SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB
Annual Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
December 31, 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)
585 West 500 South, 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
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is 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-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $4,850,947.
The aggregate market value of the voting stock held by non-affiliates
(i.e., does not include directors, executive officers or ten percent
stockholders identified in Item 11 hereof) of the issuer as of April 12, 2000
was approximately $8,029,262.
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SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-KSB
YEAR ENDED DECEMBER 31, 1999
PART I
Item 1. Description of Business ..........................................3
Item 2. Description of Properties .......................................14
Item 3. Legal Proceedings ...............................................14
Item 4. Submission of Matters to a Vote of Security Holders .............14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ........15
Item 6. Management's Discussion and Analysis or Plan of Operation .......16
Item 7. Financial Statements ............................................23
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure ........................................23
PART III
Item 9. Directors and Executive Officers of the Registrant ..............24
Item 10. Executive Compensation ..........................................26
Item 11. Security Ownership of Certain Beneficial Owners and
Management ......................................................29
Item 12. Certain Relationships and Related Transactions ..................30
Item 13. Exhibits and Reports on Form 8-K ................................31
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PART I
Item 1. Description of Business
General
Specialized Health Products International, Inc. through its wholly
owned subsidiaries, Specialized Health Products, Inc., Safety Syringe
Corporation, Specialized Cooperative Corporation and Iontophoretics Corporation
(except where the context clearly indicates otherwise, these entities are
collectively referred to as the "Company") is engaged principally in the
development of cost-effective, disposable, proprietary healthcare products
designed to reduce the incidence of accidental injury in the healthcare
industry, and thus reduce the spread of disease. The Company has created a
portfolio of proprietary healthcare products that are in various stages of
pre-production, development and research. At present, the Company is focusing
its resources and activities principally on completing development of products
under current licensing and development arrangements, developing new safety
medical device products and identifying marketing partners for the Company's
safety medical needle products and concepts, sharps containers and other new
safety medical devices. The Company's products are designed to reduce the risk
of acquiring HIV/AIDS, hepatitis B and other blood-borne diseases through
accidental needlesticks.
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
the Company's needle technology in the production of a line of safety medical
needle products, including six syringe products and five other safety needle
products. The effective date of the Kendall Agreement was subject to certain
approvals that were obtained on March 29, 2000. On April 12, 2000, the Company
received a $1,500,000 payment less $35,044 representing the Company's share of
certain patent filing costs. The Company will also receive an additional
$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. 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 the Company 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 can be
no assurance that products will be launched as anticipated or that the Company
will realize revenues under the Kendall Agreement.
In December 1997, the Company entered into a Development and License
Agreement (the "JJM Agreement") with Johnson & Johnson Medical, Inc. ("JJM") to
commercialize two applications of the safety needle technology. 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 entered into arrangements whereby they are pursuing
development and commercialization of four additional products.. The Company
anticipates that the sale of one product under the JJM Agreement will begin in
the year 2000 with additional products scheduled for introduction into the
market in 2001. 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. All product introductions are scheduled and controlled by JJM.
In May 1997, the Company entered into an agreement (the "BDIT License
Agreement") with Becton Dickinson and Company Infusion Therapy Division ("BDIT")
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relating to a single application of the Company's ExtreSafe(R) safety needle
technology (the "Technology"). Pursuant to the terms of the BDIT License
Agreement, BDIT made payments of $4,000,000 to the Company. Of these total
payments, $3,750,000 was for advanced royalties and $250,000 was for a product
development fee. In June 1999, BDIT and the Company amended the BDIT 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. Accordingly, the $3,750,000 of deferred royalty revenue was recognized
as revenue during 1999. BDIT has exclusivity related minimum royalty obligations
to the Company beginning in 2004. The Company will not be manufacturing product
in connection with the BDIT License Agreement.
BDIT previously told the Company at various times that it expected to
begin selling the product that is the subject of the BDIT License Agreement.
BDIT has indicated that it is unsure if or when product will be introduced and
sold in the market under the BDIT License Agreement. BDIT has not provided the
Company with current information regarding the market introduction of the
product.
The Company has an ongoing program for developing products using its
ExtreSafe(R) medical needle technology and other medical needle technologies.
These technologies allow a contaminated needle to be protected without exposure
of the healthcare worker to the contaminated needle. Products under development
that incorporate these safety medical needle technologies include phlebotomy
devices, catheter inserters and several different syringe applications.
Prototypes of the phlebotomy devices, catheter inserters and syringes have been
completed. The Company is developing other medical safety devices.
Company Background
Specialized Health Products, Inc. ("SHP"), a Utah corporation, was
incorporated in November 1993. On July 28, 1995, SHP became a wholly owned
subsidiary of Specialized Health Products International, Inc. ("SHPI" or
"Registrant"), a Delaware corporation, through a merger with a subsidiary of
SHPI (the "Acquisition").
The Registrant was incorporated as a Utah corporation in 1986. 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 the date
of the Acquisition. On that date the Company changed its name to "Specialized
Health Products International, Inc." 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 ownership interest in Russco, Inc.
Products
Sharps Containers
SHP owns a patented sharps container system designed to reduce the risk
of accidental needlesticks and exposure to contaminated needles, blades and
instruments when disposing of such devices (the "Safety Cradle(R)" line). 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 vehicles,
in-home and insurance testing), the Company's Safety Cradle(R) sharps containers
provide convenience and safety for home healthcare and other portable
applications. In addition, each of the Company's sharps containers is designed
such that it can be used as a shipping container for the transport of medical
products. The containers can then be readily converted at the user's site into
safe and efficient sharps disposal containers. 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
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products for a broad spectrum of sharps containment applications, especially
alternate site use. In addition to molds for three sizes of Safety Cradle(R)
sharps containers, the Company owns patents to a new single injected molded-part
Safety Cradle(R) sharps container and a unimold wall mount sharps container as
well as a method patent for sharps containers 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.
While the Company has entered into several marketing and distribution
arrangements relating to its sharps container products in the past, such
arrangements were not successful and no such arrangements are currently in
effect. The Company is actively seeking to enter into distribution, marketing
and/or licensing arrangements. The Company has been unsuccessful in entering
into such an arrangement in the past and there can be no assurance that the
Company will be successful in entering into such arrangements, or that if such
arrangements are consummated that they will be on terms that are favorable to
the Company.
Products Under Development
General
The Company currently has seven sharps container patents covering its
Safety Cradle(R), unimold and transporter technologies. The Company also has two
lancet patents and other patents in progress covering its single use safety
lancet and undercut lancet technologies. As its primary focus, the Company has
had sixteen patents granted which protect its safety needle technologies. These
lancet and needle patents support the Company's fourteen technologies that
provide the basis for a wide range of safety lancet and needle products. The
following products are currently under development.
Safety Lancets
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 healthcare 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.
The Company has two disposable safety lancet patents. One patent is for
a new single use safety lancet and the other is for a new undercut technology
which yields good blood flow with a small skin incision. In the opinion of
management, the blade and blade actuation mechanism of the Company's safety
lancets have revolutionary designs. Management also believes that the safety
lancet's undercut 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. The Company is currently developing
one safety lancet device for the market.
Safety 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 healthcare 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
has applied five of its technologies to phlebotomy designs. These designs
include safety
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needle retraction, automatic and manual safety needle retraction, needle
shielding and rear needle protection. Two safety phlebotomy device products are
currently being developed for market.
Safety Steel Needles
Generally, safety steel needle products are used for small needle
access for fluid infusion and blood collection. Safety steel needle products are
often referred to as winged infusion or blood collection devices. Commonly,
those safety steel needle products currently commercially available require two
hands to encase a needle after use. The Company has applied two of its
technologies to safety steel needle product design. Both technologies permit
single handed needle retraction. Two products are currently being developed for
market, a blood collection device and a fluid infusion device.
Safety Catheter Inserters
Catheter inserters are devices that insert catheters into veins or
other areas of the body using a catheter insertion needle 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 healthcare 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
healthcare worker. The Company has applied three of its technologies to safety
catheter inserters. These designs include safety needle retraction, automatic
and manual safety needle retraction and needle shielding.
Safety 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 needle cap 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. The Company has applied seven of its technologies to safety syringes.
These designs include safety needle retraction, automatic and manual safety
needle retraction and needle shielding. The first of the Company's safety
syringe products is currently being developed for market.
Other Medical Safety Devices
The Company has an ongoing program for developing additional medical
safety devices including specialty needles. Such devices would include huber,
biopsy, dental, apherisis, laparoscopy, opthalmic, epidural, spinal, radiology
and cariology needles. The Company has applied five of its technologies to
safety specialty needle devices. These designs include manual safety needle
retraction and needle shielding.
Filmless Digitized Imaging Technology
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 Company
currently owns approximately seventeen 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
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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. Formal development of the filmless
digitized imaging technology is pending QIC raising additional funding. QIC has
no funding arrangements in place and there can be no assurance that funding will
be available on reasonable terms, if at all.
Company Strategy
The Company's primary objective is to establish itself as a leading
developer of safety medical products. The Company will seek to accomplish this
objective by capturing significant market share of targeted product segments,
broadening existing product lines and developing new products and seeking
additional market opportunities. To achieve these objectives, the Company
expects to continue to focus on the following six types of arrangements.
* Continue pursuing license/royalty agreements with large global
medical product companies for high volume products in selected
market areas. In such areas, large sales volumes require a
substantial investment in molds, injection molding equipment
and automated production equipment. While income from such
agreements is generally royalty based, there is little or no
cost of continuing company support.
* Continue to pursue combined development/license/royalty
agreements with global medical product companies for high
volume products in selected market areas. Such agreements
include joint development for a particular product and/or
continuing development subsidized by a percentage of sales.
This continuing development revenue is dedicated to production
of future products resulting from continuing joint development
with compounding royalty income.
* Enter into joint venture arrangements, wherein the Company is
responsible for the development of each safety product and the
joint venture partner provides capital for manufacturing. In
addition, the joint venture partner would be responsible for
manufacturing, marketing and sales. Under this type of
arrangement the parties would share profits on a predetermined
basis.
* Seek joint venture and original equipment manufacture (OEM)
structures where the Company is responsible for development
and the partner is responsible for funding and manufacturing.
The Company would be responsible for marketing and sales to
the OEM. In this situation the safety product can be sold to
several OEM companies.
* Manufacture, market and sell a selected group of safety
devices in niche markets. Implementation of such a strategy
depends upon cost and time of implementation, ease of
distribution, and profitability being greater than any of the
above listed options. In such niche markets the Company plans
to perform low volume manufacturing and sell the safety
products to medical product companies.
* Sell all rights to products where income projections do not
warrant any of the above options. In some cases the Company
may seek to optimize the value of the safety product by
developing the product and getting regulatory clearance prior
to sale.
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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 employs a limited number of sales and marketing personnel.
These individuals are principally involved in identifying and working with
current and potential strategic partners and develping marketing and sales
strategies. The Company is and 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 or joint ventures with such third
parties whereby the Company would receive a licensing fee, royalty payment or
shared profit arrangement 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 or product types, but may enter
into exclusive arrangements with individual companies having a major presence in
the markets the Company seeks to penetrate. There can be no assurance that the
Company will be able to enter into contracts, license agreements or joint
ventures with third parties in the future on terms acceptable to the Company or
that the Kendall Agreement, JJM Agreement or BDIT License Agreement will be
profitable for the Company.
The Company intends to support the marketing of its products by, among
other things, attending trade shows and participating in internet website
promotions and links. The Company intends to distribute samples of its products
free of charge to various healthcare 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.
The Company has an ongoing program for developing products using its
fourteen medical needle technologies and developing additional medical needle
technologies. These technologies allow a contaminated needle to be protected
without exposure of the healthcare worker to the contaminated needle. Products
under development that incorporate these safety medical needle technologies
include phlebotomy devices, catheter inserters, safety steel needles and several
different syringe applications. Prototypes of the phlebotomy devices, catheter
inserters, safety steel needles and syringes have been completed. The Company is
developing other medical safety devices.
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 will determine whether or not it
will manufacture products on a case by case basis depending on its arrangements
with marketing and distribution partners, if any. There can be no assurance that
such arrangements will be completed or if completed that they will be on terms
favorable to the Company.
The Company is not permitted to sell products based on its safety
medical needle technologies for commercial use in the United States until
regulatory approval is obtained. 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."
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Industry
Market
Healthcare is one of the largest industries in the world. Healthcare
worker and patient safety continue to be high priority, high profile issues.
User efficiency and cost effective solutions are being sought with increasing
demand. The Company's products target this market segment. Non-safety products
today compete primarily on price. Although the Company's strategy includes being
price competitive with other safety devices, the Company also seeks to compete
on the basis of healthcare worker safety, ease of use, reduced cost of disposal,
patient comfort and compliance with OSHA regulations while paying close
attention to manufacturing cost. The Company believes that when all indirect
costs (needle disposal, testing, labor savings and costs, treatment and workers
compensation expense) are considered, the Company's products will compete
effectively both with "traditional" products and with the safety products of the
Company's competitors.
Recent safety regulations and legislation have also increased the
demand for and exposure of safety medical devices. Five U.S. states have passed
safety legislation requiring use of safety needle products. OSHA issued a
national directive in November 1999 requiring healthcare workers to use needles
and other sharps that have engineering controls to provide user safety and
prevent accidental needlestick injuries. Also, in November, the Centers for
Disease Control and National Institute for Occupational Health and Safety issued
safety alerts urging healthcare workers to use safety devices having engineered
controls.
Although these events have reduced risk relative to design and
development of safety products, there is no assurance that state legislation and
the national OSHA directive will be enforced or that healthcare workers will
follow guidelines as set forth in the safety alerts. There is no assurance that
additional safety legislation on state or national levels will be enacted or
implemented.
Accidental Needlestick Injuries
Needles for hypodermic syringes, phlebotomy sets, intravenous
catheters, safety steel needles and specialty medical needles 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 are used for the drawing of blood, catheters, butterfly needles
and specialty needles are used for access to patient vessels. 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 healthcare institutions, healthcare workers, sanitation and
environmental services workers and certain regulatory agencies. Accidental
needlesticks may result in the spread of infectious diseases such as hepatitis B
and C, HIV (which may lead to AIDS), diphtheria, gonorrhea, typhus, herpes,
malaria, rocky mountain spotted fever, syphilis and tuberculosis. According to
the International Healthcare Worker Safety Center at the University of Virginia,
"the average rate of reported sharp-object injuries is 30 injuries per 100
occupied hospital beds per year. The total annual percutaneous and mucocutaneous
exposures to blood or at-risk biological substances in the U.S., based on 1996
Epinet data, was 786,885." Also, "in the two categories of devices that pose the
greatest risk for transmission of blood-borne pathogens, IV catheters and
blood-drawing needles, only 28% of devices used and less than 10% of hospitals
have switched to safety technology, respectively." While recent government
regulations are projected to dramatically increase conversions to safety
products over the next three years, the greatest obstacle to conversion is
projected to be adequate supply and availability of safety products as a result
of enormous and sudden demand. The Company believes that recent pressures from
the government and private sectors for the healthcare industry to develop
medical devices that will provide a safer working environment for healthcare and
related workers and patients have increased considerably over the past year. The
Company's products attempt to address the demand for medical devices that reduce
the risk of accidental exposure to blood-borne diseases.
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The majority of healthcare 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 healthcare industry to develop medical
devices that will provide a safer working environment for healthcare 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.
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 seven 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 two United States patents and allowed patent applications
relating to its safety lancet technology, and fourteen United States patents and
allowed patent applications relating to its safety medical needle technologies.
The Company has additional United States and international patents and patent
applications pending. The patents referred to above begin to expire in April
2006.
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
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. Certain of the Company's ExtreSafe(R) Lancet Strip manufacturing
assets were written off or reduced to their estimated realizable value. Those
assets that were not written off are expected to be used in the Company's future
operations. 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 sharps containers, safety lancets and
safety needle products and a number of suppliers could supply the necessary
parts and materials.
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Competition
The healthcare 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 Becton
Dickinson and Company, Kendall Healthcare Products Company 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 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 Kendall Healthcare Products Company. 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
safety lancets.
The leading suppliers of standard needles are Becton Dickinson and
Company, Kendall Healthcare Products Company, B. Braun and Terumo Medical
Corporation of Japan. The leading developers of safety medical needle devices
include Med-Design Company, Bio-Plexus, Inc., New Medical Technologies,
Retractable Technologies, Inc. and Univec, Inc. The Company has conducted
in-house studies and believes that its products are superior to those presently
being marketed by its competitors. The leading suppliers in the IV catheter
market are Johnson and Johnson Medical and Becton Dickinson. Other suppliers of
IV catheters having minor positions in this market include Baxter Healthcare
Corporation, Arrow and Abbott Laboratories. The Company believes its products
are superior to any safety IV catheter products on the market today.
The current leading suppliers in the blood collection needle market
(phlebotomy needles) are Becton Dickinson, Kendall Healthcare and Terumo. The
Company believes its products are superior to any safety products on the market
being sold by its competitors.
While traditional, non-safety products in the market segments the
Company seeks to address compete primarily on the basis of price, the Company
expects to compete on the basis of healthcare 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 related to accidental
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. There can be no assurance, however, that purchasers will
be willing to purchase at prices over and above that of traditional non-safety
products unless mandated and enforced by applicable law such as those recently
passed in California, Tennessee, Texas, New Jersey, Maryland and by the 1999
OSHA directive.
Research and Development/Acquisition of Technology
The Company has devoted a substantial portion of its efforts to
acquiring, designing and developing healthcare products. Company sponsored
research activities resulted in expenses of $780,425 in 1999 and $909,048 in
1998. Customer 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 revenues were $1,100,947 in
1999 and $1,028,934 in 1998. The Company plans to continue research and
development on its current products and possible new products. There is no
assurance that the Company's research and development activities will prove
effective.
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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, formalized
product development procedures, 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. No currently
proposed Company products are believed to be to be Class III products. 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 for Class III devices 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. 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 and does not raise
questions of safety or efficacy that are different from the predicate device.
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 the Safety Cradle(R) sharps container.
The Company has received FDA clearance for 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 follow-on products (i.e., other products based on its
safety medical needle technologies, intravenous flow gauge and blood collection
device) are still in the development stage. In
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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 safety medical products. The FDA 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 healthcare
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
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 meet specific requirements 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. Moreover, in March 1999
Tennessee joined California in passing legislation requiring the use of safety
needles over conventional needle products with the states of New Jersey, Texas
and Maryland joining shortly thereafter. Similar legislation is under
consideration in other states and nationally with OSHA enacting in 1999 a
directive related to the use of safety medical devices.
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.
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Seasonality of Business
Sales of the Company's products are not anticipated to be subject to
seasonal variations.
Backlog
There is no backlog of unfilled orders of the Company's products.
Employees
As of March 28, 2000, the Company employed 15 people, including 8
research and development employees, 2 sales and marketing employees, 4
accounting and administrative employees and 1 quality assurance employee. The
Company does not expect to add additional employees in the next twelve months.
The Company's employees are not represented by any labor union, and the Company
believes its relations with its employees are good.
Item 2. Description of Properties
The Company's principal offices are located at 585 West 500 South,
Bountiful, Utah, under terms of a lease with an unaffiliated lessor which
expires on June 30, 2003, subject to the Company's right to extend the lease
term for an additional three-year term. The offices comprise 17,273 square feet
of space. The Company has subleased approximately 3,300 square feet of this
space for a term of twelve months beginning March 1, 2000 with an option to
renew for an additional twelve months. The Company believes that its current
office space will be adequate to meet the needs of current and expected growth
for the foreseeable future. The Company may, however, require additional
manufacturing facilities in the future depending upon the volume of products
sold and the manufacturing arrangements to which the Company is a party.
The Company owns production molds for the Safety Cradle(R) sharps
containers and certain automated assembly equipment. At present the molds and
automated assembly equipment are not being utilized. The Company anticipates,
however, that it will utilize the molds and equipment in the future.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on November 18,
1999, 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 David T. Rovee and Robert R. Walker expired in
1999. The terms of David B. Hurley and Dr. Gale H. Thorne expire in 2000 and the
term of David A. Robinson expires in 2001.
David T. Rovee and Robert R. Walker were nominated by the Board for
election to the class whose term expires at the 2002 annual meeting of
stockholders. The stockholders then elected David T. Rovee and Robert R. Walker
by a vote of 7,827,087 for, 500 withheld authority and 7,500 abstained.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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PART II
Item 5. Market for 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, 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
or Plan of Operation." 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") is traded in the
over-the-counter market in what is commonly referred to as the "Electronic" or
"OTC Bulletin Board" or the "OTCBB" under the trading symbol "SHPI." The
following table sets forth the high and low bid information of the Common Stock
for the periods indicated. The price information contained in the table was
obtained from IDD Information Services, Inc. and other sources the Company
considers reliable. 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
------------- ---- ---
1998
----
March 31....................... $3.50 $1.63
June 30........................ $2.38 $1.44
September 30................... $2.25 $1.19
December 31.................... $1.56 $0.94
1999
----
March 31....................... $1.18 $0.94
June 30........................ $1.13 $0.75
September 30................... $0.84 $0.41
December 31.................... $1.16 $0.41
Holders of Record
At April 12, 2000, there were approximately 315 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 1999, the Company granted to 4 non-executive members of the
Company's Board of Directors stock options to acquire a total of 64,000 shares
of the Company's common stock. These stock options were granted in equal
quarterly installments at an exercise price of $2.00. In 1999, the Company
granted employees stock options to acquire a total of 190,000 shares of the
Company's common stock at an exercise price of $2.00 per share. The exercise
prices were greater than the quoted market prices of the
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underlying common stock on the date of grant. The options expire five years from
the date of grant. The option grants were exempt from registration under Section
4(2) of the Securities Act of 1933 and pursuant to Rule 506 as promulgated under
the Securities Act of 1933.
Item 6. Management's Discussion and Analysis or Plan of Operation
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 its wholly owned
subsidiaries, SHP, Safety Syringe Corporation, 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 December 31, 1999, the Company had cumulative net losses applicable to common
shares totaling $16,063,783. To date, the Company's principal focus has been the
design, development, testing and evaluation of its 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 $180,425 in cash and cash equivalents as of December
31, 1999. This represented a decrease of $2,299,658 from December 31, 1998.
Working capital as of December 31, 1999, decreased to $230,138 as compared to
$2,877,205 at December 31, 1998. These decreases were largely due to the fact
that during 1999 the Company received only $74,400 from financing activities
compared to receipt of $3,813,159 from financing activities during 1998.
Years Ended December 31, 1999 and 1998
During the year ended December 31, 1999, the Company had total
operating revenues of $4,850,947, compared with total operating revenues of
$1,039,136 for the year ended December 31, 1998. Prior to 1999, the Company had
$3,750,000 in deferred royalty revenue relating to the BDIT License Agreement.
In June 1999, BDIT and the Company amended the BDIT 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.
Accordingly, the $3,750,000 of deferred royalty revenue was recognized as
revenue during 1999. During 1999, the Company also had $1,100,947 in development
fee revenues from JJM under the JJM Agreement. Costs incurred to generate these
development fees totaled $890,222. During 1998, $10,202 of the Company's
revenues were from product sales of the Company's sharps container products and
the remaining $1,028,934 were development fee revenues from JJM under the JJM
Agreement. Costs incurred to generate these development fees totaled $823,146.
As discussed below, the Company will look to several other products and devices
for future sales revenues.
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
the Company's needle technology in the production of a line of safety medical
needle products, including six syringe products and five other safety needle
products. The effective date of the Kendall Agreement was subject to certain
approvals that were obtained on March 29, 2000. On April 12, 2000, the Company
received a $1,500,000 payment less $35,044 representing the Company's share of
certain patent filing costs. The Company will also receive an additional
$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. The assignment of the patent rights to Kendall
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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 the Company 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 can be no assurance that products will be launched as
anticipated or that the Company will realize revenues under the Kendall
Agreement.
In December 1997, the Company entered into the JJM Agreement under
which the parties are seeking to commercialize two applications of the safety
needle technology. 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 entered into arrangements
whereby they are pursuing development and commercialization of four additional
products. The Company anticipates that the sale of one product under the JJM
Agreement will begin in the year 2000 with additional products scheduled for
introduction into the market in 2001. 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. All product introductions are scheduled and
controlled by JJM.
In May 1997, the Company entered into the BDIT License Agreement
relating to a single application of the Company's ExtreSafe(R) safety needle
technology. BDIT previously told the Company that it expected to begin selling
the product that is the subject of the BDIT License Agreement at various times.
BDIT has indicated that it is unsure if or when product will be introduced and
sold in the market under the BDIT License Agreement. BDIT has not provided the
Company with information regarding the market introduction of the product.
The Company has an ongoing program for developing products using its
fourteen medical needle technologies and expects to develop additional safety
medical needle technologies.
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 ("R&D") expenses were $780,425 for the year
ended December 31, 1999, compared with $909,048 for the year ended December 31,
1998. The Company's efforts during 1999 focused on development of several
additional products utilizing the Company's medical safety needle technologies.
The Company's efforts during 1998 focused on development of several additional
products utilizing the ExtreSafe(R) and FlexLoc(R) safety needle technology, the
safety single lancet technology and continued development work on a filmless
digitized imaging technology (which was performed by QIC, but was funded by the
Company). The 1998 R&D effort was expanded beyond development of ExtreSafe(R)
products to manually actuated safety sheathing devices. The decreases in R&D
expenses resulted primarily
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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 $2,776,669 for the
year ended December 31, 1999, compared to $2,946,722 for the year ended December
31, 1998. The decrease 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.
The Company wrote off $105,762 in operating assets in 1999 that were
comprised primarily of the write down of certain automation equipment and the
write off of certain obsolete computer equipment abandoned or sold for nominal
amounts. In 1998, the Company wrote off $754,803 in operating assets that were
comprised primarily of molds, production equipment and other assets relating to
the ExtreSafe(R) Lancet Strip. These assets were written-off in connection with
the Company's decision to abandon the further manufacture and distribution of
the ExtreSafe(R) Lancet Strip.
Net other income was $61,362 for the year ended December 31, 1999
compared with $205,064 for the year ended December 31, 1998. The decrease in net
other income is attributable to interest earned on lower levels of funds on
deposit and short-term interest bearing investments. As funds on deposit and
interest bearing short-term investments have decreased, so has the interest
income.
Liquidity and Capital Resources
To date, the Company has financed its operations principally through
private placements of equity securities, advanced royalties, development fees
and proceeds from the exercise of common stock options. The Company generated
$16,200,285 and $74,400 in net proceeds through private placements of equity and
exercise of common stock options from inception through December 31, 1999 and in
1999, respectively. The Company used net cash for operating activities of
$2,340,118 during the year ended December 31, 1999. As of December 31, 1999, the
Company's liabilities totaled $125,675. The Company had working capital as of
December 31, 1999 of $230,138.
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 technologies, blood
collection devices and other products to commercial viability, and the level of
sales of the new phlebotomy product due to launch in the fourth quarter of 2000.
At December 31, 1999, the Company had not committed to spend any funds on
capital expenditures. The Company believes that existing funds, including the
$1,500,000 received from Kendall, development fees from JJM and Kendall under
the respective agreements, license revenues and funds generated from
commencement of product royalties under current agreements, will be sufficient
to maintain operations through December 31, 2000. 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 if needed will have a material adverse effect on the Company, including
possibly requiring the Company to significantly curtail or cease its operations.
From time to time the Company is presented with new opportunities to
design, develop, acquire or manufacture safety medical devices. In the event
such opportunities arise, management and the Board of Directors could determine
that the pursuit of such opportunities is in the best interest of the Company
and its stockholders and may decide to raise additional funding through the sale
of securities. The Company will also continue to pursue new arrangements with
strategic partners which could generate additional development or licensing
fees. There are no contractual arrangements in place that would provide for
additional funding and there can be no assurance that the Company will be able
to obtain additional funding if appropriate on commercially reasonable terms or
at all.
At April 12, 2000, the Company had 3,609,787 Series D Warrants and
775,000 other warrants (the "SHPI Warrants") outstanding which are exercisable
for the same number of shares of Common Stock of
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the Company at $2.00 per share. The Series 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 $8,769,574. As of the date
hereof, all of the warrants are out of the money and there can be no assurance
that any warrants will ever be exercised.
The Company has granted stock options that are currently exercisable
for 1,964,500 shares of Common Stock at exercise prices ranging between $.39 and
$2.625 per share. The exercise of all of such stock options would result in an
equity infusion to the Company of $4,054,514. All but 18,000 of the stock
options are out of the money and there can be no assurance that any of the stock
options will be exercised.
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 four
amendments to the Option Agreement resulting in extensions of the exercise
period through May 2000. The Company paid a total of $265,000 in extension fees.
The Company was reimbursed for the majority of these fees from a third party who
expressed an interest in acquiring the technology from the Company upon exercise
of the option. Subsequent to December 31, 1999, the third party determined that
it would not complete the acquisition. As the Company was not in a position to
exercise the option, the option was allowed to expire effective January 23,
2000. The Company has no obligation to make additional cash payments to the
University of Texas System.
Inflation
The Company does not expect the impact of inflation on operations to be
significant.
Year 2000
The Company had developed plans to address the possible exposures
related to the impact on its computer systems of the Year 2000. Since entering
the Year 2000, the Company has not experienced any major disruptions to its
business nor is it aware of any significant Year 2000-related disruptions
impacting its customers and suppliers. Furthermore, the Company did not
experience any material impact on business at calendar year end. The Company
will continue to monitor its critical systems over the next several months but
does not anticipate any significant impacts due to Year 2000 exposures from its
internal systems as well as from the activities of its suppliers and customers.
Forward-Looking Statements
When used in this Form 10-KSB, 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. Forward-looking statements specifically include,
but are not limited to, the dates disclosed herein upon which sales of or
royalty payments from the Company's various products are anticipated to
commence.
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
healthcare products, the level of marketing, development and distribution
efforts of the Company's partners and other risks. Furthermore, manufacturing
delays may result from additional mold
19
<PAGE>
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.
Risk Factors
In addition to the risks set forth above, 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, except for 1999, has reported losses each year since
1993. At December 31, 1999, it had an accumulated deficit of $16,063,783. 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, the only product it was selling as of December 31, 1999. The
Company does not have marketing or distribution agreements in place for this
product. 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 1999 consolidated financial statements,
attached hereto, contains a "going concern" explanatory paragraph. See
Consolidated Financial Statements and related Notes. The Company estimates that
it will need at least $500,000 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 and product royalties. The
Company has no plans to seek significant 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.
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 healthcare industry as well as
increasing competition from safety products made by other companies, could
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 sharps
containers, safety lancets, medical safety needle technologies, blood collection
devices 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
20
<PAGE>
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 safety medical
needle technologies, intravenous flow gauge and safety lancets 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. Certain portions of
the Company's international patent prosecution efforts are funded by third
parties. The failure of the funding parties to pay for the international patent
prosecution costs would materially effect the Company's ability to prosecute
these patents. 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, and established distribution channels 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, Johnson &
Johnson, Sage Products, Inc., Surgicutt, Inc., Miles, Inc., B. Braun, Diagnostic
Corporation, Boehringer Mannheim, Inc., Kendall Healthcare Products Company,
Terumo Medical Corporation, Med-Design Company, Bio-Plexus, Inc., Maxon, Inc.
and Retractable Technologies, Inc. and Univec, Inc. See "Business -
Competition." Such competitors may use their economic strength to influence the
market to continue to buy their existing products. These competitors may also be
potential strategic partners with respect to various products as are, for
example, Kendall and JJM. 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
21
<PAGE>
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. The Company also has an umbrella policy
in the amount of $5 million. In certain cases the Company has indemnification
arrangements in place with its strategic partners who will be selling Company
developed products under the partner's label. 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 Healthcare Industry. The healthcare industry is
subject to changing political, economic and regulatory influences that may
affect the procurement practices and operations of healthcare facilities. During
the past several years, the healthcare 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
healthcare costs by limiting both coverage and reimbursement levels for
healthcare 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. healthcare system and
the healthcare systems of various states including the safety initiatives that
have been passed in five states and are under consideration in other states and
on a national level. OSHA also issued a national directive in November 1999
requiring use of safety medical devices. Many of these proposals seek to
increase government involvement in healthcare, lower reimbursement rates,
contain costs and otherwise change the operating environment for the Company's
prospective customers. Healthcare 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 healthcare 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
Board currently consists of five members, two 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.
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
22
<PAGE>
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.
Item 7. Financial Statements
See index to financial statements and financial statement schedules
included herein as Item 14.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
23
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
Set forth below is certain information concerning each of the directors
and executive officers of the Company as of April 12, 2000.
With the
Name Age Position Company Since
---- --- -------- -------------
David A. Robinson (1) 56 President, Chairman of the 1993
Board, Chief Executive Officer
and Director
Dr. Gale H. Thorne (1) 67 Vice President - Product Development 1994
and Director
Charles D. Roe 49 Vice President - Finance and Investor 1997
Relations, Chief Financial Officer,
Secretary &Treasurer
David G. Hurley (2)(3) 64 Director 1999
David T. Rovee (2)(3) 60 Director 1998
Robert R. Walker (2)(3) 69 Director 1994
- ---------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
David A. Robinson. Mr. Robinson is 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 and his term expires in 2001. 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 in Business Administration and a Masters
degree in Management Science from the University of Southern California.
Dr. Gale H. Thorne. Dr. Thorne is Vice President - Product Development,
for the Company. He has been a director since January 1995 and his term expires
in 2000. Dr. Thorne has held his present position as Vice President - Product
Development, since October 1994. From 1993 to 1994, Dr. Thorne was Vice
President - Engineering, of Eneco, Inc., a Utah company. During Dr. Thorne's
tenure at Eneco, Inc., Dr. Thorne was primarily engaged in prosecuting patents.
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 thirty 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 and is a patent agent. 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.
24
<PAGE>
Charles D. Roe. Mr. Roe is Chief Financial Officer, Vice President -
Finance and Investor Relations, Secretary and Treasurer of the Company. He was
appointed to his position as Chief Financial Officer and Vice-President in
November 1997, he was appointed as Secretary and Treasurer in December 1997 and
he 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. 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 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 that
company providing management services to various companies financed by Covington
Capital Corporation. Mr. Roe graduated from the University of Utah with a
Bachelor of Arts degree in Accounting.
David G. Hurley. Mr. Hurley has been a director of the Company since
February 1999 and his term expires in 2000. He has spent the last 33 years in
the management consulting and financial advisory business. For 25 years at
Arthur D. Little, Inc., Mr. Hurley was involved in corporate development
consulting with large and mid-sized firms throughout North America. Since 1991,
Mr. Hurley has been self employed and working principally as a management
consultant and financial advisor. He has a Bachelors degree in Economics,
Masters degree in Business Administration and has completed the Advanced
Management Program at the Harvard Graduate School of Business.
Dr. David T. Rovee. Dr. Rovee has been a director of the Company since
April 1998 and his term expires in 2002. He is currently a business management
and technology consultant in the pharmaceutical and medical products fields.
From 1991 to 2000 he served as President and Chief Operating Officer of
Organogenesis, Inc., a publicly traded biotechnology company. Dr. Rovee has been
employed full time with Organogenesis, Inc. since 1991. Prior to his employment
with Organogenesis, Inc., Dr. Rovee was employed for a twenty-five year period
by Johnson & Johnson in various capacities including Vice President and Director
of Research and Development for Johnson & Johnson Patient Care, Inc. Dr. Rovee
has a Bachelors degree in Biology from Memphis State University, a Masters
degree in Zoology from Louisiana State University and a Ph.D. in Development
Biology from Brown University.
Robert R. Walker. Mr. Walker is a director of the Company and has been
since March 1994 and his term expires in 2002. He is currently self-employed as
a consultant in the healthcare 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 Healthcare, 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 officers, 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 1999.
Item 10. 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 $100,000 (determined for the year
ended December 31, 1999) (the "Named Executive Officers"). The tables include
information related to stock options granted to the Named Executive Officers.
Summary Compensation Table. The following table provides certain
information regarding compensation paid by the Company to the Named Executive
Officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Awards Payouts
------------------- ------ -------
Restricted Stock All Other
Name and Other Annual Stock Options/ LTIP Compensation
Principal Position Year Salary ($) Bonus ($) Compensation($)(1) Awards ($) SAR(#) Payouts($) ($)
------------------ ---- ---------- --------- ------------------ ---------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David A. Robinson, 1997 240,000 --- 4,750 --- --- --- 4,150
President, CEO, Chairman 1998 240,000 1,000 10,000 --- --- --- 10,428
of the Board and Director 1999 225,416(2) --- 10,000 --- --- --- 68,508(4)
Dr. Gale H. Thorne, VP 1997 150,000 --- 4,750 --- --- --- 429
Product Development and 1998 150,000 1,000 6,925 --- --- --- 6,925
Director 1999 146,041(2) --- 7,302 --- --- --- 21,752(5)
--- --- ---
Charles D. Roe, VP 1997 20,833 --- --- --- --- ---
50,000(3)
Finance and Investor 1998 100,000 1,000 5,050 --- --- --- 226
Relations and CFO 1999 104,022(2) --- 3,438 --- --- --- 1,044(6)
David L. Thorne 1997 80,292 --- 4,000 --- --- ---
Manager - Product 1998 94,666 300 4,748 --- --- ---
Development 1999 100,000(2) --- 5,000 --- --- --- 51,044(7)
</TABLE>
- ---------------
(1) These amounts represent payments by the Company into its 401(k) retirement
plan for the benefit of the Named Executive Officer.
(2) In January 1999, Dr. Thorne's salary was increased from $150,000 to
$165,000 per year, Mr. Roe's was increased from $100,000 to $110,000 per
year and Mr. David Thorne's salary was increased from $96,000 to $100,000.
In September 1999, Mr. Robinson's salary was reduced from $240,000 to
$190,000 per year, Dr. Thorne's salary was reduced from $165,000 to
$100,000 per year and Mr. Roe's salary was reduced from $110,000 to $90,000
per year.
(3) Options issued pursuant to the non-qualified stock option plan.
(4) This represents payment of accrued vacation, $67,400 of which was used to
payoff a subscription receivable in a noncash transaction. Effective
January 1, 1999, the Company changed its accrued vacation policy and
26
<PAGE>
subsequent to that date allows a maximum of twenty days vacation pay to be
carried forward from year to year.
(5) This includes $17,957 payment of accrued vacation, $6,920 of which was used
to payoff a subscription receivable in a noncash transaction. Effective
January 1, 1999, the Company changed its accrued vacation policy and
subsequent to that date allows a maximum of twenty days vacation pay to be
carried forward from year to year. Also includes $3,795 in life insurance
on Dr. Thorne with insurance proceeds payable to the beneficiary designated
by Dr. Thorne. This insurance policy has no cash surrender value.
(6) These amounts represent the amounts paid by the Company for term life
insurance on the life of Mr. Roe with insurance proceeds payable to the
beneficiary designated by Mr. Roe. This insurance policy has no cash
surrender value.
(7) Represents $50,000 paid to Mr. Thorne for cancellation of SHPI Warrants to
acquire 25,000 shares of common stock. Also represents $1,044 paid by the
Company for term life insurance on the life of Mr. Thorne with insurance
proceeds payable to the beneficiary designated by Mr. Thorne. This
insurance policy has no cash surrender value.
Compensation of Directors
No cash fees or other consideration were paid to employee directors of
the Company by the Company for service on the Board during 1999. During 1999,
the Company compensated non-employee directors at a rate of $10,000 per year
payable in equal quarterly installments along with options to purchase 16,000
shares of the Company's common stock that were granted in equal quarterly
installments at an exercise price of $2.00 per share. The Company expects that
the 2000 compensation for non-employee directors will be the same as the 1999
compensation including the issuance of options to purchase 16,000 shares of the
Company's common stock granted in equal quarterly installments at an exercise
price equal to the fair market value of the underlying common stock on the date
of grant, but in no event shall the exercise price be less than $2.00 per share.
The Company has made no other agreements regarding compensation of non-employee
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 an employment agreement with Mr. David A.
Robinson. Mr. Robinson's employment agreement, which has been amended from time
to time, provides that (i) Mr. Robinson receive a salary of $190,000 per year
beginning September 16, 1999; (ii) Mr. Robinson's current employment agreement
expires on December 31, 2001; (iii) Mr. Robinson is entitled to vacation pay and
health insurance; (iv) if the employment of Mr. Robinson is terminated by reason
of disability or other than for cause, his salary will continue for the full
term of the agreement; (v) if Mr. Robinson is terminated for cause, his salary
ceases as of the date of termination; (vi) the Company will provide Mr. Robinson
with up to $1,000,000 of term life insurance while he is employed by the
Company; and (vii) Mr. Robinson shall keep all proprietary information relating
to the business of the Company confidential both during and after the term of
the agreement. The Company does not have employment agreements with any of its
other Named Executive Officers.
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.
27
<PAGE>
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.
Accrued Vacation Pay
Effective January 1, 1999, the Company changed its vacation policy.
Prior to January 1, 1999, the Company's policy was to allow executive officers
to carry over vacation from year to year without limitation. After January 1,
1999, the Company allows all employs to carry over a maximum of twenty days
vacation pay from year to year.
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
In October 1998, the Company's stockholders approved the adoption of
the Specialized Health Products International, Inc. 1998 Stock Option Plan (the
"Option Plan"). The Option Plan will permit the Company to grant "non-qualified
stock options" and "incentive stock options" to acquire the Company's Common
Stock. The total number of shares authorized for the Option Plan may be
allocated by the Board between the non-qualified stock options and the incentive
stock options from time to time, subject to certain requirements of the Internal
Revenue Code of 1986, as amended. The option exercise price per share under the
Option Plan may not be less than the fair market value of a share of Common
Stock on the date on which the option is granted and in no event can the
exercise price be less than $2.00 per share. A total of 2,000,000 shares are
allocated to the Option Plan, but the Option Plan also restricts the total
number of shares of Common Stock that the Company can grant options to acquire
under all of its existing stock option plans to 2,000,000 shares. As of April
12, 2000, options to acquire an aggregate of 565,000 shares of Common Stock at
an exercise price of $2.00 per share had been granted and are presently
outstanding under the Option Plan and stock options exercisable for 1,399,500
shares of Company common stock at exercise prices ranging from $.39 to $2.625
are outstanding under plans that preceded the Option Plan. None of the options
granted under the Option Plan were granted to executive officers of the Company.
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.
28
<PAGE>
Item 11. 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 April 12, 2000,
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 April 12, 2000, the
Company had 12,356,440 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) 640,717 5.1% President, CEO, Chairman
of the Board and Director
Dr. Gale H. Thorne(4) 400,905 3.2% Vice President - Product
Development and Director
Charles D. Roe(5) 38,936 * Chief Financial Officer,
VP Finance and Investor
Relations
David G. Hurley(6) 16,000 * Director
Dr. David T. Rovee(7) 27,000 * Director
Robert R. Walker(8) 139,000 1.1% Director
Executive Officers and 1,262,558 9.8%
Directors as a Group
(six persons)
Johnson & Johnson 2,000,000 15.0%
Development Corporation(9)
One Johnson & Johnson Plaza,
New Brunswick, NJ 08933
Asdale Ltd (10) 1,500,000 11.4%
44 Lowndes Street
London, England
* Less than 1%.
- --------------
(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 330,219 shares of common stock and stock options to purchase
250,000 shares of common stock. Also includes 60,498 shares of common stock
purchased through the Company's 401(k) plan.
29
<PAGE>
(4) Includes 18,000 shares of common stock, stock options to purchase 115,000
shares of common stock and warrants to purchase 200,000 shares of common
stock. Also includes 25,000 shares of common stock that Dr. Thorne is
deemed to beneficially own through a trust and 42,905 shares of common
stock purchased through the Company's 401(k) plan. See "Certain
Relationships and Related Transactions."
(5) Includes 13,936 shares of common stock purchased through the Company's
401(k) plan and stock options to acquire 25,000 shares of common stock.
Does not include stock options to acquire 25,000 shares of common stock
that vest in October 2000.
(6) Includes stock options to acquire 16,000 shares of common stock. Does not
include stock options to purchase 4,000 shares of common stock that vest in
December 2000.
(7) Includes 1,000 shares of common stock and stock options to purchase 26,000
shares of common stock. Does not include stock options to purchase 4,000
shares of common stock that vest in December 2000.
(8) Includes stock options to purchase 76,000 shares of common stock. Also
includes 63,000 shares of common stock that Mr. Walker is deemed to
beneficially own through a trust. Does not include stock options to acquire
4,000 shares of common stock that vest in December 2000.
(9) Includes 1,000,000 shares of common stock and 1,000,000 Series D Warrants.
(10) Includes 750,000 shares of common stock and 750,000 Series D Warrants.
The Company is not aware of any arrangements which may, at a subsequent
date, result in a change in control of the Company.
Item 12. 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
technology, 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 private placement that closed 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 nephew of David A.
Robinson.
In December 1997, the Company entered into a development and license
agreement with JJM to commercialize two applications of medical safety needle
technology. The JJM 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 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, 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 JJM Agreement, Johnson
& Johnson Development Corporation purchased $2,000,000 of Company securities
comprised of common stock and Series D Warrants in a private placement that
closed in January 1998.
In May 1999, the Company paid Westbridge Capital Partners $90,000 to
assist the Company in evaluating certain medical safety product markets and
segments and to evaluate and develop related business strategies. David G.
Hurley, a director of the Company, is an affiliate of Westbridge Capital
Partners.
30
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
Exhibits
Listed on page 33 hereof.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter ended December 31, 1999.
31
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SPECIALIZED HEALTH PRODUCTS
INTERNATIONAL, INC.
(Registrant)
Date: April 13, 2000 By /s/ David A. Robinson
----------------------
David A. Robinson
President, Chief Executive
Officer and Director
In accordance with the Exchange Act, 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 April 13, 2000
- ------------------------ Officer and Director (Principal
David A. Robinson Executive Officer)
/s/ Charles D. Roe Vice President, Chief Financial April 13, 2000
- ------------------------ Officer, Secretary and
Charles D. Roe Treasurer (Principal Financial
and Accounting Officer)
/s/ Gale H. Thorne Director and Vice President April 13, 2000
- ------------------------
Gale H. Thorne
/s/ David G. Hurley Director April 13, 2000
- ------------------------
David G. Hurley
/s/ Robert R. Walker Director April 13, 2000
- ------------------------
Robert R. Walker
32
<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
(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 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 Form 10-K, dated December 31,
1997)
10.1 Form of Employment Agreement with David A. Robinson
(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)
10.8 Specialized Health Products International, Inc. 1998 Stock
Option Plan (Incorporated by reference to Appendix A to the
Company's Amended Proxy Statement, filed October 1, 1998)
21.1 Schedule of subsidiaries.
27.1 Financial Data Schedule
33
<PAGE>
SPECIALIZED HEALTH PRODUCTS
INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F - 2
Consolidated Balance Sheet as of December 31, 1999 F - 3
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998 and for the Period
from Inception to December 31, 1999 F - 5
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1999 and 1998 and
for the Period from Inception to December 31, 1999 F - 6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998 and for the Period
from Inception to December 31, 1999 F - 12
Notes to Consolidated Financial Statements F - 14
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Specialized Health Products International, Inc.:
We have audited the accompanying consolidated balance sheet of Specialized
Health Products International, Inc. (a Delaware corporation in the development
stage) and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 1999 and 1998 and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from inception
(November 19, 1993) to December 31, 1999. 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 subsidiaries for the period from inception to December 31, 1995. Such
financial statements are included in the cumulative inception to December 31,
1999 totals of the statements of operations, stockholders' equity (deficit) and
cash flows and reflect total revenues and net loss of 7 percent and 24 percent,
respectively, of the related cumulative totals. Those financial statements were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to those specified amounts included in the
cumulative totals, is based solely upon the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 subsidiaries as of December 31, 1999, and the results of
their operations and their cash flows for the years ended December 31, 1999 and
1998 and for the period from inception to December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
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 experienced only minimal
profitability in 1999 and prior to that incurred significant losses since
inception. The Company incurred negative cash flows from operating activities of
$2,340,118 and $2,069,322 for the years ended December 31, 1999 and 1998,
respectively. Sales of products based on the Company's proprietary technologies
have been minimal. As of December 31, 1999, the Company had an accumulated
deficit of $16,063,783. 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 9, 2000 (except with respect to
the matter discussed in the fifth paragraph
of Note 3, as to which the date is April 12, 2000)
F-2
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED BALANCE SHEET
ASSETS December 31,
------ 1999
----------------------
CURRENT ASSETS:
<S> <C>
Cash $ 180,425
Accounts receivable 135,374
Prepaid expenses and other 36,869
Amounts due from related parties 3,145
----------------------
Total current assets 355,813
----------------------
PROPERTY AND EQUIPMENT, at cost:
Manufacturing molds 474,633
Office furnishings and fixtures 552,882
Assembly and manufacturing equipment 317,391
Leasehold improvements 132,326
Construction-in-progress 71,300
----------------------
1,548,532
Less accumulated depreciation and amortization (811,041)
----------------------
Net property and equipment 737,491
----------------------
OTHER ASSETS 35,568
----------------------
$ 1,128,872
======================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this consolidated balance sheet.
F-3
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED BALANCE SHEET (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31,
------------------------------------ 1999
----------------------
CURRENT LIABILITIES:
<S> <C>
Accounts payable $ 4,692
Accrued liabilities 120,983
----------------------
Total current liabilities 125,675
----------------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 3 and 6)
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
Additional paid-in capital 14,865,399
Series D warrants to purchase common stock 1,954,452
Deficit accumulated during the development stage (16,063,783)
----------------------
Total stockholders' equity 1,003,197
----------------------
$ 1,128,872
======================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this consolidated balance sheet.
F-4
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, Period from
------------------------------------------ Inception to
December 31,
1999 1998 1999
----------------------------------------------------------------
REVENUES:
<S> <C> <C> <C>
Net product sales $ - $ 10,202 $ 748,228
Development fees and related services 1,100,947 1,028,934 2,379,881
License fees 3,750,000 - 3,750,000
----------------------------------------------------------------
Total revenues 4,850,947 1,039,136 6,878,109
----------------------------------------------------------------
COST OF REVENUES:
Cost of product sales - 8,048 536,002
Cost of development fees and related services 890,222 823,146 1,713,368
----------------------------------------------------------------
Total cost of revenues 890,222 831,194 2,249,370
----------------------------------------------------------------
Gross margin 3,960,725 207,942 4,628,739
----------------------------------------------------------------
OPERATING EXPENSES:
Selling, general and administrative 2,776,669 2,946,722 14,692,540
Research and development 780,425 909,048 5,241,105
Loss on disposal of operating assets 105,762 754,803 1,280,557
----------------------------------------------------------------
Total operating expenses 3,662,856 4,610,573 21,214,202
----------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 297,869 (4,402,631) (16,585,463)
----------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 58,261 199,287 520,150
Interest expense - - (23,658)
Other income, net 3,101 5,777 53,357
----------------------------------------------------------------
Net other income 61,362 205,064 549,849
----------------------------------------------------------------
NET INCOME (LOSS) 359,231 (4,197,567) (16,035,614)
LESS PREFERENCE STOCK DIVIDENDS - - (28,169)
----------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 359,231 $ (4,197,567) $ (16,063,783)
================================================================
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ .03 $ (.35)
==========================================
BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 12,356,440 12,153,264
==========================================
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 12,364,917 12,153,264
==========================================
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
Common Accumulated
Preferred Stock Common Stock Stock Sub- Additional During the Deferred
-------------------- -------------------- scriptions Paid-in Series C Series D Development Consulting
Shares Amount Shares Amount Receivable Capital Warrants Warrants Stage Expense
----------------------------------------------------------------------------------------------------------------
<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)$ -
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-6
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Deficit
Common Accumulated
Preferred Stock Common Stock Stock Sub- Additional During the Deferred
-------------------- -------------------- scriptions Paid-in Series C Series D Development Consulting
Shares Amount Shares Amount Receivable Capital Warrants Warrants Stage Expense
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 - - - -
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 - - - -
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-7
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Deficit
Common Accumulated
Preferred Stock Common Stock Stock Sub- Additional During the Deferred
-------------------- -------------------- scriptions Paid-in Series C Series D Development Consulting
Shares Amount Shares Amount Receivable Capital Warrants Warrants Stage Expense
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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) -
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 $ - $ - $ (7,951,444)$ (40,200)
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-8
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Deficit
Common Accumulated
Preferred Stock Common Stock Stock Sub- Additional During the Deferred
-------------------- -------------------- scriptions Paid-in Series C Series D Development Consulting
Shares Amount Shares Amount Receivable Capital Warrants Warrants Stage Expense
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of
common stock
options - $ - 110,000 $ 2,200 $ - $ 181,575 $ - $ - $ - $ -
-
Issuance of
common stock and
common stock
warrants for
cash, net
of expenses - - 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 (12,225,447) (40,200)
Exercise of
common stock
warrants - - 85,000 1,700 - 168,300 - - - -
Issuance of
common stock and
conversion of
Series C warrants
to Series D
warrants - - 256,598 5,132 - (5,132) (310,994) - - 310,994
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-9
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Deficit
Common Accumulated
Preferred Stock Common Stock Stock Sub- Additional During the Deferred
-------------------- -------------------- scriptions Paid-in Series C Series D Development Consulting
Shares Amount Shares Amount Receivable Capital Warrants Warrants Stage Expense
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock
and common stock
warrants for cash,
net of expenses - $ - 1,860,000 $ 37,200 $ - $2,518,159 $ - $1,078,800 $ - $ -
Issuance of
common stock
warrants for
service - - - - - - - 163,500 - -
Cash received
for stock
subscriptions
receivable - - - - 9,000 - - - - -
Issuance of
common stock
options for
services - - - - - 7,200 - - - -
Issuance of
common stock
for services - - 25,000 500 - (13,500) - 13,000 - -
Net loss - - - - - - - - (4,197,567) -
----------------------------------------------------------------------------------------------------------------
BALANCE as of
December 31, 1998 - - 12,356,440 247,129 (200,200) 14,788,373 - 1,954,452 (16,423,014) (40,200)
Reduction in stock
subscriptions
receivable - - - - 200,200 - - - - -
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-10
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Deficit
Common Accumulated
Preferred Stock Common Stock Stock Sub- Additional During the Deferred
-------------------- -------------------- scriptions Paid-in Series C Series D Development Consulting
Shares Amount Shares Amount Receivable Capital Warrants Warrants Stage Expense
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Modification of
options
previously
granted to
employees - $ - - $ - $ - $ 97,126 $ - $ - $ - $ -
Stock options
granted in
exchange for
services
rendered - - - - - (20,100) - - - 20,100
Stock options
forfeited - - - - - - - - - 20,100
Net income - - - - - - - 359,231 - -
----------------------------------------------------------------------------------------------------------------
BALANCE as of
December 31, 1999 - $ - 12,356,440 $ 247,129 $ - $14,865,399 $ - $1,954,452 $ (16,063,783)$ -
================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Period from
Year Ended December 31, Inception to
------------------------------------ December 31,
1999 1998 1999
---------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 359,231 $ (4,197,567) $ (16,035,614)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 382,597 430,315 1,340,570
Allowance for doubtful accounts receivable 125,800 - 125,800
Common stock issued for services - - 231,000
Noncash consulting expense 117,226 23,700 381,726
Loss on disposition of assets 105,762 754,803 1,281,848
Changes in operating assets and liabilities:
Accounts receivable 359,110 (460,156) (135,374)
Unbilled receivables on contracts 142,414 (142,414) -
Inventories 2,520 69,832 -
Prepaid expenses and other 7,887 19,460 (36,869)
Amounts due from related parties 21,663 (24,808) (3,145)
Other assets - 1,143 (27,000)
Accounts payable (12,546) (452,710) 4,692
Accrued liabilities (201,782) 36,275 120,983
Amounts due to related parties - (127,195) -
Deferred royalty revenue (3,750,000) 2,000,000 -
---------------------------------------------------------
Net cash used in operating activities (2,340,118) (2,069,322) (12,751,383)
---------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (35,940) (709,827) (2,918,848)
Purchase of patents and technology - - (356,146)
Proceeds from the sale of assets 2,000 4,517 6,517
---------------------------------------------------------
Net cash used in investing activities (33,940) (705,310) (3,268,477)
---------------------------------------------------------
F-12
<PAGE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS international, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Increase (Decrease) in Cash
Period from
Year Ended December 31, Inception to
----------------------------------- December 31,
1999 1998 1999
--------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
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 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 repayments on stockholder loans - - 385,000
--------------------------------------------------------
Net cash provided by financing activities 74,400 3,813,159 16,200,285
--------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (2,299,658) 1,038,527 180,425
CASH AT BEGINNING OF THE PERIOD 2,480,083 1,441,556 -
--------------------------------------------------------
CASH AT END OF THE PERIOD $ 180,425 $ 2,480,083 $ 180,425
========================================================
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
For the period from inception to December 31, 1999, the Company recorded
in-kind dividends on the redeemable preferred stock of $28,169.
For the period from inception to December 31, 1999, the Company issued common
stock for subscriptions receivable of $548,000.
For the period from inception to December 31, 1999, the Company converted
certain stockholder loans and amounts due to stockholders to common stock
totaling $485,000.
F-13
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(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. together with its wholly and
majority owned subsidiaries, Specialized Health Products, Inc. ("SHP"),
Specialized Cooperative Corporation ("SCC"), Iontophoretics Corporation ("IPC"),
and Safety Syringe Corporation ("SSC") (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. The Company's activities
since inception have focused on research and development of products, obtaining
financing, recruiting personnel and identifying and contracting with
manufacturers, distributors and strategic partners. 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 has incurred significant cumulative
net losses. The Company experienced only minimal profitability in 1999 and prior
to that incurred net losses since inception. The Company incurred negative cash
flows from operating activities of $2,340,118 and $2,069,322 during the years
ended December 31, 1999 and 1998, respectively. Sales of the products based on
the Company's proprietary technologies have been minimal. As of December 31,
1999, the Company had an accumulated deficit of $16,063,783. 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, distributors and strategic partners.
Although there can be no assurance, the Company believes that existing cash and
expected cash flows from existing and potential distribution and license
agreements (see Note 3), will be sufficient to support the Company's operations
at least through December 31, 2000. Management has negotiated agreements with
third parties to assist in the development, financing, manufacturing and
distribution of its products under development or near commercialization. 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 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 products, the Company's only currently commercialized product.
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. 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 its
products expands, the level of sales and marketing activities for the
Safety Cradle(R) sharps container product and the level of effort needed to
develop and commercialize other
F-14
<PAGE>
products utilizing the Company's medical needle and other technologies. 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 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
and strategic partners.
d) 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.
e) The Company anticipates that it will be dependent on third-party contracts
for the distribution of its products, none of which have been successful to
date.
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 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 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.
h) 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. 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.
Business Combination
SHP was organized in November 1993. In July 1995, SHP entered into a business
combination with Russco, Inc. wherein it became a wholly owned subsidiary of
Russco and Russco's name was changed to Specialized Health Products
International, Inc. ("SHPI"). Russco was organized in February 1986. Russco had
no significant operations and minimal capital with which to conduct its
business.
At the closing of the business combination, Russco's 300,000 shares of common
stock 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 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 estimated
fair value at the date of closing and the operating results of Russco prior to
the business combination not being included with the historical operating
results of SHP.
F-15
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of SHPI
and its wholly owned subsidiaries. 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, 1999, the Company had demand deposits at a bank in excess of the
$100,000 limit for insurance by the Federal Deposit Insurance Corporation.
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 are 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 $423,000 at December 31, 1999. 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 or group of assets over
the remaining life in measuring whether the assets are recoverable.
F-16
<PAGE>
During 1999, the Company adjusted the estimated useful lives of certain
manufacturing molds in order to properly reflect the realized value of the molds
at December 31, 1999. As a result of the adjustment, an additional $108,554 of
depreciation expense was recognized during 1999.
During 1998, the Company elected to abandon the further manufacture and
distribution of the ExtreSafe(R) Lancet Strips. As a result, the Company wrote
off $49,853 of inventory, $7,380 of patent costs, net of accumulated
amortization, and $739,924 of fixed assets, net of accumulated depreciation,
related to the discontinued product that cannot be utilized by the Company for
other purposes.
Also during 1998, the Company adjusted the estimated useful lives of certain
patents in order to properly reflect the fair market value of the patents at
December 31, 1998. As a result of the adjustment, an additional $144,169 of
amortization expense was recognized during 1998.
Revenue Recognition
Sales are recognized when product is shipped to the customer. Development fees
are recognized in the period that the related services are performed. Royalty
revenues are recognized as revenues when the related products are sold or upon
the Company's fulfillment of any future obligation under the related agreements.
Research and Development Costs
Research and development costs are expensed as incurred.
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 values of the Company's financial instruments approximate their fair
values. The estimated fair values have been determined using appropriate market
information and valuation methodologies.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting
for Derivatives Instruments and Hedging Activities." This statement establishes
accounting and reporting standards requiring that every derivative instrument be
recorded on the balance sheet as either an asset or liability measured at fair
value. The statement also requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. This statement is effective for fiscal years beginning after June 15,
2000, and is not expected to have a material impact on the Company's
consolidated financial statements.
F-17
<PAGE>
Basic and Diluted Net Income (Loss) Per Common Share
As a result of the Company incurring net losses for the year ended December 31,
1998, both basic and diluted net loss per common share for that year are based
on the weighted average number of common shares outstanding. Stock options and
warrants prior to conversion are not included in the calculation of diluted net
loss per common share for that year because their inclusion would be
antidilutive, thereby reducing the net loss per common share. Options and
warrants to purchase 6,020,287 shares of common stock at exercise prices ranging
from $1.25 to $2.625 per share were outstanding at December 31, 1999 but were
not included in the computation of diluted EPS for the year then ended because
the exercise price was greater than the average market price of the common
shares and as such, their inclusion would be antidilutive. Options to purchase
18,000 common shares were dilative and therefore were considered in the 1999
calculation of diluted EPS.
Reclassifications
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the current year presentation.
(3) DISTRIBUTION AND LICENSE AGREEMENTS
Becton Dickinson and Company
In August 1996, the Company entered into an exclusive distribution agreement
with Becton Dickinson and Company Sharps Disposal Systems Division relating to
the Company's Safety Cradle(R) sharps container products. The agreement granted
Becton Dickinson an exclusive worldwide right to market and distribute the
Company's sharps container 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 Becton Dickinson's failure to meet minimum purchase
requirements set forth in the agreement, the Company terminated the agreement
during 1998. Sales of the Safety Cradle(R) sharps have been minimal.
In May 1997, the Company entered into an exclusive license agreement with Becton
Dickinson and Company Infusion Therapy Division relating to a single application
of the Company's ExtreSafe(R) safety needle withdrawal technology. Pursuant to
the terms of the agreement, Becton Dickinson paid $4,000,000 to the Company of
which $3,750,000 was for advanced royalties for sales of product and $250,000
was for a product development fee. In June 1999, Becton Dickinson and the
Company amended the license agreement. The amendment provides that the
$3,750,000 previously paid by Becton Dickinson to the Company will not be
credited against future earned royalties and the Company will have no further
obligation of any kind to Becton Dickinson with respect to these payments.
Accordingly, the $3,750,000 of deferred royalty revenue was recognized as
revenue during 1999. The Company will not be manufacturing product in connection
with the license agreement.
Johnson & Johnson Medical, Inc.
In December 1997, the Company entered into an agreement with Johnson & Johnson
Medical, Inc. to commercialize two applications of the Company's safety needle
technologies in one restricted field-of-application of the technology. The
agreement provides for monthly development payments by Johnson & Johnson,
sharing of field related patent costs, payments for initial periods of low
volume manufacturing, an ongoing royalty stream and a Johnson & Johnson
investment in molds, assembly equipment and other capital costs related to
commercialization of each product.
The agreement also provides for an ongoing joint cooperative program between
Johnson & Johnson and the Company 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 Johnson & Johnson will perform substantially all of the manufacturing under
the Johnson & Johnson agreement during 2000. The Company and Johnson & Johnson
also entered into arrangements whereby they are pursuing development and
commercialization of four
F-18
<PAGE>
additional products. The Company anticipates that sales of one product under the
Johnson & Johnson agreement will begin in the year 2000 with additional products
scheduled for introduction into the market in 2001. There is no assurance that
the Company will realize revenues under the Johnson & Johnson agreement or that
any of these products will be launched as anticipated.
Kendall Healthcare Products Company
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 the
Company's 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 became effective March 29, 2000 upon obtaining the
required approvals of Kendall and the Company. In April 2000, the Company
received $1,500,000, less $35,044 representing the Company's share of certain
patent filing costs, under the Kendall Agreement and will receive an additional
$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 products will be launched as anticipated
or that the Company will realize revenues under the Kendall Agreement.
(4) INVESTMENT IN QUANTUM IMAGING CORPORATION
In October 1995, the Company entered into a joint venture agreement with Zerbec,
Inc. ("Zerbec"). Under the terms of the agreement, the Company and Zerbec formed
Quantum Imaging Corporation ("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 QIC
(before considering potential dilution as a result of not meeting funding
requirements), the Company was obligated to pay QIC $15,000 a month, which in
turn was paid to Zerbec to perform research and development on QIC's behalf
through March 31, 1997. The Company was also obligated to pay the general and
administrative expenses of QIC 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. The Company provided
funding to QIC of approximately $49,500 and $469,300 during 1999 and 1998,
respectively, all of which the Company expensed and QIC used to fund research
and development and to cover administrative expenses. Assets and liabilities of
QIC were insignificant as of December 31, 1999.
During 1999, Zerbec exercised its option to acquire two thirds of the Company's
interest in QIC for nominal consideration. As a result of Zerbec exercising its
rights, the Company's ownership was reduced to approximately 17 percent of the
outstanding common stock of QIC.
(5) TECHNOLOGY OPTION TO PURCHASE AGREEMENT
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 four
amendments to the Option Agreement resulting in extensions of the exercise
period through May 2000. The Company paid a total of $265,000 in extension fees.
The Company was reimbursed for the majority of these fees from a third party who
expressed an interest in acquiring the technology from the Company upon exercise
of the option. Subsequent to December 31, 1999, the third party determined that
it
F-19
<PAGE>
would not complete the acquisition. As the Company was not in a position to
exercise the option, the option was allowed to expire effective January 23,
2000. The Company has no obligation to make additional cash payments to the
University of Texas System.
In connection with this Option Agreement, the Company entered into consulting
agreements with three individuals who were the principal inventors of the
technology. These consulting agreements provide for the individuals to assist
the Company to successfully develop the related technology. The individuals were
to provide a minimum of 50 hours of services annually for which they would be
compensated at a rate of $150 per hour. Each individual also executed stock
option agreements with the Company's subsidiary, IPC, which is the entity
entering into the Option Agreement and the individual consulting agreements. The
stock option agreements provide for the individuals to purchase up to 40,000
shares of IPC common stock at an exercise price of $.01 per share in 10,000
share increments based on achieving certain milestone events in the future.
During 1998, IPC recorded $7,200 of consulting expense related to the granting
of these options. During 1999, based on the achievement of certain milestones,
20,000 of the options granted to each of the three individuals vested, at which
time one individual elected to exercise the options in exchange for 20,000
shares of IPC no par value common stock.
(6) COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases office space, equipment, and vehicles under noncancellable
operating leases. The following summarizes future minimum lease payments under
operating leases at December 31, 1999:
Year Ending December 31,
2000 $ 295,000
2001 306,766
2002 319,001
2003 135,366
-----------------
$ 1,056,133
=================
Rental expense for the years ended December 31, 1999 and 1998 totaled
approximately $315,000 and $204,000, respectively.
Royalty Agreements
In connection with acquiring technology rights and patents, the Company entered
into various royalty agreements. Generally, the agreements required 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 was
obligated to pay minimum royalties, of which the Company paid $20,000 during
1998.
The Company elected to abandon the further manufacture and distribution of the
product utilizing the technology encompassed by one of these royalty agreements.
As a result, the royalty agreement was terminated by the Company and related
technology rights and patents were forfeited during 1998. All inventory, patents
and fixed assets used in the manufacture of the discontinued product, which
cannot be utilized by the Company for other purposes, were written off in 1998
(see Note 2).
In January 1998, the Company issued warrants to purchase 750,000 common shares
with an exercise price of $2.00 per share 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 Note 11). As a result of these
events, the Company has no further obligations under any royalty agreements.
F-20
<PAGE>
Employment Agreements
The Company has entered into an employment agreement with one of its key
employees. The agreement is for a term of three years and provides for an annual
aggregate base salary of $190,000 to be reviewed annually by the Compensation
Committee of 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 agreement. The agreement has
customary provisions for other benefits and includes noncompetition clauses.
In December 1998 and again in November 1999, a previously existing employment
agreement was amended to allow for two cash payments totaling $115,000 in
exchange for outstanding common stock warrants held by the employee. The
exchange may be elected by the employee if the fair market value of the
Company's common stock does not reach specified amounts by January 31, 1999 and
January 31, 2001. Additionally, the January 31, 2001 exchange may be
accelerated, at the employee's option, should the Company's consolidated cash
position fall below a specified level. Upon election of the accelerated
exchange, the cash compensation would be reduced by $625 each month between the
date the exchange occurs and January 3,1 2001. On January 31, 1999, the Company
paid $50,000 to the employee upon exercise of the first option.
Litigation
The Company was involved in litigation with Lerrink, Swann & Company ("Leerink")
with respect to a dispute over investment banking commissions. In July 1999, the
parties entered into a Settlement Agreement and General Release of Claims
whereby the Company paid Leerink $140,000 and all claims relating to the lawsuit
were released and the lawsuit was dismissed. The Company entered into the
Settlement Agreement in order to minimize the ongoing cost and expenses relating
to the litigation as well as the disruption to its business.
(7) STOCK OPTIONS
During 1994, the Board of Directors of SHP approved a nonqualified stock 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 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, 1999, 18,000 options are
exercisable at $.39 per share. These options expire in September 2005.
Effective September 1995, the Company's Board of Directors approved the adoption
of the Specialized Health Products International, Inc. Stock Option Plan. The
plan is a nonqualified stock option plan and is administered by the Board of
Directors. The plan provided for the issuance of 1,500,000 shares of common
stock to officers, directors, other key employees and consultants. The exercise
prices of the options granted under this plan may not be less than 100 percent
of the fair market value of the underlying common stock on the date of grant.
The options are exercisable for a period defined by the Board of Directors at
the date granted; however, no stock option may be exercisable more than five
years from the date of grant.
Effective August 1998, adoption of the Specialized Health Products
International, Inc. 1998 Stock Option Plan was approved by the Company's Board
of Directors. The plan is a nonqualified stock option plan and is administered
by the Board of Directors. The plan provides for the issuance of up to 2,000,000
shares of common stock to directors, officers, employees and consultants. The
exercise prices of the options granted may not be less than the greater of $2.00
per share of common stock or the fair market value (or 110 percent of such fair
market value when the optionee is a ten percent stockholder) of the underlying
common stock on the date of grant. The options are
F-21
<PAGE>
exercisable for a period not to exceed ten years (or five years when the
optionee is a ten percent shareholder) from the date of grant.
As permitted by 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 $117,226 and $23,700 of consulting expense during 1999 and
1998, respectively, related to certain options and warrants granted to
nonemployee consultants in accordance with SFAS No. 123.
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:
1999 1998
------------- ---------------
Net income (loss): As reported $ 359,231 $ (4,197,567)
Pro forma 279,915 (4,769,148)
Basic net income (loss) per
common share: As reported .03 (.35)
Pro forma .02 (.39)
Diluted net income (loss)
per common share: As reported .03 (.35)
Pro forma .02 (.39)
Because the SFAS No. 123 method of accounting has not been applied to options
and certain warrants granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
F-22
<PAGE>
A summary of the status of the Company's option plans as of December 31, 1999
and 1998, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- --------------------------------
Wtd. Avg. Wtd. Avg.
Shares Exercise Prices Shares Exercise Prices
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year 1,493,500 $ 2.11 1,481,500 $ 2.11
Granted 254,000 2.00 35,000 1.65
Exercised - - -
Forfeited (94,000) 0.85 (23,000) 1.55
--------------- ---------------
Outstanding at
end of year 1,653,500 2.08 1,493,500 2.11
=============== ===============
Exercisable at
end of year 1,458,500 1.30 1,307,905 2.06
=============== ===============
Weighted average fair value
of options granted $ 0.32 $ .74
=============== ===============
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------------
Number Wtd. Avg. Number
Outstanding Remaining Wtd. Avg. Exercisable Wtd. Avg.
Range of At December Contractual Exercise at December Exercise
Exercise Prices 31, 1999 Life Price 31, 1999 Price
------------------------ ------------------ ----------------- -------------- -------------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.3900 18,000 0.67 years $ 0.3900 18,000 $ 0.3900
1.2500 10,000 3.85 1.2500 10,000 1.2500
1.6250 5,000 3.60 1.6250 5,000 1.6250
1.7500 5,000 3.44 1.7500 5,000 1.7500
1.8125 10,000 3.38 1.8125 - -
2.0000 1,293,310 1.26 2.0000 1,138,310 2.0000
2.0625 50,000 2.87 2.0625 25,000 2.0625
2.6250 262,190 1.84 2.6250 257,190 2.6250
------------------ --------------------
$.39 to 2.625 1,653,500 $ 2.076 1,458,500 $ 1.3010
================== ====================
</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 1999 and 1998: risk-free interest rate of 6.0
percent in both years; expected lives of 2 years and 2.4 years, respectively;
expected dividend yields of zero percent in both years; expected volatility of
68 percent in both years.
In calculating the pro forma net loss and pro forma basic and diluted net income
(loss) per share, the Company has also considered the effect of 800,000 common
stock warrants issued to a director and officer (see Notes 6 and 11) and an
employee of the Company during 1998. The issuance of the warrants were accounted
for in accordance with APB No. 25. For disclosure purposes under SFAS No. 123,
the fair value of each warrant granted was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used: risk-free interest rate of 6.0 percent; expected lives of 2
years; expected dividend yield of zero; expected volatility of 68 percent.
F-23
<PAGE>
(8) RECENT CAPITAL TRANSACTIONS
In January 1998, the Company completed a private placement offering (the
"January Private Placement") 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 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 in December 1997 and
approximately $3,583,300 was received in January 1998. 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 in December
1997 and 1,860,000 were sold in January 1998.
Pursuant to requirements of the private placement offering in January 1998, the
Company provided accredited investors in the Company's March 1997 private
placement offering with the opportunity to exchange the securities purchased in
the March 1997 placement for a number of units the investor could have purchased
in the January 1998 placement had the investment been made under the January
1998 placement terms rather than the March 1997 terms. In February 1998, all of
the March 1997 accredited investors elected to convert to the January 1998
placement terms in reliance on the registration exemption found in Rule 506 of
Regulation D and Sections 3(9) and 4(2) of the Securities Act. 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 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. Such a registration statement
has yet to be filed. 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 Series D warrants during a
period of not less than 20 days following notice of such event.
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. The fair market value of these shares and options
were offset against the gross private placement proceeds as offering costs.
In July 1998, certain Series B warrants were exercised resulting in the issuance
of 85,000 shares of common stock with proceeds to the Company of $170,000. The
remaining Series A and B warrants have expired.
The following summarizes all warrant activity for the Company for the years
ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
-------------------------------- -------------------------------
Wtd. Avg. Wtd. Avg.
Exercise Exercise
Shares Prices Shares Prices
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year 4,409,787 $ 2.00 5,322,313 $ 2.62
Granted 25,000 2.00 3,659,787 2.00
Exercised - - (85,000) 2.00
Forfeited (50,000) 2.00 (4,487,313) 2.73
---------------- ---------------
Outstanding at end of year 4,384,787 $ 2.00 4,409,787 $ 2.00
================ ===============
</TABLE>
F-24
<PAGE>
(9) INCOME TAXES
The Company recognized no income tax expense in 1999 and 1998 due to its
incurring net operating losses. The Company did not record any income tax
benefit related to the net operating losses and other deferred tax assets as
management established a valuation allowance against the entire amount of those
assets. Significant components of the Company's deferred income tax assets and
deferred income tax liabilities as of December 31, 1999 are as follows:
1999
---------------------
Deferred income tax assets:
Net operating loss carryforwards $ 5,380,305
Non cash compensation expense 107,471
Accrued vacation 9,746
Loss on disposition of assets 213,262
Patent costs 169,698
Other 6,069
---------------------
Total gross deferred income tax assets 5,886,551
Less valuation allowance (5,544,357)
---------------------
Net deferred income tax assets 342,194
Deferred income tax liability -
Property and equipment (342,194)
---------------------
Net deferred income tax liability $ -
=====================
The net change in the total valuation allowance for the year ended December 31,
1999 was a decrease of $298,935.
At December 31, 1999, the Company had total tax net operating losses of
approximately $14,424,000 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
Employees who are 21 years of age are eligible for participation in the
Specialized Health Products 401(k) 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 $66,800 and $66,900 for the years
ended December 31, 1999 and 1998, respectively.
(11) RELATED-PARTY TRANSACTIONS
In January and February 1999, the Company entered into consulting agreements
with a former director and officer of the Company and relatives of a director
and officer of the Company. During 1999, the Company paid approximately $218,000
under these agreements.
During 1999, the Company entered into an agreement with a consulting services
firm of which one of the Company's board members is a partner. In exchange for
consulting services rendered during the year, the Company paid approximately
$90,000 (including reimbursement of costs) under the agreement.
F-25
<PAGE>
In January 1998, 1,000,000 shares of the Company's common stock and 1,000,000
Series D common stock warrants were issued to Johnson & Johnson Development
Corporation in conjunction with the private placement offering closed on January
20, 1998. Johnson & Johnson owns 8.1 percent of the Company.
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 six years. In January
1998, the Company issued 750,000 common stock warrants as consideration for a
release from its obligations under these royalty agreements (see Note 6). Each
warrant is redeemable for one share of the Company's common stock at a price of
$2.00 per share. The warrants are currently exercisable and expire on December
31, 2002.
During 1998, the Company advanced approximately $28,700 to a former director and
stockholder of the Company. The advance was non-interest bearing and was repaid
in full during 1998.
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 1995, the Company entered into an agreement with a former director, the
president and a vice president of the Company, whereby these individuals had the
opportunity to receive up to an aggregate of 2,000,000 shares of common stock
based upon the Company achieving a specified pre-tax consolidated income over a
certain period of time. The Company did not reach the levels specified in the
agreement for any period. As such, the earn-out shares did not vest and the
agreement expired effective December 31, 1998.
(12) SUBSEQUENT EVENTS
In January 2000, the Company granted to various employees options to acquire
299,000 shares of the Company's common stock at an exercise price of $2.00 per
share. The options vest over a three-year period and are exercisable for a
period of ten years from the date of grant.
In February 2000, the Company entered into an agreement with a consulting
services firm of which a stockholder of the Company is a partner. In exchange
for services rendered, the Company will make cash payments to the consulting
firm on a contingent fee basis. Under circumstances defined in the agreement,
the Company may elect to pay all of part of the service fee with shares of the
Company's common stock. These shares would be issued at a 25 percent discount
from the average daily closing bid and ask prices of the common stock during the
period as defined in the agreement.
F-26
SCHEDULE OF SUBSIDIARIES
Name of Subsidiary State of Incorporation
Specialized Health Products, Inc. Utah
Specialized Cooperative Corporation Utah
Iontophoretics Corporation Utah
Safety Syringe Corporation Utah
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 180,425
<SECURITIES> 0
<RECEIVABLES> 135,374
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 355,813
<PP&E> 1,548,532
<DEPRECIATION> 811,041
<TOTAL-ASSETS> 1,128,872
<CURRENT-LIABILITIES> 125,675
<BONDS> 0
0
0
<COMMON> 247,129
<OTHER-SE> 756,068
<TOTAL-LIABILITY-AND-EQUITY> 1,128,872
<SALES> 0
<TOTAL-REVENUES> 4,850,947
<CGS> 0
<TOTAL-COSTS> 4,553,078
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 359,231
<INCOME-TAX> 0
<INCOME-CONTINUING> 359,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 359,231
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
