 8, 1999 and November 8, 1999
with interest rates of 5.05% and 5.13%, respectively. The Company held hese
investments until maturity.
(5) Subsequent Event
In November 1999, the Company and Kendall Healthcare Products Company,
a division of Tyco Healthcare Group LP ("Kendall") entered into a Development
and License Agreement (the "Kendall Agreement") relating to one application of
SHPI needle technology in the production of a line of safety medical needle
products, including six syringe products and five other safety needle products.
The Kendall Agreement is subject to approval by the Boards of Directors of the
two Companies. The Kendall Agreement provides for payment to the Company of
$1,500,000 within ten days after Board approvals with another $1,000,000 upon
the sale of commercial quantities of products in exchange for the Company
assigning to Kendall the FlexLoc(R) and ReLoc(TM) trademarks and two related
patents for one technology. The assignment of the patent rights to Kendall is
subject to a preexisting license agreement and the retention by the Company of
an exclusive, royalty free worldwide license in a number of strategic product
areas. The Kendall Agreement also provides for SHPI to receive development fees
and ongoing royalties, including a $500,000 advance royalty payment upon the
sale of commercial quantities of products. It is anticipated that Kendall will
manufacture all products that are subject to the Kendall Agreement.
6
<PAGE>
Item 2. 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 condensed consolidated
financial statements and accompanying notes and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1998. Wherever in this discussion the term "Company" is used, it
should be understood to refer to Specialized Health Products International, Inc.
and its wholly owned subsidiaries, Specialized Health Products, Inc.,
Specialized Cooperative Corporation and Iontophoretics Corporation, on a
consolidated basis, except where the context clearly indicates otherwise.
Overview
From its inception, the Company has incurred losses from operations. As
of September 30, 1999, the Company had cumulative net losses applicable to
common shares totaling $15,143,668. To date, the Company's principal focus has
been the design, development, testing and evaluation of its Safety Cradle(R)
sharps containers, safety lancets, safety needle technologies, intravenous flow
gauge, blood collection devices, and other safety medical products, and the
design and development of various molds and production processes.
Financial Position
The Company had $581,649 in cash and cash equivalents as of September
30, 1999. This represents a decrease of $1,898,434 from December 31, 1998.
Working capital as of September 30, 1999, decreased to $743,561 as compared to
$2,849,062 at December 31, 1998. These decreases were largely due to ongoing
selling, general and administrative costs and research and development
expenditures with no product sales and minimal margins on development fees.
There were no proceeds from equity or other financing sources during the quarter
ended September 30, 1999.
Three and Nine Months Ended September 30, 1999 and 1998
During the three and nine months ended September 30, 1999, the Company
had total revenues of $170,282 and $4,699,591, respectively, comprised of
development fees under the Development and License Agreement (the "JJM
Agreement") with Johnson & Johnson Medical, Inc. ("JJM") and license fees from
the license agreement (the "License Agreement") with Becton Dickinson and
Company Infusion Therapy Division ("BDIT"), which arrangements are discussed
below. This is compared to total revenues of $251,026 and $778,615 for the
comparable periods from the prior year, comprised primarily of development fees
under the JJM Agreement and minimal product sales. As discussed below, the
Company will look to several other products, development and strategic
arrangements for future revenues.
The JJM Agreement provides that the Company and JJM will seek to
commercialize two products using safety medical needle technology. The JJM
Agreement provides for monthly development payments by JJM, sharing of field
related patent costs, the possibility of payments for initial periods of low
volume manufacturing, an ongoing royalty stream and a JJM investment in molds,
assembly equipment and other capital costs related to commercialization of each
product. The JJM Agreement also provides for an ongoing joint cooperative
program between the Company and JJM which derives future funding directly from
sales of Company created products, the possibility of low volume manufacturing
revenue for the Company and an ongoing royalty stream for additional safety
products which are jointly approved for development. The Company anticipates
that JJM will perform substantially all of the manufacturing under the JJM
Agreement during 2000. The Company and JJM also reached arrangements whereby
they are pursuing development and commercialization of four additional products
under their joint cooperative program. No products will be released into the
market under the JJM Agreement during 1999. The Company anticipates that sales
of five products under the JJM Agreement will begin in the year 2000. There is
no assurance that the Company will realize revenues under the JJM Agreement or
that any of these products will be launched as anticipated.
The Company also has entered into the License Agreement that relates to
a single application of the Company's ExtreSafe(R) safety needle technology (the
"Technology"). Pursuant to the terms of the License
7
<PAGE>
Agreement, BDIT made payments of $4,000,000 to the Company. Of these total
payments, $3,750,000 was for advanced royalties for sales of product and
$250,000 was for a product development fee. In June 1999, BDIT and the Company
amended the License Agreement. The amendment provides that the $3,750,000
previously paid by BDIT to the Company will not be credited against future
earned royalties and the Company will have no further obligation of any kind to
BDIT with respect to these payments. Additionally, the Company agreed to defer
BDIT's exclusivity related minimum royalty obligations from BDIT's fiscal 2002
to its fiscal 2004. Accordingly, the $3,750,000 of deferred royalty revenue was
recognized as revenue during the quarter ended June 30, 1999. The Company will
not be manufacturing product in connection with the License Agreement.
BDIT previously told the Company that it expected to begin selling the
product that is the subject of the License Agreement at various times. BDIT has
now indicated that it is unsure if or when product will be introduced and sold
in the market under the License Agreement. There is no assurance that the
Company will realize additional revenues under the License Agreement or that
product will be introduced or sold in the market under the License Agreement.
Research and development ("R&D") expenses were $173,604 and $562,429
for the three and nine months ended September 30, 1999, respectively, compared
with $205,600 and $872,277 for the comparable periods from the prior year. The
Company's R&D efforts during the three and nine month periods ended September
30, 1999, focused on development of several additional products utilizing the
Company's medical safety needle technologies. The Company's R&D efforts during
the three and nine month periods ended September 30, 1998, focused on
development of several products utilizing the Company's medical safety needle
technologies and continued development work on a filmless digitized imaging
technology (which was performed by Quantum Imaging Corporation, but was funded
by the Company). The decreases in R&D expenses resulted primarily from (i) a
reduction in the development activities with respect to the filmless digitized
imaging technology, (ii) the termination of two development employees, and (iii)
a reduction in the use of outside consultants for development activities.
Selling, general and administrative expenses were $635,691 and
$2,137,167 for the three and nine months ended September 30, 1999, compared with
$804,533 and $2,021,964 for the comparable periods from the prior year. The
increase in the nine month period resulted mainly from an increase in the costs
associated with exploring new product arrangements, an increase in the cost of
the Company's leased facilities and the costs associated with the settlement of
the Leerink Swann litigation. The decrease in the three month period resulted
mainly from (i) the officers of the Company taking a combined thirty-three
percent reduction in compensation, (ii) downsizing which resulted in the
termination of two administrative employees, and (iii) reduction in financial
advisory fees.
Interest and other income was $11,733 and $56,074 for the three and
nine months ended September 30, 1999, compared with $56,193 and $170,624 for the
comparable periods from the prior year. The decreases resulted primarily from
reductions in interest income earned on funds on deposit and short-term interest
bearing investments. As funds on deposit and interest bearing short-term
investments have decreased so has the related interest income.
Liquidity and Capital Resources
To date, the Company has financed its operations principally through
private placements of equity securities, license and development fees and
proceeds from the exercise of common stock options. The Company generated
$16,200,285 in net proceeds through financing activities from inception through
September 30, 1999. The Company used net cash for operating activities of
$1,952,898 for the nine months ended September 30, 1999. As of September 30,
1999, the Company's current liabilities totaled $110,457. The Company had
working capital as of September 30, 1999 of $743,561. During the nine months
ended June 30, 1999, $74,400 of the subscriptions receivable were collected.
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 safety medical needle products,
intravenous flow gauge, blood collection devices and other products to
commercial viability, and the level of sales of and marketing costs for the
Safety Cradle(R) sharps containers, safety lancets and other products. At
September 30, 1999, the Company had not committed any funds for capital
expenditures. The Company believes that existing funds, development fees from
JJM under the JJM Agreement, license revenues and funds generated from sales of
8
<PAGE>
products and non-core technologies, will be sufficient to support the Company's
operations and planned capital expenditures through at least the end of 1999.
The Company estimates that it will need at least $3,000,000 in
additional funding in 2000 to execute its business plan. The Company anticipates
that it will generate such funding through license fees, royalties, net
development fees, product sales and from the sale of non-core technologies. The
Company has no plans to seek additional funding through the sale of its
securities. The Company has no contractual arrangements that guarantee that the
Company will have adequate funding during 2000 and there can be no assurance
that additional funding will be available on commercially reasonable terms or at
all. Any inability to obtain additional funding when needed will have a material
adverse effect on the Company, including possibly requiring the Company to
significantly curtail or cease its operations.
In June 1998, the Company entered into an Option to Purchase Agreement
(the "Option Agreement") with the University of Texas System to purchase certain
patents and related technology, research and development for a total purchase
price of $2,400,000. In accordance with the Option Agreement, a $240,000
non-refundable payment was made in July 1998 with the balance of $2,160,000 to
be paid within 30 days of the exercise of the purchase option. The Company
retained the exclusive right to exercise the option and acquire the patents and
related technology for a period of one year from the date of the execution of
the Option Agreement, or within 14 days of notification of successful completion
of animal toxicity studies. The Company received notice of successful completion
of the toxicity studies in February 1999 and subsequently entered into three
amendments to the Option Agreement resulting in extensions of the exercise
period through August 23, 1999 in exchange for payments totaling $140,000. The
Company has been reimbursed for a portion of these fees from a third party who
is interested in acquiring the technology from the Company upon exercise of the
option. A fourth amendment to the Option Agreement was executed effective August
23, 1999, extending the exercise period for an additional nine months upon the
payment of $25,000 per month. Upon execution of the amendment, a payment of
$75,000 was made covering the initial three months of the extended exercise
period. The same third party previously mentioned has committed to reimburse the
Company in full for these extension payments. The Company is not in a position
to exercise the option and the third party is not prepared to complete the
acquisition at this time. Although negotiations are continuing with respect to
the exercise of the option, there can be no assurance that an extension will be
granted or, if granted, that it will be on a commercially reasonable basis.
In November 1999, the Company and Kendall Healthcare Products Company,
a division of Tyco Healthcare Group LP ("Kendall") entered into a Development
and License Agreement (the "Kendall Agreement") relating to one application of
SHPI needle technology in the production of a line of safety medical needle
products, including six syringe products and five other safety needle products.
The Kendall Agreement is subject to approval by the Boards of Directors of the
two Companies. The Kendall Agreement provides for payment to the Company of
$1,500,000 within ten days after Board approvals with another $1,000,000 upon
the sale of commercial quantities of products in exchange for the Company
assigning to Kendall the FlexLoc(R) and ReLoc(TM) trademarks and two related
patents for one technology. The assignment of the patent rights to Kendall is
subject to a preexisting license agreement and the retention by the Company of
an exclusive, royalty free worldwide license in a number of strategic product
areas. The Kendall Agreement also provides for SHPI to receive development fees
and ongoing royalties, including a $500,000 advance royalty payment upon the
sale of commercial quantities of products. It is anticipated that Kendall will
manufacture all products that are subject to the Kendall Agreement. There is no
assurance that the necessary Board of Director approvals will be obtained, that
products will be launched as anticipated or that the Company will realize
revenues under the Kendall Agreement.
Trading and Marketability of Common Stock
In August 1999, the Company's common stock was suspended from trading
on the Nasdaq SmallCap Market System as a result of the Company being unable to
comply with the net tangible assets/market capitalization/net income and bid
price requirements. Trading in the Company's securities is being conducted in
the over-the-counter market in what is commonly referred to as the "Electronic"
or "OTC Bulletin Board" or the "OTCBB". The OTCBB is a quotation medium for
subscribing members (market makers) and is not an issuer listing service. OTCBB
securities are traded by a community of market makers that enter quotes and
trade reports through a closed computer network. There are no listing
requirements or fees imposed on the Company other than the requirement to remain
current in the Company's filings with the U.S. Securities and Exchange
Commission. The OTCBB is not considered to be a securities exchange. It may now
be more difficult for the Company to obtain news coverage and obtain coverage
and the attention of the investment community.
9
<PAGE>
Inflation
The Company does not expect the impact of inflation on its operations
to be significant for the next twelve months.
Year 2000
The Company uses computer networks, personal computer based development
and measurement equipment, and personal microprocessors that have the potential
for operational problems if they lack the ability to handle the transition to
the Year 2000. The Company has been aggressively proactive in pursuing solutions
for the Year 2000 problem. The Company has acquired new accounting software that
the vendor has represented is Year 2000 compliant and has initiated
communications with its suppliers, dealers, distributors and other third parties
in order to assess and reduce the risk that the Company's operations could be
adversely affected by the failure of these third parties to adequately address
the Year 2000 issue.
The Company's principal computer systems (including the embedded
microprocessor systems) have been purchased since December 31, 1996, and the
vendors supplying such systems have generally represented that such systems are
Year 2000 compliant. The software utilized by the Company is generally standard
"off the shelf" software, typically available from a number of vendors. The
Company is verifying with its software vendors that the services and products
provided are, or will be, Year 2000 compliant. Subject to such verification, the
Company believes that its computer systems and software are Year 2000 compliant
in all material respects. The Company estimates that the cost to redevelop,
replace or repair its technology that is not Year 2000 compliant will not be
material. The Company is not using any independent verification or validation
procedures. There can be no assurance, however, that its systems or programs are
or will be Year 2000 compliant and that the failure of those systems would not
have a material adverse impact on the Company's business and operations.
In connection with its business activities, the Company interacts with
suppliers, customers, and financial service organizations who use computer
systems. The Company is verifying with those parties their state of Year 2000
readiness. Based on its assessment activity to date, the Company believes that a
majority of the suppliers, customers and financial service organizations with
whom it interacts are making acceptable progress toward Year 2000 readiness. The
Company currently believes that the most reasonable likely worst case scenario
is that there will be some localized disruptions of supplier, customer and/or
financial services that will affect the Company and its suppliers, and
distribution channels for a short time rather than systemic or long-term
problems affecting its business operations as a whole. In view of the foregoing,
the Company does not currently anticipate that it will experience a significant
disruption to its business as a result of the Year 2000 issue. However, there is
still uncertainty about the broader scope of the Year 2000 issue as it may
affect the Company and third parties that are critical to the Company's
operations. For example, lack of readiness by electrical and water utilities,
financial institutions, government agencies or other providers of general
infrastructure could pose significant impediments to the Company's ability to
carry on its normal operations in the area or areas so affected.
The statements made herein about the costs expected to be associated
with the Year 2000 compliance and the results that the Company expects to
achieve, constitute forward-looking information. As noted above, there are many
uncertainties involved in the Year 2000 issue, including the extent to which the
Company will be able to successfully and adequately provide for contingencies
that may arise, as well as the broader scope of the Year 2000 issue as it may
affect third parties that are not controlled by the Company. Accordingly, the
costs and results of the Company's Year 2000 program and the extent of any
impact on the Company's operations could vary materially from those stated
herein.
10
<PAGE>
Forward-Looking Statements
When used in this Form 10-Q, in other 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 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 from the Company's licensing partners 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. Please refer to the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and specifically the discussion under "Other Factors" that is found
in the Company's Annual Report on Form 10-K for the year ended December 31,
1998, for more details.
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.
11
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securityholders.
None.
Item 5. Other Information.
In October 1995, the Company 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 Company
currently owns approximately 17 percent of the outstanding common stock of QIC.
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. To date, this application is not in use due in part to
the necessity of carrying chemical handling equipment required for film
processing.
QIC does not have the funding to continue to develop the technology. It
has been seeking funding from several parties, but it does not have any funding
commitments. There can be no assurance that QIC will secure adequate funding to
continue development, or that if obtained, that such funding will be on
commercially reasonable terms.
Item 6. Exhibits and Reports on Form 8-K.
(a)
INDEX TO EXHIBITS
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)
12
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3(ii).1 Second Amended and Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3(ii).1 of the
Company's Annual Report on Form 10-K, dated December 31,
1997)..
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 D Warrant Certificate (Incorporated by
reference to Exhibit 4.3 of the Company's Annual Report
on Form 10-K, dated December 31, 1997).
4.2 Form of SHPI Warrant Certificate (Incorporated by
reference to Exhibit 4.4 of the Company's Annual Report
on Form 10-K, dated December 31, 1997).
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 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)
10.5 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/A, dated December 22, 1997)
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SPECIALIZED HEALTH PRODUCTS
INTERNATIONAL, INC.
Date: 11/15/99 By /s/ David A. Robinson
-----------------------------------
David A. Robinson
President, Chief Executive Officer,
Director
Date: 11/15/99 By /s/ Charles D. Roe
-----------------------------------
Charles D. Roe
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 581,649
<SECURITIES> 0
<RECEIVABLES> 220,368
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 854,018
<PP&E> 1,641,797
<DEPRECIATION> 644,542
<TOTAL-ASSETS> 1,887,869
<CURRENT-LIABILITIES> 110,457
<BONDS> 0
0
0
<COMMON> 247,129
<OTHER-SE> 1,530,283
<TOTAL-LIABILITY-AND-EQUITY> 1,887,869
<SALES> 0
<TOTAL-REVENUES> 4,699,591
<CGS> 0
<TOTAL-COSTS> 3,476,319
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,279,346
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,279,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,279,346
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
