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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, 1997
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Commission file number: 0-20316
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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. Employe Identification No.)
incorporation or organization)
65 Dan Road, Canton, MA 02021
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (617) 821-2440
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Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Title of Classes
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: $938,761
Page 1 of 66 pages.
Exhibit Index is on page 57 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 31, 1997:
$1,712,046.
The approximate number of shares of Common Stock outstanding (including shares
held by affiliates of the Registrant) as of December 31, 1997: 15,562,764
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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. (the "Company" or "Avitar") through its wholly-owned
subsidiary Avitar Technologies, Inc. ("ATI") develops, manufactures, markets and
sells proprietary hydrophilic polyurethane foam disposables fabricated for
medical, diagnostics, dental and consumer use. The Company, which resulted from
a merger in 1995, is a leading independent fabricator of disposable medical and
dental products from medical grade hydrophilic polyurethane foam.
On October 27, 1997, the Company sold the business and assets of its
wholly-owned subsidiary, Managed Health Benefits Corporation ("MHB"), which
provided health care cost containment services. Therefore, MHB is considered a
discontinued operation and this report primarily reflects the continued
operations of the Company.
Products
Currently, the Company offers the following products which utilize
its proprietary medical polyurethane foam technology:
Oral Fluids Sampling and Processing Systems. The Company has developed
foam-based oral fluids sampling and processing devices which provide convenient,
non-invasive sample collection and processing for use in diagnostic test kits.
This specialty foam (non-ionic, neutral pH, non-binding of protein) is
particularly well suited for saliva collection and processing for clinical
tests. Avitar's collection techniques are non-invasive and less costly than the
collection of blood samples. The non-binding features of these devices make them
effective for use in medical and DNA testing. Currently, the world-wide market
for diagnostic tests is estimated at $18 billion annually with the primary
sampling media being blood and urine. Oral Fluids Sampling and Processing
Systems accounted for approximately1% of the Company's revenue in Fiscal Year
1997and approximately 6% of the Company's revenue in Fiscal Year 1996.
Drugs-of-Abuse Test Kits. Under a joint development agreement with Sun
Biomedical Laboratories of Cherry Hill, New Jersey, the Company continues to
develop oral fluids based rapid on-site assay systems for detecting
drugs-of-abuse in the workplace. This agreement also grants Avitar the rights to
distribute Sun Biomedical's urine based drugs-of-abuse and pregnancy tests.
These urine based tests have received United States Food and Drug Administration
("FDA") approval to market and are sold under the Visualine trademark.
Approximately $725 million annually is spent world-wide for drugs of abuse
tests. Significant 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
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cost limitations prohibit the use of much needed diagnostic tests.
Drugs-of-Abuse Test Kits accounted for approximately 4% of the Company's revenue
in Fiscal Year 1997 and no revenue in Fiscal Year 1996.
Foam Disposable Products
The Company produces medical-grade hydrophilic polyurethane foam
disposables fabricated for the following applications:
Wound Dressings. Avitar's Hydrasorb(Trademark) (Hydrasorb) wound
dressing product is a highly absorbent topical dressing for moderate to heavy
exudating wounds. These dressings have a unique construction that provide a
moist wound healing environment which promotes skin growth and closure. The
Hydrasorb product line 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 the
ConvaTec Division of Bristol-Myers Squibb ("Convatec") a world leader in the
specialty wound care market. It is also distributed in Canada by the Knoll
Pharma Division of BASF ("Knoll") and in Germany by Medi Bayreuth ("Medi"). In
addition to the Hydrasorb line, the Company has custom developed specialty wound
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 Avitar. The market in the United States
and Europe for synthetic dressings is estimated at $800 million annually with
foam dressings accounting for approximately $150 million. The Company is
currently developing and testing a wound dressing product to be used for
dialysis patients. Wound Dressings accounted for approximately 43% of the
Company's revenue in Fiscal Year 1997 and approximately 74% of the Company's
revenue in Fiscal Year 1996.
Custom Foam Products. The Company continues to expand the number of
applications for its proprietary technologies in a variety of other
medical/consumer markets. They include the Illizarov Dressing used for dressing
external bone fixators in orthopedic procedures and a molded dental applicator
for a consumer teeth bleaching system, disposable ear cushions for a high-tech
hearing aid device. Customers for these products include Smith and Nephew, CCA
Industries, Deaconess Hospital, Decibel Instruments and Schleicher and Schuell.
Custom Foam Products accounted for approximately 53% of the Company's revenue in
Fiscal Year 1997 and approximately 20% of the Company's revenue in Fiscal Year
1996.
Development
The Company does not conduct pure research activities but, has adopted
a primary product development strategy that is based on forming partnerships
with market leading companies and recognized persons in foam products
application areas, be they consumer, medical or dental applications. With this
approach, proprietary products would be co-developed through the generation and
development of product ideas either internally or
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through these strategic partnerships. To this partnership Avitar contributes the
proprietary foam technology and related expertise, the product design,
development and prototyping, and the start-up and commercial-scale
manufacturing. The ability of the Company to keep current on technology and
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.
Products go through several stages of development. After each stage,
the Company will conduct studies to determine the effectiveness of such product.
Once a product is developed and the Company determines it may be commercially
viable, Avitar 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. The Company 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, Avitar will attempt to establish an arrangement with a
known company or individual with established distribution channels, most likely
with the same research and development partner, to commercially distribute the
new product. For certain products, the Company may decide to establish a
distribution network or directly market and distribute these products. See
"--Sales and Marketing" below.
Avitar 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 the Company's products, quality
control, regulatory affairs and facility maintenance.
Sales and Marketing
The Company generally has sold, and intends to continue to sell, its wound
dressing and custom foam products through large, recognized distributors of
dental and medical products and does not anticipate that a large direct sales
force will be required. Avitar expects to follow the same process by selling its
oral fluids and sampling systems to recognized distributors of diagnostic tests.
To sell the drugs-of-abuse test kits, the Company plans to develop a network of
established distributors that currently sell to the drugs of abuse test market.
Avitar's sales and marketing staff consists of two full-time employees. If the
Company is unable to establish satisfactory product distribution arrangements in
this manner described above, it will be required to devote substantial resources
to the establishment of a direct sales force. There can be no assurance that
Avitar would have the resources required for such an endeavor. The Company also
intends to develop strategic partnering arrangements with significant diagnostic
test, health care and dental companies with established distribution channels.
Avitar anticipates that such arrangements may involve the grant by Avitar 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.
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To introduce its products to targeted distributors and direct
customers, the Company participates in trade shows and conducts seminars for
sales personnel. Avitar also conducts user trials to support the marketing
efforts of its distribution partners.
The Company believes that these arrangements will be more effective in
promoting and distributing its products in view of Avitar's limited resources
and the extensive marketing networks of such distributors.
The Company's most significant distribution arrangements are summarized
as follows:
Oral Fluids Sampling and Processing Systems. In March 1996, the Company
signed a licensing agreement with Simplex Medical Systems, Inc. ("Simplex")
which grants Avitar exclusive worldwide rights to manufacture and market
Simplex's patent-pending, state-of-the-art saliva collection device. This
device, which utilizes Avitar'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, the Company must pay to Simplex certain
royalties on the sale of each licensed product.
Drugs-of-Abuse-Test Kits. In November 1996, the Company signed a
Non-Exclusive Distributorship Agreement with Sun Biomedical Laboratories, Inc.
("SBL") which gives Avitar 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, Avitar and SBL agreed to develop a
series of saliva-based rapid screening tests for drugs-of-abuse. These saliva
tests will use the Company's proprietary saliva collection system with Avitar
having the exclusive, world-wide manufacturing and distribution rights to the
tests when the development is completed.
Wound Dressings. In June 1992, Avitar granted Medi the right to sell
Avitar's wound care products in Germany for a period of one year. Although the
agreement, by its terms, expired in June 1993, Avitar 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 Avitar's product on a
private label basis.
In August 1993, the Company entered into a Distribution Agreement (the
"Calgon Agreement") with Calgon Vestal Laboratories, Inc. ("Calgon") pursuant to
which Calgon was granted the right to distribute Hydrasorb(Trademark) products
in the United States and Mexico, subject to certain product and territorial
exceptions based upon existing non-exclusive Avitar distribution arrangements.
Generally, the Calgon Agreement provided that Hydrasorb(Trademark) products be
sold at agreed upon prices (subject to annual inflation adjustments), Calgon
share with Avitar gross profits of Hydrasorb(Trademark) products over an
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agreed upon base, Calgon and Avitar 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 Avitar 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 Avitar by 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 Avitar. The Supply Agreement requires Avitar
to supply Calgon, and Calgon to purchase from Avitar, all of the
Hydrasorb(Trademark) products Calgon resells in the territory of South America,
Central America and North America excluding Canada (the "Territory"). Under the
License Agreement, Calgon paid $425,000 to Avitar 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 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 Avitar of such Agreement,
(ii) the filing or institution of a bankruptcy or similar proceeding by or
against Avitar, (iii) a suspension of Avitar's business operations for 30 days
or more, or (iv) Avitar'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 ended 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, the Company entered into a five-year distribution
agreement with Knoll (the "Knoll Agreement") pursuant to which Knoll was granted
the 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.
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Custom Foam Products. 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.
Manufacturing and Supply.
The Company's only facility is located in Canton, Massachusetts and
comprises approximately 53,000 square feet of which 8,000 square feet is
currently being used for administrative and office space and 31,000 square feet
is 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 Avitar's products in the diagnostic test, medical and
dental markets, the Company 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. Avitar is subject to
inspections by the FDA at all times. Avitar believes that its facilities and
procedures are in compliance with these requirements. See "--Government
Regulation".
The Company does not have any written agreements with any of its
suppliers. For raw materials, the Company purchases product components from
single sources. Avitar acquires the same key component for its
Flureze(Trademark) fluoride application product, customized foam products and
Hydrasorb(Trademark) wound dressings from a single supplier. Avitar's current
supplier of such key component is the only vendor which presently meets Avitar's
specifications for such component. The loss of this supplier would at a minimum
require the Company 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
Avitar's financial condition and operations. Although Avitar believes that
alternative sources could be found for such key component, Avitar 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 the Company would be able to locate another
satisfactory vendor or, even if one should be located, that the Company would be
able to establish a commercial relationship with such vendor. However, the
Company 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 Avitar's business.
Government Regulation
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Avitar and many of its products are subject to regulation by the FDA
and the corresponding agencies of the states and foreign countries in which the
Company sells its products. Accordingly, the Company 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. The Company believes that it is in compliance with
all such requirements. In addition, the Company 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.
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 Avitar already markets or may plan to market in
the future. If Avitar 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
The Company believes that the principal competitive factors in Avitar's
markets are innovative product design, product quality, established customer
relationships, name recognition, distribution and price. Many companies of all
sizes, including major diagnostic test, dental and health care companies, are
engaged in activities similar to those of Avitar. Most of Avitar's competitors
have substantially greater financial, marketing, administrative and other
resources and larger research and development staffs.
Although Avitar may not have the development resources of many of its
competitors, the Company believes its product design and development experience
allows it to compete favorably in producing innovative products in Avitar's
markets. Furthermore, the Company believes that its Hydrasorb(Trademark) wound
dressings, and custom foam products possess qualities with significant
advantages over competing products, including cost effectiveness. Although the
Company does not have an established internal distribution network, Medi, Knoll
and Convatec are distributing the Company's Hydrasorb(Trademark) wound
dressings. See "--Products", "--Sales and Marketing".
In addition, colleges, universities, governmental agencies and other
public and private research organizations will continue to conduct research and
are becoming more
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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 Avitar. In addition, these institutions
compete with companies such as Avitar in recruiting highly qualified scientific
personnel.
The Company 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, Avitar's competition varies from product to
product. Avitar's primary competitors in the wound dressing market include
Squibb, Johnson & Johnson, Smith and Nephew, 3M and Acme United. In the drugs-
of-abuse test kit market, the largest competitors are Roche Diagnostic Systems,
Biosite Diagnostics, Editek, Inc., Princeton Biomedical and American Biomedical.
Intellectual Property
Trade secrets, proprietary information and know-how are important to
the Company's scientific and commercial success. Avitar 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.
Avitar currently holds several United States patents, and has applications
pending for additional patents, which are not directly related to products
currently marketed. In addition, the Company has certain registered and other
trademarks.
The Company believes that its products, trademarks and other
proprietary rights do not infringe upon the proprietary rights of third parties.
Product Liability; Insurance Coverage
The testing, marketing and sale of medical and dental products entail a
high risk of product liability claims by consumers and others. Claims may be
asserted against the Company by end-users of any of Avitar's products. As of
September 30, 1997, the Company 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 Avitar, up to an annual aggregate deductible payable by Avitar 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 the Company 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.
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Employees
At September 30, 1997, the Company had 37 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), 23 in manufacturing and supply (two of
whom devote a portion of their time to research and development), 2 in sales and
marketing and 9 in administration. None of the employees is subject to a
collective bargaining agreement. The Company believes its relationship with its
employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 53,000 square feet in Canton,
Massachusetts for its manufacturing facility and administrative offices which
are in satisfactory condition for their purposes. The current annual rent is
approximately $455,000 and the lease expires in June 2005.
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 accordingly moved to dismiss the
Underwriter's complaint based upon both the rule violations and otherwise.
Former attorneys for the Company commenced an action (and made a motion
for summary judgement) against the Company in New York Supreme Court. This
proceeding is based on a note given by the Company in connection with such
former attorneys' claim for legal fees. Plaintiff sought judgement in the
principal amount of $185,171.63 plus the accrued interest thereon. Plaintiff
commenced action on February 27, 1997 but, with extensions, the Company
responded in opposition on June 13, 1997 and, after service of the plaintiff's
reply, the motion was submitted to the Court on June 26, 1997. In November 1997,
the Company reached a settlement with the plaintiff whereby the Company paid
$90,000 in cash and issued 275,000 shares of its common stock.
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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 is traded on The Nasdaq
Stock Market Small-Cap Market ("NASDAQ") under the symbol AVIT and the
Redeemable Warrants, which expired on July 31, 1997, were traded on the NASDAQ
under the symbol AVITW. 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
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Fiscal 1996 High Low High Low
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First Quarter .66 .31 .12 .09
Second Quarter 1.81 .31 .40 .09
Third Quarter 2.81 1.12 1.38 .22
Fourth Quarter 1.56 .88 .59 .28
Fiscal 1997
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First Quarter .97 .38 .44 .09
Second Quarter .97 .34 .63 .06
Third Quarter .84 .34 .31 .13
Fourth Quarter .47 .25 .22* .03*
*For the month of July 1997
As of December 31, 1997 the last sales price for the Company's Common
Stock was $.13.
NASDAQ Continued Listing Requirements. In August 1997, Securities and
Exchange Commission approved new NASDAQ requirements, which become effective
February 23, 1998, for companies to continue to be listed on the SmallCap
Market. Currently, the Company does not meet the requirement for a minimum bid
price of $1.00 for its common stock and the requirement to have net tangible
assets of $2,000,000. The Company is in the process of developing a plan that
will enable the Company to meet these new requirements. However, there can be no
assurance that the Company will be able to meet these requirements and remain
listed on the NASDAQ SmallCap Market.
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Holders. The Company had approximately 250 owners of record and, it
believes, in excess of 1,800 beneficial owners of the Company Common Stock as of
December 31, 1997.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis 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, 1997 ("Fiscal 1997")
decreased $1,403,720 or approximately 60% to $938,761 from $2,342,481 for the
fiscal year ended September 30, 1996 ("Fiscal 1996"). The results for Fiscal
1997 primarily reflect the decrease in sales of wound dressing products to the
Company's main customer.
No other income was recorded during Fiscal 1997 compared to the
adjustment of $492,819 recognized in connection with the amendments to ATI's
License and Supply Agreements with Convatec in Fiscal 1996.
Operating Expenses
Direct costs of sales were approximately 169% of sales in Fiscal 1997
compared to approximately 98% of sales for Fiscal 1996. The higher ratio of
direct cost to sales for fiscal 1997 was primarily related to the decrease in
sales described above.
Sales, general and administrative expenses for Fiscal 1997 increased
$65,702 or approximately 4%, to $1,757,791 from $1,692,089 for Fiscal 1996. This
increase resulted mainly from the addition of a Senior Vice President of Sales
and Marketing position to increase sales activity.
Research and development expenses for Fiscal 1997 amounted to $452,169
compared to $352,700 Fiscal 1996. The increase of $99,469, or approximately 28%,
was
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primarily attributable to increased research and development activities related
to saliva diagnostic products and the hiring of a Vice President for Research
and Development.
For Fiscal 1997, amortization of goodwill was $559,708 compared to the
same amount for Fiscal 1996. During the fourth quarter of Fiscal 1997, the
remaining balance of goodwill in the amount of $4,270,682 was written-off as
explained in Note 2 of the Consolidated Financial Statements.
Other Income and Expense
Interest income amounted to $2,384 for Fiscal 1997 compared to $5,619
for Fiscal 1996. This decrease resulted from the interest earned on lower levels
of cash available during Fiscal 1997.
Interest expense and financing costs were $120,335 for Fiscal 1997
compared to $152,140 incurred during Fiscal 1996. This decrease resulted from
the reduction of interest expense on the Company's bridge loans and receivable
financing provided by Silicon Valley Financial Services, offset in part by
interest expense on loans received from affiliates beginning in April 1997.
Other expense amounted to $10,383 for Fiscal 1997 versus other expense
of $6,141 for Fiscal 1996.
Discontinued Operations
In October 1997, the Company consummated the sale of the net assets and
business of its MHB subsidiary. Loss from operations of MHB was $20, 357 in
Fiscal 1997 compared to income of $628,167 in Fiscal 1996. The change of
$648,524 was primarily the result of the reduction in sales of MHB's psychiatric
review services.
Net Loss
Primarily as a result of the factors described above, the Company had a
net loss of $7,835,670 ($0.71 per share) for Fiscal 1997 compared to a net loss
of $1,591,250 ($0.27 per share) for Fiscal 1996.
Financial Condition and Liquidity
At September 30, 1997 and September 30, 1996, the Company had working
capital deficiencies of ($1,504,807) and ($496,067), respectively, and cash and
cash equivalents of $65,512 and $370,856, respectively. Net cash used in
operating activities during Fiscal 1997 amounted to $1,734,542 resulting
primarily from the operating loss of $7,835,670 and increases in prepaid
expenses and other current assets of 10,625, partially offset by increases in
accounts payable and accrued expenses of $213,466, decreases in
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<PAGE>
inventories of $48,990, depreciation and amortization of equipment and
intangible assets of $727,213, write-off of goodwill of $4,270,682, non-cash
charge for services and compensation of $583,748 and decreases in accounts
receivable and other assets of $267,654. Net cash provided by financing and
investing activities during Fiscal 1997 was $1,429,198 which included sales of
Company preferred stock, common stock and warrants of $1,131,890 and proceeds
from notes payable and long-term debt of $454,845, offset in part by purchases
of equipment of $4,136 and re-payment of notes payable and long-term debt of
$153,401.
During Fiscal 1997, the Company issued 1,154,008 shares of its common
stock upon the exercise of redeemable warrants and warrants issued in connection
notes during fiscal years 1994 and 1995. As a result, the Company received
approximately $218,035 and extinguished debt payable to PK&S in the amount of
$267,938.
During the period January-May 1997, the Company completed Regulation S
placements of 2,677,304 shares of its common stock to offshore investors
resulting in net proceeds of approximately $671,090. From April-October 1997,
officers and affiliates of the Company made loans to the Company totaling
$428,723 with interest payable at 10% per annum. During September and October
1997, private individuals made loans to the Company totaling $62,500 with
interest payable at 20% per annum. Of these loans, $378,723 and the accrued
interest thereon were due on or before September 30, 1997 and the balance of
$112,500 plus accrued interest is to be repaid by January 31, 1998. As of
December 31, 1997, loans in the total amount of $60,000 and the related accrued
interest have been repaid thereby reducing the amount due on these loans to
$431,223 ( of which $363,723 is from officers and affiliates) plus accrued
interest thereon. In May 1997, the Company established the Avitar, Inc. Stock
Based Compensation Plan under which during Fiscal 1997 the Company issued
1,259,561 shares of common stock for approximately $439,870 of compensation for
certain of its employees and consultants. From July-September 1997, the Company
sold 963,400 shares of its common stock through a private placement offering and
raised net proceeds of approximately $240,850. Under the terms of this offering,
the investors received warrants to purchase 1,013,400 shares of common stock at
an exercise price of $0.375 per share for a period of 18 months. In addition,
the Company issued 359,025 shares of its common stock for approximately $143,878
of fees paid to certain consultants,
As indicated in Results of Operations above, the Company sold the net
assets and business of its MHB subsidiary in October 1997. From this sale the
Company received net proceeds of approximately $1,225,000 and will record a gain
of approximately $1,000,000 in the first quarter of fiscal year 1998. In
addition, the Company is attempting to raise up to $4,000,000 from the sales of
equity and or debt securities. Proceeds from these proposed financings are
intended to enable the Company to meet NASDAQ's new continued listing
requirements and are anticipated to be used primarily to provide the necessary
working capital and capital equipment funding to operate the Company and
15
<PAGE>
expand the Company's business. However, there can be no assurance that these
financings will be achieved.
For the balance of fiscal year 1998, the Company's cash requirements
are expected to include primarily the funding of any operating losses, the
payment of outstanding accounts payable, the repayment of certain notes payable
and the funding of operating capital to grow the Company's rapid diagnostic
testing and other lines of business.
Operating revenues of the Company declined significantly during Fiscal
1997, but they are expected to increase substantially during Fiscal 1998 if the
sales for the wound dressing products return to previous levels and the Company
continues to expand the use of its polyurethane foam bases technology to produce
and market products for the diagnostic and other marketplaces. 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 $1,225,000 of net proceeds
from the sale of MHB, and, most significantly, a portion of the anticipated net
proceeds from the financing mentioned above would be sufficient to fund
operations until the Company achieves profitability. There can be no assurance
that the Company will consummate the above-mentioned financing, or that all of
the net proceeds sought thereby will be obtained. Once the Company achieves
profitability, 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 Fiscal 1997 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 (December
10, 1997). 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.
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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, 1997, along
with certain biographical information (based solely on information supplied by
them), are as follows:
Name Age Title
- ---- --- -----
Peter P. Phildius 67 Chairman of the Board/Chief Executive
OfficerDouglas W. Scott (1) 51 President and Chief Operating Officer/Director
Jay C. Leatherman Jr. 53 Chief Financial Officer and Secretary
John McCambridge(5) 48 Senior Vice President, Sales and Marketing
Carl M. Good, III 53 Vice President, Research and Development
William Martin 50 Controller for ATI
Craig Taylor (3) 41 Director
George Witt, Ph.D. (2) 67 Director
James Groth (1)(2) 59 Director
Neil R. Gordon (1)(2)(4) 49 Director
- ----------------------------
1. Member of Audit Committee.
2. Member of Compensation Committee.
3. Resigned effective December 31, 1996
4. Elected to the Board on June 9, 1997
5. Resigned effective December 18, 1997
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. 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
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Healthcare Corporation. During the last eight years of his 18 year career at
Baxter (1961 - 1979), 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 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.
JOHN MCCAMBRIDGE
Mr. McCambridge served as the Company's Senior Vice President of Sales
and Marketing from January 1997 until his resignation in December 1997. He has
over 23 years of marketing experience in the medical device and biotechnology
industries, most recently as Senior Vice President of Sales and Marketing with
Genzyme Tissue Repair (formerly BioSurface Technology, Inc.). In addition, Mr.
McCambridge has served in a variety of executive level sales and marketing
positions with companies such as Empire Blue Cross Blue Shield and American
Hospital Supply Corporation. Mr. McCambridge has a Bachelor's Degree in Business
Administration from the University of Deleware.
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<PAGE>
CARL M. GOOD, III
Dr. Good has served as the Company's Vice President of Research and
Development since February 1997 and as a consultant and member of the Company's
Scientific Board since October 1996. He has over 30 years of experience in
product development and operating management experience in the medical
diagnostics industry. Dr. Good has held technology management positions with
Millipore Corporation and most recently, worked in the development of
sophisticated medical diagnostic products at Cambridge Biotech Corporation. He
has received a Ph. D. in Microbial Genetics from Iowa State University and has
completed Postdoctoral Study in Enzymology at the University of Wisconsin
Medical School and the University of Massachusetts.
WILLIAM MARTIN
Mr. Martin has served as Controller of ATI since August 1991. 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 served as a director of the Company from January 1989 to
December 31, 1996. 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.
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<PAGE>
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.
NEIL R. GORDON
Mr. Gordon has served as a director since June 1997. He has been
President of N.R. Gordon & Company, Inc., a company that provides a broad range
of financial consulting services, since 1995. From 1981 to 1995, he was
associated with Ekco Group, Inc. and served as its Treasurer from 1987 to 1995.
Mr. Gordon has also served as Director of Financing and Accounting for Empire of
Carolina, Inc. He received a Bachelor of Science Degree from Pennsylvania State
University.
Section 16(a) Compliance.
Section 16(a) of the Securities Exchange Act ("SEC") of 1934 requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ. Officers, directors and greater that ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during Fiscal 1997, all
filing requirements applicable to its officers, directors and greater than
ten-percent shareholders were complied with except the following are failures to
file timely reports required by Section 16(a):
* Eight reports (Form 4) covering 34 transactions were
filed late by Peter Phildius.
* Six reports (Form 4) covering 14 transactions were
filed late by Douglas Scott.
* Two reports(Form 4) covering 2 transactions were
filed late by Neil R. Gordon.
* One report (Form 5) covering two transactions was
filed late by George Witt.
* One report (Form 5) covering two transactions was
filed late by James Groth.
* One report (Form 5) covering 17 transactions was filed
late by Jay Leatherman.
* One report (Form 5) covering 11 transactions was
filed late by John McCambridge.
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<PAGE>
* One report(Form 5) covering 18 transactions was filed
late by Carl Good.
* One report(Form 5) covering 12 transactions was filed
late by William Martin
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 1997 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 1995, 1996 or
1997. 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 1997 $150,000 0 0
(Chairman of the Board/ 1996 $150.000 0 0
Chief Executive Officer 1995 $103,125 0 250.000(2)
- -July 1996)
Douglas W. Scott 1997 $150,000 0 0
(President/ 1996 $150,000 0 0
Chief Operating Officer 1994 $103,125 0 250,000(2)
- -July 1996/Chief Executive
Officer-Until July 1996)
</TABLE>
(1) Does not include $15,864, $11,371 and $18,160 reimbursed to PK&S for fiscal
years 1995, 1996 and 1997, 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.
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 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.
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<PAGE>
Stock Option Grants in Last Fiscal Year. No options were granted to Mr.
Phildius and Mr. Scott in Fiscal 1997.
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 1997.
As of September 30, 1997, Mr. Phildius and Mr. Scott each held options
covering 440,000 shares of Common Stock, all of which are exercisable, but none
of which are in the money.
Employment 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 (originally signed in 1993)
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 share and will expire no later than July 12, 2005. These options are vested
and exercisable .
In October 1996, the Company entered into a consulting agreement with
N.R. Gordon & Company, Inc. Neil Gordon, a member of the Company's Board of
Directors, is the President of N.R. Gordon and Company, Inc. Under this
agreement, N.R. Gordon & Company, Inc. provides financial consulting services
for which it received 50,000 warrants at an exercise price of $0.93 per share
and is paid $100.00 per hour for all services performed. In addition, N.R.
Gordon & Company, Inc. is entitled to receive commissions for certain capital
raising services.
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<PAGE>
Director Compensation. The Company presently pays its non-management
directors $500 for each Board and Committee meeting which they attend plus a
travel fee of $250 if they must travel outside of the area to attend the
meeting. 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 1997, each non-management director received a grant of
5,000 options for calendar year 1997 with an exercise price of $0.83 per share,
representing the fair market value of the Company Common Stock on the date of
such grant.
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, 1997 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 was one); 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.
Name and Address of Beneficial Owner (1) No. Owned %
- ---------------------------------------- --------- -----
Peter P. Phildius (2)(3)(5) 2,011,174 11.7
Douglas W. Scott (2)(4)(5) 2,138,227 12.3
Phildius, Kenyon & Scott("PK&S") (2)(5) 1,342,460 8.1
James Groth (2)(7)(10) 86,003 *
George Witt, Ph.D. (2)(7) 60,127 *
Neil R. Gordon (2)(8) 78,583 *
A. S. Goldmen& Co., Inc.(6) 278,000 1.8
All directors and executive officers
as a group (3)(4)(5)(7)(8)(9)(10) 3,469,462 18.5
* Indicates beneficial ownership of less than one (1%) percent.
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<PAGE>
(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., 65 Dan Road, Canton, MA 02021.
(3) Includes 228,654 shares of the Company's Common Stock and options to
purchase 440,000 shares of the Company's Common Stock. Also includes the
1,342,460 shares of the Company's Common Stock beneficially owned by PK&S
as described below in Note 5.
(4) Includes 355,767 shares of the Company's Common Stock and options to
purchase 440,000 shares of the Company's Common Stock. Also includes the
1,342,460 shares of the Company's Common Stock beneficially owned by PK&S
as described below in Note 5.
(5) Represents ownership of 1,039,460 shares of the Company's Common Stock,
options to purchase 60,000 shares of the Company's Common Stock and
warrants to purchase 242,565 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"). 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 20,000 shares of the Company's Common Stock
granted to such director under the Directors' Plan approved by the
stockholders on May 18, 1995.
(8) Includes warrants to purchase 50,000 shares of the Company's Common Stock
granted to such director under a consulting agreement to provide services
to the Company.
(9) Includes 110,368 shares of the Company's Common Stock and options to
purchase 277,500 shares of the Company's Common Stock beneficially owned by
Jay C. Leatherman, Jr., John McCambridge, Carl Good and William Martin,
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.
24
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PK&S, a 8.1% beneficial owner of the Company, provided consulting
services to the Company from September 1989 to May 1995. 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. Under the terms of the current employment
agreements with Peter Phildius and Douglas Scott described above, the Company
pays their salaries and related expenses directly to PK&S. The aggregate of
consulting fees and salaries paid and reimbursement of expenses made to PK&S by
the Company for fiscal years 1997, 1996 and 1995 totaled $318,160, $311,371 and
$194,957 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 options covering 60,000 shares of common
stock at the exercise price of $0.80 per share expired in December 1996. The
remaining 60,000 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.
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, or seven days following completion of such private placement. 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
25
<PAGE>
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. These warrants were exercised
by PK&S in November 1996.
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. These warrants
were exercised by PK&S in November 1996.
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. These shares of Series A
Convertible Preferred Stock were converted into 1,166,568 shares of Company
Common Stock in February 1997.
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. The consulting portion of this
agreement was canceled in February 1997 and an issuance of 100,000 shares of the
Company's Common Stock was made to Mr. Freeman to cover the total compensation
earned under this agreement.
From April-October 1997, officers and affiliates of the Company made
loans to the Company totaling $428,723 with interest payable at 10% per annum..
Of these loans, $368,723 were due on or before September 30, 1997 with the
balance of $60,000 due on or before January 31, 1998. In November 1997, loans in
the total amount of $60,000 (plus the accrued interest thereon) due on or before
January 31, 1998 were repaid. As of December 31, 1997, loans from these officers
and affiliates totaling $368,723 remain outstanding.
26
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Document
----------- --------
(K) 2.1 Asset Purchase Agreement made as of October 24,1997
by and among Prompt Associates, Inc., Managed Health
Benefits Corporation, and Avitar, Inc.
(G) 3.1 Certificate of Amendment to the Certificate of
Incorporation of the Company dated May 19, 1995.
(G) 3.2 Certificate of Amendment of the Certificate of
Incorporation of the Company dated June5, 1995.
(A) 4.1 Specimen Copies representing the Company's Common
Stock and Redeemable Warrants.
(D) 4.2 Specimen Certificates representing the Company's
Class A Warrants and Class B Warrants.
(D) 4.3 Warrants granted to Phildius, Kenyon & Scott as of
September 5, 1994.
(J) 4.4 Certificate of Designations, Rights and Preferences
of Series A Redeemable Convertible Preferred Stock.
(C) 10.1 Employment Agreement between MHB and Peter P.
Phildius, dated as of July 23, 1993.
(D) 10.2 Amended and Restated Employment Agreement between MHB
and Peter P. Phildius, dated as of August 15, 1994.
(C) 10.3 Employment Agreement between MHB and Douglas W.
Scott, dated as of July 23, 1993.
(D) 10.3.1 Amended and Restated Employment Agreement between MHB
and Douglas W. Scott, dated as of August 15, 1994.
(D) 10.4.1 Form of Warrant Agreement respecting the Class A
Warrants between the Company and Continental Stock
Transfer & Trust Company.
(D) 10.4.2 Form of Warrant Agreement respecting the Class B
Warrants between the Company and Continental Stock
Transfer & Trust Company.
(A) 10.4.3 Form of Warrant Agreement respecting the Company
Redeemable Warrants between the Company and
Continental Stock Transfer & Trust Company.
(D) 10.4.4 Form of First Amendment to Warrant Agreement
respecting the Company Redeemable Warrants between
the Company and Continental Stock Transfer & Trust
Company.
(B) 10.5 Form of Consulting Agreement between MHB and A.S.
Goldmen & Co., Inc., dated August 11, 1992.
(B) 10.6 Consulting Agreement between MHB and The Equity
Group, Inc., dated October 18, 1991.
27
<PAGE>
(D) 10.7 Consulting Agreement between MHB and Phildius, Kenyon
& Scott, dated November 29, 1989, as amended.
(D) 10.8 Promissory Note executed by MHB to Phildius, Kenyon &
Scott, dated September 3, 1994.
(E) 10.9 Promissory Noted executed by MHB to Phildius, Kenyon
& Scott dated December 16, 1994.
(E) 10.10 Warrant Agreement executed by MHB to Phildius, Kenyon
& Scott dated December 16, 1994.
(F) 10.11 Form of 11% Promissory Note executed by the Company
to parties providing the bridge loans between January
- May 1995.
(F) 10.12 Form of Warrant Agreement executed by the Company to
parties providing the bridge loans between January -
May 1995.
(F) 10.13 Lease Agreement executed by Avitar, Inc. and the
Company to KBC Realty Trust, dated March 22, 1995.
(H) 10.14 Agreement between the Company and Silicon Valley
Financial Services dated January 18, 1996
(H) 10.15 Agreement between the Company and Simplex Medical
Systems, Inc. dated March 14,1996
(I) 10.16 Form of Offshore Securities Agreement between the
Company and parties purchasing common stock under
Regulation S during Fiscal 1996 and Fiscal 1997
(I) 10.17 Form of Subscription Agreement between the Company
and parties purchasing common stock during Fiscal
1996 and Fiscal 1997
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 the Company's Quarterly Report for the fiscal quarter ended June 30,
1993 (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 Registration Statement on Form S-4 (Commission File No.
33-71666), and incorporated herein by reference.
(D) 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
28
<PAGE>
reference.
(E) 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.
(F) 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.
(G) 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.
(H) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report for the fiscal quarter ended March
31,1996 (Commission File No. 0-20316), 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,
1996 (Commission File No. 0-20316), and incorporated herein by reference.
(J) 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.
(K) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Current Report dated October 27, 1997 (Commission File No.
0-20316), and incorporated herein by reference.
(b) Reports on Form 8-K:
On September 27, 1997, filed with the Securities and Exchange
Commission a report on Form 8-K, Item 5.
29
<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, 1998
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, 1998
- ----------------------------------- Chief Executive Officer
Peter P. Phildius (Principal Executive Officer);
and Director
/s/ Douglas W. Scott President and Chief Operating January 13, 1998
- ----------------------------------- Officer and Director
Douglas W. Scott
/s/ J.C. Leatherman, Jr. Chief Financial Officer and January 13, 1998
- ----------------------------------- Secretary (Principal Financial
J.C. Leatherman, Jr. and Accounting Officer)
/s/ Neil Gordon
- ----------------------------------- Director January 13, 1998
Neil Gordon
/s/ George Witt, Ph.D. Director January 13, 1998
- -----------------------------------
George Witt, Ph.D.
/s/ James Groth Director January 13, 1998
- -----------------------------------
James Groth
</TABLE>
30
<PAGE>
Avitar, Inc. and
Subsidiaries
Consolidated Financial Statements
Years Ended September 30, 1997 and 1996
<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 (deficit) 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, 1997, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each of the two
years in the period ended September 30, 1997. 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, 1997, and the results of their operations and their cash flows for
each of the two years in the period ended September 30, 1997 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has stockholders' and working capital deficits as of
September 30, 1997. 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
Boston, Massachusetts
December 10, 1997
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, 1997
=======================================================================================================
<S> <C>
Assets
Current:
Cash and cash equivalents $ 65,512
Accounts receivable, net of allowance for
doubtful accounts of $76,122 100,020
Inventories 142,453
Prepaid expenses and other (including employee receivable
of $41,275) 75,870
Net assets of discontinued operations 75,769
- -------------------------------------------------------------------------------------------------------
Total current assets 459,624
Property and equipment, net 282,480
Other assets 15,358
- -------------------------------------------------------------------------------------------------------
$ 757,462
=======================================================================================================
Liabilities and Stockholders' Deficit
Current liabilities:
Notes payable to affiliates and others $ 398,286
Accounts payable 611,761
Accrued expenses (including $26,054 due to affiliates) 524,239
Current portion of long-term debt 430,145
- -------------------------------------------------------------------------------------------------------
Total current liabilities 1,964,431
Long-term debt, less current portion 119,355
- -------------------------------------------------------------------------------------------------------
Total liabilities 2,083,786
- -------------------------------------------------------------------------------------------------------
Commitments and contingency (Note 8)
Stockholders' deficit:
Series A convertible preferred stock, $.01 par value;
authorized 5,000,000 shares; 657,249 shares issued
and outstanding 6,572
Common stock, $.01 par value; authorized 25,000,000 shares;
15,234,218 shares issued and outstanding 152,342
Additional paid-in capital 14,866,017
Accumulated deficit (16,351,255)
- -------------------------------------------------------------------------------------------------------
Total stockholders' deficit (1,326,324)
- -------------------------------------------------------------------------------------------------------
$ 757,462
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended September 30, 1997 1996
===================================================================================================
<S> <C> <C>
Revenues:
Sales $ 938,761 $ 2,342,481
Other income - 492,819
- ---------------------------------------------------------------------------------------------------
Total revenues 938,761 2,835,300
- ---------------------------------------------------------------------------------------------------
Operating expenses:
Direct cost of revenues 1,583,390 2,295,558
Selling, general and administrative expenses 1,757,791 1,692,089
Research and development expenses 452,169 352,700
Amortization of goodwill 559,708 559,708
Write-off of goodwill 4,270,682 -
- ---------------------------------------------------------------------------------------------------
Total operating expenses 8,623,740 4,900,055
- ---------------------------------------------------------------------------------------------------
Loss from operations (7,684,979) (2,064,755)
- ---------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 2,384 5,619
Interest expense and financing costs (includes $18,179
and $24,750 to affiliates) (120,335) (152,140)
Other, net (10,383) (6,141)
- ---------------------------------------------------------------------------------------------------
Total other expense (128,334) (152,662)
- ---------------------------------------------------------------------------------------------------
Loss before provision for income taxes and
discontinued operations (7,813,313) (2,217,417)
Provision for income taxes 2,000 2,000
- ---------------------------------------------------------------------------------------------------
Loss from continuing operations (7,815,313) (2,219,417)
Discontinued operations:
Income (loss) from operations of MHB (net of income taxes
of $4,000 in 1997 and $5,206 in 1996) (20,357) 628,167
- ---------------------------------------------------------------------------------------------------
Net loss $ (7,835,670) $ (1,591,250)
===================================================================================================
Income (loss) per share:
Loss per share from continuing operations $ (.71) $ (.38)
Income per share from discontinued operations - .11
- ---------------------------------------------------------------------------------------------------
Net loss per share $ (.71) $ (.27)
===================================================================================================
Weighted average number of common and common equivalent
shares outstanding 11,036,047 5,772,617
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- --------------------- Additional Accumulated
Years ended September 30, 1997 and 1996 Shares Amount Shares Amount Paid-in Capital Deficit
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
Sale of common stock, net of expenses - - 3,640,704 36,407 871,633 -
Exercise of common stock warrants, net
of expenses - - 576,508 5,765 218,085 -
Conversion of notes payable - - 577,500 5,775 262,163 -
Issuance of common stock for services - - 700,810 7,008 267,910 -
Conversion of preferred stock into common stock (618,012) (6,180) 1,854,036 18,540 (12,360) -
Issuance of common stock to employees - - 917,776 9,178 299,652 -
Net loss - - - - - (7,835,670)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 657,249 $ 6,572 15,234,218 $152,342 $ 14,866,017 $(16,351,255)
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended September 30, 1997 1996
==========================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,835,670) $(1,591,250)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 167,505 175,826
Amortization of goodwill 559,708 559,708
Write-off of goodwill 4,270,682 -
Noncash charge for services and compensation 583,748 12,675
Changes in operating assets and liabilities:
Decrease in accounts receivable 253,924 171,767
Decrease (increase) in inventories 48,990 (21,994)
Decrease (increase) in prepaid expenses and
other current assets (10,625) 1,985
Decrease in other assets 13,730 20,944
Increase (decrease) in accounts payable and accrued expenses 213,466 (332,176)
- ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,734,542) (1,002,515)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (4,136) (50,978)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,136) (50,978)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 454,845 -
Repayments of notes payable and long-term debt (153,401) (201,880)
Sales of preferred stock, common stock and warrants 1,131,890 1,470,820
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,433,334 1,268,940
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (305,344) 215,447
Cash and cash equivalents, beginning of year 370,856 155,409
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 65,512 370,856
==========================================================================================================
</TABLE>
F-7
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Concluded)
<TABLE>
<CAPTION>
Years ended September 30, 1997 1996
======================================================================================================================
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 91 823 $ 45 887
Taxes $ 2 925 $ -
======================================================================================================================
Supplemental schedule of noncash investing and
financing activities:
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.
During 1997:
Notes payable of $267,938 were converted into common stock upon the
exercise of warrants.
</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")
Business and Basis through its wholly-owned subsidiary, Avitar
of Presentation Technologies, Inc. ("ATI") designs,
develops, manufactures and markets
healthcare products and services. ATI sells
its products and services primarily to large
medical supply companies.
Managed Health Benefits Corporation ("MHB"),
another wholly-owned subsidiary of Avitar,
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. Avitar
was looking to sell this business in 1997
and consummated a sale of MHB's net assets
and business in October 1997. The Company
received $1,224,959, net of expenses, and
recorded a gain of approximately $1,000,000
that will be reflected in the first quarter
of fiscal 1998. The MHB business has been
treated as a discontinued operation (see
Note 3).
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 and
stockholders' deficit as of September 30,
1997 of $1,504,807 and $1,326,324,
respectively. The Company raised net
proceeds aggregating approximately
$1,100,000 and $1,500,000 during the years
ended September 30, 1997 and 1996,
respectively, from the sale of stock. The
Company is attempting to obtain additional
equity financing. Based upon cash flow
projections, the Company believes the
anticipated cash flow from operations,
proceeds from the sale of MHB and expected
net proceeds from future equity financings
will be sufficient to finance the Company's
operating needs until the 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
Significant
Accounting
Policies
Principles of The consolidated financial statements
Consolidation include the accounts of the Company and its
wholly-owned subsidiaries. All significant
intercompany balances and transactions have
been eliminated.
Revenue Sales of ATI's products and services are
Recognition recorded in the period the products are
shipped or services are provided.
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 Property and equipment (including equipment
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.
Research and Research and development costs are expensed
Development as incurred.
Income (Loss) Income (loss) per common share is based on
Per Share 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.
Income Taxes Income taxes are accounted for on the
liability method, where deferred income
taxes are provided on the differences in
basis of assets and liabilities between
financial reporting and tax returns using
enacted rates. Valuation allowances have
been recorded (see Note 10).
F-10
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of
Significant
Accounting
Policies
(Continued)
Fair Value of The carrying amounts of cash, accounts
Financial receivable and accounts payable approximate
Instruments 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 Financial Accounting Standards No. 121,
Standards "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be
Disposed of" 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. This statement was adopted
October 1, 1996.
The Company periodically assessed the
continuing recoverability of the goodwill
which arose from the acquisition of ATI in
May, 1995. Based upon various sales and
marketing agreements in place and expected
to occur in the future, management believed
the goodwill amount (which was being
amortized over a 10-year period) was fully
recoverable. Certain delays in the
introduction of new products as well as less
than anticipated sales of existing products
in fiscal 1997 caused the Company to
reassess its position regarding the
recoverability of the remaining value of
goodwill. While the Company remains
optimistic that future sales of ATI products
will grow at a substantial rate and that the
Company should achieve profitable results
from operations, there can be no assurance
as to when these improved operating results
will occur. Accordingly, in the fourth
quarter of fiscal 1997, the Company
wrote-off the remaining book value of
goodwill which totaled $4,270,682.
F-11
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of
Significant
Accounting
Policies
(Continued)
Recent Accounting Statement of Financial Accounting Standards
Standards No. 123, "Accounting for Stock-Based
(Continued) Compensation," 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 intrinsic value
method.
Statement of Financial Accounting Standards
No. 128, "Earnings per Share," ("SFAS No.
128") is effective for financial statements
for fiscal periods ending after December 15,
1997. The new standard establishes standards
for computing and presenting earnings per
share. The effect of adopting SFAS No. 128
is not expected to be material.
In June 1997, the Financial Accounting
Standards Board issued two new disclosure
standards. Results of operations and
financial position will be unaffected by
implementation of these new standards.
Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income,"
("SFAS No. 130") establishes standards for
reporting and display of comprehensive
income, its components, and accumulated
balances. Comprehensive income is defined to
include all changes in equity except those
resulting from investments by owners and
distributions to owners. Among other
disclosures, SFAS No. 130 requires that all
items that are required to be recognized
under current accounting standards as
components of comprehensive income be
reported in a financial statement that is
displayed with the same prominence as other
financial statements.
SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information,"
which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business
Enterprise," establishes standards for the
way that public enterprises report
information about operating segments in
annual financial statements and requires
reporting of selected information about
F-12
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Summary of
Significant
Accounting
Policies
(Continued)
Recent Accounting operating segments in the financial
Standards statements. It also establishes standards
(Continued) for disclosures regarding products and
services, geographic areas, and major
customers. SFAS No. 131 defines operating
segments as components of an enterprise
about which separate financial information
is available that is evaluated regularly by
the chief operating decision maker in
deciding how to allocate resources and in
assessing performance.
Both of these new standards are effective
for financial statements for years beginning
after December 15, 1997 and require
comparative information for earlier years to
be restated. These standards are not
expected to impact future financial
statements.
3. Discontinued In fiscal 1997, the Company pursued the sale
Operations of its wholly-owned subsidiary, Managed
Health Benefits Corporation ("MHB"). On
October 27, 1997, the Company sold MHB's net
assets and business and received $1,224,959,
net of expenses. The Company's financial
statements have been restated to reflect MHB
as a discontinued operation.
F-13
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Discontinued Following is a summary of net assets and
Operations results of operations of MHB:
(Continued)
<TABLE>
<CAPTION>
September 30, 1997
===================================================================================
<S> <C>
Accounts receivable $109,978
Prepaid expenses and other 7,222
Property and equipment, net 31,292
-----------------------------------------------------------------------------------
Total assets 148,492
-----------------------------------------------------------------------------------
Accounts payable and accruals 64,363
Long-term debt 8,360
-----------------------------------------------------------------------------------
Total liabilities 72,723
-----------------------------------------------------------------------------------
Net assets disposed of 75,769
===================================================================================
</TABLE>
Assets and liabilities are shown at their
carrying values.
<TABLE>
<CAPTION>
Years ended September 30, 1997 1996
===================================================================================
<S> <C> <C>
Sales $1,202,918 $2,005,859
Operating expenses 1,219,275 1,372,486
-----------------------------------------------------------------------------------
Income (loss) before provision
for income taxes (16,357) 633,373
Provision for income taxes 4,000 5,206
-----------------------------------------------------------------------------------
Net income (loss) $ (20,357) $ 628,167
===================================================================================
</TABLE>
F-14
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Inventories Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1997
==================================================================================
<S> <C>
Raw materials $ 56,367
Work-in-process 46,495
Finished goods 39,591
----------------------------------------------------------------------------------
$142,453
==================================================================================
</TABLE>
5. Property and Property and equipment used in continuing
Equipment operations consists of the following:
<TABLE>
<CAPTION>
September 30, 1997
==================================================================================
<S> <C>
Equipment $ 564,771
Furniture and fixtures 19,006
Leasehold improvements 20,871
----------------------------------------------------------------------------------
604,648
Less: accumulated depreciation
and amortization (322,168)
----------------------------------------------------------------------------------
$ 282,480
==================================================================================
</TABLE>
At September 30, 1997, the cost of equipment
under capital leases was $489,372 and the
related accumulated amortization was
$260,178.
F-15
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Notes Payable to During 1997, various related parties
Affiliates and advanced funds totaling $378,723 to the
Others Company to fund operations and provide
working capital. These advances are due on
demand and bear interest at 10%.
On September 22, 1997, the Company borrowed
$12,500 from an individual bearing interest
at 20%. Principal balance is due on January
31, 1998.
In December 1992, an affiliate advanced ATI
$350,000 to fund operations and provide
working capital. These advances were due on
demand and bore interest at prime plus 1/2%.
The balance was reduced to $275,000 in a
prior year as settlement for a $75,000
receivable due to ATI. In connection with
the exercise of warrants in November, 1996,
this debt was reduced by $268,000. The
remaining balance at September 30, 1997 was
$7,063.
7. Long-Term Debt Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, 1997
==================================================================================
<S> <C>
Note payable to a law firm $203,126
Note payable to a vendor in monthly
installments through September 1998,
uncollateralized, with interest at
rates ranging from 8% to 10% 142,218
Obligations under capital leases (see Note 8) 204,156
----------------------------------------------------------------------------------
549,500
Less: current maturities 430,145
----------------------------------------------------------------------------------
$119,355
==================================================================================
</TABLE>
F-16
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Long-term Debt The notes payable are primarily to the
(Continued) 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, $203,126, is included in current
maturities. A settlement was reached in
November, 1997 between the parties, whereby
the Company paid $90,000 in cash and issued
275,000 shares of its common stock.
8. Commitments and
Contingency
Leases ATI leases office space under operating
leases which expire in years through 2005.
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 continuing
operations for the years ended September 30,
1997 and 1996 was $455,292 and $451,636,
respectively.
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, 1997.
F-17
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Commitments and
Contingency
(Continued)
Leases Future minimum rentals are as follows:
(Continued)
<TABLE>
<CAPTION>
Capital Operating
==================================================================================
<S> <C> <C>
1998 $111,675 416,833
1999 100,713 428,260
2000 35,116 492,087
2001 - 503,120
2002 - 503,120
Thereafter - 1,215,873
----------------------------------------------------------------------------------
Total minimum lease payments 247,504 $3,559,293
==========
Less: Amounts representing interest 43,348
-------------------------------------------------------------
Present value of net minimum lease
payments $204,156
=============================================================
</TABLE>
License/Supply In June 1994, ATI entered into a license
Agreements 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, excluding Canada, and South
America, (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)
F-18
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Commitments and
Contingency
(Continued)
License/Supply products, ATI would pay Calgon an amount
Agreements equal to $7,083 multiplied by a number equal
(Continued) 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 1997 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 The Company entered into employment
Agreements agreements with its two principal
executives, which payments thereunder were
subsequently assigned to an affiliate. 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.
Expenses under these agreements totaled
approximately $300,000 in 1997 and 1996.
F-19
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Commitments and
Contingency
(Continued)
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 (Deficit)
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-20
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Stockholders'
Equity (Deficit)
(Continued)
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,
1997. Warrants were exercised for 1,154,008
shares in fiscal 1997. Warrants expired or
cancelled in 1997 totaled 10,311,047. No
warrants were exercised in fiscal 1996.
<TABLE>
<CAPTION>
Exercise Shares Expiration
Price Issuable Date
======================================================================================================================
<S> <C> <C> <C>
Underwriter's Warrants issued in connection
with the Company's prior public offering* $ 8.00 278,000 1997
Warrants issued in connection with prior
stock sales 1.00 25,000 1998
Warrants issued in connection with repaid
notes payable .50 510,000 1999
Warrants issued to lessor .50 150,000 1999
Warrants issued to consultant for services provided .935 50,000 1999
Warrants issued in connection with stock sales .375 1,013,400 1999
Warrants issued in connection with notes payable .375 112,500 1999
Warrants issued in connection with merger
in fiscal 1994 12.00 1,000,000 2000
</TABLE>
* Antidilution adjustment not made as the terms of these warrants are
currently in litigation.
F-21
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Stockholders'
Equity (Deficit)
(Continued)
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 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. In
fiscal 1997 and 1996, 10,000 and 15,000
options, respectively, were granted to
directors under this plan.
The Company's officers had been granted
options to purchase an aggregate of 120,000
shares of common stock, of which 60,000
shares (expired in December 1996) 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 these
officers to purchase an aggregate of 380,000
shares of common stock at an exercise price
of $.59
F-22
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Stockholders'
Equity (Deficit)
(Continued)
Stock Options per share, the fair market value of the
(Continued) 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.
On July 12, 1995, the Company's Board of
Directors granted options to two officers 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.
F-23
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Stockholders'
Equity (Deficit)
(Continued)
Stock Options A summary of option transactions is as
(Continued) follows:
<TABLE>
<CAPTION>
Shares Price
==================================================================================
<S> <C> <C>
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
Cancelled/expired (80,450) .59 - .80
Granted 210,000 .38 - .83
----------------------------------------------------------------------------------
Outstanding at September 30, 1997 1,479,573 $.38 - $7.38
==================================================================================
</TABLE>
Substantially all options are exercisable.
The following table summarizes information
about stock options outstanding at September
30, 1997:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-------------------------------------------------------
Weighted-
Average Weighted-
Range of Number Remaining Average
Exercise Outstanding at Contractual Exercise
Prices September 30, 1997 Life (years) Price
==================================================================================
<S> <C> <C> <C>
$.38 - $ .56 815,000 6.5 .41
.59 - .75 619,573 3.3 .59
.97 - 1.19 25,000 6.9 1.10
7.38 20,000 4.5 7.38
----------------------------------------------------------------------------------
$.38 - $7.38 1,479,573 5.1 .60
==================================================================================
</TABLE>
F-24
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Stockholders'
Equity (Deficit)
(Continued)
Stock Options The Company accounts for its stock-based
(Continued) compensation plan using the intrinsic value
method. Accordingly, no compensation cost
has been recognized for its stock option
plan. Had compensation cost for the
Company's stock option plan been determined
based on the fair value at the grant dates
for awards under the plan consistent with
the method of Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation, the Company's net
loss and loss per share would have been
adjusted to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Years ended September 30, 1997 1996
==================================================================================
<S> <C> <C> <C>
Net loss As reported $7,835,670 $1,591,250
Pro forma 7,888,241 1,620,309
Loss As reported .71 .27
per share Pro forma .71 .28
</TABLE>
In determining the pro forma amounts above,
the Company estimated the fair value of each
option granted using the Black-Scholes
option pricing model with the following
weighted-average assumptions used for grants
in 1997 and 1996: dividend yield of 0% for
both years and expected volatility of 46.50%
for both years, risk free rates ranging from
6.21% to 6.72% for 1997 and 6.06% to 6.62%
for 1996, and expected lives of 5-10 years
for 1997 and 1996.
The weighted average fair value of options
granted in fiscal 1997 and 1996 was $.25 per
share and $.45 per share, respectively.
F-25
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Income Taxes No provision for Federal income taxes has
been made for the years ended September 30,
1997 and 1996, 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 1997, the Company has unused
net operating loss carryforwards of
approximately $21,000,000 (including
approximately $11,000,000 acquired from ATI)
which expire at various dates through 2012.
Most of this amount is subject to annual
limitations due to various "changes in
ownership" that have occurred over the past
few years. Accordingly, most of the net
operating loss carryforwards will not be
available to use in the future.
As of September 30, 1997 and 1996, the
deferred tax assets related to the net
operating loss carryforwards have been fully
offset by valuation allowances, since the
utilization of such amounts is uncertain.
11. Major Customers Customers in excess of 10% of total sales
and Product are:
<TABLE>
<CAPTION>
Year ended September 30, 1997 1996
===================================================================================
<S> <C> <C>
Customer A $202,000 $ -*
Customer B 168,000 1,381,000
Customer C 149,000 -*
Customer D 123,000 -*
Customer E 97,000 -*
===================================================================================
</TABLE>
* Customer was not in excess of 10% of total
sales in 1996.
At September 30, 1997, accounts receivable
from these major customers totaled
approximately $85,000.
One product represents the majority of ATI's
sales. The Company purchases the materials
for this product from one supplier. The loss
of this supplier could have a material
adverse effect on the Company.
F-26
<PAGE>
EXHIBIT INDEX
Exhibit No. Document
----------- --------
(K) 2.1 Asset Purchase Agreement made as of October 24,1997
by and among Prompt Associates, Inc., Managed Health
Benefits Corporation, and Avitar, Inc.
(G) 3.1 Certificate of Amendment to the Certificate of
Incorporation of the Company dated May 19, 1995.
(G) 3.2 Certificate of Amendment of the Certificate of
Incorporation of the Company dated June5, 1995.
(A) 4.1 Specimen Copies representing the Company's Common
Stock and Redeemable Warrants.
(D) 4.2 Specimen Certificates representing the Company's
Class A Warrants and Class B Warrants.
(D) 4.3 Warrants granted to Phildius, Kenyon & Scott as of
September 5, 1994.
(J) 4.4 Certificate of Designations, Rights and Preferences
of Series A Redeemable Convertible Preferred Stock.
(C) 10.1 Employment Agreement between MHB and Peter P.
Phildius, dated as of July 23, 1993.
(D) 10.2 Amended and Restated Employment Agreement between MHB
and Peter P. Phildius, dated as of August 15, 1994.
(C) 10.3 Employment Agreement between MHB and Douglas W.
Scott, dated as of July 23, 1993.
(D) 10.3.1 Amended and Restated Employment Agreement between MHB
and Douglas W. Scott, dated as of August 15, 1994.
(D) 10.4.1 Form of Warrant Agreement respecting the Class A
Warrants between the Company and Continental Stock
Transfer & Trust Company.
(D) 10.4.2 Form of Warrant Agreement respecting the Class B
Warrants between the Company and Continental Stock
Transfer & Trust Company.
(A) 10.4.3 Form of Warrant Agreement respecting the Company
Redeemable Warrants between the Company and
Continental Stock Transfer & Trust Company.
(D) 10.4.4 Form of First Amendment to Warrant Agreement
respecting the Company Redeemable Warrants between
the Company and Continental Stock Transfer & Trust
Company.
(B) 10.5 Form of Consulting Agreement between MHB and A.S.
Goldmen & Co., Inc., dated August 11, 1992.
(B) 10.6 Consulting Agreement between MHB and The Equity
Group, Inc., dated October 18, 1991.
(D) 10.7 Consulting Agreement between MHB and Phildius, Kenyon
& Scott, dated November 29, 1989, as amended.
(D) 10.8 Promissory Note executed by MHB to Phildius, Kenyon
& Scott, dated September 3, 1994.
<PAGE>
(E) 10.9 Promissory Noted executed by MHB to Phildius, Kenyon
& Scott dated December 16, 1994.
(E) 10.10 Warrant Agreement executed by MHB to Phildius, Kenyon
& Scott dated December 16, 1994.
(F) 10.11 Form of 11% Promissory Note executed by the Company
to parties providing the bridge loans between January
- May 1995.
(F) 10.12 Form of Warrant Agreement executed by the Company to
parties providing the bridge loans between January -
May 1995.
(F) 10.13 Lease Agreement executed by Avitar, Inc. and the
Company to KBC Realty Trust, dated March 22, 1995.
(H) 10.14 Agreement between the Company and Silicon Valley
Financial Services dated January 18, 1996
(H) 10.15 Agreement between the Company and Simplex Medical
Systems, Inc. dated March 14,1996
(I) 10.16 Form of Offshore Securities Agreement between the
Company and parties purchasing common stock under
Regulation S during Fiscal 1996 and Fiscal 1997
(I) 10.17 Form of Subscription Agreement between the Company
and parties purchasing common stock during Fiscal
1996 and Fiscal 1997
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 the Company's Quarterly Report for the fiscal quarter ended June 30,
1993 (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 Registration Statement on Form S-4 (Commission File No.
33-71666), and incorporated herein by reference.
(D) 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.
(E) 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
<PAGE>
(Commission File No. 0-20316), and incorporated herein by reference.
(F) 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.
(G) 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.
(H) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report for the fiscal quarter ended March
31,1996 (Commission File No. 0-20316), 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,
1996 (Commission File No. 0-20316), and incorporated herein by reference.
(J) 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.
(K) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Current Report dated October 27, 1997 (Commission File No.
0-20316), and incorporated herein by reference.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<PAGE>
Avitar, Inc.
List of Subsidiaries
Avitar Technologies, Inc.
Avitar Industries, Inc. (formerly Managed Health Benefits Corporation)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
Avitar, Inc.
Canton, MA
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 December 10,
1997, 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, 1997. Our report contains an explanatory paragraph regarding
uncertainties as to the Company's ability to continue in business.
BDO Seidman, LLP
/s/ BDO Seidman
New York, New York
January 8, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
AVITAR, INC.
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AVITAR'S
ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 65,512
<SECURITIES> 0
<RECEIVABLES> 100,020
<ALLOWANCES> 76,000
<INVENTORY> 142,453
<CURRENT-ASSETS> 459,624
<PP&E> 282,480
<DEPRECIATION> 0
<TOTAL-ASSETS> 757,462
<CURRENT-LIABILITIES> 1,964,431
<BONDS> 0
0
6,572
<COMMON> 152,342
<OTHER-SE> (1,485,238)
<TOTAL-LIABILITY-AND-EQUITY> 757,462
<SALES> 938,761
<TOTAL-REVENUES> 938,761
<CGS> 1,583,390
<TOTAL-COSTS> 8,623,740
<OTHER-EXPENSES> 10,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120,335
<INCOME-PRETAX> (7,833,670)
<INCOME-TAX> 2,000
<INCOME-CONTINUING> (7,815,313)
<DISCONTINUED> (20,357)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,835,670)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> (.71)
</TABLE>
