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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
Commission file number: 0-20316
AVITAR, INC.
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(Name of small business issuer in its charter)
Delaware 06-1174053
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
35 Thorpe Avenue, Suite 101, Wallingford, Connecticut 06473
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (203)265-3594
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Title of Classes
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Common Stock, $.01 par value
Redeemable Warrants
Class A Warrants
Class B Warrants
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $4,841,159
Page 1 of 68 pages.
Exhibit Index is on page 61 hereof.
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant (computed by reference to the average of the bid and ask prices of
such stock and assuming solely for purposes hereof that all directors and
officers of the Registrant are "affiliates") as of December 30, 1996: $2,392,599
The approximate number of shares of Common Stock outstanding (including shares
held by affiliates of the Registrant) as of December 30, 1996: 8,158,108
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format (check one) Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
Avitar, Inc. (formerly Managed Health Benefits Corporation and used
herein as the "Company") acquired Avitar, Inc., a publicly held corporation
("Old Avitar") pursuant to a merger transaction in which Old Avitar merged with
and into a wholly-owned subsidiary of the Company (the "Merger"). Pursuant to
the Merger, which was effective on May 19, 1995, the Company changed its name to
Avitar, Inc. The surviving corporation in the Merger, which holds all the assets
and business of Old Avitar, is named Avitar Technologies, Inc. and is referred
to herein as "ATI". Following the Merger, the Company transferred all of its
pre-merger business and assets to a wholly-owned subsidiary now named Managed
Health Benefits Corporation ("MHB"). The Company is now a holding company with
two operating subsidiaries. Through ATI and MHB, the Company provides health
care cost containment services and produces disposable medical and dental
products. For the fiscal year ended September 30, 1996, ATI's business accounted
for 59% and MHB's business accounted for 41% of the Company's aggregate
revenues.
Avitar Technologies, Inc.
General. ATI was founded in 1979 to provide product design and
development services to medial device manufacturers. In the course of providing
these services, ATI developed proprietary biomaterials and processing
technologies that it has applied and intends to continue to apply to a variety
of medical and dental products. In 1989, ATI undertook a strategic shift from
product design and development to the commercial exploitation of its core
technologies. This strategy included the establishment of distribution
agreements with large medical product companies to market products designed,
and/or licensed, and/or manufactured by ATI. ATI currently has marketing
relationships with major medical products firms including the Convatec Division
of Bristol Meyers Squibb, ("Convatec"), Smith & Nephew Richards, Inc. ("Smith &
Nephew"), Medi Bayreuth ("Medi"), and Knoll Pharmaceutical, Inc. ("Knoll").
Products. Currently, ATI offers the following products which utilize
its proprietary medical polyurethane technology:
Diagnostic Saliva Collection Devices. ATI recently developed and is in
the early stages of marketing a saliva collection device which is used as a
component in the diagnostic testing of such diseases as HIV and Hepatitis. This
device utilizes the non-protein binding characteristics of its polyurethane foam
technology which eliminates the need for a buffer solution, thereby enhancing
the efficiency and reducing the uncertainty of the collection procedure. A
recent test conducted at the Nassau County Medical Center in New York by a
Canadian producer of diagnostic tests showed a 100% correlation with the
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standard reference blood test utilizing 300 HIV tests and 300 Hepatitis tests.
This type of test is especially beneficial to most third-world countries where
the incidence of HIV is high and the availability of technical expertise for
drawing and handling blood samples is limited. Diagnostic Saliva Collection
Devices accounted for 6% of ATI's revenues in Fiscal Year 1996.
Rapid Diagnostic Screening Tests. In November 1996, ATI entered into a
joint development agreement with Sun Biomedical Laboratories of Cherry Hill, New
Jersey to develop six saliva based drugs-of-abuse rapid screening diagnostic
tests. This agreement also grants ATI the rights to distribute Sun Biomedical's
urine based drugs-of-abuse and pregnancy tests. These urine based tests have
received United State Food and Drug Administration ("FDA") approval to market
and are sold under the Visualine trademark. Currently, the world-wide market for
diagnostic tests is estimated at $15 billion with the primary sampling media
being blood and urine. Obvious advantages exist for saliva to replace blood and
urine in many of these tests and at the same time expand the market where
current infrastructure cost limitations prohibit the use of much needed
diagnostic tests.
Wound Dressings. ATI's Hydrasorb(Trademark) wound dressing product is a
highly absorbent foam dressing which was introduced by Calgon Vestal Division of
Merck & Co. in 1994. Today, this product is marketed throughout North America
(excluding Canada), Central America, South America, Australia and New Zealand by
Convatec, a world leader in the specialty wound care market. It is also
distributed in Canada by Knoll, in Germany by Medi and in Italy by Espansione
Marketing SPA. In addition to the Hydrasorb line, ATI has custom developed
specialty would dressings for the cardiac catheter lab market as well as the
orthopedic market. The Joyce Dressing is used in dressing the introducer
catheter for cardiology procedures and is marketed directly by ATI. The
Illizarov Dressing used for dressing external bone fixators in orthopedic
procedures is marketed and sold by Smith & Nephew. Wound Dressings accounted for
74% of ATIs revenue in Fiscal Year 1996 and 80% of ATI's revenue in Fiscal Year
1995.
Other Applications/Products. ATI continues to expand the number of
applications for its proprietary technologies in a variety of other
medical/consumer markets. They include a molded foam component which provides
cushioning and sealing functions for laproscopic surgery, a molded dental
applicator for a consumer teeth bleaching system, disposable ear cushions for a
high-tech noise attenuation device and several applications in the feminine
hygiene market. Other Applications/Products accounted for 20% of ATI's revenue
in both Fiscal Years 1996 and 1995.
Development. ATI does not conduct pure research activities. ATI's
primary development strategy is to develop proprietary products through the
generation and development of product ideas either internally or through
strategic partnerships with persons and entities in the health care or dental
fields. Although secondary to its primary objective, ATI also intends to
actively pursue fee-for-service product design and development arrangements. The
ability of ATI to keep current on technology and
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purchase new equipment in connection with development of new improved products
will be affected by its existing and future need for, and the availability of,
financing.
ATI intends to continue to focus on developing proprietary products
related to the health care and dental markets. Whether such products are
developed entirely internally, or in conjunction with strategic partners, a
product will go through several stages of development. After each stage, ATI
will conduct studies to determine the effectiveness of such product. If ATI has
a strategic partner with respect to the development of a particular product, the
strategic partner may also test the product as it is being developed.
Once a product is developed and ATI determines it may be commercially
viable, ATI will obtain necessary governmental approvals prior to marketing the
product. See "Government Regulation." There can be no assurance, however, that
such approvals will actually be obtained. ATI intends to conduct marketing
trials with any new product to determine the effectiveness of the product. If
such marketing trials prove to be successful and after the product is ready for
marketing, ATI will attempt to establish an arrangement with a known medical or
dental products company with established distribution channels, most likely with
the same research and development partner, to commercially distribute the new
product. See "--Sales and Marketing" below.
ATI currently employs three full-time individuals in its development
efforts. In addition, two other employees also devote a portion of their time to
development, as well as to the manufacture of ATI's products, quality control,
regulatory affairs and facility maintenance.
Sales and Marketing. ATI generally has sold, and intends to continue to
sell, its products through large, recognized distributors of dental and medical
products and does not anticipate that a large direct sales force will be
required. ATI's sales and marketing staff consists of two full-time employees.
If ATI is unable to establish satisfactory product distribution arrangements in
this manner, it will be required to devote substantial resources to the
establishment of a direct sales force. There can be no assurance that ATI would
have the resources required for such an endeavor. ATI also intends to develop
strategic partnering arrangements with significant health care and dental
companies with established distribution channels. ATI anticipates that such
arrangements may involve the grant by ATI of the exclusive or semi-exclusive
rights to sell specific products to specified market segments and/or in
particular geographic territories in exchange for a royalty, joint venture or
other financial interests.
To introduce its products to dental and medical distributors, ATI
participates in trade shows and conducts seminars for sales personnel. ATI also
conducts user trials to support the marketing efforts of its distribution
partners.
ATI believes that these arrangements will be more effective in
promoting and distributing its medical and dental products in view of ATI's
limited resources and the extensive marketing networks of such distributors.
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ATI's most significant distribution arrangements are summarized as
follows:
Diagnostic Saliva Collection Devices/Rapid Screening Tests. In March
1996, ATI signed a licensing agreement with Simplex Medical Systems, Inc.
("Simplex") which grants ATI exclusive worldwide rights to manufacture and
market Simplex's patent-pending, state-of-the-art saliva collection device. This
device, which utilizes ATI's proprietary foam technology, will be used to
collect saliva for diagnostic tests such as HIV, hepatitis, and a number of
other diseases and substances which formerly required blood as the test medium.
Under this licensing agreement, ATI must pay to Simplex certain royalties on the
sale of each licensed product.
In November 1996, ATI signed a Non-Exclusive Distributorship Agreement
with Sun Biomedical Laboratories, Inc. ("SBL") which gives ATI the rights to
sell SBL's FDA approved urine-based, rapid screening tests for drugs of abuse
and pregnancy. These tests are marketed under the Visuline II trademark. In
addition, ATI and SBL agreed to develop a series of saliva-based rapid screening
tests for drugs of abuse. These saliva tests will use ATI's proprietary saliva
collection system with ATI having the exclusive, world-wide manufacturing and
distribution rights to the tests when the development is completed.
Hydrasorb(Trademark) Wound Dressings. In June 1992, ATI granted Medi
the exclusive right to sell Hydrasorb(Trademark) wound care products in Germany
and Holland for a period of one year. Although the agreement, by its terms,
expired in June 1993, ATI and Medi have continued the relationship under the
terms and conditions of the original agreement. Prices of products sold to Medi
may be changed upon 60 days' notice. Medi is a privately owned distributor and
producer of medical products based in Bayreuth, Germany, and sells medical
products in 20 countries. It distributes products through its direct specialty
sales force and distributes Hydrasorb(Trademark) product on a private label
basis.
In August 1993, ATI entered into a Distribution Agreement (the "Calgon
Agreement") with Calgon Vestal Laboratories, Inc. ("Calgon") pursuant to which
Calgon was granted the exclusive right to distribute Hydrasorb(Trademark)
products in the United States and Mexico, subject to certain product and
territorial exceptions based upon existing non-exclusive ATI distribution
arrangements. Generally, the Agreement provided that Hydrasorb(Trademark)
products be sold at agreed upon prices (subject to annual inflation
adjustments), Calgon share with ATI gross profits of Hydrasorb(Trademark)
products over an agreed upon base, Calgon and ATI collaborate in the development
and distribution of new wound dressing products and Calgon attain certain
minimal annual sales in order to maintain exclusivity. In consideration of the
license, Calgon (i) paid to ATI a non-refundable deposit of $125,000 to be
applied to Hydrasorb(Trademark) purchases by Calgon, and an additional $125,000
was applied to Hydrasorb(Trademark) purchases by Calgon, and (ii) agreed to pay
termination royalties if Calgon elected to terminate the Agreement (for either
reason set forth in the preceding sentence) based generally upon annual sales of
Hydrasorb(Trademark) for each post-termination year ranging from 3% to 5% of net
sales. If Calgon exercised its rights to the license prior to complete
application of the $250,000 paid to ATI by
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Hydrasorb(Trademark) then the balance, if any, was to be credited against the
termination royalties. The Agreement also contained numerous other terms and
conditions relating to the obligations, rights and duties of both parties.
In June 1994, the Calgon Agreement was terminated and the parties
thereto entered into a Supply Agreement and a License Agreement on generally the
same overall terms as the Calgon Agreement. The Supply Agreement and License
Agreement are both for a term of five years with a five-year renewal term upon
the mutual agreement of Calgon and ATI. The Supply Agreement requires ATI to
supply Calgon, and Calgon to purchase from ATI, all of the Hydrasorb(Trademark)
products Calgon resells in the exclusive territory of South America, Central
America and North America excluding Canada (the "Territory"). Under the License
Agreement, Calgon paid $425,000 to ATI for an exclusive license to use (a) the
licensed trademark for Hydrasorb(Trademark) and (b) certain technology to
manufacture or have manufactured, use and sell Hydrasorb(Trademark) products in
the territory. However, Calgon cannot exercise its right to manufacture or to
have manufactured Hydrasorb(Trademark) products unless the Supply Agreement is
terminated by Calgon in the event of (i) the breach, without curing, of a
material provision by ATI of such Agreement, (ii) the filing or institution of a
bankruptcy or similar proceeding by or against ATI, (iii) a suspension of ATI's
business operations for 30 days or more, or (iv) ATI's failure to meet certain
agreed upon delivery requirements. In December 1994, Calgon was sold to
Convatec.
In April 1996, the Company and Convatec determined that it was
necessary to modify and clarify their rights and obligations under the Supply
and Licensing Agreements in light of intervening business developments, facts,
and circumstances. In consideration for the amendments to the agreements,
Convatec immediately compensated the Company $250,000 all of which was
recognized as income during the quarter ending June 30, 1996. In addition, the
amended agreements contain termination provisions that eliminate the Company's
obligation to repay any of the $425,000 received from Calgon in July 1994 as a
licensing fee.
In November 1993, ATI entered into a five-year distribution agreement
with Knoll (the "Knoll Agreement") pursuant to which Knoll was granted the
exclusive right to distribute Hydrasorb(Trademark) products throughout Canada.
The Knoll Agreement provides that Hydrasorb(Trademark) products are to be sold
at agreed upon prices (subject to annual inflation adjustments) and that certain
minimum quantities are maintained.
Other Products/Applications. Custom medical foam products (including
the Illizarov dressing and certain nasal and sinus products) are marketed and
distributed (in the United States and abroad) primarily by Smith & Nephew on a
non-exclusive basis pursuant to an oral agreement. ATI is currently developing
products utilizing its proprietary polyurethane foam processing and formulation
technologies.
Manufacturing and Supply. ATI's only facility is located in Canton,
Massachusetts and comprises approximately 53,000 square feet of which 8,000
square feet
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is currently being used for administrative and office space and 31,000 square
feet are being used for product manufacturing and warehousing. The remaining
14,000 square feet is not being used at this time but ATI has set aside this
area for future manufacturing expansion.
Given the use of ATI's products in the medical and dental markets, ATI
is required to conform to FDA Good Manufacturing Practice regulations and
various other statutory and regulatory requirements applicable to the
manufacture and sale of medical devices. ATI is subject to inspections by the
FDA at all times. ATI believes that ATI's facilities and procedures are in
compliance with these requirements. See "--Government Regulation".
ATI does not have any written agreements with any of its suppliers. For raw
materials purchases, ATI purchases product components from single sources. ATI
acquires the same key component for its Flureze(Trademark) fluoride application
product, customized foam products and Hydrasorb(Trademark) wound dressings from
a single supplier. ATI's current supplier of such key component is the only
vendor which presently meets ATI's specifications for such components. The loss
of this supplier would at a minimum require ATI to locate another satisfactory
vendor, which would result in a period of time during which manufacturing and
sales of products utilizing such a component may be suspended and could have a
material adverse effect on ATI's financial condition and operations. Although
ATI believes that alternative sources could be found for such key component, ATI
expects that the cost of such component from an alternative source would be
substantially higher and cause substantial delays in delivery of such product.
Furthermore, there is no guarantee that ATI would be able to locate another
satisfactory vendor or, even if one should be located, that ATI would be able to
establish a commercial relationship with such vendor. However, ATI believes that
alternative sources of supply are available for its remaining product components
and that the loss of any such supplier would not have a material adverse effect
upon ATI's business.
Government Regulation. ATI and many of its products are subject to regulation by
the FDA and the corresponding agencies of the states and foreign countries in
which ATI sells its products. Accordingly, ATI is required to comply with
applicable FDA regulations and similar state and foreign country requirements
governing the manufacture, marketing, distribution, labeling, registration,
notification, clearance and/or pre-market approval of drugs, medical and dental
devices and cosmetics, as well as record keeping and reporting requirements
applicable to such products. ATI believes that it is in compliance with all such
requirements. In addition, ATI is subject to inspections by the FDA at all
times, and may be subject to inspections by state and foreign agencies. If the
FDA believes that its legal requirements have not been fulfilled, it has
extensive enforcement powers, including the ability to initiate action to
physically seize products or to enjoin their manufacture and distribution, to
require recalls of certain types of products, and to impose or seek to impose
civil or criminal sanctions against individuals or companies violating
applicable statutes.
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The standards and procedures for obtaining approval or providing
notification to the FDA with respect to medical devices were changed by
legislation in late 1990. This legislation, which also affected numerous other
changes in device regulations, is still being interpreted and implemented by the
FDA. In addition, there can be no assurance that the FDA or the U.S. Federal
Government will not enact further changes in the current rules and regulations
with respect to products which ATI already markets or may plan to market in the
future. If ATI is unable to demonstrate compliance with such new or modified
requirements, sales of affected products may be significantly limited or
prohibited until such requirements are met (if ever).
Competition. ATI believes that the principal competitive factors in
ATI's markets are innovative product design, product quality, established
customer relationships, name recognition, distribution and price. Many companies
of all sizes, including major dental and health care companies, are engaged in
activities similar to those of ATI. Most of ATI's competitors have substantially
greater financial, marketing, administrative and other resources and larger
research and development staffs.
Although ATI may not have the development resources of many of its
competitors, ATI believes its health care product design and development
experience allows it to compete favorably in producing innovative products in
ATI's markets. Furthermore, ATI believes that its Hydrasorb(Trademark) wound
dressings, and custom foam products possess qualities with significant
advantages over competing products, including cost effectiveness. Although ATI
does not have an established internal distribution network, Medi, Knoll and
Convatec are distributing ATI's Hydrasorb(Trademark) wound dressings. See
"--Products", "--Development".
In addition, colleges, universities, governmental agencies and other
public and private research organizations will continue to conduct research and
are becoming more active in seeking patent protection and licensing arrangements
to collect royalties for use of technology that they have developed, some of
which may be directly competitive with that of ATI. In addition, these
institutions compete with companies such as ATI in recruiting highly qualified
scientific personnel.
ATI believes that its product markets are highly fragmented with many
different companies competing with regard to a specific product or product
category. As a result, ATI's competition varies from product to product. ATI's
primary competitors in the wound dressing market include Squibb, Johnson &
Johnson, Smith and Nephew, 3M and Acme United.
Intellectual Property. Trade secrets, proprietary information and
know-how are important to ATI's scientific and commercial success. ATI currently
relies on a combination of patents, trade secrets, trademark law and
non-disclosure agreements to establish and protect its proprietary rights in its
products. ATI currently holds several United States patents, and has
applications pending for additional patents, which are not
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directly related to products currently marketed. In addition, ATI has certain
registered and other trademarks.
ATI believes that its products, trademarks and other proprietary rights
do not infringe the proprietary rights of third parties.
Product Liability; Insurance Coverage. The testing, marketing and sale
of medical and dental products entails a high risk of product liability claims
by consumers and others. Claims may be asserted against ATI by end-users of any
of ATI's products. As of September 30, 1996, ATI had product liability insurance
coverage in the amount of $5,000,000 and no claims had been asserted. Amounts
payable pursuant to such coverage are subject to a deductible on each occurrence
of $5,000 payable by ATI, up to an annual aggregate deductible payable by ATI of
$25,000, and certain other coverage exclusions. This insurance will not cover
liabilities caused by events occurring prior to the time such policy was
purchased by ATI or liabilities caused by events occurring after such policy is
terminated or for claims made after 60 days following termination of the policy.
Further, certain distributors of medical and dental products require minimum
product liability insurance coverage as a condition precedent to purchasing or
accepting products for distribution.
Employees. At September 30, 1996, ATI had 52 full-time employees,
including 3 in research and development (in addition to two other employees who
devote a portion of their time to research and development as well as
manufacturing and supply activities), 45 in manufacturing and supply (two of
whom devote a portion of their time to research and development), 1 in sales and
marketing and 3 in administration. None of ATI's employees is subject to a
collective bargaining agreement. ATI believes its relationship with its
employees to be satisfactory.
Managed Health Benefits Corporation
General. MHB is in the business of providing cost containment services
to assist employers and other third-party payors in controlling the costs of
group medical, workers' compensation and disability benefits. The benefit cost
containment industry is a part of the general managed care industry, which
includes health maintenance organizations ("HMOs") and preferred provider
organizations ("PPOs"). The HMO and PPO managed care models attempt to control
costs by being more efficient service providers. Cost containment companies
pursue essentially the same objective by enabling payors to more effectively
manage claims.
MHB specializes in providing mental health and substance abuse cost
containment services that assist employers, insurance carriers, managed care
organizations and other third party payors in controlling the cost of group
medical and disability benefits.
The services provided by MHB presently consist principally of (i)
Psychiatric Utilization Review; (ii) Psychiatric Bill Review; and (iii)
Psychiatric Disability Case
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Management. MHB also markets, as exclusive agent until December 31, 1996, a line
of occupational health, safety and environmental cost control software ("Medgate
OHS&E").
MHB believes that many payors do not effectively control their costs
related to psychiatric and substance abuse, and has designed Psychiatric Bill
Review, Psychiatric Utilization Review and Psychiatric Disability Case
Management Services to address this problem. MHB also believes that many
self-insured employers do not routinely audit their medical bills, and that
significant savings can be recovered by such audits, and has established its
Medical Bill Review Services Program to address this problem.
MHB presently provides its services to companies nationwide. MHB's
Psychiatric Review Services (Bill Review, Utilization Review and Disability Case
Management) provided MHB with substantially all of its revenues (95%) in fiscal
year 1996. In this service area, MHB helps its clients monitor and attempt to
reduce the costs of mental health/substance abuse, with the goal of not
adversely affecting the quality of the care received by patients. In general,
MHB performs its Psychiatric Utilization Review and Disability Case Management
Services on a per case fee basis and its Psychiatric Bill Review Services on a
percentage of savings or charges basis. MHB's heavy emphasis on Psychiatric
Review Services has resulted largely from its developed expertise in the area of
mental health care and the marketability of such services to insurance
companies.
As of September 30, 1996, MHB provided its cost containment services to
clients including The Guardian Life Insurance Company, Chubb LifeAmerica,
Northwestern National Life Insurance Company, Pioneer Insurance Company, Mercer,
Allmerica Financial, Trustmark Insurance Company, John Alden Life Insurance
Company, Phoenix Home Life Mutual Insurance Company and First UNUM.
MHB's business strategy in each of its service areas is ultimately to
create a relationship of shared risk and reward with its clients. Presently, MHB
has implemented this strategy with most of its Bill Review Services clients.
Under this strategy, MHB attempts to work with its clients in reducing and/or
recovering the costs of health care treatment in a manner which is mutually
beneficial, and in which there is an incentive for both MHB and its client to
address costly health care treatment in an efficient and cost-effective manner.
Service Areas. Although small by comparison within the health care
industry taken as a whole, MHB believes that the cost containment portion of
such industry is diversified. The service providers in the industry vary
significantly in size, amount of resources and services offered. MHB believes
that the cost containment industry has a potentially significant growth rate and
is diversified in its array of service offerings. The industry includes
companies specializing in the following services and different combinations
thereof: utilization review, price negotiation, independent medical evaluations,
bill auditing, case management and claims management. These services can be
applied to most major lines of insurance: group medical, workers' compensation,
disability and
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liability. In addition, services can be applied to major classifications of
medical expenses, including in-patient, out-patient, mental health,
pharmaceutical and rehabilitation.
Given MHB's relatively small size, limited financial and other
resources, and the array of cost containment services offered, MHB has elected
to concentrate its efforts in areas where it believes it has technical strength.
MHB's revenues are derived substantially from the services in its Psychiatric
Review Program: Psychiatric Utilization Review, Psychiatric Bill Review and
Psychiatric Disability Case Management Services. In early 1993, MHB began
marketing, as exclusive agent, the Medgate OHS&E. MHB has derived only a small
portion of its revenues from Medgate OHS&E to date, and will no longer be an
agent after December 31, 1996.
As noted above, MHB's Psychiatric Review Services include Utilization
Review, Bill Review and Disability Case Management Services. In fiscal year
1995, 98% of MHB's total revenues were derived from Psychiatric Review Services,
with Utilization Review constituting about 15% and Bill Review providing about
83% of such revenues. In fiscal year 1996, Psychiatric Bill Review Services
accounted for 83% of MHB's total revenues in fiscal year 1996, while Psychiatric
Utilization Review and Disability Case Management Services accounted for 12% of
total revenues and Medical Bill Review Services and Medgate OHS&E together
accounted for approximately 5% of total revenues. MHB expects that Psychiatric
Review Services will continue to generate the substantial majority of MHB's
revenues in fiscal year 1997, although, MHB believes, over a larger client base.
Each principal service is described below.
Psychiatric Utilization Review Services. These services have been
extremely effective in reducing the high cost of in-patient psychiatric and
substance abuse treatment by decreasing the extent and length of inpatient
services and/or by substituting lower cost, equally effective alternatives to
inpatient services.
Psychiatric Bill Review Services. Bill Review Services involve a
comprehensive prior-to-payment review of psychiatric hospital bills to determine
the accuracy and appropriateness of the charges contained in the bills. These
services typically generate savings in excess of 25% of the total dollar amount
of bills reviewed.
Psychiatric Disability Case Management. This specialized service
enables clients to significantly reduce disability claims expense by providing
them with the clinical support needed to manage psychiatric disability claims
through intensive treatment assessment and clinical monitoring of ongoing care.
Medgate OHS&E Software. This software is designed to help employers
track the costs of preventing injuries in the workplace. Under a joint marketing
agreement with Medgate, MHB has the exclusive rights to market this software in
the United States. This agreement was modified effective January 1, 1997. Under
this modified arrangement, MHB will no longer function as an agent, but will
have certain rights to receive revenues on sales made by it prior to December
31, 1996.
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Marketing Strategies. MHB has developed and implemented the following
targeted sales campaigns for each of its service areas:
- To capitalize on its ongoing Psychiatric Review Services
program with current clients, MHB has developed a sales
program directed at large and mid-sized insurance carriers
and managed care organizations. This sales program
emphasizes MHB's savings achieved for its clients, its
performance-based pricing and MHB's ability to integrate
with the payor's existing benefit plans and claims
administration procedures.
- MHB attempts to cross-sell its services, particularly all
components of its Psychiatric Review Services, so that a
client is provided with more than one of MHB's services.
MHB believes that its services can often complement each
other and lead to overall cost savings by its clients.
- MHB is developing new products in the managed health
field, based on cost containment needs identified by its
clients, including services that provide integrated
management for employee disability and health benefits.
In addition, as part of its overall sales effort, MHB will consider
additional joint marketing arrangements with organizations whose services MHB
believes to be high-quality and complementary to MHB's services and to have
significant revenue potential.
Competition. The industry in which MHB competes is relatively young and
several other companies presently provide services similar to those provided by
MHB. MHB competes for health benefit expenditures with many various health
delivery systems. MHB believes that there are no effective barriers to entry
into the health cost containment industry. MHB also believes that competition in
the health cost containment industry is likely to increase as the industry
matures, and as more companies enter the market and expand the range of services
which they offer. Many of these companies have and/or will have greater
financial, marketing, administrative and other resources than MHB. MHB believes
that the principal competitive factors in its industry presently are (i) savings
performance, (ii) pricing and (iii) accountability. MHB believes (although
definitive research has not been conducted) that the savings performance it has
recently generated in its service areas generally exceeds local industry norms.
As the industry matures, MHB believes that price (including the percentage of
recovery charged a client) will become an even more important competitive
factor. Accordingly, the revenues generated from MHB's services may be reduced
as price competition intensifies.
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<PAGE>
Customers. MHB's largest client, Guardian Life Insurance Company ,
accounted for 22% of MHB's total revenues in fiscal year 1996. All of the
services provided to Guardian Life Insurance Company were Psychiatric Review
Services. MHB's second largest client, Chubb LifeAmerica , accounted for 21% of
MHB's revenues during fiscal year 1996. As a result, for the fiscal year 1996,
the two largest clients of MHB accounted for approximately 43% of MHB's total
revenues and 18% of the Company's total revenues. MHB's arrangements with
Guardian Life Insurance Company and Chubb LifeAmerica are terminable at any time
without liability by such clients. MHB believes that the loss of either of these
clients could have a material adverse effect on the operations and financial
condition of MHB.
Governmental Regulation. MHB's Bill Audit Services are not currently
subject to regulation by the Federal Government or by any state where MHB is
currently doing business. Since October 1992, however, Psychiatric Review
Services became subject to regulation by the Connecticut Department of
Insurance, which requires licensure of organizations performing utilization
services in the State of Connecticut. MHB was granted a license by the
Department of Insurance in January 1993, which has been renewed annually
thereafter. MHB intends, to the extent possible, to renew such license annually.
MHB believes that a total of 27 states presently regulate the type of
utilization and bill review services conducted by MHB in its Psychiatric Review
Services area.
In order to eliminate any perceived risk by any of its clients, MHB has
obtained licenses in 23 of such states. MHB has found that the regulations
governing licensure in the remaining four states would prohibit MHB from using
performance-based pricing, which would be unprofitable to MHB and, therefore,
has opted not to pursue licenses in such states. Although the laws regulating
utilization management firms, like MHB, vary from state to state, MHB's
experience has been that the requirements for obtaining licensure generally
address reviewers' qualifications, review criteria, timeliness of reviews and
the appeal process. In any event, MHB expects to incur significant expenses of
time and money in maintaining its status by complying with applicable state
regulatory requirements.
Certain of MHB's clients, principally insurance companies, are also
subject to regulations which indirectly affect MHB. MHB is unable to predict
what additional governmental regulations, if any, directly or indirectly
affecting its business may be promulgated in the future. To MHB's knowledge,
health care utilization management services have not been considered to
constitute the practice of medicine under any state law. In the event, however,
that a state should determine such to be the practice of medicine, MHB's
business in that state, if any, could be materially adversely affected. In such
event, MHB would be required to comply with additional state regulations or to
elect to stop performing services in that state. MHB is also aware that, in
certain court cases, utilization review companies have been made co-defendants
in medical malpractice cases. MHB's business could be adversely affected by its
failure to obtain any required licenses or governmental approvals, or its
failure to comply with applicable regulations, significant changes in
regulations applicable to its clients, or a change in its status with regard to
the
14
<PAGE>
practice of medicine. In addition, more aggressive approaches by MHB in
Psychiatric Utilization Review Services could result in increased liability to
MHB, including possible medical malpractice related liabilities.
Employees. As of September 30, 1996, MHB employed 16 persons on a
full-time basis and engaged five persons as independent consultants (four on a
part-time basis and one on a full-time basis). Of these 21 persons, two are
executives, seven administrative and clerical capacity and 12 are employed in
operations. Operations staff includes nine review and support staff members, and
three part-time psychiatric consultants. Almost all MHB reviewers have
Bachelor's Degree level training, one is a registered nurse and two have earned
Master's Degrees. MHB presently utilizes three licensed, Board-certified
psychiatrists to authorize any report which determines the necessity of medical
services and to consult with MHB's Psychiatric Review staff. MHB expects to add
additional psychiatrists as consultants over the next fiscal year, as and if its
Psychiatric Review Services expand.
In addition, MHB occasionally utilizes the physician review services of
CORE (formerly Peer Review Analysis) of Boston, Massachusetts ("CORE") in the
conduct of its Psychiatric Review Services, based on an agreement signed between
MHB and CORE in December 1989, and updated in December 1994.
ITEM 2. DESCRIPTION OF PROPERTY
ATI leases approximately 53,000 square feet in Canton, Massachusetts
for its manufacturing facility and administrative offices. The current annual
rent is approximately $364,000 and the lease expires in June 2006.
MHB conducts its business in approximately 5,000 square feet of leased
office space located in Wallingford, Connecticut. The current annual rent is
approximately $72,000 and the lease expires in November 2001.
ITEM 3. LEGAL PROCEEDINGS.
In August 1996, A.S. Goldmen & Co., Inc. (the "Underwriter") and
certain holders of Underwriter's warrants issued by the Company commenced a
court action against the Company by filing a complaint in Federal Court for the
Southern District of New York, seeking, among other things, damages of
$6,261,839.00 based upon the Underwriters' warrant agreement between the Company
and the Underwriter.
The monetary demands made by the Underwriter relate primarily to the
anti-dilution provision of the warrant agreement. The Company believes that the
Underwriter's claims improperly seek additional underwriting compensation in
defiance of NASD rules that proscribe underwriters and their associates from
receiving the kind of compensation here sought - based on the type of
anti-dilution provision invoked by the Underwriter - on the ground that it is
unfair and unreasonable. The Company has
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<PAGE>
accordingly moved to dismiss the Underwriter's complaint based upon both the
rule violations and otherwise.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price Data. The Company's Common Stock and Redeemable Warrants
are traded on The Nasdaq Stock Market Small-Cap Market ("NASDAQ") under the
symbols AVIT and AVITW respectively. The Class A Warrants are listed, but have
not traded. The table below sets forth the high and low sales prices for the
Company's Common Stock and Redeemable Warrants, as quoted on NASDAQ (Small Cap
Market), for the periods indicated. Quotations reflect inter-dealer prices
without retail markup, markdown or commission, and do not necessarily represent
actual transactions:
Common Stock Redeemable Warrants
------------ --------------------
Fiscal 1995 High Low High Low
----------- ---- --- ---- ---
First Quarter .94 .50 .06 .06
Second Quarter .81 .38 .06 .06
Third Quarter .88 .38 .06 .06
Forth Quarter 1.00 .34 .25 .06
Fiscal 1996
-----------
First Quarter .66 .31 .12 .09
Second Quarter 1.81 .31 .40 .09
Third Quarter 2.81 1.12 1.38 .22
Forth Quarter 1.56 .88 .59 .28
As of December 31, 1996 the last sales prices for the Company's Common
Stock and Redeemable Warrants were $.34 and $.06, respectively.
Holders. The Company had approximately 250 owners of record and, it
believes, in excess of 1,500 beneficial owners of the Company Common Stock as of
December 29, 1996.
Dividends. Since its inception, the Company has not paid or declared
any cash dividends on its Common Stock. The Company intends to retain future
earnings, if any, that may be generated from its operations to help finance the
operations and expansion of the Company and accordingly does not plan, for the
reasonably foreseeable future, to pay cash dividends to holders of its Common
Stock. Any decisions as to the future payment of dividends will depend on the
earnings, if any, and financial position of the Company and such other factors
as its Board of Directors may deem relevant.
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<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis includes the operation of ATI
only from May 19 1995, the date of the Merger, and should be read in conjunction
with the Company's consolidated financial statements and the notes thereto
appearing elsewhere in this report.
Results of Operations
Revenues
Sales for the fiscal year ended September 30, 1996 increased $835,515,
or approximately 24% to $4,348,340 from $3,512,825. The results for the fiscal
year ended September 30, 1996 primarily reflect the additional revenues from the
operations of ATI of $1,228,470 and increases in revenue from the sales of
Medgate OHS&E Software of $74,000; offset by decreases in the sales of
psychiatric review services of approximately $467,000.
Other income of $492,819 reflect income recognized in connection with
the amendments to ATI's License and Supply Agreements with Convatec.
Operating Expenses
For the fiscal year ended September 30, 1996, the direct costs of sales
were $2,862,550, or approximately 65% of sales, as compared to $1,540,596, or
approximately 44% of sales, for the fiscal year ended September 30, 1995.
Excluding the $2,295,557 of costs associated with the sales of ATI, the direct
cost of sales for MHB for the fiscal year ended September 30, 1996 amounted to
$566,990, or approximately 28% of sales, compared to $563,712, or approximately
24% of sales, for the fiscal year ended September 30, 1995. The higher ratio of
direct cost to sales for MHB was primarily related to the decrease in MHB sales
described above.
Sales, general and administrative expenses for the fiscal year ended
September 30, 1996 increased $848,218, or approximately 51%, to $2,497,583 from
$1,649,365 for the fiscal year ended September 30, 1995. This increase resulted
mainly from additional operating expenses of ATI of $783,583 and additional
legal and financing expenses of $64,635; offset in part by the reversal of prior
year accruals(rent and legal expenses) of ATI totaling approximately $115,000
which were no longer necessary.
Research and development expenses for the fiscal year ended September
30, 1996 amounted to $352,700 compared to $626,224 for the prior fiscal year.
The decrease was attributable to the non-recurring adjustment for research and
development expense of $497,277 recorded in fiscal year 1995; offset in part by
an increase in research and development expenses of ATI of $223,753.
17
<PAGE>
For the fiscal year ended September 30, 1996, amortization of goodwill
was $559,708 which covered a full year as compared to $207,017 for the fiscal
year ended September 30, 1995 which only covered the period from May 19, 1995 to
September 30, 1995.
Other Income and Expense
Interest income amounted to $5,619 for the fiscal year ended September
30, 1996, as compared to $2,132 for the fiscal year ended September 30, 1995.
This increase resulted from the interest earned on higher levels of cash
maintained during fiscal year 1996.
Interest expenses and financing costs were $152,140 for the fiscal year
ended September 30, 1996 compared to $ $216,118 incurred for the fiscal year
ended September 30, 1995. This decrease resulted from the reduction of interest
expense on MHB's bridge loans of $213,618; offset in part by increases in
interest expense of $85,000 from the operations of ATI and interest expenses of
$35,000 on accounts receivable financing provided by Silicon Valley Financial
Services.
Other expense amounted to $6,141 for the fiscal year ended September
30, 1996 while other income of $50,788 was realized in the fiscal year ended
September 30, 1995. This change was attributable primarily to the net
non-recurring adjustment of $50,788 related to ATI's Distribution Agreement with
Cadco and MHB investment in Graph Max recorded in fiscal year 1995 and discussed
in the Annual Report for that period.
Net Loss
Primarily as a result of the factors described above, the Company had
net a loss of $1,591,250 ($0.28 per share) for the fiscal year ended September
30, 1996, as compared to a net loss of $688,575 ($0.14 per share) for the fiscal
year ended September 30, 1995.
Financial Condition and Liquidity
At September 30, 1996 and September 30, 1995, the Company had working
capital deficiencies of ($496,067) and ($800,583), respectively, and cash and
cash equivalents of $370,856 and $155,409, respectively. Net cash used in
operating activities during the fiscal year ended September 30, 1996 amounted to
$1,002,515 resulting primarily from a operating loss of $1,591,250, decreases in
accounts payable and accrued expenses of $332,176 and increases in inventories
of $21,994, partially offset by depreciation and amortization of equipment and
intangible assets of $735,534, non-cash charge for services of $12,675 and
decreases in accounts receivable and other assets of $194,696. Net cash provided
by financing and investing activities during Fiscal Year 1996 was $1,217,962
which included sales of Company preferred stock, common stock and warrants of
$1,470,820, offset in part by purchases of equipment of $50,978 and re-payment
of notes payable and long-term debt of $201,880.
18
<PAGE>
During October 1995, the Company sold 50,000 shares of its Series A
Convertible Preferred Stock in a private placement for a total of $50,000. In
March 1996, certain debt holders agreed to exchange their debt totaling
$125,000, and accrued interest thereon of $2,280, for 127,280 shares of Series A
Convertible Preferred Stock. Each share of this Series A Convertible Preferred
Stock entitles its holder to convert it at any time into three shares of the
Company's Common Stock and receive dividends in an amount equal to 110% of any
dividends paid on the Company's Common Stock into which each share is
convertible.
In January 1996, the Company obtained a $1,250,000 credit line from
Silicon Valley Financial Services, a division of Silicon Valley Bank. Under the
terms of the agreement, Silicon Valley Financial Services will advance funds
against 80% of the Company's qualified accounts receivable for an administrative
fee of .25 to .5% and interest at the rate of 2% per month of the outstanding
loan balance. As of September 30, 1996, the Company had an outstanding balance
of approximately $46,000 against its line of credit, all of which was recorded
as an advance against the Company's Accounts Receivable. The agreement also
provides for the interest rate to decrease to a rate not lower than 1.25% per
month as the revenues of the Company grow and meet pre-established levels.
During April 1996, the Company and Convatec, a division of E.R. Squibb
& Sons, Inc. ("Convatec") determined that it was necessary to modify and clarify
their rights and obligations under the Supply Agreement in light of intervening
business developments, facts, and circumstances. The Company entered into these
agreements on June 30, 1994 with Calgon Vestal Laboratories, Inc., now owned by
Convatec. In consideration for the amendments to the agreements, Convatec
immediately compensated the Company $250,000, all of which was recognized as
income during the quarter ending June 30, 1996. In addition, the amended
agreements contain termination provisions that eliminate the Company's
obligation to repay any of the $425,000 received from Convatec in July 1994 as a
licensing fee (the balance of which was recorded as income during the quarter
ended June 30, 1996).
In April 1996, the Company negotiated a settlement with an investment
firm that assisted the Company in the placement of its common stock under
Regulation S in 1994. Under the settlement, the Company received approximately
$89,000 from the exercise of the warrants granted to this firm. In May and June
1996, the Company completed Regulation S placements of 1,472,144 shares of its
common stock to offshore investors resulting in net proceeds of approximately
$1,250,000. In addition, the Company sold 143,116 shares of its common stock
during May and June 1996 for an aggregate amount of $100,000.
In November 1996, the Company lowered the exercise price of certain
warrants (previously issued in connection with notes during fiscal years 1994
and 1995) with the intent of inducing warrant holders to exercise the warrants.
As a result, the Company issued 1,125,000 shares of its common stock for which
it received $212,000 and
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<PAGE>
extinguished debt payable to PK&S in the amount of $268,000. In addition, the
Company is attempting to raise up to $6,000,000 from the sales of its common
stock through private placement and/or a rights offering to existing
shareholders and redeemable warrant holders. Proceeds from these financings are
expected to be used to finance any Company operating losses, to meet working
capital needs, to pay outstanding payables and to expand the business.
For the balance of fiscal year 1997, the Company's cash requirements
are expected to include primarily the funding of any operating losses and the
payment of outstanding payables and accrued professional fees incurred in
relation to the Merger.
Operating revenues of the Company declined slightly during fiscal year
1996, but are expected to gradually increase during fiscal year 1997. Based on
current sales, expense and cash flow projections, the Company believes that the
current level of cash and short-term investments on hand, the anticipated cash
flow from operations, and, most significantly, the anticipated net proceeds from
the financing mentioned above would be sufficient to fund operations for the
immediately succeeding 12 months. There can be no assurances that the Company
will consummate the above-mentioned financing, or that all of the net proceeds
sought thereby will be obtained. Although the Company had expected to achieve
profitability and generate positive cash flow by the forth calendar quarter of
1996, the lower than anticipated level of sales of products and services at ATI
and MHB will prevent the company from reaching this level of performance until
the third calendar quarter of 1997. The longer-term cash requirements of the
Company to fund operating activities, purchase capital equipment and expand the
business are expected to be met by the anticipated cash flow from operations and
proceeds from the financings described above. However, because there can be no
assurances that sales will materialize as forecasted, management will continue
to closely monitor and attempt to control costs at the Company and will continue
to actively seek additional capital on favorable terms.
As a result of the Company's recurring losses from operations and
working capital deficit, the report of its independent certified public
accountants relating to the financial statements for the fiscal year ended
September 30, 1996 contains an explanatory paragraph stating substantial doubt
about the Company's ability to continue as a going concern. Such report also
states that the ultimate outcome of this matter could not be determined as of
the date of such report (November 15, 1996). The Company's plans to address the
situation are presented above. However, there are no assurances that these
endeavors will be successful or sufficient.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Index on page F-2 of the Consolidated
Financial Statements, included herein.
20
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
Part III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors and executive officers of the Company and their
respective ages and positions with the Company, as of September 30, 1995, along
with certain biographical information (based solely on information supplied by
them), are as follows:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Peter Phildius (1) 66 Chairman of the Board/Chief Executive Officer
Douglas W. Scott (1) 50 President and Chief Operating Officer
Jay C. Leatherman Jr. 52 Chief Financial Officer and Secretary
Jane Freeman 50 Vice President of Sales and Marketing for MHB
William Martin 49 Controller for ATI
Craig Taylor (1)(2)(3)(4) 41 Director
George Witt, Ph.D. (2)(3) 67 Director
James Groth (2)(3) 59 Director
</TABLE>
- ------------------
1.Member of Audit Committee.
2.Member of Special Independent Committee.
3.Member of Compensation Committee.
4.Resigned effective December 31, 1996
PETER P. PHILDIUS
Mr. Phildius has been Chairman of the Company's Board of Directors
since October 1990 and Chief Executive Officer since July 1996. Mr. Phildius was
also Chairman of Old Avitar's Board of Directors since December 1989, and has
served as Old Avitar's Chief Executive Officer since April 1991. He has been a
general partner in PK&S since the firm's founding in 1985. Prior to 1985, Mr.
Phildius was an independent consultant and Chairman and co-founder of
Nutritional Management, Inc., a company that operates weight loss clinics (1983
- - 1985), President and Chief Operating Officer of Delmed, Inc., a medical
products company (1982 - 1983), President and Chief Operating Officer of
National Medical Care, Inc., a dialysis and medical products company (1979 -
1981), and held a variety of senior management positions with Baxter
Laboratories Inc. ("Baxter"), a hospital supply company and the predecessor of
Baxter Healthcare Corporation. During the last eight years of his 18 year career
at Baxter (1961 - 1979),
21
<PAGE>
Mr. Phildius was Group Vice President and President of the Parenteral Division,
President of the Artificial Organs Division and President of the Fenwal
Division.
DOUGLAS W. SCOTT
Mr. Scott has been the Chief Operating Officer since July 1996, was
the Chief Executive Officer from August 1989 until July 1996, and has been a
director of the Company since August 1989. Mr. Scott has been President of Old
Avitar since December 1989, its Chief Financial Officer and Chief Operating
Officer since April 1991 and its Treasurer since May 1991. Mr. Scott was also
Chief Executive Officer of Old Avitar from December 1989 through April 1991, and
has been a general partner in PK&S since its founding in 1985. Prior to 1985,
Mr. Scott was Executive Vice President of Nutritional Management, Inc. (1983 -
1985); Senior Vice President, Operations of Delmed, Inc. (1982 - 1983); Vice
President, Quality Assurance of Frito-Lay, Inc., a consumer products company
(1980 - 1982); and held several senior positions at Baxter from 1970 - 1980.
The last two of these senior positions at Baxter were General Manager of the
Vicra Division and General manager of Irish Operations. Mr. Scott is also a
director of Candela Laser Corporation, a publicly-traded company in the business
of manufacturing and marketing medical lasers. Mr. Scott received an M.B.A.
from Harvard Business School.
JAY C. LEATHERMAN, JR.
Mr. Leatherman has served as the Company's Chief Financial Officer
since October 1992 and its Secretary since July 1994. He has over 16 years
experience in financial management in the health care field. Mr. Leatherman
served as Vice President and Chief Financial Officer of 3030 Park, Inc. and 3030
Park Management Company from 1985 to 1992, responsible for financial, management
information services and business development functions for this continuing care
retirement community and management company. He served as Director of Finance
and Business Services for the Visiting Nurses Association of New Haven, Inc.
from 1977 to 1985. In addition, he served in a variety of accounting and
financial positions with Westinghouse Electric Corporation from 1969 to 1977.
Mr. Leatherman has a Bachelor's Degree in Business Administration from the
University of Hawaii.
JANE FREEMAN
Ms. Freeman has served as MHB's Vice President of Sales and Marketing
since May 1995. Ms. Freeman was Vice President of Clinical Services from April
1990 through May of 1995 after having served as Director of Mental Health
Services for MHB since November 1987. Ms. Freeman was an Account Manager with
preferred Health Care from January 1986 to October 1987. From 1980 to 1985, she
served with Vista Hill Hospital, in San Diego, California for one year as a
social worker and for four years as Director of the Social Services Department.
She has been in private practice for over 11 years specializing in the treatment
of adult survivors of sexual abuse and has been involved in the delivery of
mental health care for over 18 years. Ms. Freeman is a member of the
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<PAGE>
National Association of Social Workers. She received her Bachelors Degree from
Brandeis University (graduating magna cum laude) and her Masters Degree in
Social Work from San Diego State University.
WILLIAM MARTIN
Mr. Martin has served as Old Avitar's Controller since August 1991 and
as its Secretary from November 1994 to May 18, 1995. He has over 25 years of
accounting and financial management experience, primarily in manufacturing
environments. He served as Manufacturing Controller for Delmed, Inc. from 1984
to 1986 with responsibility for the financial and planning functions of the
company's four domestic and foreign manufacturing facilities. He was Director of
Finance for Microsomics, Inc., a high tech manufacture of electronic components
for several major defense contractors, from 1986 to 1987. Prior to joining ATI,
Mr. Martin was the Controller for Barcolene, Inc., a consumer products
manufacturer. He also held a variety of accounting and financial positions with
Fram Corporation (1970 to 1974) and with Ludlow Corporation (1974 to 1983). Mr.
Martin received his Bachelor of Science Degree in Business Administration from
Bryant College.
CRAIG TAYLOR
Mr. Taylor has served as a director of the Company since January 1989.
Mr. Taylor has been a private investor for over the past 10 years. He is also
Treasurer and a member of the Board of the New York City Mission Society.
GEORGE WITT, PH.D.
Dr. Witt has served as a director of the Company since November 1986.
Dr. Witt served as Chairman of the Board and Chief Executive Officer of MHB from
November 1986 to August 1988, and continued as its Chairman of the Board through
June 1989. Dr. Witt has maintained a private practice in clinical psychology
since 1962, and has written extensively in the field of clinical psychology.
Dr. Witt served as a professor at Quinnipiac College in Connecticut and the
Universidad de Puerto Rico in San Juan, Puerto Rico. He received his doctorate
in Clinical Psychology from the University of Wisconsin. He is a member of the
Connecticut Psychological Association and the American Psychological
Association.
JAMES GROTH
Mr. Groth has served as a director of the Company since January 1990.
Mr. Groth has been President of Mountainside Corporation, a provider of
corporate sponsored functions, for over the past 15 years.
Section 16(a) Compliance.
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<PAGE>
Based solely upon certain discussions with its officers and directors,
the Company is aware of the following failure to file timely reports required by
Section 16(a) of the Securities Exchange Act of 1934, as amended: James Groth
failed to file one Statement of Changes of Beneficial Ownership of Securities on
Form 4 with respect to 2 transactions.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth compensation
earned by or paid to the Chief Executive Officer and Chief Operating Officer for
fiscal year 1996 and, to the extent required by applicable Commission rules, the
preceding two fiscal years. No other executive officers of the Company received
annual salary and bonus in excess of $100,000 during fiscal years 1994, 1995 or
1996. All of the compensation in the table below represents management
consulting fees and salary paid by the Company to PK&S for the services of Mr.
Phildius and Mr. Scott.
<TABLE>
<CAPTION>
Annual Compensation
------------------- Long-Term
Name/Position Year Salary(1) Bonus Compensation Options
- ------------- ---- --------- ----- --------------------
<S> <C> <C> <C> <C>
Peter P. Phildius 1996 $150,000 0 0
(Chairman of the Board/ 1995 $103,125 0 250,000 (2)
Chief Executive Officer 1994 $ 75,000 0 190,000 (3)
- -July 1996)
Douglas W. Scott 1996 $150,000 0 0
(President/ 1995 $103,125 0 250,000 (2)
Chief Operating Officer 1994 $ 75,000 190,000 (3)
- -July 1996/Chief Executive
Officer-Until July 1996)
</TABLE>
- ------------------
(1) Does not include $14,008, $15,864 and $ 11,371 reimbursed to PK&S for
fiscal years 1994, 1995 and 1996, respectively, for business-related
expenses incurred by Mr. Phildius and Mr. Scott on behalf of the Company.
(2) Reflects additional options granted to Mr. Phildius and Mr. Scott by the
Company's Board of Directors in July 1995. See "--Employment Agreements"
below.
(3) Reflects certain options granted to Mr. Phildius and Mr. Scott by the
Company's Board of Directors in June 1994. See "--Employment Agreements"
below.
PK&S is a partnership, two of whose general partners are Messrs.
Phildius and Scott. PK&S provided management consulting services to the Company
through May 18, 1995 pursuant to a written consulting agreement effective May
28, 1992. Under this agreement, Messrs. Phildius and Scott each devoted
approximately 20 hours per week to the Company's affairs for which the Company
paid a monthly consulting fee of $14,500
24
<PAGE>
and reimbursed expenses. Since May 19, 1995, the Company has paid PK&S the
salary and employee benefit amounts provided under the terms of the Company's
employment agreements with Messrs. Phildius and Scott. See "--Employment
Agreements" below and Item 12. "Certain Relationships and Related Transactions"
below.
Stock Option Grants in Last Fiscal Year. No options were granted to
Mr. Phildius and Mr. Scott in fiscal year 1996.
Option Exercises in Last Fiscal Year and Year-Ended Option Values. No
stock options or stock appreciation rights were exercised by Mr. Scott and Mr.
Phildius in fiscal year 1995.
As of September 30, 1996, Mr. Phildius and Mr. Scott each held options
covering 440,000 shares of Common Stock, all of which are exercisable. The
aggregate dollar value of the unexercised in-the-money options was $220,213 as
of such date.
Employee Agreements. As a condition to the consummation of the Merger,
Messrs. Phildius and Scott entered into Employment Agreements (the "Employment
Agreements") with the Company. Under these Employment Agreements, which
commenced on May 19, 1995, Messrs. Phildius and Scott each receive an annual
salary of $150,000 (subject to cost of living increases). Pursuant to the
Employment Agreements, if Messrs. Phildius and/or Scott are terminated with
"Cause" (as such term is defined in the Employment Agreements) by the Company or
if Messrs. Phildius and/or Scott terminate their employment as a result of a
breach by the Company of its obligations under such Agreements, he will be
entitled to receive his annual base salary for a period of up to 18 months
following such termination. In addition, if there is a "Change of Control" of
the Company (as such term is defined in the Employment Agreements) and, within
two years following such "Change of Control", either of Messrs. Phildius or
Scott is terminated without cause by the Company or terminates his employment as
a result of a breach by the Company, such executive will be entitled to certain
payments and benefits, including the payment, in a lump sum, of an amount equal
to up to two times the sum of (i) the executive's annual base salary and (ii)
the executive's most recent annual bonus (if any). In addition, pursuant to the
Employment Agreements, which have a three-year term (subject to extension),
Messrs. Phildius and Scott are each entitled to annual bonus payments of up to
$150,000 if the Company achieves certain levels of Pre-tax Income (as such term
is defined in such Agreements).
In August 1994, the Employment Agreements were amended to cancel the
stock options granted thereunder (covering an aggregate of 203,000 shares and
subject to the effectiveness of the Merger), and new options to purchase an
aggregate of 380,000 shares of the Company's Common Stock at an exercise price
of $0.59 per share were granted unconditionally and independently of the
Employment Agreements. Such options will expire no later than June 16, 2004, and
are vested and exercisable . In July 1995, the Company's Board of Directors
granted additional options in the amount of 250,000 to Mr. Phildius and 250,000
to Mr. Scott. Such options have an exercise price of $0.375 per
25
<PAGE>
share and will expire no later than July 12, 2005. These options are vested and
exercisable.
Director Compensation. The Company presently pays its non-management
directors $1,000 for each Board and Committee meeting which they attend. In
consideration of the fact that the Company does not pay its non-management
directors an annual retainer, the Company adopted a directors' plan (the
"Directors' Plan"), which was approved by the Stockholders on May 18, 1995.
Under the Directors' Plan, each non-management director is to be granted options
covering 5,000 shares of the Company's Common Stock initially upon election of
the Board, and each year in which he/she is selected to serve as a director. On
June 16, 1994, the Board of Directors granted to each member of the Special
Independent Committee options to purchase 10,000 shares of the Company's Common
Stock at an exercise price of $0.59 per share, representing the fair market
value of the Company's Common Stock on the date of such grant. Such options
represent an initial special grant as well as the grant for calendar year 1995.
Such options became effective on May 19, 1995, the consummation of the Merger.
In March 1996, each non-management director received a grant of 5,000 options
for calendar hear 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's
Common Stock beneficially owned as of December 30, 1996 by (i) each person
believed by the Company to be the beneficial owner of more that 5% of the
outstanding Company Common Stock; (ii) each director of the Company; (iii) the
Company Chief Executive Officer and its four most highly compensated executive
officers (other than the Chief Executive Officer) who earn over $100,000 a year
(of which there were none); and (iv) all directors and executive officers of the
Company as a group. Beneficial ownership by the Company's stockholders has been
determined in accordance with the rules promulgated under Section 13(d) of the
Securities Exchange Act of 1934, as amended. All shares of the Company Common
Stock are owned both of record and beneficially, unless otherwise indicated.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner (1) No. Owned %
- ---------------------------------------- --------- ---
<S> <C> <C>
Peter P. Phildius (2)(3)(5) 3,286,074 27.2
Douglas W. Scott (2)(4)(5) 3,158,074 26.2
Phildius, Kenyon & Scott (2)(5) 2,556,548 21.2
James Groth (2)(7)(10) 76,548 *
George Witt, Ph.D. (2)(7) 48,571 *
Craig Taylor (2)(7)(8) 18,643 *
A. S. Goldmen & Co., Inc.(6) 706,914 5.9
All directors and executive officers as a group (3)(4)(5)(7)(8)(9)(10) 4,141,873 34.3
</TABLE>
26
<PAGE>
- ------------------
* Indicates beneficial ownership of less than one (1%) percent.
(1) Information with respect to holders of more than five (5%) percent of the
outstanding shares of the Company's Common Stock was derived from, to the
extent available, Schedules 13D and the amendments thereto on file with the
Commission.
(2) The business address of such persons, for the purpose hereof, is c/o
Avitar, Inc., Thorpe Avenue, Suite 101, Wallingford, Connecticut 06492.
(3) Includes 128,000 shares of the Company's Common Stock, options to purchase
shares of the Company's Common Stock and Preferred Stock convertible into
161,526 shares of the Company's Common Stock. Also includes the 2,566,548
shares of the Company's Common Stock beneficially owned by PK&S as
described below in Note 5.
(4) Includes Preferred Stock convertible into 161,526 shares of the Company's
Common Stock and options to purchase 440,000 shares of the Company's Common
Stock. Also includes the 2,556,548 shares of the Company's Common Stock
beneficially owned by PK&S as described below in Note 5.
(5) Represents ownership of 639,870 shares of the Company's Common Stock,
options to purchase 120,000 shares of the Company's Common Stock, warrants
to purchase 630,110 shares of the Company's Common Stock and Preferred
Stock convertible into 1,166,568 shares of the Company's Common Stock. PK&S
is a partnership of which Mr. Phildius and Mr. Scott are general partners.
(6) The business address of A.S. Goldmen & Co., Inc. is 67 Wall Street, New
York, New York 10005. Represents Underwriter Warrants to purchase up to
111,200 shares of the Company's Common Stock at an exercise price of $8.00
per share (subject to adjustment) and up to 166,800 warrants (the
"Underlying Warrants"). Each Underlying Warrant entitles the holder to
purchase the Company's Redeemable Warrant at an exercise price of $0.40 per
Redeemable Warrant (subject to adjustment). Such Redeemable Warrants
constitute the right to purchase 595,714 shares of the Company's Common
Stock. The number and percentage of shares of the Company's Common Stock
presented herein do not reflect certain anti-dilution provisions in respect
of the Underwriter Warrants. See Part I, Item 3, Legal Proceedings.
(7) Includes options to purchase 15,000 shares of the Company's Common Stock
granted to such director under the Directors' Plan approved by the
stockholders on May 18, 1995.
(8) Does not include an aggregate of 19,701 shares of the Company's Common
Stock owned by Mr. Taylor's parents and sister, of which he disclaims
beneficial ownership.
27
<PAGE>
(9) Includes options to purchase 52,500 and 33,011 and 25,000 shares of the
Company's Common Stock beneficially owned by Jay C. Leatherman, Jr.,
Jane Freeman and William Martin respectively. Mr. Leatherman, Ms. Freeman
and Mr. Martin are executive officers of the Company.
(10) Does not include 10,929 shares of the Company's Common Stock owned by a
trust established for Mr. Groth's children, all of which he disclaims
beneficial ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PK&S, a 21.1% beneficial owner of the Company, has been providing
consulting services to the Company since September 1989. On May 28, 1992, the
Company entered into a written consulting agreement with PK&S which reflected
the provisions of a previous oral agreement approved by the Company's Board of
Directors in October 1990. Pursuant to its arrangement with the Company, PK&S
provided the services of each of Messrs. Phildius and Scott to the Company for
approximately 20 hours per week. In consideration for these services, the
Company paid PK&S a consulting fee of $12,500 per month. In October 1992, the
monthly fee paid to PK&S was increased to $14,500 to reflect and compensate for
certain administrative support services provided by the PK&S staff to the
Company. The aggregate of consulting fees and salaries paid and reimbursement of
expenses made to PK&S by the Company for fiscal years 1996, 1995 and 1994
totaled $311,371, $194,957 and $209,143 respectively.
In connection with its consulting arrangement with the Company, PK&S
was granted options to purchase an aggregate of 1.6 million shares of the
Company Common Stock prior to the one for 54.9 stock split effected by the
Company in November 1991 (the "Stock Split"). In December 1991, following the
Stock Split, the Company's Board of Directors canceled these previously granted
options and replaced them with five-year options covering an aggregate of
120,000 shares of the Company Common Stock, of which options covering 60,000
shares are exercisable at $0.80 per share and options covering an additional
60,000 shares were exercisable at $2.00 per share. Such options were granted to
PK&S as compensation for services rendered to the Company. The number of shares
of Company Common Stock covered by such options was approximately 91,000 shares
more than those which PK&S would have received pursuant to the Stock Split
alone, and the exercise prices and other terms of such options were more
favorable than those of the options that they replaced. On June 16, 1994, the
Company's Board of Directors canceled the options covering 60,000 shares with an
exercise price of $2.00 per share and replaced them with options covering a like
number of shares, at $0.59 per share, the fair market value of the Company
Common Stock as of June 16, 1994. The 120,000 shares of Company Common Stock
covered by such options are subject to certain demand registration rights
granted to PK&S. Pursuant to these registration rights, PK&S has the right,
which commenced on September 18, 1993, to cause the Company to register the
shares of the Company Common Stock underlying these options.
28
<PAGE>
On September 3, 1994, PK&S made a bridge loan to the Company in the
amount of $300,000, with interest payable thereon monthly in arrears at 10% per
annum. The loan is to be repaid in the amount of one-third of the net proceeds
to the Company (up to $300,000 plus accrued interest thereon) resulting from a
private placement of the Company securities upon the earlier of September 2,
1995. In connection with the loan, the Company granted to PK&S warrants to
purchase 300,000 shares of the Company's Common Stock at an exercise price of
$0.65 per share, the average bid price of the Company Common Stock during the 10
days prior to August 17, 1994, the date the loan from PK&S was approved by the
Special Independent Committee. The warrants expire five years from the date of
grant thereof, and have piggy-back registration rights.
On December 16, 1994, the Company granted to PK&S warrants to purchase
112,500 shares of the Company's Common Stock at an exercise price of $0.50 per
share in connection with an additional bridge loan of $75,000 made by PK&S to
the Company. In addition, during January 1995, Messrs. Phildius and Scott and
Michael Kenyon, a general partner of PK&S, made bridge loans in an aggregate
amount of $110,000 to the Company. In connection with these loans, the Company
granted to them warrants to purchase an aggregate of 165,000 shares of the
Company Common Stock at an exercise price of $0.50 per share. The warrants
expire four years from the date of grant and have certain registration rights.
In connection with the bridge loans totaling $375,000 made by PK&S to
the Company, PK&S, on September 30, 1995, exchanged its bridge note, and accrued
interest thereon, for 388,856 shares of Series A Convertible Preferred Stock.
Each share of Series A Convertible Preferred Stock entitles PK&S to convert it
at any time into three shares of the Company's Common Stock and receive
dividends in an amount equal to 110% of any dividends paid on the Company's
Common Stock into which each share is convertible.
On May 19, 1995, the Company's Consulting Agreement ended and was
replaced by the Employment Agreements with Messrs. Phildius and Scott (See --
"Employment Agreements"). As requested by Messrs. Phildius and Scott and
approved by the Company's Board of Directors, the salary and benefits provided
under the Employment Agreements will be paid directly to PK&S.
In July 1995, the Company entered into a consulting agreement with
Richard Freemen, M.D., the son-in-law of the Company's Chairman and Chief
Executive Officer. Under this agreement, Dr. Freemen will act as Chairman of
ATI's Medical Advisory Board and will be compensated $5,000 per month for the
duration of the agreement. In addition, Dr. Freemen received options to purchase
20,000 shares of the Company's Common Stock.
29
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Document
- ----------- ---------
(C) 2.1 Agreement and Plan of Merger by and between MHB
and MHB Acquisition Incorporated and Avitar, Inc.,
dated April 14, 1993.
(E) 2.1.1 Amendment to Agreement and Plan of Merger by
and Between MHB, MHB Acquisition Incorporated and
Avitar, Inc., dated as of August 12, 1993.
(E) 2.1.2 Amendment to Agreement and Plan of Merger
between MHB, MHB Acquisition Incorporated and Avitar,
Inc., dated November 10, 1993.
(F) 2.1.3 Amendment to Agreement and Plan of Merger
between MHB, MHB Acquisition Incorporated and Avitar,
Inc., dated as of August 15, 1994.
(J) 2.1.4 Amendment to Agreement and Plan of Merger
between MHB, MHB Acquisition Incorporated and Avitar,
Inc., dated as of December 20, 1994.
(I) 3.1 Certificate of Amendment to the Certificate of
Incorporation of the Company dated May 19, 1995.
(I) 3.2 Certificate of Amendment of the Certificate of
Incorporation of the Company dated June 5, 1995.
(A) 4.1 Specimen Copies representing the Company's Common
Stock and Redeemable Warrants.
(F) 4.2 Specimen Certificates representing the Company's
Class A Warrants and Class B Warrants.
(F) 4.3 Warrants granted to Phildius, Kenyon & Scott as of
September 5, 1994.
(M) 4.4 Certificate of Designations, Rights and Preferences
of Series A Redeemable Convertible Preferred Stock.
(E) 10.1 Agreement between MHB, Peter N. Christos, D.H.
Blair Holdings, Inc. and Suzanne Schiller, dated
October 25, 1993, with respect to the exchange of
10% convertible promissory notes.
(E) 10.2 Agreement between MHB, Avitar, Inc., Peter N.
Christos, and D.H. Blair Investment Banking Corp.,
dated October 25, 1993, with respect to exchange of
10% convertible promissory notes of Avitar, Inc.
relating to the Merger.
(E) 10.3 Employment Agreement between MHB and Peter P.
Phildius, dated as of July 23, 1993.
(F) 10.3.1 Amended and Restated Employment Agreement
between MHB and Peter P. Phildius, dated as of August
15, 1994.
(E) 10.4 Employment Agreement between MHB and Douglas W.
Scott, dated as of July 23, 1993.
(F) 10.4.1 Amended and Restated Employment Agreement between
MHB and
30
<PAGE>
Douglas W. Scott, dated as of August 15, 1994.
(F) 10.5.1 Form of Warrant Agreement respecting the Class
A Warrants between the Company and Continental Stock
Transfer & Trust Company.
(F) 10.5.2 Form of Warrant Agreement respecting the Class
B Warrants between the Company and Continental Stock
Transfer & Trust Company.
(A) 10.5.3 Form of Warrant Agreement respecting the
Company Redeemable Warrants between the Company and
Continental Stock Transfer & Trust Company.
(F) 10.5.4 Form of First Amendment to Warrant Agreement
respecting the Company Redeemable Warrants between
the Company and Continental Stock Transfer & Trust
Company.
(C) 10.6 Marketing Agreement between MHB and American
Insurance Auditors, Inc., dated May 6, 1993.
(D) 10.7 Marketing Agreement between MHB and Medgate,
Inc., dated January 5, 1993.
(E) 10.8 Client Services Agreement for Psychiatric Review
Services between MHB and Phoenix Home Life Mutual
of Enfield, Connecticut, dated November 1, 1993.
(E) 10.9 Broker Agreement between MHB and Medical Review
Systems, L.P., dated October 28, 1993.
(C) 10.10 Form of Consulting Agreement between MHB and A.S.
Goldmen & Co., Inc., dated August 11, 1992.
(C) 10.11 Consulting Agreement between MHB and The Equity
Group, Inc., dated October 18, 1991.
(C) 10.12 Agreement between MHB and Peer Review Analysis,
Inc., dated May 28, 1992.
(F) 10.13 Consulting Agreement between MHB and Phildius,
Kenyon & Scott, dated November 29, 1989, as amended.
(B) 10.14 Agreement between MHB and Massachusetts General
Physicians Corporation, dated August 13, 1992.
(D) 10.15 Loan Agreement, Promissory Note and Security
Agreement, each between MHB as Lender and Avitar,
Inc. as Debtor, dated December 4, 1992.
(E) 10.16 Amended and Restated Loan Agreement, dated as of
December 4, 1992, and as amended as of August 12,
1993 between MHB and Avitar, Inc.
(E) 10.17 Form of Consent of Holders of Series A 10%
Cumulative Convertible Preferred Stock of Avitar,
Inc., in connection with the Merger.
(F) 10.18 Promissory Note executed by MHB to Phildius, Kenyon
& Scott, dated September 3, 1994.
(F) 10.19 Sales Consultant Agreement between MHB and Charles
P. Collins, dated September 7, 1993.
31
<PAGE>
(G) 10.20 Client Services Agreement for Psychiatric and
Substance Abuse Review Services between Registrant
and the Colonial Life Insurance Company d/b/a Chubb
LifeAmerica dated November 1, 1994.
(G) 10.21 Promissory Noted executed by MHB to Phildius, Kenyon
& Scott dated December 16, 1994.
(G) 10.22 Warrant Agreement executed by MHB to Phildius,
Kenyon & Scott dated December 16, 1994.
(H) 10.23 Form of 11% Promissory Note executed by the Company
to parties providing the bridge loans between
January - May 1995.
(H) 10.24 Form of Warrant Agreement executed by the Company to
parties providing the bridge loans between
January - May 1995.
(H) 10.25 Lease Agreement executed by Avitar, Inc. and the
Company to KBC Realty Trust, dated March 22, 1995.
(K) 10.26 Agreement between the Company and Silicon Valley
Financial Services dated January 18, 1996
(K) 10.27 Agreement between the Company and Simplex Medical
Systems, Inc. dated March 14,1996
(L) 10.28 Form of Offshore Securities Agreement between
the Company and parties purchasing common stock under
Regulation S during May-June 1996
(L) 10.29 Form of Subscription Agreement between the Company
and parties purchasing common stock during May-June
1996
(M) 21.1 Subsidiaries of the Company.
23.1 Consent from BDO Seidman, LLP
27.1 Financial Data Schedule
- ------------------
(A) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Registration Statement on Form S-18, including all
amendments filed thereto (Commission File No. 33-47365-B), and incorporated
herein by reference.
(B) Previously filed with the Securities and Exchange Commission as an Exhibit
to MHB's Annual Report on Form 10-Ksb for the fiscal year ended September
30, 1992 (Commission File No. 0-20316), and incorporated herein by
reference.
(C) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Quarterly Report for the fiscal quarter ended June 30,
1993 (Commission File No. 0-20316), and incorporated herein by reference.
(D) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Report on Form 8-K, dated January 4, 1993, as amended by
Amendment No. 1 thereto on Form 8, dated January 25, 1993, and each
incorporated herein by reference.
32
<PAGE>
(E) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Registration Statement on Form S-4 (Commission File No.
33-71666), and incorporated herein by reference.
(F) Previously filed with the Securities and Exchange Commission as an
Exhibit to MHB's Amendment No. 1 to the Registration Statement on
Form S-4 (Commission File No. 33-71666), as filed on October 12, 1994, and
incorporated herein by reference.
(G) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Quarterly Report for the fiscal quarter ended December 31,
1994 (Commission File No. 0-20316), and incorporated herein by reference.
(H) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Quarterly Report for the fiscal quarter ended March 31,
1995 (Commission File No. 02-20316), and incorporated herein by reference.
(I) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Quarterly Report for the fiscal quarter ended June 30,
1995 (Commission File No. 0-20316), and incorporated herein by reference.
(J) Previously filed with the Securities and Exchange Commission as an exhibit
to MHB's Annual Report on Form 10-KSB for the fiscal year ended September
30, 1994 (Commission File No. 0-20316), and incorporated herein by
reference
(K) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report for the fiscal quarter ended March 31,
1996 (Commission File No. 0-20316), and incorporated herein by reference.
(L) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report for the fiscal quarter ended June 30,
1996 (Commission File No. 0-20316), and incorporated herein by reference.
(M) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Annual Report on Form 10Ksb for the fiscal year ended
September 30, 1995 (Commission File No. 0-20316), and incorporated herein
by reference.
(b) Reports on Form 8-K:
On September 30, 1996, filed with the Securities and Exchange
Commission a report on Form 8-K, Item 5.
33
<PAGE>
SIGNATURES
In accordance with Section 13 of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: January 13, 1997
AVITAR, INC.
(Registrant)
By: /s/ Peter P. Phildius
---------------------------
Peter P. Phildius
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Peter P. Phildius Chairman of the Board and January 13, 1997
- ----------------------------------- Chief Executive Officer
Peter P. Phildius (Principal Executive Officer);
and Director
/s/ Douglas W. Scott President and Chief Operating January 13, 1997
- ----------------------------------- Officer and Director
Douglas W. Scott
/s/ J.C. Leatherman, Jr. Chief Financial Officer and January 13, 1997
- ----------------------------------- Secretary (Principal Financial
J.C. Leatherman, Jr. and Accounting Officer)
Not required-Resigned on
December 31, 1996 Director January 13, 1997
- -----------------------------------
Craig Taylor
/s/ George Witt, Ph.D. Director January 13, 1997
- -----------------------------------
George Witt, Ph.D.
/s/ James Groth Director January 13, 1997
- -----------------------------------
James Groth
</TABLE>
34
<PAGE>
Avitar, Inc.
and Subsidiaries
Consolidated Financial Statements
Years Ended September 30, 1996 and 1995
<PAGE>
Avitar, Inc.
and Subsidiaries
- -------------------------------------------------------------------------------
Consolidated Financial Statements
Years Ended September 30, 1996 and 1995
F-1
<PAGE>
Avitar, Inc.
and Subsidiaries
Contents
- -------------------------------------------------------------------------------
Report of independent certified public accountants F-3
Consolidated financial statements:
Balance sheet F-4
Statements of operations F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-26
F-2
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Avitar, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Avitar, Inc., and
subsidiaries as of September 30, 1996, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two years in
the period ended September 30, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Avitar, Inc. and subsidiaries as of
September 30, 1996, and the results of their operations and their cash flows for
each of the two years in the period ended September 30, 1996 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a working capital deficit as of September 30, 1996.
These matters raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
BDO Seidman, LLP
New York, New York
November 15, 1996
F-3
<PAGE>
Avitar, Inc.
and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
=======================================================================================================
September 30, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Current:
Cash and cash equivalents $ 370,856
Accounts receivable, net of allowance for doubtful accounts of $7,000 463,922
Inventories 191,443
Prepaid expenses and other 72,467
- -------------------------------------------------------------------------------------------------------
Total current assets 1,098,688
Property and equipment, net 477,141
Goodwill, net of accumulated amortization of $766,725 4,830,390
Other assets 29,088
- -------------------------------------------------------------------------------------------------------
$ 6,435,307
=======================================================================================================
Liabilities and Stockholders' Equity
Current:
Notes payable to affiliate $ 275,000
Accounts payable 452,010
Accrued expenses 534,887
Current portion of long-term debt 332,858
- -------------------------------------------------------------------------------------------------------
Total current liabilities 1,594,755
Long-term debt, less current portion 314,782
- -------------------------------------------------------------------------------------------------------
Total liabilities 1,909,537
- -------------------------------------------------------------------------------------------------------
Commitments and contingency (Note 8)
Stockholders' equity:
Series A convertible preferred stock, $.01 par value; authorized
5,000,000 shares; 1,275,261 shares issued and outstanding 12,752
Common stock, $.01 par value; authorized 25,000,000 shares; 6,966,884
shares issued and outstanding 69,669
Additional paid-in capital 12,958,934
Accumulated deficit (8,515,585)
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,525,770
- -------------------------------------------------------------------------------------------------------
$ 6,435,307
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Avitar, Inc.
and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
========================================================================================================
Year ended September 30, 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Sales $4,348,340 $ 3,512,825
Other income 492,819 -
- ---------------------------------------------------------------------------------------------------------
Total revenues 4,841,159 3,512,825
- ---------------------------------------------------------------------------------------------------------
Operating expenses:
Direct cost of revenues 2,862,550 1,540,596
Selling, general and administrative expenses 2,497,583 1,649,365
Research and development expenses 352,700 626,224
Amortization of goodwill 559,708 207,017
- ---------------------------------------------------------------------------------------------------------
Total operating expenses 6,272,541 4,023,202
- ---------------------------------------------------------------------------------------------------------
Loss from operations (1,431,382) (510,377)
- ---------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 5,619 2,132
Interest expense and financing costs (includes $24,750 and
$89,985 to affiliates) (152,140) (216,118)
Other, net (6,141) 50,788
- ---------------------------------------------------------------------------------------------------------
Total other expense (152,662) (163,198)
- ---------------------------------------------------------------------------------------------------------
Loss before provision for income taxes (1,584,044) (673,575)
Provision for income taxes 7,206 15,000
Net loss $(1,591,250) $ (688,575)
=========================================================================================================
Loss per share $ (.28) $ (.14)
=========================================================================================================
Weighted average number of common and common
equivalent shares outstanding 5,772,617 4,940,517
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Avitar, Inc.
and Subsidaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
====================================================================================================================================
Years ended September 30, 1996 and 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized
loss on
investment in
Preferred stock Common stock marketable
-------------------- ------------------- Additional Accumulated equity
Shares Amount Shares Amount paid-in capital deficit security
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1994 - $ - 4,610,953 $46,110 $ 9,856,698 $(6,235,760) $(23,710)
Sale of common stock and warrants - - 200,000 2,000 98,000 - -
Issuance of common stock for services - - 25,000 250 12,250 - -
Conversion of notes payable 1,097,981 10,980 - - 1,087,001 - -
Issuance of warrants - - - - 62,329 - -
Issuance of common stock and warrants
in merger - - 341,497 3,415 251,547 - -
Write-off of investment in marketable
equity security - - - - - - 23,710
Net loss - - - - - (688,575) -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 1,097,981 10,980 5,177,450 51,775 11,367,825 (6,924,335) -
Sale of preferred stock 50,000 500 - - 49,500 - -
Sale of common stock and warrants, net
of expenses - - 1,777,434 17,774 1,421,236 - -
Issuance of common stock for services - - 12,000 120 12,555 - -
Conversion of notes payable 127,280 1,272 - - 126,008 - -
Placement fees - - - - (18,190) - -
Net loss - - - - - (1,591,250) -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 1,275,261 $12,752 6,966,884 $69,669 $12,958,934 $(8,515,585) $ -
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Avitar, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
===============================================================================================================
Year ended September 30, 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,591,250) $ (688,575)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 175,826 63,704
Amortization of goodwill 559,708 207,017
Write-off of investment in marketable equity security - 49,860
Noncash charge for services 12,675 -
Noncash charges for consulting and other expenses, net - 95,432
Acquired research and development - 497,237
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 171,767 (182,652)
Increase in inventories (21,994) (14,620)
Decrease (increase) in prepaid expenses and other
current assets 1,985 (65,059)
Decrease in other assets 20,944 1,844
Increase (decrease) in accounts payable, accrued
expenses and consulting fees and customer advances (332,176) 85,153
Other - 21,382
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,002,515) 70,723
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in affiliate - (1,064,000)
Purchases of property and equipment (50,978) (46,551)
Increase in deferred acquisition costs - (112,075)
Cash acquired in merger - 19,544
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (50,978) (1,203,082)
- ---------------------------------------------------------------------------------------------------------------
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Avitar, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
=========================================================================================================
Year ended September 30, 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from note payable and warrants $ - $ 940,000
Repayments of notes payable and long-term debt (201,880) (113,731)
Sales of preferred stock, common stock and warrants 1,470,820 100,000
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,268,940 926,269
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 215,447 (206,090)
Cash and cash equivalents, beginning of year 155,409 361,499
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 370,856 $ 155,409
=========================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 45,887 $ 53,271
Income taxes - 7,500
=========================================================================================================
Supplemental schedule of noncash investing and financing
activities:
During 1995:
Common stock and warrants valued at $251,547 were issued
for merger.
Notes payable of $1,040,000 and accrued interest of $57,981 were
converted into preferred stock.
Accounts payable of $223,172 were converted into long-term debt.
During 1996:
Notes payable of $125,000 and accrued interest of $2,280 were
converted into preferred stock.
Accounts payable of $131,000 were converted into long-term debt.
Capital leases totaling $76,313 were entered into.
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Description of Avitar, Inc. ("Avitar" or the "Company") (formerly
Business and Basis Managed Health Benefits Corporation (see Note 3)),
of Presentation through its wholly-owned subsidiary, Managed Health
Benefits Corporation ("MHB"), is in the business of
providing cost containment services to assist employers
and other third-party payers in controlling costs of
group medical, workers' compensation and disability
benefits. MHB has targeted certain economically
significant benefit areas where it believes health
benefit payors have difficulty in controlling costs:
mental health, hospitalization and occupational health
and safety. Most of MHB's customers are located or
headquartered in the United States.
As discussed in Note 3, in May 1995, the Company
acquired Avitar, Inc. (which changed its name to Avitar
Technologies, Inc. ("ATI")). ATI designs, develops,
manufactures and markets healthcare products and
services. ATI sells its products and services primarily
to large medical supply companies.
The Company's consolidated financial statements have
been presented on the basis that it is a going concern,
which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of
business. The Company has suffered recurring losses
from operations and has a working capital deficit as of
September 30, 1996 of $496,067. The Company raised net
proceeds aggregating approximately $1,500,000 during
the years ended September 30, 1996 and 1995 from the
sale of stock and a total of $1,240,000 during the
years ended September 30, 1995 and 1994 from the
issuance of notes, of which $1,200,000 was subsequently
converted to equity (see Note 6). The Company is
attempting to obtain additional equity financing. Based
upon current revenues, expenses and cash flow
projections, the Company believes the current level of
working capital, anticipated cash flow from operations,
and expected net proceeds from future equity financings
noted above will be sufficient to finance the Company's
operating needs until the combined operations achieve
profitability. There can be no assurances that
forecasted results will be achieved or that additional
financing will be obtained. The financial statements do
not include any adjustments relating to the
recoverability and classification of asset amounts or
the amounts and classification of liabilities that
might be necessary should the Company be unable to
continue as a going concern.
F-9
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Summary of Principles of Consolidation
Significant
Accounting Policies The consolidated financial statements include the
accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Revenue Recognition
Sales of ATI's products and services are recorded in
the period the products are shipped or services are
provided.
Revenues for MHB's utilization reviews are recognized
as services are provided, based upon agreed-upon fees
per hour, or agreed-upon fees per service when services
are completed. For bill review services, revenues are
recognized at a fixed percentage of recoveries
identified in recommendations to its clients or at a
fixed percentage of the face amount of each bill review
performed for its clients.
Cash Equivalents
The Company considers all highly liquid investments and
interest-bearing certificates of deposit with original
maturities of three months or less to be cash
equivalents.
Inventories
Inventories are recorded at the lower of cost
(determined by the first-in, first-out method) or
market.
Property and Equipment
Property and equipment (including equipment under
capital leases) is recorded at cost at the date of
acquisition. Depreciation is computed using the
straight-line method over the estimated useful lives of
the assets (three to seven years). Leasehold
improvements are amortized over the terms of the
leases.
F-10
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Goodwill
Goodwill, resulting from the acquisition of ATI (see
Note 3), is amortized on the straight-line basis over
10 years. The Company periodically assesses the
continuing recoverability of goodwill based upon
nondiscounted cash flow forecasts from estimated sales
of the acquired products. If the forecasts result in
valuations below the carrying value of goodwill,
adjustments will be recorded to reduce the carrying
value.
Research and Development
Research and development costs, including acquired
research and development from ATI, are expensed as
incurred.
Loss Per Share
Loss per common share is based on the weighted average
number of common shares outstanding in each year.
Common stock equivalents, including convertible
preferred stock, options and warrants, have not been
included because they are antidilutive.
As required by APB Opinion No. 15, supplementary loss
per share for the year ended September 30, 1996 was
$.25. For this calculation, shares issued subsequent to
September 30, 1996 upon the retirement of notes payable
to affiliates (see Note 14) are included in the
weighted average number of shares as of October 1,
1995.
Income Taxes
Income taxes are accounted for on the liability method,
where deferred income taxes are provided on the
differences in bases of assets and liabilities between
financial reporting and tax returns using enacted
rates. Valuation allowances have been recorded (see
Note 10).
F-11
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable and
accounts payable approximate fair value because of the
short-term nature of these items. The current fair
values of the notes payable and long-term debt
approximate fair value because of the respective
interest rates.
Recent Accounting Standards
SFAS No. 121 - In March 1995, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", which requires that certain
long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the
carrying amount may not be recoverable. The adoption of
this pronouncement in fiscal 1997 is not expected to
have a significant effect on the Company's financial
statements.
SFAS No. 123 - In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which allows
the choice of either the intrinsic value method or the
fair value method of accounting for employee stock
options. The Company has selected the option to
continue the use of the current intrinsic value method
in fiscal 1997.
3. Acquisition In December 1992, the Company entered into a letter
agreement and, on April 14, 1993, the Company executed
a definitive merger agreement to acquire all of the
outstanding capital stock of Avitar, Inc. (name
subsequently changed to "Avitar Technologies, Inc.")
("ATI"), a small publicly-held company that designs,
develops, manufactures and markets medical products and
services. Certain of the principals of Phildius, Kenyon
& Scott ("PK&S") (see Note 8), who are executive
officers, directors and stockholders of the Company,
had similar positions at ATI. The transaction was
consummated on May 19, 1995.
F-12
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The aggregate acquisition consideration paid to the ATI
security holders was (i) 341,497 shares of the
Company's common stock, (ii) 815,019 of the Company's
redeemable warrants, each exercisable to purchase 2.63
shares of the Company's common stock at $2.66 per
share, (iii) warrants to purchase 1,000,000 shares of
the Company's common stock at an exercise price of $12
per share for a period of five years from date of
closing of the merger, and (iv) warrants to purchase
400,000 shares of the Company's common stock at $3.82
per share for a period of four months from the date of
closing (which have expired). In addition, the Company
is also obligated to issue (i) 142,890 shares of common
stock, (ii) 341,737 redeemable warrants, each
exercisable to purchase 2.63 shares of the Company's
common stock at $2.66 per share and (iii) warrants to
purchase 397,640 shares of the Company's common stock
at an exercise price of $12 per share for a period of
five years from the date of closing of the merger upon
the exercise of the then outstanding ATI Class A
warrants, Class B warrants and bridge warrants
(collectively the "ATI Warrants"). None of the
underlying ATI Warrants have been exercised as of
September 30, 1996. In connection with this
acquisition, the Company contributed its business to a
newly formed, wholly-owned subsidiary, Managed Health
Benefits Corporation.
Pursuant to a letter agreement dated December 4, 1992
and subsequently amended, the Company agreed, in
connection with the merger transaction, to consider
providing working capital financing to ATI. All
advances made by the Company bore interest at a rate of
2% above the prime rate. The Company obtained a
security interest in ATI's assets, primarily patents,
product rights and interests therein, as collateral for
the advances. In addition, the Company received
warrants to purchase five million shares of ATI's
common stock (the "Loan Warrants") at an exercise price
of $.25 per share. The Loan Warrants terminated upon
consummation of the merger transaction. Net advances to
ATI made under this agreement amounted to $2,796,000,
including a repayment of $425,000 by ATI, as of
September 30, 1994 (an additional $1,064,000 was
advanced during the period from October 1, 1994 through
May 19, 1995). Interest charged on the advances totaled
$172,593 in fiscal 1994. Since future interest charges
F-13
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
were considered not to be collectible, no interest was
recorded as revenue in fiscal 1995. Amounts previously
recorded in interim financial statements in fiscal 1995
($208,000) were reversed in the fourth quarter.
The acquisition was accounted for as a purchase and,
accordingly, ATI's assets and liabilities were recorded
at their estimated fair values and operations were
included in the consolidation from the date of the
acquisition (May 19, 1995). The excess of the purchase
price (value of issued securities plus prior advances
to ATI and assumed liabilities) over the assets
acquired totaled approximately $5,600,000, which was
classified as goodwill. Acquired research and
development was valued at approximately $500,000 and
that amount was written off as research and development
expense immediately after the acquisition.
Pro forma operating results, as if the acquisition had
occurred October 1, 1994 follow. These pro forma
results for 1995 reflect (i) the write-off of acquired
research and development in fiscal 1994 (rather than
1995); and (ii) amortization of goodwill.
September 30, 1995
--------------------------------------------------------
Revenues $ 4,679,940
Net loss (1,452,380)
Net loss per share (.29)
========================================================
4. Inventories At September 30, 1996, inventories consist of the
following:
--------------------------------------------------------
Raw materials $109,045
Work-in-process 26,519
Finished goods 55,879
--------------------------------------------------------
$191,443
========================================================
F-14
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
5. Property and At September 30, 1996, property and equipment consists
Equipment of the following:
--------------------------------------------------------
Equipment $682,692
Furniture and fixtures 56,714
Leasehold improvements 20,874
--------------------------------------------------------
760,280
Less: Accumulated depreciation and
amortization 283,139
--------------------------------------------------------
$477,141
========================================================
At September 30, 1996, the cost of equipment under
capital leases was $539,390 and the related accumulated
amortization was $178,230.
6. Notes Payable In fiscal 1994, the Company raised $300,000 and, in
fiscal 1995, it raised an additional $940,000 from the
issuance of short-term notes and warrants to purchase
the Company's common stock. The notes were payable
within one year from issuance and they bore interest at
an annual rate ranging from 10% to 11%. The Company
issued warrants to purchase 1,410,000 shares of its
common stock at exercise prices ranging from $.50 to
$.63 per share (fair value at the grant dates) for a
five-year period. The estimated fair value of the
warrants was treated as a debt discount and was
credited to additional paid-in capital. Of the total
amount raised, $485,000 was received from officers and
stockholders of the Company and PK&S.
In 1995 and 1996, debt holders (including related
parties) agreed to exchange their debt totaling
$1,165,000, and interest accrued thereon totaling
$60,261, for 1,225,261 shares of convertible preferred
stock (see Note 9 for a description of the preferred
stock). The value of the preferred stock approximated
the value of the debt and accrued interest;
accordingly, no gain or loss resulted from this
transaction. As of September 30, 1996, all of these
notes were either converted to preferred stock or
repaid.
F-15
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In December 1992, PK&S advanced ATI $350,000 to fund
operations and provide working capital. These advances
are due on demand and bear interest at prime plus 1/2%.
PK&S reduced this balance to $275,000 in a prior year
as settlement for a $75,000 receivable due to ATI. In
connection with the exercise of warrants, this debt was
reduced by $268,000 (see Note 14).
7. Long-term Debt Long-term debt consists of the following:
-------------------------------------------------------
Note payable in monthly installments through
June 1998, uncollateralized, with interest
at rates ranging from 8% to 10% $350,302
Obligations under capital leases (see Note 8) 297,338
-------------------------------------------------------
647,640
Less: Current maturities 332,858
-------------------------------------------------------
$314,782
=======================================================
The notes payable are primarily to the Company's prior
law firm and a vendor. The amounts were reclassified
from accounts payable when notes were negotiated
between the parties. The Company is in default on
payments to the law firm and the remaining balance,
$203,000, is included in current maturities.
8. Commitments and Leases
Contingency
MHB and ATI lease office space under operating leases
which expire in years through 2006. Certain additional
costs are incurred in connection with the leases and
the leases may be renewed for additional periods. ATI
leases certain equipment under capital leases.
Rental expense under all noncancelable operating leases
charged to operations for the years ended September 30,
1996 and 1995 was $356,892 and $196,612, respectively.
F-16
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Company issued warrants to purchase 150,000 shares
of its common stock to one of its lessors. The warrants
are exercisable at $.50 per share and expire in 1999.
No warrants have been exercised as of September 30,
1996.
Future minimum rentals are as follows:
Capital Operating
-------------------------------------------------------
1997 $125,522 $ 417,713
1998 116,334 488,346
1999 103,718 490,673
2000 39,777 563,600
2001 4,276 574,633
Thereafter - 1,747,397
-------------------------------------------------------
Total minimum lease payments 389,627 $4,282,362
=============
Less: Amounts representing
interest 92,289
----------------------------------------
Present value of net minimum
lease payments $297,338
=======================================================
License/Supply Agreements
In June 1994, ATI entered into a license agreement and
a supply agreement with Calgon Vestal Laboratories,
Inc. ("Calgon"), its largest customer. The supply
agreement and license agreement were both for a term of
five years with a five-year renewal term upon agreement
of Calgon and ATI. The supply agreement required ATI to
supply to Calgon and Calgon to purchase from ATI all of
the Hydrasorb(Trademark) wound dressings Calgon
resells in the exclusive territory of North America
and South America, excluding Canada (the "Territory").
Calgon had agreed to purchase certain minimum amounts
of Hydrasorb(Trademark) products. Calgon agreed to
pay ATI a royalty as determined by a formula based on
Calgon's profits on net sales of the
Hydrasorb(Trademark) products. In the event ATI
terminated the supply agreement and the license
agreement for Calgon's failure to purchase the required
quantity of Hydrasorb(Trademark) products, ATI would
pay Calgon an amount equal to $7,083 multiplied
F-17
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
by a number equal to the difference between (a) the
number of calendar months, if any, remaining during the
initial term of the supply agreement and (b) 14.
Royalty revenues were not material in 1995 or 1996.
Under the license agreement, Calgon paid $425,000 to
ATI for an exclusive license to use (a) the licensed
trademark for Hydrasorb(Trademark) and (b) certain
technology for the manufacture, use and sale of
Hydrasorb(Trademark) products in the Territory. The
license fee was being amortized over the term of the
license agreement.
The Calgon agreements were substantially modified in
fiscal 1996, eliminating, among other matters, the
minimum amounts of Calgon purchases from ATI. In
consideration for these modifications, Calgon paid
$250,000 to ATI and eliminated ATI's future obligations
under the license agreement, which amounted to
approximately $243,000 at the date of the modification.
The aggregate amount ($493,000) is included in other
income in 1996.
Employment/Consulting Agreements
In October 1990, the Board of Directors of the Company
approved a $12,500 monthly consulting fee, plus
expenses, to PK&S for management services rendered to
the Company. In fiscal 1993, this monthly fee was
increased to $14,500. Certain of the principals of PK&S
are executive officers and directors of the Company and
ATI. In addition, PK&S is a holder of the Company's
common stock.
As a condition of the merger with ATI (see Note 3), the
Company terminated the consulting agreement with PK&S
and entered into employment agreements with its two
principal executives, which payments thereunder were
subsequently assigned to PK&S. The agreements provide
for annual compensation aggregating $300,000 per year,
plus cost-of-living increases and bonuses based upon
pre-tax income, as defined. In the event of a change in
control of the Company, the two executives may be
entitled to receive up to two times their annual salary
plus prior bonus. The agreements have a term of three
years and may be extended for future successive
one-year periods.
F-18
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Expenses under these agreements totaled approximately
$300,000 in 1996 and $216,000 in 1995.
The Company entered into a consulting agreement with
the son-in-law of the Company's chairman, who is the
chairman of ATI's Advisory Board. The agreement calls
for monthly payments of $5,000 and is cancelable by
either party with 60 days notice. The expense under
this agreement totaled $60,000 and $-0-, in 1996 and
1995, respectively.
Litigation
An action is pending against the Company whereby the
underwriter for the Company's 1992 initial public
offering (and three of its principals) is seeking,
among other things, (i) to have the Company repurchase
warrant securities (see Note 9) for an aggregate price
of approximately $6.3 million, and (ii) damages of
approximately $1.6 million. The Company intends to
contest the case vigorously and has moved to dismiss
the case. Management believes the case is without merit
and does not believe it will adversely affect its
financial condition, operations or liquidity. No
adjustments have been made in the accompanying
financial statements for this litigation.
9. Stockholders' Equity Preferred Stock
Each share of Series A convertible preferred stock
entitles its holder to: convert it, at any time, at the
option of the holder, into three shares of common stock
subject to antidilution provisions; receive dividends
in an amount equal to 110% of the dividends paid on the
Company's common stock into which each share is
convertible; redeem, in whole or in part, at the
Company's option at a price of $1.00 per share if the
common stock trades at $3.00 or more per share for a
defined period; and receive $1.00 per share plus a
liquidating dividend of 7% annually in preference to
holders of common stock in the event of liquidation.
F-19
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Warrants
The Company has outstanding warrants entitling the
holder to purchase one share of common stock at the
applicable exercise price. The following is a summary
of shares issuable upon the exercise of warrants (all
of which are exercisable) at September 30, 1996. No
warrants have been exercised or cancelled in fiscal
1995 or 1996.
Exercise Shares Expiration
price issuable date
- --------------------------------------------------------------------------------
Warrants issued in connection with
debt retired in previous years* $.035 142,857 1996
Redeemable Warrants issued in
connection with a prior public
offering* 1.96 6,850,714 1997
Underwriter's Warrants issued in
connection with the Company's
prior public offering** 8.00 278,000 1997
Warrants issued in connection with
prior debt financings* 1.12 272,321 1996
Warrants issued in connection with
prior stock sales .26 - 1.00 188,381 1998
Warrants issued in connection with
notes payable (see Notes 6 and 14) .50 - .65 1,485,000 1999
Warrants issued to lessor .50 150,000 1999
Redeemable Warrants issued in
connection with merger
(see Note 3)* 1.96 2,910,782 1997
Warrants issued in connection with
merger (see Note 3) 12.00 1,000,000 2000
================================================================================
* Exercise price and shares issuable reflect adjustment for antidilution
provisions as noted above.
** Antidilution adjustment not made as the terms of these warrants are currently
in litigation.
F-20
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Stock Options
The Company has stock option plans providing for the
granting of incentive stock options for up to 750,000
shares of common stock to certain employees to purchase
common stock at not less than 100% of the fair market
value on the date of grant. Each option granted under
the plan may be exercised only during the continuance
of the optionee's employment with the Company or during
certain additional periods following the death or
termination of the optionee. Each employee is fully
vested in all options granted under the Plan after the
completion of two years of continuous service to the
Company. If the optionee has been employed by the
Company for a period of less than two years, all
options granted under the plan vest at a rate of 50%
per year.
During fiscal 1995, the Company adopted a directors'
plan, (the "Directors' Plan"). Under the Directors'
Plan, each nonmanagement director is to be granted
options covering 5,000 shares of MHB common stock
initially upon election to the Board, and each year in
which he/she is selected to serve as a director. On
June 16, 1994, the Board of Directors granted to such
directors options to purchase a total of 15,000 shares
of the Company's common stock at an exercise price of
$.59 per share, representing the fair value on the date
of such grant. Such options represent the initial grant
as well as the grant for calendar year 1995. Such
options became effective upon the consummation of the
merger with ATI (see Note 3). In fiscal 1996, another
15,000 options were granted to directors under this
plan.
F-21
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In addition, in connection with a consulting
arrangement with the Company, PK&S, a related party
(see Note 8), had been granted options to purchase an
aggregate of 120,000 shares of common stock, of which
60,000 shares were exercisable at $.80 per share and
60,000 shares were exercisable at $2.00 per share. On
June 16, 1994, the Company's Board of Directors
cancelled the options covering 60,000 shares with an
exercise price of $2.00 per share and replaced them
with options covering a like number of shares at $.59
per share, the fair market value of the Company's
common stock on such date. Also on the same date, the
Company's Board of Directors granted options to two of
the principals of PK&S to purchase an aggregate of
380,000 shares of common stock at an exercise price of
$.59 per share, the fair market value of the Company's
common stock on such date. The options vest upon the
earlier of five years or in installments upon the
occurrence of the following: 120,000 upon the trading
price of the Company's common stock equalling or
exceeding $1.20 per share over a 10-day consecutive
period; 120,000 upon the trading price of the Company's
common stock equalling or exceeding $1.60 per share
over a 10-day consecutive period; and 140,000 upon the
trading price of the Company's common stock equalling
or exceeding $2.00 per share over a 10-day consecutive
period. The vesting of such options is cumulative and
remains in effect once a threshold has been met,
whether or not the stock trading price later declines
below such threshold. As a result of the stock trading
prices in fiscal 1996, all options are currently
exercisable.
F-22
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
On July 12, 1995, the Company's Board of Directors
granted options to two of the principals of PK&S to
purchase an aggregate of 500,000 shares of common stock
at an exercise price of $.375 per share, the fair
market value of the Company's common stock on such
date. The options vest upon the earlier of ten years or
in installments upon the occurrence of the following:
200,000 upon the trading price of the Company's common
stock equalling or exceeding $1.60 per share over a
10-day consecutive period; and 300,000 upon the trading
price of the Company's common stock equalling or
exceeding $2.00 per share over a 10-day consecutive
period. The vesting of such options is also cumulative
and remains in effect once a threshold has been met,
whether or not the stock trading price later declines
below such threshold. As a result of the stock trading
prices in fiscal 1996, all options are currently
exercisable.
A summary of option transactions is as follows:
Shares Price
- --------------------------------------------------------------------------------
Outstanding at September 30, 1994 631,442 $.53 - $7.38
Cancelled/expired (3,959) $.59
Granted 659,440 $.38 - $.59
- --------------------------------------------------------------------------------
Outstanding at September 30, 1995 1,286,923 $.38 - $7.38
Cancelled/expired (1,900) $.59
Granted 65,000 $.63 - $1.19
- --------------------------------------------------------------------------------
Outstanding at September 30, 1996 1,350,023 $.38 - $7.38
================================================================================
Substantially all options are exercisable.
10. Income Taxes No provision for Federal income taxes has been made for
the years ended September 30, 1996 and 1995, due to the
Company's operating losses. The income taxes in the
statements of operations represent minimum state
imposed, capital based income taxes. At September 30,
1996, the Company has unused net operating loss
carryforwards of
F-23
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
approximately $18,000,000 (which includes approximately
$11,000,000 acquired from ATI) which expire at various
dates through 2011. Included in the net operating loss
carryforward is approximately $17,000,000 of prior
years' losses, which are subject to limitation (see
below) and approximately $1,000,000 of recent losses,
which are not currently subject to limitation.
Because of the Company's public offering in 1992,
subsequent stock issuances and the resulting "changes
in ownership", the future use of the prior
carryforwards is restricted. The maximum amount of the
prior years' net operating loss that can be used in any
one year is approximately $300,000 (of which $240,000
can only be used against ATI's income).
As of September 30, 1996 and 1995, the deferred tax
assets related to the net operating loss carryforwards
totaling approximately $2,100,000 and $1,800,000,
respectively, have been fully offset by valuation
allowances, since the utilization of such amounts is
uncertain. Future utilization of ATI's net operating
losses, if any, attributable to periods prior to the
acquisition will be accounted for as a reduction of
goodwill.
11. Major Customers Customers in excess of 10% of total sales are:
and Product
Year ended September 30, 1996 1995
-------------------------------------------------------
Customer A $ 441,000 $ 783,000
Customer B 430,000 1,005,000
Customer C 1,381,000 857,000*
=======================================================
At September 30, 1996, accounts receivable from these
major customers totaled $106,000.
One product represents the majority of ATI's sales.
--------------
* Represents ATI customer and sales from May 19, 1995
through September 30, 1995.
F-24
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
12. Business Segments Prior to the acquisition of ATI in fiscal 1995 (see
Note 3), the Company operated in only one reportable
business segment - providing cost containment services
for healthcare claims. ATI represents a second
reportable business segment - manufacturing and selling
healthcare products. Segment information as of and for
the years ended September 30, 1996 and 1995 is as
follows:
September 30, 1996 MHB ATI Total
- --------------------------------------------------------------------------------
Revenues $ 2,005,859 $ 2,835,300 $ 4,841,159
================================================================================
Operating profit (loss) $ 95,935 $(1,527,317) $(1,431,382)
================================================================================
Identifiable assets $ 733,107 $ 5,702,200 $ 6,435,307
================================================================================
Capital expenditures $ 35,947 $ 103,923 $ 139,870
================================================================================
Depreciation and $ 8,234 $ 727,300 $ 735,534
amortization
================================================================================
September 30, 1995 MHB ATI Total
- --------------------------------------------------------------------------------
Revenues $ 2,398,814 $ 1,114,011 $ 3,512,825
================================================================================
Operating profit (loss) $ 617,110 $(1,127,487) $ (510,377)
================================================================================
Identifiable assets $ 587,929 $ 6,400,294 $ 6,988,223
================================================================================
Capital expenditures $ 1,256 $ 45,295 $ 46,551
================================================================================
Depreciation and $ 15,174 $ 255,547 $ 270,721
amortization
================================================================================
13. Operating Expenses Operations in fiscal 1996 reflect the reversal of
certain prior year accruals totaling $115,000 which
were not necessary.
F-25
<PAGE>
Avitar, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
14. Subsequent Events In November 1996, the Company lowered the exercise
price of the warrants issued in connection with notes
(see Note 6) to induce the warrant holders to exercise
the warrants. The exercise prices were reduced to
amounts ranging from $.37 to $.53 per share. The
Company issued 1,125,000 shares of its common stock in
connection with this offer and received $480,000. Of
this amount, 577,500 shares were issued to PK&S (see
Note 3) in connection with the extinguishment of debt
payable to PK&S in the amount of $268,000 (see Note 6).
F-26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Page
<S> <C> <C>
(C) 2.1 Agreement and Plan of Merger by and between MHB and MHB Acquisition (C)
Incorporated and Avitar, Inc., dated April 14, 1993.
(E) 2.1.1 Amendment to Agreement and Plan of Merger by and Between MHB, MHB (E)
Acquisition Incorporated and Avitar, Inc., dated as of August 12, 1993.
(E) 2.1.2 Amendment to Agreement and Plan of Merger between MHB, MHB (E)
Acquisition Incorporated and Avitar, Inc., dated November 10, 1993.
(F) 2.1.3 Amendment to Agreement and Plan of Merger between MHB, MHB (F)
Acquisition Incorporated and Avitar, Inc., dated as of August 15, 1994.
(J) 2.1.4 Amendment to Agreement and Plan of Merger between MHB, MHB (J)
Acquisition Incorporated and Avitar, Inc., dated as of December 20, 1994.
(I) 3.1 Certificate of Amendment to the Certificate of Incorporation of the (I)
Company dated May 19, 1995.
(I) 3.2 Certificate of Amendment of the Certificate of Incorporation of the (I)
Company dated June 5, 1995.
(A) 4.1 Specimen Copies representing the Company's Common Stock and (A)
Redeemable Warrants.
(F) 4.2 Specimen Certificates representing the Company's Class A Warrants and (F)
Class B Warrants.
(F) 4.3 Warrants granted to Phildius, Kenyon & Scott as of September 5, 1994. (F)
(M) 4.4 Certificate of Designations, Rights and Preferences of Series A (M)
Redeemable Convertible Preferred Stock.
(E) 10.1 Agreement between MHB, Peter N. Christos, D.H. Blair Holdings, Inc. (E)
and Suzanne Schiller, dated October 25, 1993, with respect
to the exchange of 10% convertible promissory notes.
(E) 10.2 Agreement between MHB, Avitar, Inc., Peter N. Christos, and D.H. (E)
Blair Investment Banking Corp., dated October 25, 1993, with respect
to exchange of 10% convertible promissory notes of Avitar, Inc.
relating to the Merger.
(E) 10.3 Employment Agreement between MHB and Peter P. Phildius, dated as of (E)
July 23, 1993.
(F) 10.3.1 Amended and Restated Employment Agreement between MHB and Peter P. (F)
Phildius, dated as of August 15, 1994.
(E) 10.4 Employment Agreement between MHB and Douglas W. Scott, dated as of (E)
July 23, 1993.
(F) 10.4.1 Amended and Restated Employment Agreement between (F)
</TABLE>
61
<PAGE>
<TABLE>
<S> <C> <C>
MHB and Douglas W. Scott, dated as of August 15, 1994.
(F) 10.5.1 Form of Warrant Agreement respecting the Class A Warrants between the (F)
Company and Continental Stock Transfer & Trust Company.
(F) 10.5.2 Form of Warrant Agreement respecting the Class B Warrants between the (F)
Company and Continental Stock Transfer & Trust Company.
(A) 10.5.3 Form of Warrant Agreement respecting the Company Redeemable Warrants (A)
between the Company and Continental Stock Transfer & Trust Company.
(F) 10.5.4 Form of First Amendment to Warrant Agreement respecting the Company (F)
Redeemable Warrants between the Company and Continental Stock
Transfer & Trust Company.
(C) 10.6 Marketing Agreement between MHB and American Insurance Auditors, (C)
Inc., dated May 6, 1993.
(D) 10.7 Marketing Agreement between MHB and Medgate, Inc., dated January 5, (D)
1993.
(E) 10.8 Client Services Agreement for Psychiatric Review Services between MHB (E)
and Phoenix Home Life Mutual of Enfield, Connecticut, dated November
1, 1993.
(E) 10.9 Broker Agreement between MHB and Medical Review Systems, L.P., dated (E)
October 28, 1993.
(C) 10.10 Form of Consulting Agreement between MHB and A.S. Goldmen & Co., (C)
Inc., dated August 11, 1992.
(C) 10.11 Consulting Agreement between MHB and The Equity Group, Inc., dated (C)
October 18, 1991.
(C) 10.12 Agreement between MHB and Peer Review Analysis, Inc., dated May 28, (C)
1992.
(F) 10.13 Consulting Agreement between MHB and Phildius, Kenyon & Scott, dated (F)
November 29, 1989, as amended.
(B) 10.14 Agreement between MHB and Massachusetts General Physicians (B)
Corporation, dated August 13, 1992.
(D) 10.15 Loan Agreement, Promissory Note and Security Agreement, each between (D)
MHB as Lender and Avitar, Inc. as Debtor, dated December 4, 1992.
(E) 10.16 Amended and Restated Loan Agreement, dated as of December 4, 1992, (E)
and as amended as of August 12, 1993 between MHB and Avitar, Inc.
(E) 10.17 Form of Consent of Holders of Series A 10% Cumulative Convertible (E)
Preferred Stock of Avitar, Inc., in connection with the Merger.
(F) 10.18 Promissory Note executed by MHB to Phildius, Kenyon & Scott, dated (F)
September 3, 1994.
</TABLE>
62
<PAGE>
<TABLE>
<S> <C> <C>
(F) 10.19 Sales Consultant Agreement between MHB and Charles P. Collins, dated (F)
September 7, 1993.
(G) 10.20 Client Services Agreement for Psychiatric and Substance Abuse Review (G)
Services between Registrant and the Colonial Life Insurance Company
d/b/a Chubb LifeAmerica dated November 1, 1994.
(G) 10.21 Promissory Noted executed by MHB to Phildius, Kenyon & Scott dated (G)
December 16, 1994.
(G) 10.22 Warrant Agreement executed by MHB to Phildius, Kenyon & Scott dated (G)
December 16, 1994.
(H) 10.23 Form of 11% Promissory Note executed by the Company to parties (H)
providing the bridge loans between January - May 1995.
(H) 10.24 Form of Warrant Agreement executed by the Company to parties (H)
providing the bridge loans between January - May 1995.
(H) 10.25 Lease Agreement executed by Avitar, Inc. and the Company to KBC (H)
Realty Trust, dated March 22, 1995.
(K) 10.26 Agreement between the Company and Silicon Valley Financial Services (K)
dated January 18, 1996
(K) 10.27 Agreement between the Company and Simplex Medical Systems, Inc. dated (K)
March 14,1996
(L) 10.28 Form of Offshore Securities Agreement between the Company and parties (L)
purchasing common stock under Regulation S during May-June 1996
(L) 10.29 Form of Subscription Agreement between the Company and parties (L)
purchasing common stock during May-June 1996
(M) 21.1 Subsidiaries of the Company. (M)
23.1 Consent from BDO Seidman, LLP 65
27.1 Financial Data Schedule 67
</TABLE>
- ------------------
(A) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Registration Statement on Form S-18, including all
amendments filed thereto (Commission File No. 33-47365-B), and incorporated
herein by reference.
(B) Previously filed with the Securities and Exchange Commission as an Exhibit
to MHB's Annual Report on Form 10-Ksb for the fiscal year ended September
30, 1992 (Commission File No. 0-20316), and incorporated herein by
reference.
63
<PAGE>
(C) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Quarterly Report for the fiscal quarter ended June 30,
1993 (Commission File No. 0-20316), and incorporated herein by reference.
(D) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Report on Form 8-K, dated January 4, 1993, as amended by
Amendment No. 1 thereto on Form 8, dated January 25, 1993, and each
incorporated herein by reference.
(E) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Registration Statement on Form S-4 (Commission File No.
33-71666), and incorporated herein by reference.
(F) Previously filed with the Securities and Exchange Commission as an
Exhibit to MHB's Amendment No. 1 to the Registration Statement on
Form S-4 (Commission File No. 33-71666), as filed on October 12, 1994, and
incorporated herein by reference.
(G) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Quarterly Report for the fiscal quarter ended December 31,
1994 (Commission File No. 0-20316), and incorporated herein by reference.
(H) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Quarterly Report for the fiscal quarter ended March 31,
1995 (Commission File No. 02-20316), and incorporated herein by reference.
(I) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Quarterly Report for the fiscal quarter ended June 30,
1995 (Commission File No. 0-20316), and incorporated herein by reference.
(J) Previously filed with the Securities and Exchange Commission as an exhibit
to MHB's Annual Report on Form 10-KSB for the fiscal year ended September
30, 1994 (Commission File No. 0-20316), and incorporated herein by
reference
(K) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report for the fiscal quarter ended March 31,
1996 (Commission File No. 0-20316), and incorporated herein by reference.
(L) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report for the fiscal quarter ended June 30,
1996 (Commission File No. 0-20316), and incorporated herein by reference.
(M) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Annual Report on Form 10Ksb for the fiscal year ended
September 30, 1995 (Commission File No. 0-20316), and incorporated herein
by reference.
64
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
65
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Avitar, Inc.
Wallingford, Connecticut
We hereby consent to the incorporation by reference in the Registration
Statements filed on Forms S-3 and S-8 in 1996 of our report dated November 15,
1996, relating to the consolidated financial statements of Avitar, Inc.
appearing in the Company's Annual Report on Form 10-KSB for the year ended
September 30, 1996. Our report contains an explanatory paragraph regarding
uncertainties as to the Company's ability to continue in business.
BDO Seidman, LLP
New York, New York
January 8, 1997
66
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AVITAR'S
ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-1-1995
<PERIOD-END> SEP-30-1996
<CASH> 370,856
<SECURITIES> 0
<RECEIVABLES> 463,922
<ALLOWANCES> 7,000
<INVENTORY> 191,443
<CURRENT-ASSETS> 1,098,688
<PP&E> 477,141
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,435,307
<CURRENT-LIABILITIES> 1,594,755
<BONDS> 0
0
12,752
<COMMON> 69,669
<OTHER-SE> 4,443,349
<TOTAL-LIABILITY-AND-EQUITY> 6,435,307
<SALES> 4,348,340
<TOTAL-REVENUES> 4,841,159
<CGS> 2,862,550
<TOTAL-COSTS> 6,272,541
<OTHER-EXPENSES> 6,141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152,140
<INCOME-PRETAX> (1,584,044)
<INCOME-TAX> 7,206
<INCOME-CONTINUING> (2,076,863)
<DISCONTINUED> 0
<EXTRAORDINARY> 492,829
<CHANGES> 0
<NET-INCOME> (1,591,250)
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
