As filed with the Securities and Exchange Commission on January 10, 2001
Registration Statement No. 333-52720
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
Registration Statement Under
the Securities Act of 1933
(Amendment No. 1)
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
(Name of small business issuer in its charter)
Delaware 3841 93-0945003
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
585 West 500 South, Bountiful, Utah 84010, (801) 298-3360
(Address and telephone number of principal executive offices
and principal place of business)
Eric L. Robinson
BLACKBURN & STOLL, LC
77 West Second South, Suite 400
Salt Lake City, UT 84101 (801) 521-7900
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: As soon as practicable
from time to time after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities to be Amount Offering Price Aggregate Registration
Registered to be Registered Per Unit(1) Offering Price(1) Fee
-------------------------- ----------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Common Stock (2) 4,382,120 $1.125 (3) $4,929,885 $1,301.49(4)
========================== ======================= ======================= ======================= =======================
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The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
(footnotes continued from previous page)
(1) Estimated solely for the purpose of determining the registration fee. The
registrant will receive no proceeds from the sale of these shares.
(2) Shares of common stock issuable by the registrant from time to time upon
exercise of outstanding warrants.
(3) Represents the average of the bid and asked prices of the common stock on
the OTC Bulletin Board on December 19, 2000. Fees were calculated under Rule
457(c) under the Securities Act of 1933.
(4) Previously paid on December 26, 2000.
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PROSPECTUS
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
4,382,120 Shares
Common Stock
This prospectus relates to 4,382,120 shares of common stock of
Specialized Health Products International, Inc. that may be sold from time to
time by the selling security holders. We are not selling any shares in the
offering. We will not receive any proceeds from sales by the selling security
holders.
Our common stock is quoted in the over-the-counter market in what is
commonly referred to as the OTC Bulletin Board under the trading symbol SHPI. On
December 19, 2000, the last reported sale price for the common stock on the OTC
Bulletin Board was $1.15 per share.
Our executive offices and telephone number are:
585 West 500 South
Bountiful, Utah 84010
(801) 298-3360
Investing in shares of our stock involves significant risks. Our "Risk
Factors" begin on page 2.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
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The date of this Prospectus is January 12, 2001
<PAGE>
Risk Factors
You should consider carefully the following risk factors and other
information in this prospectus before investing in our common stock.
We have a history of losses and may never become profitable.
We are a development stage company and have incurred total losses of
approximately $18,253,889 from November 1993, date of inception, through
September 30, 2000. With the exception of the second quarter of 1999, all
quarters have had operating losses. We may not be profitable in the future.
We do not have sufficient funding to pay current creditors.
We have current liabilities, that exceed our current assets. We will
need to raise funds to pay our current liabilities. We have no contractual
arrangements to provide necessary funding and there is no assurance that we will
obtain funding or that if funding is obtained that it will be on favorable
terms. If we do not obtain funding, as needed, it would be unlikely that we
could continue our business due to lack of funding.
We do not have sufficient funding to execute our business plan.
We estimate that we will need to raise at lease $4,000,000 in
additional funding to fully execute our business plan. This funding is needed to
bring safety medical needle technologies and other products to commercial
viability. We may be unsuccessful in obtaining additional funding or funding may
only be available on terms that our disadvantageous to us. If we are
unsuccessful in raising additional funds it may result in the discontinuance of
our business due to lack of funding.
Our success is dependent on sales generated by our distribution and
licensing partners.
We have entered into distribution and licensing arrangements with
Kendall Healthcare Products Company, a division of Tyco Healthcare Group LP
("Kendall"), Johnson & Johnson Medical, Inc. ("JJM") and Becton Dickinson and
Company Infusion Therapy Division ("BDIT"). You should consider the following in
assessing the value of these agreements and our financial prospects:
o We are reliant on our business partners for substantially all
of our product sales;
o Our product revenues will depend, in part, on the marketing
ability, marketing plans and credit-worthiness of our business
partners;
o We are depended on our business partners with respect to
release dates for the products under contract;
o Our products will be marketed under our business partners'
labels and goodwill associated with use of the products may
inure to the benefit of our business partners rather than to
us;
o Our distribution and licensing arrangements provide us with
only limited protection from changes in manufacturing costs
and raw materials costs;
o We may be limited in our ability to negotiate with new
business partners upon any renewals of agreements;
o Because our distribution and licensing arrangements are
generally expected to provide our business partners with
exclusivity with respect to the products to be marketed by
those partners, our success will be highly dependent on the
results obtained by our partners and the diligence with which
our partners seek to develop, market and sell our products;
and
o Our distribution and licensing arrangements do not provide for
substantial minimum product royalties in the event our
partners do not seek to develop, market or sell our products.
If our distribution and licensing partners are not successful in their
efforts to develop, market and sell our products it may result in the
discontinuance of our business due to lack of revenues.
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There are negative pricing pressures on safety products.
Prices for our safety products may be higher than for competing
conventional products that are not designed to provide the safety protection
afforded by our products. Our prices, however, are expected to be competitive
with those of competing safety products. Continuing pressure from third-party
payers to reduce costs in the healthcare industry as well as increasing
competition from safety products made by other companies, could adversely affect
our selling prices. Reductions in selling prices could adversely affect our
operating margins if we cannot achieve corresponding reductions in manufacturing
costs.
Our business could be adversely affected by changes in safety medical
product technology.
Our products are in various stages of pre-production, development and
research. There is no assurance that development of superior products by
competitors or changes in technology will not eliminate the need for our
products. The introduction of competing products using different technology
could adversely affect our attempts to develop and market our products.
Our products may not be accepted by the market.
The use of safety medical products, including our products, is
relatively new. Our products may not be accepted by the market and their
acceptance will depend in large part on our ability to demonstrate the
operational advantages, safety, efficacy, and cost-effectiveness of our products
in comparison with competing products and our ability to distribute our products
through major medical products companies. Our products may not achieve market
acceptance and major medical products companies may not sell our products.
Our long-term success is dependent on the success of our research and
development efforts.
Our safety medical needle technologies and products are still in
various stages of pre-production, development and research. We are also
exploring additional applications for all of our products. The continued
development of our products and development of additional applications and new
products is important to our long-term success. There can be no assurance that
our technologies or products will be developed or, if developed, that they will
be successful.
Our success is dependent on our patents and proprietary rights.
Our future success depends in part on our ability to protect our
intellectual property and maintain the proprietary nature of our technology
through a combination of patents and other intellectual property arrangements.
The protection provided by our patents and patent applications, if issued, may
not be broad enough to prevent competitors from introducing similar products or
our patents, if challenged, may not be upheld by the courts of any jurisdiction.
Patent infringement litigation, either to enforce our patents or to defend us
from infringement suits, would be expensive and, if it occurs, could divert our
resources from other planned uses. Any adverse outcome in such litigation could
have a material adverse effect on our ability to market, sell or license the
related products. 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 us. Some of our
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 our ability to prosecute these patents. We also
attempt to protect our proprietary information through the use of
confidentiality agreements and by limiting access to our facilities. There can
be no assurance that our program of patents, confidentiality agreements and
restricted access to our facilities will be sufficient to protect our
proprietary technology.
We may not have adequate experience to manage anticipated growth.
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We may not be equipped to successfully manage any future periods of
rapid growth or expansion, which could be expected to place a significant strain
on our managerial, operating, financial and other resources. Our future
performance will depend, in part, on our ability to manage growth effectively,
which will require us to (i) improve existing and implement new financial
controls and systems, management information systems, operating, administrative,
financial and accounting systems and controls, (ii) maintain close coordination
among engineering, accounting, finance, marketing, sales and operations, and
(iii) retain and train additional management, technical and marketing personnel.
There is intense competition for management, technical and marketing personnel
in our business. The loss of the services of any of our key employees or our
failure to attract and retain additional key employees could have a material
adverse effect on our ability to continue as a going concern.
Because we are significantly smaller than the majority of our
competitors, we may lack the resources needed to capture market share.
We are engaged in a highly competitive business and will compete
directly with companies 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 us. Our
competitors and potential competitors include Baxter International, Inc., B.
Braun, Becton Dickinson and Company, Bio-Plexus, Inc., Boehringer Mannheim,
Inc., Johnson & Johnson, Kendall Healthcare Products Company, Maxon, Inc.,
Med-Design Corporation, Medi-Hut, Medisys PLC, Miles, Inc., NMT Group PLC,
Retractable Technologies, Inc., Surgicutt, Inc., Terumo Medical Corporation and
Univec, Inc. Our competitors may use their economic strength to influence the
market to continue to buy their existing products. Our competitors may also be
potential strategic partners with respect to various products as are, for
example, Kendall and JJM. We do not have an established customer base and are
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
our products. New competitors may emerge and may develop products that compete
with our products. No assurance can be given that we will be successful in
competing in this industry.
Potential product liability relating to failure of our safety products.
The sale of safety 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 we will not be subject to such claims,
that any claim will be successfully defended or, if we are found liable, that
the claim will not exceed the limits of our insurance. Our current insurance
coverage is in the amount of $1 million per occurrence and $2 million in
aggregate. We also have an umbrella policy in the amount of $5 million. In some
cases we have indemnification arrangements in place with strategic partners who
may be selling our products under our partner's label. There is no assurance
that we will maintain product liability insurance in the future, that such
insurance will be available or that we will not be subject to product liability
claims in excess of our insurance coverage.
Uncertainties in the healthcare industry create uncertainties regarding
medical safety products.
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 payers are increasingly
attempting to contain healthcare costs by limiting both coverage and
reimbursement levels for healthcare products and procedures. Because prices of
our products may exceed the price of conventional products, the cost control
policies of third-party payers, including government agencies, may adversely
affect use of our products. We believe that the costs associated with accidental
needlesticks, however, exceed the procurement costs of our safety products.
Our success if dependent on our key personnel.
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Our success depends upon the skills, experience and efforts of its
management and other key personnel. Should the services of one or more members
of our present management or other key personnel become unavailable to us for
any reason, our business could be adversely affected. We do not have employment
agreements in place with all key personnel. There is no assurance that we will
be able to retain existing employees or attract new employees of the caliber
needed to achieve our objectives.
Our common stock price may continue to be volatile.
Market prices of securities of medical technology companies are highly
volatile from time to time. The trading price of our common stock may be
significantly affected by factors such as the announcement of new product or
technical innovations by us or our competitors, proposed changes in the
regulatory environment, or by other factors that may or may not relate directly
to us. 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 our common
stock.
We do not anticipate paying dividends in the foreseeable future.
We have never paid dividends on our common stock. The payment of
dividends, if any, on the common stock in the future is at the discretion of the
board of directors and will depend upon our earnings, if any, capital
requirements, financial condition and other relevant factors. The board of
directors does not intend to declare any dividends on our common stock in the
foreseeable future.
Limitations on director liability.
Our Certificate of Incorporation provides, as permitted by Delaware
law, that our directors are not personally liable to the company or its
stockholders for monetary damages for any action or failure to take any action,
with specified 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, we have agreed and our Certificate of
Incorporation and Bylaws provide for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law and we have entered
into contracts with our directors and officers providing for such
indemnification.
Anti-takeover provisions of certificate of incorporation and bylaws may
discourage non-negotiated takeover of our company.
Our Certificate of Incorporation provides for the division of the board
of directors 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 of directors or by a two-thirds vote of the
outstanding stock entitled to vote. Meetings of stockholders may be called only
by the board of directors, our chief executive officer or our president, and
stockholder action may not be taken by written consent. These provisions could
have the effect of (i) discouraging attempts at non-negotiated takeovers which
may provide for stockholders to receive a premium price for their stock or (ii)
delaying or preventing a change of control which some stockholders may believe
is in their interest.
Possible negative affect relating to possible issuance of preferred
stock.
We have an authorized class of preferred stock, shares of which may be
issued with the approval of our board of directors on such terms and with such
rights, preferences and designations as we 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. 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 and
may be considered disadvantageous by some stockholders. We presently do 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. The
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issuance of such stock to a limited group of stockholders may vest in such
persons absolute voting control, 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.
No assurance of a liquid public market for our common stock.
There can be no assurance as to the depth or liquidity of any market
for our common stock or the prices at which holders may be able to sell their
shares. As a result, an investment in our common stock may not be totally
liquid, and investors may not be able to liquidate their investment readily or
at all when they need or desire to sell.
Applicability of low priced stock risk disclosure requirements may
adversely affect the prices at which our common stock trades.
Our common stock may be considered a low priced security under rules
promulgated under the Securities Exchange Act of 1934. Under these rules,
broker-dealers participating in transactions in low priced securities must first
deliver a risk disclosure document which describes the risks associated with
such stocks, the broker-dealer's duties, the customer's rights and remedies, and
certain market and other information, and make a suitability determination
approving the customer for low priced stock transactions based on the customer's
financial situation, investment experience and objectives. Broker-dealers must
also disclose these restrictions in writing to the customer, obtain specific
written consent of the customer, and provide monthly account statements to the
customer. With these restrictions, the likely effect of designation as a low
priced stock will be to decrease the willingness of broker-dealers to make a
market for the stock, to decrease the liquidity of the stock and to increase the
transaction cost of sales and purchases of such stock compared to other
securities.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the
securities laws. These forward-looking statements are subject to a number of
risks and uncertainties, many of which are beyond our control. All statements
other than statements of historical facts included in this prospectus, including
the statements under "Business," "Management Discussion and Analysis or Plan of
Operation" and elsewhere in this prospectus regarding our strategy, future
operations, financial position, projected costs, projected revenues, prospects,
plans and objectives of management, are forward-looking statements. When used in
this prospectus, in other filings by us with the SEC, in our press releases or
other public or stockholder communications, or in oral statements made with the
approval of our executive officers, 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", although not all forward-looking
statements contain such identifying words.
We caution 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. We disclose important factors
that could cause our actual results to differ materially from our expectations
under the caption "Risk Factors" and "Management Discussion and Analysis or Plan
of Operations" of Financial Condition and Results of Operations", including but
not limited to our history of losses, working capital deficit, need for
additional funds to execute our business plan, dependence on our marketing and
licensing partners, and the risk of product demand, market acceptance, negative
pricing pressures on safety medical products, economic conditions, competitive
products and pricing, difficulties in product development, commercialization and
technology, changes in the regulation of safety health care products, protection
of our intellectual property rights and other risks. Furthermore, manufacturing
delays may result from mold redesigns or delays may result from the failure to
timely obtain FDA approval to sell future products. In addition, sales and other
revenues may not commence as anticipated due to delays from our distribution and
licensing partners or otherwise. If and
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when product sales commence, sales may not reach the levels anticipated. As a
result, our actual results for future periods could differ materially from those
anticipated or projected.
Unless otherwise required by applicable law, we do not undertake, and
specifically disclaim any obligation, to update any forward-looking statements
to reflect occurrences, developments, unanticipated events or circumstances
after the date of such statement.
USE OF PROCEEDS
The net proceeds from the sale of common stock will be received by the
selling security holders. We will not receive any of the proceeds from any sale
of the shares by the selling security holders. The selling security holders may
acquire shares upon exercise of warrants. Any proceeds we received from the
exercise of warrants will be used as working capital.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our 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. 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
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1998
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March 31.............................. $3.50 $1.63
June 30............................... $2.38 $1.44
September 30.......................... $2.25 $1.19
December 31........................... $1.56 $0.94
June 30............................... $1.13 $0.75
September 30.......................... $0.84 $0.41
December 31........................... $1.16 $0.41
June 30............................... $1.31 $.75
September 30.......................... $1.81 $.88
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To date, we have not paid dividends on our common stock. The payment of
dividends, if any, in the future is within the discretion of the board of
directors and will depend upon our earnings, capital requirements, financial
condition and other factors the board views are relevant. 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 our operations.
As of December 19, 2000, there were 277 holders of record of our common
stock. The number of holders of record was calculated by reference to our stock
transfer agent's books.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis provides information that we
believe is relevant to an assessment and understanding of our consolidated
results of operations and financial condition. The discussion should be read in
conjunction with our consolidated financial statements and notes thereto. Except
as otherwise stated or implied by the context, all references to "us," "our,"
"we" or similar phrases will be deemed to refer to Specialized Health Products
International, Inc. and its subsidiaries on a consolidated basis.
Overview
Our principal business is the design, development, testing and
evaluation, and marketing of our safety needle technologies and other safety
medical products, and the design and development of various molds and production
processes. These technologies allow a contaminated needle to be protected
without exposure of the healthcare worker to the contaminated needle.
In accordance with U.S. generally accepted accounting principles, we
have expensed all past research and development costs and have incurred
cumulative losses from operations since inception. With the exception of a
patent with a net book value of $5,480, our balance sheet does not reflect any
value attributable to our intellectual property. To date, development
expenditures have resulted in the ownership of in excess of 80 patents and
patent applications world-wide and the creation of 16 different and unique
safety-needle technologies which have application in almost all medical needles
used today. We have already licensed 18 safety needle products to three leading
global medical device companies; Johnson & Johnson Medical, Inc. ("JJM"), The
Kendall Company, a division of Tyco Healthcare Group LP ("Kendall") and Becton
Dickinson and Company Infusion Therapy Division ("BDIT"). These license
agreements have generated in excess of $3,890,000 by way of pre-production
payments to us and are expected to generate further revenues from the sale of
patents, development fees, advanced royalties and royalties based on product
sales.
We plan to focus our activities on the further development and
licensing of additional products based upon our intellectual property portfolio
and unique safety needle technologies. Such products are expected to include
syringes, prefilled syringes, IV catheters, catheter introducers, Huber needles,
plasma apheresis sets, dialysis sets, blood donor sets, winged steel infusion,
Seldinger needles, epidural and spinal needles, lancets, as well as additional
safety needle devices. Prototypes of the phlebotomy devices, catheter inserters,
lancets, Huber needles, Seldinger needles, winged steel needles, syringes and
prefilled syringes have been completed. We plan to continue discussions and
negotiations with third parties to generate revenues through the licensing of
products, joint venturing, and partnering with original equipment manufacturers.
Three and Nine Months Ended September 30, 2000 and 1999
During the three and nine months ended September 30, 2000, we had total
revenues of $119,205 and $466,386, respectively. These revenues were comprised
primarily of $344 and $96,458 in development fees from JJM under the Development
and License Agreement with JJM (the "JJM Agreement") for the
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respective periods and $44,532 and $280,110 in development fees and technology
and license revenue for the respective periods under the Kendall Agreement. See
"--License Agreements." Costs incurred to generate these revenues for the
respective periods totaled $26,771 and $224,321. This is compared to total
revenues of $170,282 and $4,699,591 for the comparable periods from the prior
year. These prior year revenues were comprised primarily of $170,282 and
$949,591 in development fees under the JJM Agreement during the respective
periods and $0 and $3,750,000 in license fees from the license agreement with
BDIT (the "BDIT License Agreement") during the respective periods. See
"--License Agreements." Costs incurred to generate these revenues for the
respective periods totaled $140,451 and $3,929,136. We will look to product
sales and other development and strategic arrangements for future revenues.
Research and development ("R&D") expenses were $326,472 and $706,338
for the three and nine months ended September 30, 2000, respectively, compared
with $173,604 and $562,429 for the comparable periods of the prior year. The
increase in the three and nine month periods resulted mainly from our increasing
R&D expenditures due, in part, to a reduction in our R&D funding by JJM. Our R&D
efforts during these periods focused on continuing development of existing and
new products utilizing our medical safety needle technologies.
Selling, general and administrative ("SG&A") expenses were $695,837 and
$1,755,566 for the three and nine months ended September 30, 2000, compared with
$635,691 and $2,137,167 for the comparable periods of the prior year. The
increase for the three month period ended September 30, 2000 primarily resulted
from compensation expense of $245,244 as a result of issuing fully-vested
options to non-employees. The decrease in the nine month period resulted mainly
from (i) reductions in the level of compensation being paid to our officers
during such periods, (ii) downsizing which resulted in the termination of two
administrative employees, (iii) reduction in financial advisory fees and general
consulting fees, (iv) elimination of costs associated with the Leerink Swann
litigation and (v) subleasing approximately 25% of our facilities. We anticipate
that SG&A expenses will increase during the remainder of 2000 as a result of
consulting and public relations arrangements.
Interest and other income was $9,919 and $29,474 for the three and nine
months ended September 30, 2000, compared with $11,733 and $56,074 for the
comparable periods of the prior year. As funds on deposit have decreased, so has
the related interest income.
Years Ended December 31, 1999 and 1998
During the year ended December 31, 1999, we had total operating
revenues of $4,850,947, compared with total operating revenues of $1,039,136 for
the prior year. Prior to 1999, we had $3,750,000 in deferred royalty revenue
relating to the BDIT License Agreement. In June 1999, the parties amended the
BDIT License Agreement. The amendment provided that the $3,750,000 previously
paid by BDIT to us will not be credited against future earned royalties and we
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, we 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 our revenues were
from product sales of our 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.
Research and development ("R&D") expenses were $780,425 for the year
ended December 31, 1999, compared with $909,048 for the prior year. Our efforts
during 1999 focused on development of several additional products utilizing our
medical safety needle technologies. Our efforts during 1998 focused on
development of several additional products utilizing the ExtreSafe(R) and
FlexLoc(R) safety needle technology, the safety lancet technology and continued
development work on a filmless digitized imaging technology. 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 from
(i) a reduction in the development activities with respect to the filmless
digitized imaging technology, (ii) the
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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 prior year. The
decrease resulted mainly from (i) our officers taking a combined 33 percent
reduction in compensation, (ii) downsizing which resulted in the termination of
two administrative employees, and (iii) reduction in financial advisory fees.
We 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, we 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 our 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 prior year. 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, we have financed our operations principally through private
placements of equity securities, the sale of technology and patents, advanced
royalties, development fees, technology and license fees and proceeds from the
exercise of common stock options. We generated $16,207,305 in net proceeds
through financing activities from inception through September 30, 2000. We used
net cash for operating activities of $97,298 for the nine months ended September
30, 2000. As of September 30, 2000, our current liabilities totaled $183,384.
We had $71,939 in cash as of September 30, 2000. This represents a
decrease of $108,486 from December 31, 1999. Working capital as of September 30,
2000 decreased to a deficit of ($52,307) as compared to $230,138 at December 31,
1999. These decreases were largely due to ongoing selling, general and
administrative costs and research and development expenditures with no product
sales and minimal margins on development fees and related services.
Our 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 and other products
to commercial viability, and the level of sales of the new safety needle
product. At September 30, 2000, we had not committed any funds for capital
expenditures. We believe that existing funds and anticipated cash flows from
development fees will be sufficient to support planned operations at least
through the year end. We are currently in the process of implementing a plan to
provide adequate working capital to fulfill our business plan. If we are
unsuccessful in completing our financing plan or negotiating further licensing
and royalty agreements, we may be required to reduce substantially or eliminate
certain areas of our product development activities, limit our operations
significantly or cease operations entirely.
As of December 1, 2000, we had 3,609,787 Series D Warrants (the "Series D
Warrants") and 773,333 other warrants (the "SHPI Warrants") outstanding that are
exercisable for the same number of shares of our common stock 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 Securities Act of
1933 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 Securities Act of 1933 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). We
reached agreement in July 2000 to extend the expiration date of 500,000 of the
SHPI Warrants outstanding to June 30, 2004. This extension was given in
consideration for the employees
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executing non-compete agreements and entering into one year employment
agreements. The remaining 273,333 SHPI Warrants will expire on their original
date of December 31, 2002. The exercise of all the warrants would result in an
equity infusion of $8,766,240. As of the date hereof, all of the warrants are
out of the money and there can be no assurance that any warrants will be
exercised.
We have granted stock options that are currently exercisable for
1,924,000 shares of Common Stock at exercise prices ranging between $1.00 and
$2.625 per share. The exercise of all of such stock options would result in an
equity infusion to us of $3,272,074. At December 1, 2000, 1,065,190 of the stock
options are out of the money and there can be no assurance that any of the stock
options will be exercised.
License Agreements
In November 1999, we entered into a Development and License Agreement
(the "Kendall Agreement") with Kendall that relates to one application of our
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, we received a $1,500,000
payment less $35,044 representing our share of certain patent filing costs. We
will receive an additional $1,000,000 upon the sale of commercial quantities of
products (as defined in the Kendall Agreement) or 30 months from the effective
date of the Kendall Agreement, whichever comes first. These payments, totaling
approximately $2,500,000, are in exchange for our 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 us of an exclusive, royalty free worldwide license in a number
of strategic product areas. The Kendall Agreement also provides for us to
receive development fees and ongoing royalties, including minimum royalty
payments totaling $2,500,000 during the period commencing upon the sale of
commercial quantities of products and the third anniversary thereof. Kendall has
the right to cancel its unaccrued obligations under the Kendall Agreement upon
15 days written notice and by assigning the patents to us. It is anticipated
that Kendall will manufacture all products that are subject to the Kendall
Agreement.
In December 1997, we entered into the JJM Agreement with JJM to
commercialize two applications of the safety needle technology. The JJM
Agreement provides that the parties 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
parties which derives future funding directly from sales of products we create,
the possibility of low volume manufacturing revenue for us and an ongoing
royalty stream for additional safety products which are jointly approved for
development. JJM is indicating that sales of two variations of this product will
begin in the first quarter of 2001. All product introductions are scheduled and
controlled by JJM and products may not be released as anticipated.
We are also jointly pursuing with JJM the development and
commercialization of four additional products. Development work is currently
being done by both parties with respect to these products.
In May 1997, we entered into the BDIT License Agreement with BDIT
relating to a single application of our ExtreSafe(R) safety needle technology
(the "Technology"). Pursuant to the terms of the BDIT License Agreement, BDIT
made payments to us of $4,000,000. Of these total payments, $3,750,000 was for
advanced royalties and $250,000 was a product development fee. In June 1999, the
BDIT License Agreement was amended. The amendment provided that the $3,750,000
previously paid by BDIT to us would not be credited against future earned
royalties and we would 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 us beginning in 2004. We will not be
manufacturing product in connection with 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.
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We have an ongoing program for developing products using our 16 medical
needle technologies and expect to develop additional safety medical needle
technologies. These technologies allow a contaminated needle to be protected
without exposure of the healthcare worker to the contaminated needle. Such
products are expected to include syringes, prefilled syringes, IV catheters,
catheter introducers, Huber needles, plasma apheresis sets, dialysis sets, blood
donor sets, winged steel infusion, Seldinger needles, epidural and spinal
needles and lancets as well as additional safety needle devices. Prototypes of
the phlebotomy devices, catheter inserters, lancets, Huber needles, Seldinger
needles, winged steel needles, syringes and prefilled syringes have been
completed. We plan to continue discussions and negotiations with third parties
to generate revenues through the licensing of products, joint venturing, and
partnering with original equipment manufacturers.
There is no assurance that we will realize royalty revenue under the
JJM, BDIT or Kendall agreements, or that any of these products will be launched
as anticipated.
Other Matters
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, is effective for our fiscal year beginning 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that we recognize all derivative instruments as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. We do not expect the adoption of SFAS 133, as amended, to have a
material impact on our results of operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101 ("SAB 101"). SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
subsequent issuance of SAB 101A and SAB 101B has deferred the effective date of
SAB 101 until the fourth quarter of 2000. We do not expect the adoption of SAB
101 to have a material impact on our results of operations, financial position
or liquidity.
Inflation
We do not expect the impact of inflation on our operations to be
significant for the next twelve months.
Forward-Looking Statements
Our actual results and estimated product release dates could vary
significantly from the results discussed above. See "Forward-Looking Statement."
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DESCRIPTION OF THE BUSINESS
General
Specialized Health Products International, Inc. through its wholly
owned subsidiaries, Specialized Health Products, Inc. ("SHP"), Safety Syringe
Corporation, Specialized Cooperative Corporation and Iontophoretics Corporation
(except where the context clearly indicates otherwise, these entities are
collectively referred to as "we", "us", "our" and "ourselves") 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. We have created a
portfolio of proprietary healthcare products that are in various stages of
pre-production, development and research. At present, we are focusing our
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 our safety medical needle
products and concepts and other new safety medical devices. Our products are
designed to reduce the risk of acquiring HIV/AIDS, hepatitis B, hepatitis C and
other blood-borne diseases through accidental needlesticks.
In November 1999, The Kendall Company, a division of Tyco Healthcare
Group LP ("Kendall") entered into a Development and License Agreement (the
"Kendall Agreement") with us relating to one application of our 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, we received a $1,500,000
payment less $35,044 representing our share of related patent filing costs. We
will receive an additional $1,000,000 upon the sale of commercial quantities of
products (as defined in the agreement) or 30 months from the effective date of
the Kendall Agreement, whichever comes first. These payments, totaling
approximately $2,500,000, are in exchange for our 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 pre-existing license agreement and
our retention of an exclusive, royalty free worldwide license in a number of
strategic product areas. The Kendall Agreement also provides for us to receive
development fees and ongoing royalties, including minimum royalty payments
totaling $2,500,000 during the period commencing upon sale of commercial
quantities of products and through the third anniversary thereof. Kendall has
the right to cancel its unaccrued obligations under the Kendall agreement upon
15 days written notice and assigning the patents to us. It is anticipated that
Kendall will manufacture all products that are subject to the Kendall Agreement.
In December 1997, we 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 parties will seek to commercialize two products
using our 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 JJM and
ourselves which derives future funding directly from sales of products we
create, the possibility of low volume manufacturing revenue for us and an
ongoing royalty stream for additional safety products which are jointly approved
for development. JJM has indicated that it expects sales of two products will
begin in the first quarter of 2001. All product introductions are scheduled and
controlled by JJM.
In May 1997, we entered into an agreement (the "BDIT License
Agreement") with Becton Dickinson and Company Infusion Therapy Division ("BDIT")
relating to a single application of the our ExtreSafe(R) safety needle
technology (the "Technology"). Pursuant to the terms of the BDIT License
Agreement, BDIT made payments of $4,000,000 to us. Of these total payments,
$3,750,000 was for advanced royalties and $250,000 was for a product development
fee. In June 1999, we amended the BDIT License Agreement. The amendment provides
that the $3,750,000 previously paid by BDIT to us will not be credited against
future earned royalties and we 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
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revenue during 1999. BDIT has exclusivity related minimum royalty obligations to
us beginning in 2004. We will not be manufacturing product in connection with
the BDIT License Agreement.
BDIT previously told us that it expected to begin selling the safety
needle product that is the subject of the BDIT License Agreement on various
dates. 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 us with current information regarding the market introduction of the
product.
We plan to focus our activities on the further development and
licensing of additional products based upon our intellectual property portfolio
and unique safety needle technologies. Such products are expected to include
syringes, prefilled syringes, IV catheters, catheter introducers, Huber needles,
plasma apheresis sets, dialysis sets, blood donor sets, winged steel infusion
sets, Seldinger needles, epidural and spinal needles, lancets and other safety
needle devices. Prototypes of the phlebotomy devices, catheter introducers,
lancets, Huber needles, Seldinger needles, winged steel needles, syringes and
prefilled syringes have been completed. We plan to continue discussions and
negotiations with third parties to generate revenues through the licensing of
products, joint venturing, and partnering with original equipment manufacturers.
Company Background
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., a Delaware corporation, through a merger with a subsidiary
of SHPI (the "Acquisition").
We were incorporated as a Utah corporation in 1986. Our corporate
domicile was changed to the State of Delaware, and our name was changed to
"Russco, Inc.", effective December 20, 1990, by merger into a then newly created
Delaware corporation. Russco, Inc. had no operations until the date of the
Acquisition. On that date we changed our 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 Specialized Heath Products International, Inc. and retained
their positions as directors and officers of SHP. In addition, the outstanding
securities of SHP became outstanding securities of Specialized Heath Products
International, Inc. Prior to the Acquisition, neither SHP nor any affiliate of
SHP had an ownership interest in Russco, Inc.
Products Under Development
General
As its primary focus, we have sixteen issued patents which protect our
safety needle technologies. These needle patents support our 16 technologies and
provide the basis for a wide range of safety needle products. We also have two
lancet patents covering our single use safety lancet and undercut lancet
technologies. The following products are currently under development.
Safety Syringes
There is significant risk of needlesticks 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 high number 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. We have safety needle
technologies for syringes that include passive, automatic and manual safety
needle retraction and needle shielding. The first of our safety syringe products
is currently being developed for market.
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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 our trademark.
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. We have safety needle
technologies for blood collection that include 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. We have applied two of our technologies to
safety steel needle product design. Both technologies permit one handed needle
retraction. Two products are currently being developed for the 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 exposed while the patient is tended to by the
healthcare worker. We have safety needle technologies for catheter insertion
that include passive, automatic and manual safety needle retraction and needle
shielding.
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.
We have two disposable safety lancet patents. One patent is for a new
single use safety fingerstick lancet and the other is for a new undercut
heelstick technology which yields good blood flow with a small skin incision. In
the opinion of management, the blade and blade actuation mechanism of our 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. We have applied two of our
technologies to safety lancets. We are currently developing one safety lancet
device for the market.
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Other Medical Safety Devices
We have an ongoing program for developing additional medical safety
devices including specialty needles. Such devices would include Huber, biopsy,
apherisis, dialysis, blood donor, filter, laparoscopy, opthalmic, epidural,
Seldinger, spinal, radiology and cardiology needles. We have safety needle
technologies for specialty needles that include passive activation, manual
safety needle retraction and needle shielding.
Company Strategy
Our primary objective is to establish ourself as a leading developer of
safety medical needle products. We 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, we expect to continue to focus on
the following six types of arrangements.
o Continue pursuing license/royalty agreements with large global
medical product companies for the manufacture, marketing and
sale of 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.
o Continue to pursue combined development/license/royalty
agreements with global medical product companies for the
development, manufacture, marketing and sale of 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.
o Enter into joint venture arrangements, wherein we are 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.
o Seek joint venture and original equipment manufacture (OEM)
structures where we are responsible for development and the
partner is responsible for funding and manufacturing. We would
be responsible for marketing and sales to the OEM. In this
situation the safety product can be sold to several OEM
companies.
o 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 we may outsource
the low volume manufacturing and sell the safety products to
medical product companies.
o Sell all rights to products where income projections do not
warrant any of the above options. In some cases we 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
We intend to enter additional safety needle device markets where we
believe that we 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 our
technologies, but there can be no assurance that we will commence development of
any such products or that, if commenced, such development will be successful or
profitable.
Marketing and Sales
We employ two sales and marketing personnel. These individuals are
principally involved in identifying and working with current and potential
strategic partners and developing marketing and sales strategies. We are seeking
third parties to market and distribute its products in the United States and
selected foreign countries. We may enter into contracts, licensing agreements or
joint ventures with such third parties whereby we would receive a licensing fee,
royalty payment, shared profit arrangement based on the licensee's revenues from
licensed products or other revenues. We would likely enter into such
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 we seek to penetrate. There can be no
assurance that we will be able to enter into contracts, license agreements or
joint ventures with third parties in the future on terms acceptable to us or
that the Kendall Agreement, JJM Agreement or BDIT License Agreement will be
commercially successful.
We intend to support the marketing of our products by, among other
things, attending trade shows and participating in internet website promotions
and links. We intend to distribute samples of our 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 our
products in the marketplace.
We have an ongoing program for developing products using our 16 medical
needle technologies and expect to develop additional medical needle
technologies. These technologies allow a contaminated needle to be protected
without exposure of the healthcare worker to the contaminated needle. Such
products are expected to include syringes, prefilled syringes, IV catheters,
catheter introducers, Huber needles, plasma apheresis sets, dialysis sets, blood
donor sets, winged steel infusion sets, Seldinger needles, epidural and spinal
needles, lancets and other safety needle devices. Prototypes of the phlebotomy
devices, catheter introducers, lancets, Huber needles, Seldinger needles, winged
steel needles, syringes and prefilled syringes have been completed. We plan to
continue discussions and negotiations with third parties to generate revenues
through the licensing of products, joint venturing, and partnering with original
equipment manufacturers. There can be no assurance such negotiations will be
successful.
Our plan for the sales and distribution of our 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. We intend to market and
distribute our products in the United States and selected foreign countries
through one or more companies that have a major presence in these major
segments. There can be no assurance that we will be able to enter into such
arrangements for the sale and distribution of its products, other than those
referenced to above.
We are not permitted to sell products based on our safety medical
needle technologies for commercial use in the United States until regulatory
approval is obtained. We must also comply with the laws and regulations of the
various foreign countries in which we sell our products. Certain foreign
countries may only require that we 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.
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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. Our products target this market segment. Non-safety products today
compete primarily on price. Although our strategy includes being price
competitive with other safety devices, we 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. We believe that when all indirect costs (needle disposal,
testing, labor savings and costs, treatment and workers compensation expense)
are considered, our products will compete effectively both with "traditional"
products and with the safety products of our competitors.
Recent safety regulations and legislation have also increased the demand
for and exposure of safety medical devices. Seventeen U.S. states have passed
safety legislation requiring use of safety needle products. The Needlestick
Safety and Prevention Act was recently approved by the federal government. OSHA
also issued a national directive in November 1999 requiring use of safety
medical devices. In addition, in November 1999, 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.
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. We believe 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. Our
products attempt to address the demand for medical devices that reduce the risk
of accidental exposure to blood-borne diseases. The majority of healthcare
workers' adverse exposures to blood are either product related, such as
needlesticks, or could be prevented by the use of appropriate products. We
believe 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. Our
products attempt to address the demand for medical devices that reduce the risk
of accidental exposure to blood-borne diseases.
18
<PAGE>
Patents and Proprietary Rights
Our policy is to seek patent protection for all developments,
inventions and improvements that are patentable and which have potential value
to us and to protect as trade secrets other confidential and proprietary
information. We intend to vigorously defend its intellectual property rights to
the extent its resources permit.
We own two United States patents relating to its safety lancet
technology, and 14 United States patents relating to its safety medical needle
technologies. We have over 80 United States and international patents and patent
applications pending. These patents do not begin to expire until 2013.
Our future success may depend upon the strength of our intellectual
property. We believe that the scope of our patents/patent applications is
sufficiently broad to prevent competitors from introducing devices of similar
novelty and design to compete with our 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 us. We plan to timely file international patents in all countries
in which we are seeking market share.
We are not aware of any patent infringement claims against us.
Litigation to enforce our issued patents, to protect our proprietary
information, or to defend against alleged infringement against the rights of
others may occur. Such litigation would be costly, could divert our resources
from other planned activities, and could have a material adverse effect on our
results of operations and financial condition.
Manufacturing
Our products are in various stages of development and are not currently
being manufactured. The materials used to produce our products is generally
widely available. We do not anticipate difficulty in obtaining such materials.
Competition
The healthcare products market is highly competitive. Many of our
competitors have longer operating histories and are substantially larger, better
financed and better situated in the market than we are.
The leading suppliers in the IV catheter market are Johnson and Johnson
Medical and Becton Dickinson and Company. Other suppliers of IV catheters having
minor positions in this market include B. Braun and Terumo Medical Corporation.
We believe our 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. We
believe our products are superior to any safety needle products on the market
being sold by our competitors.
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 the us, Med-Design Company, Bio-Plexus, Inc., New Medical Technologies,
Retractable Technologies, Inc. and SIMS Portex, Inc. We have conducted in-house
studies and believe that our products are superior to those presently being
marketed by our competitors.
The leading suppliers in the lancet market are Becton Dickinson and
Company, Surgicutt, Inc., Miles, Inc., Boehringer Mannheim, Inc. and Kendall
Healthcare Products Company. There are also numerous smaller suppliers. To the
best of our knowledge, there are no safety lancets on the market today that
operate in a manner similar to our safety lancets.
19
<PAGE>
While traditional, non-safety products in the market segments we seek
to address compete primarily on the basis of price, we expect to compete on the
basis of healthcare worker safety, ease of use, reduced cost of disposal,
patient comfort, and compliance with state, federal and OSHA regulations, but
not on the basis of price except with respect to comparable safety products.
However, we believe that when all indirect costs related to accidental
needlestick injuries are considered, our products will compete effectively both
with "traditional" products and with the safety products of our competitors.
Research and Development
We have devoted a substantial portion of our efforts to designing and
developing healthcare products. To date, research and development expenditures
have resulted in our ownership of in excess of 80 patents and patent
applications worldwide and the creation of 16 different safety needle
technologies which have application in almost all medical needles used today.
Customer sponsored research and development activities resulted in expenses of
$780,425 in 1999 and $909,048 in 1998. Customer sponsored research and
development activities relating to the development of new products, services or
techniques or the improvement of existing products, services or techniques for
which we earned revenues were $1,100,947 in 1999 and $1,028,934 in 1998. We plan
to continue research and development on our current products and possible new
products. There is no assurance that our ongoing research and development
activities will prove effective.
Government Regulation
We 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. None of our currently proposed 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. The average time for 510(k) clearance for safety
devices is currently 90 days. In general, clearance of a 510(k) Notification for
a Class II
20
<PAGE>
device may be obtained if we 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.
We expect our development stage products, that is our products based on
its safety medical needle and lancet technologies, to be categorized as Class II
devices. We also expect that these 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 we will obtain 510(k) Notification clearance to market its
products, that our products will be classified as set forth above, or that, in
order to obtain 510(k) Notification clearance, we will not be required to submit
additional data or meet additional FDA requirements which could substantially
delay sales and add to our 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 our 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. We are registered as
a manufacturer with the FDA. To date, no incidents have occurred with our
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 our ability to conduct business.
In addition to the laws and regulations described above, we are subject
to government regulations applicable to all businesses, including, among others,
regulations related to occupational health and safety, workers' benefits and
environmental protection. Moreover, seventeen states have passed safety
legislation requiring use of safety needle products. The Needlestick Safety and
Prevention Act was recently passed by the federal government. OSHA also issued a
national directive in November 1999 requiring use of safety medical devices.
Also, in November 1999, 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.
Distribution and sales of our products in countries other than the
United States are subject to regulations in those countries. There can be no
assurance that we will be able to obtain the approvals necessary to market our
products outside the United States.
21
<PAGE>
Seasonality of Business
Sales of our products are not anticipated to be subject to seasonal
variations.
Backlog
There is no backlog of unfilled orders of our products.
Employees
As of December 19, 2000, we employed 19 people, including 14 research
and development employees, 2 sales and marketing employees and 3 accounting and
administrative employees. We expect to add additional employees in the next 12
months. Our employees are not represented by any labor union, and we believe our
relations with our employees are good.
DESCRIPTION OF PROPERTY
Our 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 our right to extend the lease term for an additional
three-year term. The offices comprise 17,273 square feet of space. We have
subleased approximately 3,300 square feet of this space for a term of 12 months
beginning March 1, 2000 with an option to renew for an additional 12 months. We
believe that our current office space will be adequate to meet the needs of
current and expected growth for the foreseeable future. We may, however, require
additional manufacturing facilities in the future depending upon the volume of
products sold and the manufacturing arrangements to which we are a party.
LEGAL PROCEEDINGS
We are not party to any legal proceedings.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below is certain information concerning our directors and
executive officers as of December 19, 2000.
With the
Name Age Position Company Since
---- --- -------- -------------
David A. Robinson (1) 57 President, chairman of 1993
the board and chief
executive officer
Paul S. Evans (1) 37 Vice president, general 2000
counsel and director
Keith L. Merrell (1) 55 Vice president finance 2000
and investor relations
and chief financial
officer, secretary and
treasurer
Dr. Donald D. Solomon (1) 50 Vice president and 2000
chief technical officer
Dr. David T. Rovee (2) 61 Director 1998
Robert R. Walker (2) 69 Director 1994
Dr. Roy Bichan (2) 59 Director 2000
---------------
22
<PAGE>
(1) Member of Executive Committee.
(2) Member of Audit and Compensation Committees.
David A. Robinson. Mr. Robinson is our president, chief executive
officer and chairman of the board. He has been a director and officer since
November 1993 and his term as a director 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.
Mr. Paul Evans. Mr. Evans joined us in September 2000 as our vice
president, general counsel and a director. His term as a director expires in
2003. He serves as patent counsel in various intellectual property areas,
including: domestic and foreign patent prosecution; technology transfer and
licensing; and strategic and tactical business-focused, legal planning with an
emphasis on intellectual property. Mr. Evans received a B.S. in Mechanical
Engineering from the University of Utah and worked as a Project/Design Engineer
for Morton International (now Autoliv) prior to receiving his law degree. For
the five years prior to joining us, Mr. Evans was principally employed as Vice
President and General Counsel for two research and development companies. Prior
to that time, he was a patent attorney with the law firm of Snow, Christensen &
Martineau. His project and design engineering experience, coupled with his law
expertise, provides a valuable insight into his management of intellectual
property for the Company. Mr. Evans speaks fluent Japanese.
Keith L. Merrell. Mr. Merrell joined us in July 2000 as our vice
president - finance and investor relations, chief financial officer, secretary
and treasurer. Along with his financial responsibilities as the CFO, Mr. Merrell
draws on 25 years of accounting experience to manage all of the accounting
functions and to interface with the Company's accounting firm, Arthur Andersen.
He spent two years in the field of public accounting. His business career also
includes extensive experience in management, sales and marketing, and
consulting. Most recently he served as Vice President - Western Operations for
Michelex Industrial Group, an injection molding company headquartered in New
York. From 1980 to 1992 he worked for Bonneville Telecommunications, a company
providing composite stock and commodity feed data to brokerage houses and
institutional investors. During that time he was engaged in the negotiating of
contracts and maintaining relationships with the U.S. and foreign stock
exchanges and boards of trade. He graduated from Arizona State University with a
Bachelor of Science degree in Accounting.
Dr. Don Solomon. Dr. Solomon joined us in October 2000 as our vice
president and chief technical officer. Dr. Solomon is widely recognized in the
medical device and pharmaceutical industry as an innovator with a keen
understanding of the clinician's needs. He will play a lead role in managing the
development of the safety needle technology and our related strategy, and as a
member of the Executive Committee he will assist in the development and
implementation of the Company's overall business strategy. He brings more than
21 years of medical product experience in research, product development,
engineering, and manufacturing in both the U.S. and internationally. Dr. Solomon
was previously the Vice President of Research and Development at Johnson &
Johnson Medical - Vascular Access ("JJM"). Prior to JJM, Dr. Solomon served at
Becton Dickinson ("BD"), including positions as Worldwide Director of R&D for BD
Pharmaceutical Systems Division based in France and Director of R&D of
Biocompatible Polymer Development at the BD Infusion Therapy Division. Dr.
Solomon currently holds 37 patents and is the author of 52 scientific
publications. He received his Masters and Ph.D. degrees in Polymer Science from
Case Institute of Technology at Case Western Reserve University.
Dr. David T. Rovee. Dr. Rovee joined us as a director in 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 1994 to 2000
he served as president and chief operating officer of Organogenesis, Inc., a
publicly traded biotechnology company. Prior to his employment with
Organogenesis, Inc., Dr. Rovee was employed for a twenty-five year period by
Johnson & Johnson in various capacities including
23
<PAGE>
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 Developmental Biology from Brown University.
Robert R. Walker. Mr. Walker joined us in March 1994 as a director 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.
Dr. Roy Bichan. Dr. Bichan joined us in September 2000 as a director
and is the most recent addition to the Board of Directors. His term expires in
2003. His vast business experience has taken him around the world and includes
serving as Chairman and Director of a number of companies. He has long been
activive in developing the economic base of Wales. He served as Deputy Chairman
of the Welch Development Agency, Chairman of the Welsh Industrial Development
Advisory Board, and is currently a Director of the Midland Enterprise Fund for
Wales. He earned a Ph.D. in geology from the University of Leeds.
Executive officers are elected by the board of directors on an annual
basis and serve at the discretion of the board.
EXECUTIVE COMPENSATION
The table below set forth certain information concerning compensation
we paid to our chief executive officer and all other executive officers with
annual compensation in excess of $100,000, determined for the year ended
December 31, 1999 (the "Named Executive Officers"). The table includes
information related to stock options granted to the Named Executive Officers.
Summary Compensation Table. The following table provides certain
information regarding compensation paid to the Named Executive Officers.
24
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Awards Payouts
------------------- ------ -------
Restricted Stock All Other
Name and Other Annual Stock Options/ LTIP Compensation
Principal Position Year Salary ($) 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(5)
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(3) --- 7,302 --- --- --- 21,752(6)
--- --- ---
Charles D. Roe, VP 1997 20,833 --- --- --- --- ---
Finance and Investor 1998 100,000 1,000 5,050 --- --- --- 226
Relations and CFO 1999 104,022(3) --- 3,438 --- --- --- 1,044(7)
David L. Thorne 1997 80,292 --- 4,000 --- --- ---
Manager - Product 1998 94,666 300 4,748 --- --- ---
Development 1999 100,000 --- 5,000 --- --- --- 51,044(8)
---------------
</TABLE>
(1) These amounts represent payments by us into our 401(k) retirement plan
for the benefit of the Named Executive Officer.
(2) In September 1999, Mr. Robinson's salary was reduced from $240,000 to
$190,000 per year.
(3) Mr. Charles D. Roe is no longer employed by us. Dr. Gale H. Thonre is
semi-retired and working for us as a consultant on a part time basis.
(4) Options issued pursuant to the non-qualified stock option plan.
(5) This represents payment of accrued vacation, $67,400 of which was used
to pay off a subscription receivable in a noncash transaction.
Effective January 1, 1999, we changed our accrued vacation policy and
subsequent to that date the policy allows a maximum of twenty days
vacation pay to be carried forward from year to year.
(6) This includes $17,957 payment of accrued vacation, $6,920 of which was
used to pay off a subscription receivable in a noncash transaction.
Effective January 1, 1999, we changed our accrued vacation policy and
subsequent to that date the policy 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.
(7) These amounts represent the amounts paid by us 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. (8) 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 us 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
We paid no cash fees or other consideration to employee directors to
our employee directors for service on the board of directors during 1999. During
1999, we 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 our common stock that were granted in equal quarterly installments at
an exercise price of $2.00 per share. With the exception of Dr. Roy Bichan, we
expect that the 2000 compensation for non-employee directors will be the same as
the 1999 compensation including the payment of options to purchase 16,000 shares
of our common stock which shall be 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. We pay Dr. Bichan $1,000 for each board of directors meeting
25
<PAGE>
he attends. Dr. Bichan also received stock options exercisable for 50,000 shares
of common stock when he joined the board. We have made no agreements regarding
compensation of non-employee directors. All directors are entitled to
reimbursement for reasonable expenses incurred in the performance of their
duties as members of the board of directors.
Employment Agreement and Indemnity Agreements
We have entered into employment agreements with David A. Robinson, Paul
S. Evans, Don D. Solomon, and David L. Thorne, who are each expected to earn
annual salaries in excess of $100,000. These employment agreements, which have
been amended from time to time, provide that Mr. Robinson, Mr. Evans, Dr.
Solomon and Mr. Thorne (i) receive annual salaries of $190,000, $165,000,
$165,000 and $100,000, respectively; (ii) employment agreements expire on
December 31, 2001, June 12, 2003, October 23, 2003 and October 27, 2003,
respectively; (iii) are entitled to vacation pay and health insurance; (iv) will
receive their full salaries if their employment is terminated for reasons other
than for cause, (v) will receive no salary after their termination date if they
are terminated for cause; (vi) will receive up to $1,000,000, $200,000, $200,000
and $200,000, respectively, of term life insurance while they are employed; and
(vii) shall keep all proprietary information relating to our business
confidential.
We have entered into indemnity agreements (the "Indemnity Agreements")
with each of our executive officers and directors pursuant to which we have
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 that takes place prior to or after the execution of the
Indemnity Agreement. The Indemnity Agreements obligate us to reimburse or
advance expenses relating to any proceeding arising out of an indemnifiable
event. Under the Indemnity Agreements, our officers and directors 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 us in certain
cases at its discretion.
401(k) Retirement Plan
Effective in 1996, we adopted a 401(k) retirement plan whereby we
contribute 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.
Accrued Vacation Pay
Effective January 1, 1999, we changed our vacation policy. Prior to
January 1, 1999, our policy allowed executive officers to carry over vacation
from year to year without limitation. After January 1, 1999, we allow employs to
carry over a maximum of 20 days vacation pay from year to year.
Indemnification for Securities Act Liabilities
Delaware law authorizes, and our bylaws and indemnity agreements
provide for, indemnification our directors and officers against claims,
liabilities, amounts paid in settlement and expenses in a variety of
circumstances. Indemnification for liabilities arising under the Securities Act
of 1933 may be permitted for directors, officers and controlling persons
pursuant to the foregoing or otherwise. However, we have been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
Stock Options and Warrants
In June 2000, our stockholders approved the adoption of the Specialized
Health Products International, Inc. 2000 Stock Option Plan (the "Option Plan").
The Option Plan permits us to grant "non-qualified stock options" and "incentive
stock options" to acquire common stock. The total number of shares authorized
for the Option Plan may be allocated by the board or directors between the
non-qualified stock
26
<PAGE>
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 $1.00 per share. A
total of 2,500,000 shares are allocated to the Option Plan, but the Option Plan
also restricts the total number of shares of common stock that we can grant
options to acquire under all of our stock option plans to 2,500,000 shares. As
of December 19, 2000, options to acquire an aggregate of 1,982,000 shares of
common stock at exercise prices ranging between $1.00 and $2.625 per share had
been granted and are presently outstanding under the Option Plan and our prior
stock options plans. During 2000, we have granted to Mr. Robinson, Mr. Evans,
Dr. Solomon and Mr. Thorne stock options to acquire 300,000, 100,000, 100,000,
and 90,000 shares of common stock, respectively, under the Option Plan.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serve on our compensation committee (or
in a like capacity) or on the compensation committees of any other entity.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of December 19, 2000, for: (i) each
person who is known by us to beneficially own more than five percent of the our
common stock, (ii) each of our directors, (iii) each of our Named Executive
Officers (defined below), and (iv) all directors and executive officers as a
group. As of December 19, 2000, we had 12,449,440 shares of common stock
outstanding.
<TABLE>
<CAPTION>
Shares
Name and Address Beneficially Percentage of
of Beneficial Owner (1) Owned (2) Total (2) Position
----------------------- --------- --------- --------
<S> <C> <C> <C>
David A. Robinson (3) 649,728 5.1% President, CEO and chairman
of the board
Paul S. Evans (4) 25,450 * Vice president, general
counsel and director
Keith L. Merrell (5) 601 * Vice president - finance and
investor relations and
chief financial officer
Dr. Don D. Solomon (6) 10,000 * Vice president and chief
technical officer
Dr. David T. Rovee (7) 43,000 * Director
Robert R. Walker (8) 155,000 1.2% Director
Dr. Roy Bichan (9) 50,000 * Director
Executive Officers and Directors 933,779 6.3%
as a Group (seven persons)
Johnson & Johnson Development 2,000,000 14.9%
Corp. (10)
One Johnson & Johnson Plaza, New
Brunswick, NJ 08933
27
<PAGE>
<CAPTION>
Shares
Name and Address Beneficially Percentage of
of Beneficial Owner (1) Owned (2) Total (2) Position
----------------------- --------- --------- --------
<S> <C> <C> <C>
Asdale Ltd (11) 1,500,000 11.4%
44 Lowndes Street
London, England
--------------
</TABLE>
* Less than 1%.
(1) Except where otherwise indicated, the address of the beneficial owner
is deemed to be the same address as our address.
(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 69,509 shares of common
stock purchased through our 401(k) plan.
(4) Includes 25,000 shares of common stock. Also includes 450 shares of
common stock purchased through our 401(k) plan. Does not include stock
options to purchase 100,000 shares of common stock that vest in June
12, 2001.
(5) Includes 601 shares of common stock purchased through our 401(k) plan.
Does not include stock options to purchase 50,000 shares of common
stock that vest in July 10, 2002.
(6) Includes 10,000 shares of common stock. Does not include stock options
to purchase 100,000 shares of common stock that vest in September 25,
2002.
(7) Includes 1,000 shares of common stock and stock options to purchase
42,000 shares of common stock.
(8) Includes stock options to purchase 92,000 shares of common stock. Also
includes 63,000 shares of common stock that Mr. Walker is deemed to
beneficially own through a trust.
(9) Includes stock options to purchase 50,000 shares of common stock.
(10) Includes 1,000,000 shares of common stock and 1,000,000 Series D
Warrants.
(11) Includes 750,000 shares of common stock and 750,000 Series D Warrants.
We are not aware of any arrangements which may, at a subsequent date,
result in a change in control of our company.
DESCRIPTION OF SECURITIES
Our authorized capital stock currently consists of 50,000,000 shares of
common stock, $.02 par value per share; and 5,000,000 shares of preferred stock,
$.001 par value per share. No preferred stock is currently outstanding. The
following descriptions are a summary and qualified in their entirety by the
provisions of our Certificate of Incorporation and by the provisions of the
Delaware General Corporation Law.
Common Stock
At December 19, 2000, we had 12,449,440 shares of common stock
outstanding. Holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Accordingly,
holders of a majority of the shares of common stock entitled to vote in any
election of directors may elect all of the directors standing for election.
Subject to preferential dividend rights with respect to any outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared by the board of directors out of funds
legally available therefor. Upon liquidation, dissolution or winding up of our
company, holders of common stock are entitled to share ratably in our assets
that are legally available, subject to any prior rights of any outstanding
preferred stock or other rights including any
28
<PAGE>
preemptive, subscription, redemption or conversion rights. Holders of common
stock have no cumulative voting rights and no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges of
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock which we may
designate and issue in the future.
Preferred Stock
The board of directors is empowered, without further action by
stockholders, to issue from time to time one or more series of preferred stock,
with such designations, rights, preferences and limitations as the board of
directors may determine by resolution. The rights, preferences and limitations
of separate series of preferred stock may differ with respect to such matters
among such series as may be determined by the board of directors, including,
without limitation, the rate of dividends, method and nature of payment of
dividends, terms of redemption, amounts payable on liquidation, sinking fund
provisions (if any), conversion rights (if any) and voting rights. Certain
issuances of preferred stock may have the effect of delaying or preventing a
change in control of our company that some stockholders may believe is not in
their interest.
Certificate and Bylaw Provisions that May Delay, Defer or Prevent a Change in
Control
Our Certificate of Incorporation and Bylaws contain the following
provisions that could have the effect of (i) discouraging attempts at
non-negotiated takeovers which may provide for stockholders to receive a premium
price for their stock or (ii) delaying or preventing a change of control which
some stockholders may believe is in their interest:
o Our Certificate of Incorporation provides for the division of
the board of directors 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 of
directors or by a two-thirds vote of the outstanding stock
entitled to vote.
o Meetings of stockholders may be called only by the board of
directors, our chief executive officer or our president.
o Stockholder action may not be taken by written consent.
o Our Certificate of Incorporation provides that our directors
are not personally liable to the company or its stockholders
for monetary damages for any action or failure to take any
action, with specified exceptions.
o We have agreed and our Certificate of Incorporation and Bylaws
provide for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law and
we have entered into contracts with our directors and officers
providing for such indemnification.
Transfer Agent and Registrar
The stock transfer agent and registrar for our common stock and
warrants is Colonial Stock Transfer, Inc., Salt Lake City, Utah. We act as our
own registrar with respect to stock options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Gale H. Thorne, a former director and officer, was entitled to a
royalty of two and one-half percent on our 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 us the
29
<PAGE>
intellectual property rights he owned prior to his involvement with us, which
intellectual property rights relate to the Thorne Products. In addition, we were
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. In 1998, Dr. Thorne
released us from all royalty obligations relating to Thorne Products in exchange
for the issuance of warrants to acquire 750,000 shares of common stock at $2.00
per share to Dr. Thorne and his assigns.
The law firm of Blackburn & Stoll, LC provides legal services to us.
Eric L. Robinson, a member of that firm, is the nephew of David A. Robinson.
In December 1997, we entered into a development and license agreement
with JJM to commercialize two applications of our safety needle technology. The
JJM Agreement provides for monthly development payments by JJM, sharing of field
related patent costs, 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 JJM and
ourselves which derives future funding directly from sales our products, low
volume manufacturing revenue 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 our
securities comprised of common stock and Series D Warrants in a private
placement that closed in January 1998.
In May 1999, we paid Westbridge Capital Partners $85,000 to assist us
in evaluating certain medical safety product markets and segments and to
evaluate and develop related business strategies. David G. Hurley, a former
director, is an affiliate of Westbridge Capital Partners.
In November 2000, we granted stock options to acquire 50,000 shares of
common stock to Bradley Robinson, a nephew of David A. Robinson, for services
rendered. The options are exercisable at $2.00 per share and vest in three
installments on November 2000, November 2001 and November 2002.
SELLING SECURITY HOLDERS
The following table provides the names of and number of shares of
common stock offered for sale by the selling security holder. Selling security
holders may sell all, some or none of its shares of common stock. The following
entries to the table represent the total number of shares that selling security
holders may sell pursuant to this registration statement.
The shares of common stock offered by this prospectus may be offered
from time to time by selling security holders. Selling security holders do not
have any material relationship with us or any of our affiliates during the past
three years except as otherwise noted.
<TABLE>
<CAPTION>
Number of Shares Shares that will be Beneficially Owned
Beneficially Owned Number of Shares on Completion of the Offering
as of December 19, of Common Stock ------------------------------------------
Name of Selling Security Holder 2000 (1) Offered Hereby (2) Number % of the Class
------------------------------- -------- ------------------ -------------------- ---------------------
<S> <C> <C> <C> <C>
Amalie AS 100,000 50,000 50,000 *
Asdale Ltd. 1,500,000 750,000 750,000 6.0
Asia Orient Enterprises, Inc. 100,000 100,000 *
Bank Hofmann AG 166,751 100,063 66,688 *
Banyan Investment Company 125,000 125,000 *
Boyd Financial Corp. 190,829 50,000 140,829 1.1
Byte Consult AS 100,000 50,000 50,000 *
Caesar Invest AS 100,000 50,000 50,000 *
Capitol Group AS 100,000 100,000 *
DS Holdings AS 150,000 75,000 75,000 *
Alan Field & Susan Field Jt. Ten. 48,780 24,390 24,390 *
Paul Freed 9,000 9,000 *
John Freed and Karen Freed Jt. Ten. 18,000 18,000 *
John Freed, Trustee of the Robert E.
Freed Family Trust 36,000 18,000 18,000 *
30
<PAGE>
<CAPTION>
Number of Shares Shares that will be Beneficially Owned
Beneficially Owned Number of Shares on Completion of the Offering
as of December 19, of Common Stock ------------------------------------------
Name of Selling Security Holder 2000 (1) Offered Hereby (2) Number % of the Class
------------------------------- -------- ------------------ -------------------- ---------------------
<S> <C> <C> <C> <C>
Francois Gaille 100,000 50,000 50,000 *
Genevalor Trusteeship & Management 188,690 75,000 113,690 *
Grange Nominees Limited 300,000 150,000 150,000 1.2
Julian Hill 20,400 18,000 2,400 *
Johnson & Johnson Dev Corp 2,000,000 1,000,000 1,000,000 8.0
J.K. Lewinsohn 75,000 75,000 *
Atle Lygren 80,000 55,000 25,000 *
Metropolitan Finance Limited 252,000 54,000 198,000 1.6
Naess Investments Limited 66,667 50,000 16,667 *
Gisela Oswald 39,150 19,575 19,575 *
Marguerite Piret 20,000 10,000 10,000 *
Procedo Capital Corp 770,000 385,000 385,000 3.1
Brian Roth Trustee in Trust 1 FBO Lucie
Claire Jane Roth 11,386 5,693 5,693 *
Brian Roth 22,726 11,363 11,363 *
Brian Roth & Suzan Irene Roth Jt. Ten. 51,020 25,010 26,010 *
Brian Roth Trustee in Trust 1 FBO Laura
Jane Roth 11,386 5,693 5,693 *
September Corporation 75,000 75,000 *
Solmeim Industrier AS 25,000 25,000 *
Dave Thorne (3) 314,233 273,333 40,900 *
Gale Thorne, Jr. (4) 298,400 250,000 48,400 *
Gale Thorne, Sr. (5) 333,000 200,000 133,000 *
Bruce Thorne 10,900 10,000 900 *
Michael Thorne 10,900 10,000 900 *
Steven Thorne 10,900 10,000 900 *
Kendall Thorne 10,900 10,000 900 *
Craig Thorne 10,900 10,000 900 *
---------------
</TABLE>
* Less than one percent
(1) Reflects shares beneficially owned in name of record holders.
(2) Common stock issuable upon exercise of warrants.
(3) Dave Thorne is our Conceptual Product Development Manager
(4) Gale Thorne, Jr. is our Director of Sales and Marketing.
(5) Gale Thorne, Sr. is a former director and vice president.
PLAN OF DISTRIBUTION
Selling security holders may sell some or all of its shares at any time
and in any of the following ways. They may sell their shares:
o To underwriters who buy the shares for their own account and
resell them in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying
prices determined at the time of sale. Any public offering
price and any discount or concessions allowed or reallowed or
paid to dealers may be changed from time to time; or
o Through brokers, acting as principal or agent, in
transactions, which may involve block transactions, on the OTC
Bulletin Board or on other exchanges on which the shares are
then listed, in special offerings, exchange distributions
pursuant to the rules of the applicable exchanges or in
31
<PAGE>
the over-the-counter market, or otherwise, at market prices
prevailing at the time of sale, at prices related to
prevailing market prices, at negotiated prices or at fixed
prices; or
o Directly or through brokers or agents in private sales at
negotiated prices; or
o In open market transactions in reliance upon rule 144 under
the Securities Act of 1933, provided selling security holders
comply with the requirements of the rule; or
o By any other legally available means.
Selling security holders may pay part of the proceeds from the sale of
shares in commissions and other compensation to underwriters, dealers, brokers
or agents who participate in the sales. To our knowledge, the sellers purchased
in the ordinary course of investment.
At the time the sellers purchased the securities to be resold, they
represented to us that they had purchased the securities for their own account
and not with a view to distribution or resale.
Some states may require shares to be sold only through registered or
licensed brokers or dealers. In addition, some states may require the shares to
be registered or qualified for sale unless an exemption from registration or
qualification is available and complied with.
Selling security holders and any broker-dealers who act in connection
with the sale of their shares may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act of 1933 and any commissions
received by them and profit on any resale of the shares as principal might be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
Prior to the effective date of this registration statement, we shall
advise selling security holders that they and any securities broker-dealers or
others who may be deemed to be statutory underwriters will be subject to the
prospectus delivery requirements under the Securities Act of 1933. Under
applicable rules and regulations under the Securities Exchange Act of 1934 any
person engaged in a distribution of any of the shares may not simultaneously
engage in market activities with respect to the common stock for the applicable
period under Regulation M prior to the commencement of the distribution. In
addition and without limiting the foregoing, the selling security holders will
be subject to applicable provisions of the Securities Exchange Act of 1934 and
the rules and regulations thereunder, including without limitation Rules 10b-5
and Regulation M, which provisions may limit the timing of purchases and sales
of any of the shares by the selling security holders. All of the foregoing may
affect the marketability of the common stock.
In the absence of this registration statement, the selling security
holders would be able to sell their shares subject to the limitations of Rule
144 promulgated under the Securities Act of 1933 ("Rule 144"). In general, under
Rule 144 as currently in effect, an "affiliate" of the issuer, or a person who
has beneficially owned shares which are "restricted securities" for at least one
year, is entitled to sell within any three-month period a number of shares that
does not exceed the greater of: one percent (1%) of the then outstanding shares
of common stock of the issuer or the average weekly trading volume of the common
stock during the four calendar weeks preceding a sale by these person. Sales
under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about the
issuer. Under Rule 144, however, a person who is not, and for the three months
prior to the sale of the shares has not been, an affiliate of the issuer is free
to sell shares which are "restricted securities" which have been held for at
least two years without regard to the limitations contained in Rule 144. None of
the selling security holders will be subject to the foregoing restrictions when
selling their shares pursuant to this prospectus.
Under Section 16 of the Securities Exchange Act of 1934, our executive
officers, directors, and 10% or greater stockholders will be liable to us for
any profit realized from any purchase and sale, or any sale and purchase, of
common stock within a period of less than six months.
32
<PAGE>
We have agreed to indemnify the selling security holders against
liabilities under the Securities Act of 1933. We have also agreed to bear
certain expenses in connection with the registration of the shares being offered
and sold by the selling security holders, estimated to be $28,300.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be
passed upon for us by Blackburn & Stoll, LC, Salt Lake City, Utah.
EXPERTS
The financial statements as of December 31, 1999 and 1998 and for the
years ended December 31, 1999 and 1998 and for the period from inception to
December 31, 1999 included in this prospectus and registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York, and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms.
This prospectus does not contain all the information which is in the
registration statement, as allowed by the rules and regulations of the SEC. We
refer you to the registration statement and to the exhibits for further
information offered in this prospectus. Copies of the registration statement and
the exhibits are on file at the offices of the SEC and may be obtained upon
payment of the prescribed fee. They may be examined without charge at the SEC's
Public Reference Room or through the SEC's website described above. Statements
contained in this prospectus concerning the provisions of documents are
necessarily summaries of the material provisions of such documents, and each
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the SEC.
33
<PAGE>
FINANCIAL STATEMENTS
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
Years Ended December 31, 1999 and 1998
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
Quarter Ended September 30, 2000 (Unaudited):
Balance Sheet at September 30, 2000 F - 27
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999 and for the
Period from Inception to September 30, 2000 F - 28
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 and for the Period
from Inception to September 30, 2000 F - 30
Notes to Consolidated Financial Statements F - 31
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
Common stock, $.02 par value; 50,000,000 shares authorized, 12,356,440
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
----------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
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>
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
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 this consolidated balance sheet.
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 this consolidated balance sheet.
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 this consolidated balance sheet.
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) 388,158 - -
The accompanying notes to consolidated financial statements are an integral part
of this consolidated balance sheet.
F-9
<PAGE>
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 this consolidated balance sheet.
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 this consolidated balance sheet.
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
---------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 359,231 $ (4,197,567) $ (16,035,614)
Adjustments to reconcile net income (loss) to net cash
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)
---------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this consolidated balance sheet.
F-12
<PAGE>
<TABLE>
<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
--------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ - $ 2,725,359 $ 12,487,801
Proceeds from issuance of common stock warrants - 1,078,800 1,777,952
Proceeds from 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>
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.
The accompanying notes to consolidated financial statements are an integral part
of this consolidated balance sheet.
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 products utilizing the Company's medical
F-14
<PAGE>
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
F-18
<PAGE>
the Johnson & Johnson agreement during 2000. The Company and Johnson & Johnson
also entered into arrangements whereby they are pursuing development and
commercialization of four 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
F-19
<PAGE>
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.
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).
F-20
<PAGE>
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.
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.
F-21
<PAGE>
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 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:
<TABLE>
<CAPTION>
1999
---------------------
<S> <C>
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 $ -
=====================
</TABLE>
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.
F-25
<PAGE>
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.
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
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS September 30, December 31,
2000 1999
----------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 71,939 $ 180,425
Accounts receivable 45,412 135,374
Prepaid expenses and other 12,326 36,869
Amounts due from related parties 1,400 3,145
----------------- -------------------
Total current assets 131,077 355,813
----------------- -------------------
PROPERTY AND EQUIPMENT, at cost:
Manufacturing molds 474,633 474,633
Office furnishings and fixtures 568,546 552,882
Assembly and manufacturing equipment 317,391 317,391
Leasehold improvements 134,869 132,326
Automated assembly equipment 71,300 71,300
----------------- -------------------
1,566,739 1,548,532
Less accumulated depreciation and amortization (1,033,800) (811,041)
----------------- -------------------
----------------- -------------------
Net property and equipment 532,939 737,491
----------------- -------------------
OTHER ASSETS 32,558 35,568
----------------- -------------------
$ 696,574 $ 1,128,872
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 26,678 $ 4,692
Accrued liabilities 156,706 120,983
----------------- -------------------
Total current liabilities 183,384 125,675
----------------- -------------------
DEFERRED REVENUES 1,351,998 -
----------------- -------------------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 6) - -
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value; 5,000,000 shares authorized,
no shares outstanding - -
Common stock, $.02 par value; 50,000,000 shares authorized,
12,449,440 and 12,356,440 shares outstanding, respectively 248,989 247,129
Additional paid-in capital 15,211,640 14,865,399
Series D warrants to purchase common stock 1,954,452 1,954,452
Deficit accumulated during the development stage (18,253,889) (16,063,783)
----------------- -------------------
Total stockholders' equity (deficit) (838,808) 1,003,197
----------------- -------------------
$ 696,574 $ 1,128,872
================= ===================
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
F-27
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Period from
----------------------------------------- Inception to
September 30, September 30, September 30,
2000 1999 2000
------------------ ------------------- -------------------
<S> <C> <C> <C>
REVENUES:
Technology fees and licensing revenues $ 74,002 $ - $ 3,898,002
Development fees and related services 45,203 170,282 2,698,265
Net product sales - - 748,228
------------------ ------------------- -------------------
Total revenues 119,205 170,282 7,344,495
------------------ ------------------- -------------------
COST OF REVENUES:
Cost of development fees and related services 26,771 140,451 1,937,430
Cost of product sales - - 536,002
------------------ ------------------- -------------------
Total cost of revenues 26,771 140,451 2,473,432
------------------ ------------------- -------------------
Gross margin 92,434 29,831 4,871,063
------------------ ------------------- -------------------
OPERATING EXPENSES:
Selling, general and administrative 695,837 635,691 16,448,106
Research and development 326,472 173,604 5,947,443
Write-off of operating assets - - 1,280,557
------------------ ------------------- -------------------
Total operating expenses 1,022,309 809,295 23,676,106
------------------ ------------------- -------------------
LOSS FROM OPERATIONS (929,875) (779,464) (18,805,043)
------------------ ------------------- -------------------
OTHER INCOME (EXPENSE):
Interest income 6,897 11,200 541,125
Interest expense - - (23,658)
Other income 3,022 533 61,856
------------------ ------------------- -------------------
Total other income, net 9,919 11,733 579,323
------------------ ------------------- -------------------
NET LOSS (919,956) (767,731) (18,225,720)
LESS PREFERENCE STOCK DIVIDENDS - - (28,169)
------------------ ------------------- -------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
$ (919,956) $ (767,731) $ (18,253,889)
================== =================== ===================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (.07) $ (.06)
================== ===================
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,404,956 12,356,440
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-28
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Period from
----------------------------------------- Inception to
September 30, September 30, September 30,
2000 1999 2000
------------------ ------------------- -------------------
<S> <C> <C> <C>
REVENUES:
Technology fees and license revenues $ 148,002 $ 3,750,000 $ 3,898,002
Development fees and related services 318,384 949,591 2,698,265
Net product sales - - 748,228
------------------ ------------------- -------------------
Total revenues 466,386 4,699,591 7,344,495
------------------ ------------------- -------------------
COST OF REVENUES:
Cost of development fees and related services 224,062 770,455 1,937,430
Cost of product sales - - 536,002
------------------ ------------------- -------------------
Total cost of revenues 224,062 770,455 2,473,432
------------------ ------------------- -------------------
Gross margin 242,324 3,929,136 4,871,063
------------------ ------------------- -------------------
OPERATING EXPENSES:
Selling, general and administrative 1,755,566 2,137,167 16,448,106
Research and development 706,338 562,429 5,947,443
Write-off of operating assets - 6,268 1,280,557
------------------ ------------------- -------------------
Total operating expenses 2,461,904 2,705,864 23,676,106
------------------ ------------------- -------------------
INCOME (LOSS) FROM OPERATIONS (2,219,580) 1,223,272 (18,805,043)
------------------ ------------------- -------------------
OTHER INCOME (EXPENSE):
Interest income 20,975 53,324 541,125
Interest expense - - (23,658)
Other income 8,499 2,750 61,856
------------------ ------------------- -------------------
Total other income, net 29,474 56,074 579,323
------------------ ------------------- -------------------
LESS PREFERENCE STOCK DIVIDENDS - - (28,169)
------------------ ------------------- -------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (2,190,106) $ 1,279,346 $ (18,253,889)
================== =================== ===================
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE $ (.18) $ .10
================== ===================
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 12,374,287 12,365,910
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-29
<PAGE>
<TABLE>
<CAPTION>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Net Increase (Decrease) in Cash
Nine Months Ended Period from
------------------------------------- Inception to
September 30, September 30, September 30,
2000 1999 2000
----------------- ---------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,190,106) $ 1,279,346 $ (18,225,720)
Adjustments to reconcile net income (loss) to net cash
Depreciation and amortization 225,769 205,295 1,566,339
Allowance for doubtful accounts receivable - - 125,800
Common stock issued for services and compensation 28,125 - 259,125
Noncash consulting compensation expense 253,581 97,126 635,307
Loss on disposition of assets - 8,268 1,281,848
Changes in operating assets and liabilities:
Accounts receivable 89,962 274,116 (45,412)
Unbilled receivables on contracts - 142,414 -
Inventories - 2,520 -
Prepaid expenses and other 24,543 4,614 (12,326)
Amounts due from related parties 1,745 12,949 (1,400)
Other assets - - (27,000)
Accounts payable 21,986 (8,515) 26,678
Accrued liabilities 95,099 (221,031) 216,082
Deferred revenues 1,351,998 (3,750,000) 1,351,998
----------------- ---------------- -------------------
Net cash used in operating activities (97,298) (1,952,898) (12,848,681)
----------------- ---------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (18,208) (19,936) (2,937,056)
Purchase of short-term investments - - (356,146)
Proceeds from the sale of assets - - 6,517
----------------- ---------------- -------------------
Net cash used in investing activities (18,208) (19,936) (3,286,685)
----------------- ---------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 7,020 - 12,494,821
Proceeds from issuance of common stock warrants - - 1,777,952
Proceeds from collection of stock subscriptions - 74,400 413,700
Proceeds from issuance of preferred stock - - 1,164,001
Proceeds from issuance of redeemable
Preference stock - - 240,000
Payments on redeemable preference stock
And dividends - - (268,169)
Net borrowings on stockholder loans - - 385,000
----------------- ---------------- -------------------
Net cash provided by financing activities 7,020 74,400 16,207,305
----------------- ---------------- -------------------
NET INCREASE (DECREASE) IN CASH (108,486) (1,898,434) 71,939
----------------- ---------------- -------------------
CASH AT END OF THE PERIOD $ 71,939 $ 581,649 $ 71,939
================= ================ ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-30
<PAGE>
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Interim Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows as
of the dates and for the periods presented herein have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to the Securities and Exchange Commission rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's December 31, 1999 Annual Report on Form 10-KSB/A. The
results of operations for the three and nine months ended September 30, 2000,
are not necessarily indicative of the operating results that may result for the
full fiscal year ending December 31, 2000. The accounting policies followed by
the Company are set forth in Note 1 to the Company's consolidated financial
statements in its December 31, 1999 Annual Report on Form 10-KSB/A and in Notes
6 and 7 below.
(2) Basic and Diluted Net Income (Loss) Per Common Share
Net loss per common share is based on the weighted average number of
common shares outstanding. Stock options, warrants and preferred shares prior to
conversion are not included in the calculation of net loss per common share
because their inclusion would be antidilutive, thereby reducing the net loss per
common share. Therefore, there is no difference between basic and diluted net
loss per common share for the periods presented in which the Company incurs net
losses. Basic and diluted net income per common share are equivalent for the
three and nine months ended September 30, 2000 due to the minimal impact from
outstanding options and warrants. The Company has common stock options and
warrants outstanding at September 30, 2000 that, if exercised, would result in
the issuance of an additional 6,307,120 shares of common stock.
(3) Common Stock Warrants
The Company currently has 773,333 warrants (the "SHPI Warrants")
outstanding that were originally granted in exchange for cancellation of certain
royalty obligations which are exercisable for the same number of shares of the
Company at $2.00 per share. The SHPI Warrants expire on December 31, 2002. In
July 2000, the Company entered into arrangements with two of the SHPI Warrant
holders who are also employees of the Company whereby the expiration date of
500,000 of the SHPI Warrants was extended to June 30, 2004. The SHPI Warrant
extension was in consideration for the employees executing non-compete
agreements and entering into one year employment agreements.
(4) Employment Agreement
The Company entered into an employment arrangement effective June 12,
2000, with an individual to provide management, patent and product development
related services to the Company. This arrangement provides for among other
employee benefits, a three-year term of employment at a beginning annual
compensation of $165,000, and options to acquire 100,000 shares of common stock
at $1.125 per share.
The Company entered into an employment arrangement effective September
26, 2000, with an individual to provide management, technical services and
product development services to the Company. This arrangement provides for,
among other employee benefits, a three-year term of employment at a beginning
F-31
<PAGE>
annual compensation of $165,000 and options to acquire 100,000 shares of common
stock at $1.5625 per share.
(5) Issuance of Common Stock and Stock Options
In conjunction with the new employment arrangement effective June 12,
2000 discussed in Note 4, the board of directors of the Company authorized the
issuance of 25,000 shares of restricted common stock to the officer. The
issuance of these shares of common stock was accounted for at fair market value
as of June 12, 2000 for a total value of $28,125. This amount was recorded as
compensation expense in the quarter ended June 30, 2000.
In March and June 2000, we granted to the non-executive members of our
board of directors stock options to acquire a total of 24,000 shares of our
common stock. These stock options were granted in equal quarterly installments
at exercise prices of $2.00 in March 2000, and $1.125 in June 2000.
Effective June 19, 2000, the Company entered into an agreement with a
consulting firm located in the United Kingdom for the performance of certain
public relations activities. As compensation for these services, the consulting
firm was issued options to purchase 10,000 shares of the Company's common stock
at $1.125 per share. These options have been valued at $8,337 using the
Black-Scholes option pricing model and have been reflected as consulting expense
in the consolidated financial statements for the quarter ended June 30, 2000.
In 1993, the Company entered into an agreement with an individual to
reimburse certain expenses incurred by that individual in connection with the
Company's acquisition of certain intellectual property and related assets.
Subsequently a dispute arose over such expenses and as of June 30, 2000, the
Company accrued $101,098 as a liability. Thereafter, the Company reached an
agreement with this individual whereby the Company would issue to the individual
50,000 shares of common stock as full and final settlement of the claims he may
have against the Company. On August 29, 2000, the Company issued 50,000 shares
of restricted common stock in full settlement of the claim. The stock closing
price on August 29, 2000 was $1.1875, resulting in total consideration of
$59,375. Accordingly, consulting expense was reduced by $41,723 in the quarter
ended September 30, 2000.
In July 2000, the Company granted stock options to acquire 50,000
shares of the Company's common stock at an exercise price of $1.625 per share to
the Company's chief financial officer.
In August 2000, stock options to acquire 18,000 shares of the Company's
common stock at $.39 per share were exercised by a former employee and director
of the Company.
In August 2000, options to purchase 1,074,310 shares of the Company's
common stock expired.
In August 2000, the Company granted to two of the non-executive members
of the Company's board of directors stock options to acquire a total of 8,000
shares of the Company's common stock at an exercise price of $1.00 per share. In
August 2000, the Company also granted fully vested stock options to acquire
50,000 shares of the Company's common stock at an exercise price of $1.00 per
share to a newly appointed director as compensation for service on the Company's
board.
In September 2000, the Company granted stock options to acquire a total
of 846,810 shares of the Company's common stock at exercise prices of between
$1.25 and $2.00 per share. Options to acquire 469,810 shares were granted to
Company employees and directors, including the Company's president, who received
options to acquire 300,000 shares at an exercise price of $2.00 per share, a
non-executive director, who received options to acquire 20,000 shares at an
exercise price of $2.00 per share and the Company's newly hired vice president
and chief technical officer, who received options to acquire 100,000 shares at
an exercise price of $1.5625 per share. Options to acquire 320,000 shares were
granted to non-employees and 57,000 shares to an employee at exercise prices of
$1.25 and $2.00 per share, respectively. The options to non-employees have been
valued at $245,244 using the Black-Scholes option pricing model and have been
reflected as compensation expense in the accompanying consolidated financial
statements for the periods ended September 30, 2000.
F-32
<PAGE>
(6) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, is effective for the Company's fiscal year beginning 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that the Company recognize
all derivative instruments as either assets or liabilities in the condensed
consolidated balance sheet and measure those instruments at fair value. The
Company does not expect the adoption of SFAS 133, as amended, to have a material
impact on the Company's results of operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101 ("SAB 101"). SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
subsequent issuance of SAB 101A and SAB 101B has deferred the effective date of
SAB 101 until the fourth quarter of 2000. The Company does not expect the
adoption of SAB 101 to have a material impact on the Company's results of
operations, financial position or liquidity.
(7) Development and License Agreement
In November 1999, the Company and The Kendall 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
safety 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 receive an additional $1,000,000 upon the
sale of commercial quantities of products (as defined in the agreement) or 30
months from the effective date of the agreement, whichever comes first. These
payments, totaling approximately $2,500,000, are 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
pre-existing 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 minimum royalty payments totaling $2,500,000 during
the period commencing upon the sale of commercial quantities of products and the
third anniversary thereof. Kendall has the right to cancel its unaccrued
obligations under the Kendall Agreement upon 15 days written notice and by
assigning the patents to the Company. It is anticipated that Kendall will
manufacture all products that are subject to the Kendall Agreement.
In accordance with SAB 101, "Revenue Recognition in Financial
Statements" as issued by the Securities and Exchange Commission, the technology
payments provided for in the agreement will be recognized as revenue over the
estimated period for which the Company will receive economic benefit. Revenue
recognition for the $2,500,000 of payments will be based on the relative fair
values of the various products covered by the Kendall Agreement on a
straight-line basis over the estimated economic lives of those products. The
$1,500,000 payment received by the Company on April 12, 2000 is non-refundable
and the additional $1,000,000 is receivable upon commercialization of the first
product subject to the Kendall Agreement or 30 months from the effective date of
the agreement, whichever comes first. Accordingly, in compliance with SAB 101,
the Company is recognizing technology and licensing revenue at a rate of $24,667
per month which began in April 2000. The effect of treating revenue in this
manner has been to defer, as of September 30, 2000, revenue of $1,351,998. Were
the revenue not deferred stockholder equity would have been increased by that
amount.
F-33
<PAGE>
======================================== =====================================
You should rely only on the
information provided in this
prospectus or any prospectus
supplement. We have not authorized
anyone else to provide you with
different information. We are not
making an offer of these securities in
any state where the offer is not
permitted. You should not assume that 4,382,120 Shares
the information in this prospectus or of Common Stock
any prospectus supplement is accurate
as of any date other than the date on
the front of those documents.
----------------------
TABLE OF CONTENTS
SPECIALIZED
Page HEALTH PRODUCTS
INTERNATIONAL, INC.
Risk Factors 2
Forward Looking Statements 6
Use Of Proceeds 7
Market For Common Equity And Related
Stockholder Matters 7
Management's Discussion And Analysis
Or Plan Of Operation 8 ____________
Description Of The Business 13
Description Of Property 23 PROSPECTUS
Legal Proceedings 23 ____________
Directors, Executive Officers,
Promoters And Control Persons 23
Executive Compensation 25
Security Ownership Of Certain
Beneficial Owners And Management 27
Description Of Securities 29
Certain Relationships And Related
Transactions 30
Selling Security Holders 31
Plan Of Distribution 32
Legal Matters 33
Experts 33
Available Information 34
Financial Statements F-1
----------------------
Until 90 days after the date of this
Prospectus, all dealers that effect
transactions in these securities,
whether or not participating in this
offering, may be required to deliver a
prospectus. This is in addition to
dealers' obligation to deliver a January 12, 2001
prospectus when acting as underwriters
and with respect to their unsold
allotments or subscriptions.
======================================== =====================================
======================================== =====================================
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification Of Directors And Officers
Section 145 of the Delaware General Corporation Law permits us to
indemnify our directors, officers, employees and agents, subject to limitations
imposed by the Delaware General Corporation Law. Article XI of our Bylaws and
Article Ninth of our Certificate of Incorporation require us to indemnify
officers, employees and agents to the full extent permitted by the Delaware
General Corporation Law. We have also entered into indemnity agreements with our
officers pursuant to which we have agreed to indemnify them. The indemnity
agreements require payment of any amount which an indemnitee is legally
obligated to pay because of claims relating to his or her service as an officer,
although in some circumstances indemnification would be discretionary. The
indemnity agreements also provide that we will have the burden of proving that
the applicable standard of conduct has not been met. However, we are not
obligated to make any payment prohibited by law or to pay where payment is made
to an indemnitee under an insurance policy or otherwise.
Our Bylaws, Certificate of Incorporation and indemnity agreements
expand our indemnity obligations to the full extent permitted by law. While
Delaware law contemplates some expansion of indemnification beyond what is
specifically authorized by the Delaware General Corporation Law, the courts have
not yet established the boundaries of permissible indemnification.
Our directors and officers are also covered by director and officer
liability insurance coverage.
Item 25. Other Expenses Of Issuance And Distribution
The following table sets forth all estimated costs and expenses, other
than underwriting discounts, commissions and expense allowances, payable by the
registrant in connection with the maximum offering for the securities included
in this Registration Statement:
Securities and Exchange Commission registration fee........ $1,301
Blue Sky fees and expenses................................. --
Printing and shipping expenses............................. 1,000
Legal fees and expenses.................................... 10,000
Accounting fees and expenses............................... 15,000
Transfer Agent and Miscellaneous fees ..................... 1,000
--------------
Total........................................... $28,301
==============
---------------
* All expenses are estimated except the Commission filing fee.
Item 26. Recent Sales Of Unregistered Securities
In January 1998, we completed a private placement wherein we raised
gross proceeds of $5,220,000 and approximate net proceeds of $4,948,500 through
an offering of units solely to accredited investors without general solicitation
for $2.00 per unit. As part of the private placement terms, we also cancelled
outstanding Series C Warrants and issued an additional 256,598 shares of common
stock and 769,787 Series D Warrants to certain accredited investors who had
previously invested in a private placement we conducted in 1997. The securities
were issued under Rule 506 of Regulation D and Section 4(2) of the Securities
Act of 1933, as amended. We did not use an underwriter in connection with the
transactions.
Under the requirements imposed by the private placement referenced in
the prior paragraph, in January 1998 Dr. Gale H. Thorne, who was then acting as
a director and vice-president, released us from certain royalty obligations
relating to products we were attempting to commercialize in consideration for
warrants to acquire 750,000 shares of our common stock that we granted to Dr.
II-2
<PAGE>
Thorne and his assigns. The securities were issued under Rule 506 of Regulation
D and Section 4(2) of the Securities Act of 1933, as amended. We did not use an
underwriter in connection with the transactions.
In January 1998 we also issued 25,000 shares of common stock and 25,000
Series D Warrants to (i) an unaffiliated accredited advisor for services
rendered, (ii) 175,000 Series D Warrants to a different unaffiliated accredited
advisor for services rendered, and (iii) 50,000 warrants to an executive officer
a subsidiary in connection with the execution of an employment agreement. The
securities were issued under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended. We did not use an underwriter in connection
with the transactions.
In May 1998, we granted to an employee stock options to acquire 10,000
shares of common stock at $1.81 per share. The exercise price was the market
price of the underlying common stock on the date of grant. The securities were
issued under Rule 506 of Regulation D and Section 4(2) of the Securities Act of
1933, as amended. We did not use an underwriter in connection with the
transactions.
In July 1998, Series B Warrant holders exercised warrants to acquire
85,000 shares of our common stock for total proceeds of $170,000. The securities
were issued under Rule 506 of Regulation D and Section 4(2) of the Securities
Act of 1933, as amended. We did not use an underwriter in connection with the
transactions.
In 1998, we granted to two members of our board of directors stock
options to acquire 20,000 shares of our common stock. These stock options were
granted in equal quarterly installments at exercise prices of $1.75, $1.63,
$1.25 and $1.25 per share, respectively. In 1998, we granted two employees stock
options to acquire a total of 15,000 shares of our common stock at exercise
prices ranging from $1.81 to $2.06 per share. The exercise prices of the above
options were equal to the quoted market prices of the underlying common stock on
the date of grant. The securities were issued under Rule 506 of Regulation D and
Section 4(2) of the Securities Act of 1933, as amended. We did not use an
underwriter in connection with the transactions.
In 1999, the Company granted to 4 non-executive members of our board of
directors stock options to acquire a total of 64,000 shares of common stock.
These stock options were granted in equal quarterly installments at an exercise
price of $2.00. In 1999, we also granted employees stock options to acquire a
total of 190,000 shares of our common stock at an exercise price of $2.00 per
share. The exercise prices were greater than the quoted market prices of the
underlying common stock on the date of grant. The securities were issued under
Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as
amended. We did not use an underwriter in connection with the transactions.
In January 2000, we granted employees stock options to acquire a total
of 299,000 shares of common stock at an exercise prices of $2.00 per share and
granted to an employee options to acquire 100,000 shares of common stock at an
exercise price of $1.125 per share. The securities were issued under Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933, as amended. We did
not use an underwriter in connection with the transactions.
In March and June 2000, we granted to the non-executive members of our
board of directors stock options to acquire a total of 24,000 shares of our
common stock. These stock options were granted in equal quarterly installments
at exercise prices of $2.00 in March 2000, and $1.125 in June 2000. The
securities were issued under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended. We did not use an underwriter in connection
with the transactions.
In June 2000, we granted to an officer 25,000 shares of common stock as
part of a new employment arrangement. The securities were issued under Rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. We
did not use an underwriter in connection with the transactions.
In June 2000, the Company entered into an agreement with a consulting
firm located in the United Kingdom for the performance of certain public
relations activities. As compensation for these services, the consulting firm
was issued options to purchase 10,000 shares of the Company's common stock at
$1.125 per share. The securities were issued under Rule 506 of Regulation D and
Section 4(2) of the Securities Act of 1933, as amended. We did not use an
underwriter in connection with the transactions.
II-3
<PAGE>
In June 2000, we granted to an officer stock options to acquire 100,000
shares of common stock at an exercise price of $1.125 per share. The securities
were issued under Rule 506 of Regulation D and Section 4(2) of the Securities
Act of 1933, as amended. We did not use an uderwriter in connection with the
transactions.
In July 2000, we granted stock options to acquire 50,000 shares of
common stock at an exercise price of $1.625 per share to the an employee. The
securities were issued under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended. We did not use an underwriter in connection
with the transactions.
In August 2000, stock options to acquire 18,000 shares of common stock
at $.39 per share were exercised by a former employee and director of the
Company. The securities were issued under Rule 506 of Regulation D and Section
4(2) of the Securities Act of 1933, as amended. We did not use an underwriter in
connection with the transactions.
In August 2000, we granted to two of the non-executive members of our
board of directors stock options to acquire a total of 8,000 shares of our
common stock at an exercise price of $1.00 per share. These stock options were
granted as part of the quarterly compensation to these non-executive directors
for service on our board of directors. The securities were issued under Rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. We
did not use an underwriter in connection with the transactions.
In August 2000, the Company granted stock options to acquire 50,000
shares of the Company's common stock at an exercise price of $1.00 per share to
a newly appointed director as compensation for service on our board of
directors. The securities were issued under Rule 506 of Regulation D and Section
4(2) of the Securities Act of 1933, as amended. We did not use an underwriter in
connection with the transactions.
In 1993, we entered into an agreement with an entity and certain
individuals to acquire certain intellectual property and related assets.
Subsequently a dispute arose over whether the total consideration had been paid
by us. The initial claim for additional consideration was $101,098. We reached
an agreement with the accredited individual making the claim and in August 2000
we issued to the individual 50,000 shares of restricted common stock as full and
final settlement of claims he may have against us. The securities were issued
under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933,
as amended. We did not use an underwriter in connection with the transactions.
In September 2000, we granted stock options to acquire a total of
846,810 shares of our common stock at exercise prices ranging between $1.25 and
$2.00 per share. Options to acquire 469,810 shares were granted to employees and
directors, including our president who received options to acquire 300,000
shares at an exercise price of $2.00 per share, a non-executive director, who
received options to acquire 20,000 shares at an exercise price of $2.00 per
share and the newly hired vice president and chief technical officer, who
received options to acquire 100,000 shares at an exercise price of $1.5625 per
share. Options to acquire 320,000 shares were granted accredited persons and
entities for services rendered and 57,000 shares to an employee at exercise
prices of $1.25 and $2.00 per share, respectively. The options to non-employees
have been valued at $245,244 using the Black-Scholes option pricing model and
have been reflected as compensation expense in the consolidated financial
statements for the period ended September 30, 2000. The securities were issued
under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933,
as amended. We did not use an underwriter in connection with the transactions.
In December 2000, we completed a private placement wherein we raised
gross proceeds of $600,000 through an offering of convertible promissory notes
solely to accredited investors without general solicitation. The notes are
convertible, at the sole election of the note holder, into our $.02 par value
common stock at a conversion rate of $1 per share on or before December 31,
2000. For each share of common stock received upon conversion, the note holder
shall receive a Series E Warrant. The Series E Warrants are exercisable at $1.50
per share and expire on June 30, 2001. The securities were issued under Rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. We
did not use an underwriter in connection with the transactions.
Item 27. Exhibits Index
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
3(i).1 Restated Certificate of Incorporation of the Company.
II-4
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
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)
5.1 Opinion of Blackburn & Stoll, LC
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 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)
10.5 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)
II-5
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
10.6 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. 2000 Stock Option
Plan (Incorporated by reference to Exhibit 10.7 of the Company's
Quarterly Report on Form 10-QSB, dated June 30, 2000)
21.1 Schedule of subsidiaries.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Blackburn & Stoll, LC (included in Exhibit 5.1 hereto)
24.1 Powers of Attorney (included in Part II of this Registration
Statement)
---------------
Item 28. Undertakings
The registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) Include
any prospectus required by section 10(a)(3) of the Securities Act of
1933; (ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; (iii) Include any additional
or changed material information on the plan of distribution.
(2) For determining any liability under the Securities Act of 1933,
treat each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at that time
to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Salt
Lake, State of Utah, on January 9, 2001.
SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC.
(Registrant)
By /s/ David A. Robinson
------------------------------------------------
David A. Robinson,
President, Chief Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
* President, Chief Executive Officer January 9, 2001
------------------------ and Director (Principal Executive
David A. Robinson Officer)
* Vice President, General Counsel January 9, 2001
------------------------ and Director
Paul Evans
* Chief Financial Officer (Principal January 9, 2001
------------------------ Financial Officer), Vice President
Keith L. Merrell Finance and Investor Relations
* Director January 9, 2001
------------------------
Robert R. Walker
* By /s/ David A. Robinson
---------------------------
Attorney-In-Fact
II-7
