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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, 1998
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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: (781) 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
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Common Stock, $.01 par value
Class A 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: $2,203,646
Page 1 of 67 pages.
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Exhibit Index is on page 59 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, 1998: $907,069.
The approximate number of shares of Common Stock outstanding (including shares
held by affiliates of the Registrant) as of December 31, 1998: 17,530,855.
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:
Diagnostic Test Products
The Company makes products for the diagnostic test applications
described below. These products accounted for approximately 8% of the Company's
revenue in Fiscal 1998 and approximately 4% of the Company's revenue in Fiscal
1997.
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.
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
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United States Food and Drug Administration ("FDA") approval to market and are
sold under the Visualine trademark. Approximately $1 billion 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 cost limitations prohibit the use of much
needed diagnostic tests. Using its newly developed Oral Fluid Sampling and
Processing System described above, the Company is planning entry into this large
and growing market for testing for drugs-of-abuse.
Foam Disposable Products
The Company produces medical-grade hydrophilic polyurethane foam
disposables fabricated for the applications described below. These products
accounted for approximately 92% of the Company's revenue in Fiscal 1998 and
approximately 96% of the Company's revenue in Fiscal 1997.
Wound Dressings. Avitar's Hydrasorb(TM) (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. Currently, the
Hydrasorb product is marketed internationally by the ConvaTec Division of
Bristol-Myers Squibb ("Convatec"), by the Knoll Pharma Division of BASF
("Knoll") and other specialty distributors worldwide. 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 $1.2 billion annually with foam
dressings accounting for approximately $150 million. New foam applications are
currently being evaluated by the Company to broaden this product line. Currently
under development are a number of second generation wound dressings which
combine the Company's hydrophilic polyurethane foam with other biomaterials for
composite dressings.
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 and 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.
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,
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medical or dental applications. With this approach, proprietary products would
be co-developed through the generation and development of product ideas either
internally or 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 four full-time individuals in its development
efforts. In addition, one other employee also devotes a portion of his 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 one full-time employee. 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
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particular geographic territories in exchange for a royalty, joint venture or
other financial interests.
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-AbuseTest 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 June 1994, the Company and Calgon Vestal Laboratories, Inc.
("Calgon") terminated their existing distribution agreement and entered into a
Supply and a License Agreement whereby Calgon purchases from Avitar all of the
Hydrasorb(TM) products that Calgon resells in the territories of North America
(excluding Canada), South America and
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Central America. Under the License Agreement, Calgon paid $425,000 to Avitar for
an exclusive license to use (a) the license trademark for Hydrasorb(TM) and (b)
certain technology to manufacture or have manufactured, use and sell
Hydrasorb(TM) products in the territories covered under these agreements. In
December 1994, Calgon was sold to Convatec which assumed the obligations of
Calgon under these agreements. 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.
Since November 1993, the Company has maintained a distribution
agreement with Knoll (the "Knoll Agreement") pursuant to which Knoll was granted
the right to distribute Hydrasorb(TM) products throughout Canada. The Knoll
Agreement provides that Hydrasorb(TM) products are to be sold at agreed upon
prices (subject to annual inflation adjustments) and that certain minimum
quantities are maintained.
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. Since the remaining
14,000 square feet is not being used at this time and will not be needed for the
next several years, ATI has subleased approximately 6,000 square feet and is
attempting to sub-lease the other 8,000 square feet.
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, International Standard Organization ("ISO") rules 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 some product components from
single sources.
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Avitar acquires the same key component for its Flureze(TM) fluoride application
product, customized foam products and Hydrasorb(TM) 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. Avitar believes that alternative sources could be found for such key
component and expects that the cost of such component from an alternative source
would be similar. The Company also 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
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, ISO rules and similar other 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
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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(TM) 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(TM) 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 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 numerous United States patents, and has applications
pending for additional patents. 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, 1998, the
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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.
Employees
At September 30, 1998, the Company had 39 full-time employees,
including 4 in research and development (in addition to one other employee who
devotes a portion of his time to research and development as well as
manufacturing and supply activities), 26 in manufacturing and supply (one of
whom devotes a portion of his time to research and development), 1 in sales and
marketing and 8 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
(excluding assessment for operating expenses) 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 (the "Court"), 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 immediately moved to dismiss the
Underwriter's complaint based upon both the rule violations and otherwise. In
December 1998, the Court denied the Company's motion to dismiss the
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Underwriter's complaint, but did not decide and expressly left open for a later
day the principal legal argument urged by the Company in favor of dismissal.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price Data. Until March 24, 1998 the Company's Common Stock was
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. Since March 25, 1998, the Company's Common
Stock has been quoted on the NASD OTC Bulletin Board ("OTC") under the symbol
AVIT. The Class A Warrants 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 and OTC, for the periods indicated. Quotations reflect
inter-dealer prices without retail markup, markdown or commission, and do not
necessarily represent actual transactions:
<TABLE>
<CAPTION>
Common Stock Redeemable Warrants
Fiscal 1997 High Low High Low
----------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter .97 .38 .44 .09
Second Quarter .97 .34 .63 .06
Third Quarter .84 .34 .31 .13
Fourth Quarter .47 .25 .22* .03*
Fiscal 1998
-----------
First Quarter .34 .09 N/A N/A
Second Quarter .31 .09 N/A N/A
Third Quarter .28 .13 N/A N/A
Fourth Quarter .29 .13 N/A N/A
</TABLE>
*For the month of July 1997
As of December 31, 1998 the last sales price for the Company's Common
Stock was $ .25.
NASDAQ Listing. On March 24, 1998, the Company was notified after the
close of trading that its stock would no longer be traded on NASDAQ, but instead
be quoted on the OTC.
Holders. The Company had approximately 250 owners of record and, it
believes, in excess of 2,000 beneficial owners of the Company Common Stock as of
December 31, 1998.
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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, 1998 ("Fiscal 1998")
increased $1,265,885 or approximately 135% to $2,203,646 from $938,761 for the
fiscal year ended September 30, 1997 ("Fiscal 1997"). The results for Fiscal
1998 primarily reflect the increase in sales of wound dressing products,
particularly to the Company's main customer.
Operating Expenses
Direct costs of sales were approximately 87% of sales in Fiscal 1998
compared to approximately 169% of sales for Fiscal 1997. The lower ratio of
direct cost to sales for Fiscal 1998 was primarily related to the increase in
sales described above.
Sales, general and administrative expenses for Fiscal 1998 decreased
$227,730 or approximately 13%, to $1,530,061 from $1,757,791 for Fiscal 1997.
This decrease resulted mainly from the reduction of approximately $58,000
related to the settlement of the note with the Company's former attorneys and a
decrease in consulting and legal expenses of approximately $170,000.
Research and development expenses for Fiscal 1998 amounted to $546,233
compared to $452,169 Fiscal 1997. The increase of $94,064, or approximately 21%,
was primarily attributable to increased research and development activities
related to the Company's entry into the rapid diagnostic test market.
For Fiscal 1998, no amortization of goodwill was recorded compared to
$559,708 for Fiscal 1997. No write-off of goodwill occurred in Fiscal 1998
compared to $4,270,682 of goodwill written-off in Fiscal 1997. These changes in
Fiscal 1998 are a
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result of the Company's decision during the fourth quarter of Fiscal 1997 to
write-off the remaining balance of goodwill.
Other Income and Expense
Interest income amounted to $8,126 for Fiscal 1998 compared to $2,384
for Fiscal 1997. This increase resulted from the interest earned on the proceeds
received from the sale of the MHB subsidiary.
Interest expense and financing costs were $135,398 for Fiscal 1998
compared to $120,335 incurred during Fiscal 1997. This increase resulted
primarily from the interest expense on the borrowings by the Company against its
Revolving Line of Credit from Silicon Valley Bank beginning in May 1998.
Other income amounted to $25,965 for Fiscal 1998 versus other expense
of $10,383 for Fiscal 1997. This change is mainly the result of rental income
from the Company subleasing excess square feet in its facility to a major
department store chain and a software maintenance company.
Discontinued Operations
In October 1997, the Company consummated the sale of the net assets and
business of its MHB subsidiary. Income from operations and sale of MHB was
$1,136,170 in Fiscal 1998 compared to a loss of $20,357 in Fiscal 1997. The
significant change for Fiscal 1998 was primarily the result of the gain realized
from the sale of MHB.
Net Loss
Primarily as a result of the factors described above, the Company had a
net loss of $757,954 ($.05 per share) for Fiscal 1998 compared to a net loss of
$7,835,670 ($0.71 per share) for Fiscal 1997.
Financial Condition and Liquidity
At September 30, 1998 and September 30, 1997, the Company had working
capital deficiencies of ($1,569,085) and ($1,504,807), respectively, and cash
and cash equivalents of $12,483 and $65,512, respectively. Net cash used in
operating activities during Fiscal 1998 amounted to $1,475,118 resulting
primarily from the operating loss of $757,954, an increase in accounts
receivable of $71,888, increases in prepaid expenses and other current assets of
$38,631 and the gain from the sale of MHB of $1,208,084; partially offset by
depreciation and amortization of $131,864, non-cash charges for
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consulting services of $19,541, an increase in inventories of $263, increases in
other assets of $15,358 and increases in accounts payable and accrued expenses
of $434,413. Net cash provided by financing and investing activities during
Fiscal 1998 was $1,422,089 which included proceeds from the sale of MHB of
$1,286,000, proceeds from the sale of preferred stock and warrants of $199,601
and proceeds from notes payable and long-term debt of $340,034; offset in part
by purchases of equipment of $1,996, re-payment of notes payable and long-term
debt of $381,925 and redemption of common stock of $19,625.
During October 1997, an affiliate of the Company and a private
individual made loans to the Company totaling $100,000 with interest payable at
10% per annum on $50,000 and 20% per annum on the other $50,000. These loans and
the accrued interest thereon, which were due on January 31, 1998, have been
repaid as of January 31, 1998. Also in October 1997, the Company paid $10,000
plus accrued interest to an affiliate of the Company as repayment of a loan made
to the Company during Fiscal 1997. During March 1998, the Company retired notes
payable to the Chairman of the Board and the President of the Company totaling
approximately $369,000 plus accrued interest thereon of approximately $31,000
for 1,818,020 shares of the Company's common stock and warrants to purchase
400,000 shares of the Company's common stock at an exercise price of $.28 per
share until March 2003.
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 gross proceeds of $1,286,000 and recorded a gain of $1,208,084
in the quarter ended December 31, 1997. In May and June 1998, the Company
borrowed approximately $248,000 against a $250,000 Revolving Line of Credit from
Silicon Valley Bank ( original limit of the credit line was $350,000 offset by
accounts receivable financing, but was modified in June changing the maximum
borrowing amount to $250,000 which is not reduced by accounts receivable
financing). In July 1998, the Company subleased approximately 6,000 excess
square feet in its facility which will generate approximately $144,000 in other
income over the two year period covered by the lease. During the period of May
through December 1998, the Company received net proceeds of approximately
$485,000 from the sale of 316,381 shares of Series B Convertible Preferred Stock
(convertible at any time into 3,163,810 shares of the Company's common stock)
which included warrants to purchase 1,039,200 shares of the Company's common
stock at an exercise price of approximately $.22-.24 per share for a period of
twelve months. In addition, the Company is actively attempting to raise up to
$3,000,000 from the sales of equity and/or debt securities. The Company's
current cash position is such that it must immediately raise part of this
capital to fund current operations. Proceeds from these proposed financings are
needed to provide working capital and capital equipment funding to operate the
Company and expand the Company's business. However, there can be no assurance
that these financings will be achieved.
For the balance of fiscal year 1999, the Company's cash requirements
are expected to include primarily the funding of operating losses, the payment
of outstanding accounts
15
<PAGE>
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 grew significantly during Fiscal 1998
and are expected to continue to increase during Fiscal 1999 and beyond if the
sales for the wound dressing products return to previous levels and the Company
continues to expand the use of its polyurethane foam base 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 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 any or 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 the needed additional capital.
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 1998 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
23, 1998). The Company's plans to address the situation are presented above.
However, there are no assurances that these endeavors will be successful or
sufficient.
Year 2000 Impact
Many currently installed computer systems and software products are
coded to accept or recognize only two digit entries in the date code field.
These systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
The Company has undertaken a review concerning the ability of its
internal information systems, including its internal accounting systems, to
handle date information and function appropriately from and after January 1,
2000 and does not believe that the total cost to address any changes to become
Year 2000 Compliant will be material. In addition, the Company during the first
quarter of calendar 1999 will complete its evaluation as to what impact, if any,
possible Year 2000 problems encountered by its
16
<PAGE>
suppliers and customers will have upon the Company. At this time, the Company
does not believe that these problems would have a material effect on the
Company.
As discussed above, the Company has not yet completed its Year 2000
evaluation and therefore, has not developed any contingency plans. The results
of the Company's evaluation will be the basis for determining the nature and
extent of any contingency plans.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Index on page 19 of the Consolidated
Financial Statements, included herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
17
<PAGE>
Avitar, Inc. and
Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Financial Statements
Years Ended September 30, 1998 and 1997
18
<PAGE>
Avitar, Inc. and Subsidiaries
Contents
- -------------------------------------------------------------------------------
Report of independent certified public accountants 20
Consolidated financial statements:
Balance sheet 21
Statements of operations 22
Statements of stockholders' deficit 23
Statements of cash flows 24-25
Notes to consolidated financial statements 26-44
19
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Avitar, Inc.
We have audited the accompanying consolidated balance sheet of Avitar, Inc.
and subsidiaries as of September 30, 1998, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of the
two years in the period ended September 30, 1998. 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, 1998, and the results of their operations and their cash
flows for each of the two years in the period ended September 30, 1998 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, 1998. 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 23, 1998
20
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
- -------------------------------------------------------------------------------
September 30, 1998
- -------------------------------------------------------------------------------
Assets
Current:
Cash and cash equivalents $ 12,483
Accounts receivable 171,908
Inventories 142,190
Prepaid expenses and other (including employee
receivables of $33,400) 114,501
------------
Total current assets 441,082
Property and equipment, net 205,373
------------
$ 646,455
Liabilities and Stockholders' Deficit
Current liabilities:
Short-term debt (including $40,665 due to affiliates) $ 338,357
Accounts payable 928,842
Accrued expenses (including $124,000 due to affiliates) 643,718
Current portion of long-term debt 99,250
------------
Total current liabilities 2,010,167
Long-term debt, less current portion 66,085
------------
Total liabilities 2,076,252
------------
Commitments and contingency (Note 8)
Stockholders' deficit:
Series A and B convertible preferred stock, $.01 par value;
authorized 5,000,000 shares; 792,588 shares issued and
outstanding, with aggregate liquidation value - Series A -
$657,249 plus 7% annual dividend; Series B - $199,600 7,926
Common stock, $.01 par value; authorized 25,000,000 shares;
17,469,768 shares issued and outstanding 174,698
Additional paid-in capital 15,496,788
Accumulated deficit (17,109,209)
------------
Total stockholders' deficit (1,429,797)
------------
$ 646,455
------------
See accompanying notes to consolidated financial statements.
21
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 2,203,646 $ 938,761
------------ ------------
Operating expenses:
Direct cost of revenues 1,920,169 1,583,390
Selling, general and administrative expenses 1,530,061 1,757,791
Research and development expenses 546,233 452,169
Amortization of goodwill - 559,708
Write-off of goodwill - 4,270,682
------------ ------------
Total operating expenses 3,996,463 8,623,740
------------ ------------
Loss from operations (1,792,817) (7,684,979)
------------ ------------
Other income (expense):
Interest income 8,126 2,384
Interest expense and financing costs (includes $565 and
$18,179 to affiliates) (135,398) (120,335)
Other, net 25,965 (10,383)
------------ ------------
Total other expense (101,307) (128,334)
------------ ------------
Loss before provision for income taxes and
discontinued operations (1,894,124) (7,813,313)
Provision for income taxes - 2,000
------------ ------------
Loss from continuing operations (1,894,124) (7,815,313)
Discontinued operations:
Loss from operations of MHB (net of income taxes
of $0 in 1998 and $4,000 in 1997) (71,914) (20,357)
Gain on sale of MHB 1,208,084 -
------------ ------------
Net loss $ (757,954) $ (7,835,670)
------------ ------------
Basic and diluted income (loss) per share:
Loss per share from continuing operations $ (.12) $ (.71)
Income per share from discontinued operations .07 -
------------ ------------
Net loss per share $ (.05) $ (.71)
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------- ---------------------- Paid-in Accumulated
Years ended September 30, 1998 and 1997 Shares Amount Shares Amount Capital Deficit
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
Sale of common stock, net of expenses - - 100,000 1,000 24,000 -
Conversion of notes payable - - 2,093,020 20,930 434,034 -
Issuance of common stock for services - - 84,315 843 18,698 -
Redemption of common stock - - (41,785) (417) (19,208) -
Sale of preferred stock, net of expenses 135,339 1,354 - - 173,247 -
Net loss - - - - - (757,954)
--------- ------- ---------- -------- ----------- ------------
Balance at September 30, 1998 792,588 $ 7,926 17,469,768 $174,698 $15,496,788 $(17,109,209)
--------- ------- ---------- -------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (757,954) $ (7,835,670)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of MHB (1,208,084) -
Depreciation and amortization 131,864 167,505
Amortization of goodwill - 559,708
Write-off of goodwill - 4,270,682
Noncash charge for services and compensation 19,541 583,748
Changes in operating assets and liabilities:
Accounts receivable (71,888) 253,924
Inventories 263 48,990
Prepaid expenses and other current assets (38,631) (10,625)
Other assets 15,358 13,730
Accounts payable and accrued expenses 434,413 213,466
------------- ------------
Net cash used in operating activities (1,475,118) (1,734,542)
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (1,996) (4,136)
------------- ------------
Net cash used in investing activities (1,996) (4,136)
------------- ------------
Cash flows from financing activities:
Proceeds from sale of MHB 1,286,000 -
Proceeds from notes payable and long-term debt 340,034 454,845
Repayments of notes payable and long-term debt (381,925) (153,401)
Sales of preferred stock, common stock and warrants 199,601 1,131,890
Redemption of common stock (19,625) -
------------- ------------
Net cash provided by financing activities 1,424,085 1,433,334
------------- ------------
Net decrease in cash and cash equivalents (53,029) (305,344)
Cash and cash equivalents, beginning of year 65,512 370,856
------------- ------------
Cash and cash equivalents, end of year $ 12,483 $ 65,512
------------- ------------
</TABLE>
24
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Concluded)
- -------------------------------------------------------------------------------
Years ended September 30, 1998 1997
- -------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $124,100 $91,823
Taxes $ 2,100 $ 2,925
Supplemental schedule of noncash investing and
financing activities:
Notes payable of $454,964 and $267,938 were converted into common stock
during 1998 and 1997, respectively.
An equipment capital lease having a net present value of $52,761 was
entered into during 1998.
See accompanying notes to consolidated financial statements.
25
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
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, was 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 consummated a
sale of MHB's net assets and business in
October 1997. The Company received
$1,286,000 and recorded a gain of
$1,208,084. 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,
1998 of $1,569,085 and $1,429,797,
respectively. The Company raised net
proceeds aggregating approximately
$200,000 and $1,100,000 during the years
ended September 30, 1998 and 1997,
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 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.
</TABLE>
26
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
2. Summary of
Significant
Accounting
Policies
Estimates and The preparation of financial statements in
Assumptions conformity with generally accepted
accounting principles requires management
to make estimates and assumptions that
affect the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported
amounts of revenues and expenses during
the reporting period. Actual results could
differ from those estimates.
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 The Company considers all highly liquid
Equivalents 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 on a first-in, first-out
basis) 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. Expenditures for repairs
and maintenance are expensed as incurred.
Research and Research and development costs are expensed
Development as incurred.
</TABLE>
27
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
2. Summary of
Significant
Accounting
Policies
(Continued)
Income (Loss) Effective October 1, 1997, the Company
Per Share of adopted Statement of Financial Accounting
Common Stock Standards No. 128 ("SFAS 128") "Earnings
per Share." This pronouncement requires
the presentation of both basic and diluted
earnings per share and replaces previously
required standards for computing and
presenting earnings per share. Earnings
per share amounts for all periods have
been presented and, where appropriate,
restated to conform to SFAS 128. Adoption
of this standard did not have a material
effect on the Company's earnings per share
calculation.
Stock Options Effective October 1, 1996, the Company
adopted the provisions of Statement of
Financial Accounting Standard No. 123
("SFAS 123"), "Accounting for Stock-Based
Compensation." The Company has elected to
continue to account for stock options at
their intrinsic value with disclosure of
the effects of fair value accounting on
net income (loss) and income (loss) per
basic and diluted share of common stock on
a pro forma basis.
Income Taxes Income taxes are accounted for using the
liability method as set forth in Statement
of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this
method, 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 11).
Fair Value of The carrying amounts of cash, accounts
Financial receivable and accounts payable
Instruments approximate fair value because of the
short-term nature of these items. The
current fair values of the notes payable
and long-term debt approximate fair value
because of the respective interest rates.
</TABLE>
28
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
2. Summary of
Significant
Accounting
Policies
(Continued)
Impairment of Statement of Financial Accounting
Long-Lived Standards ("SFAS") No. 121, "Accounting
Assets 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.
</TABLE>
29
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
2. Summary of
Significant
Accounting
Policies
(Continued)
Recent In June 1997, the Financial Accounting
Accounting Standards Board issued two new disclosure
Standards standards. Results of operations and
financial position will be unaffected by
implementation of these new standards.
Statement of Financial Accounting
Standards ("SFAS") 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
operating segments in the financial
statements. It also establishes standards
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. Management
does not expect implementation of these
standards to materially affect future
financial statements and disclosures.
</TABLE>
30
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
2. Summary of
Significant
Accounting
Policies
(Continued)
Recent In June 1998, the Financial Accounting
Accounting Standards Board issued SFAS No. 133,
Standards "Accounting for Derivative Instruments and
(Continued) Hedging Activities." SFAS No. 133 requires
companies to recognize all derivative
contracts at their fair values, as either
assets or liabilities on the balance
sheet. If certain conditions are met, a
derivative may be specifically designated
as a hedge, the objective of which is to
match the timing of gain or loss
recognition on the hedging derivative with
the recognition of (1) the changes in the
fair value of the hedged asset or
liability that are attributable to the
hedged risk, or (2) the earnings effect of
the hedged forecasted transaction. For a
derivative not designated as a hedging
instrument, the gain or loss is recognized
in income in the period of change. SFAS
No. 133 is effective for all fiscal
quarters of fiscal years beginning after
June 15, 1999.
Historically, the Company has not entered
into derivative contracts either to hedge
existing risks or for speculative
purposes. Accordingly, the Company does
not expect adoption of the new standard on
October 1, 1999 to affect its financial
statements.
3. Discontinued In fiscal 1997, the Company pursued the
Operations sale 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 $1,286,000. The Company's
financial statements reflect MHB as a
discontinued operation.
</TABLE>
31
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Discontinued Following is a summary of the results of operations of MHB:
Operations
(Continued) Years ended September 30, 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 13,737 $1,202,918
Operating expenses 85,651 1,219,275
-------- ----------
Loss before provision for income taxes (71,914) (16,357)
Provision for income taxes - 4,000
-------- ----------
Net loss $(71,914) $ (20,357)
-------- ----------
4. Accounts At September 30, 1998, accounts receivable
Receivable in the amount of $345,900 were factored
with a financial services organization at
full recourse against the Company. The
Company pays an administration fee of .25%
of each purchased receivable and 2% per
month of the average daily account balance
outstanding. Interest expense charged to
operations amounted to approximately
$55,000 and $20,000 during the years ended
September 30, 1998 and 1997, respectively.
5. Inventories Inventories consist of the following:
September 30, 1998
-------------------------------------------
Raw materials $ 72,235
Work-in-process 57,974
Finished goods 11,981
---------
$ 142,190
---------
</TABLE>
32
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
6. Property and Property and equipment consists of the following:
Equipment
September 30, 1998
--------------------------------------------
Equipment $617,532
Furniture and fixtures 62,292
Leasehold improvements 20,871
---------
700,695
Less: accumulated depreciation
and amortization 495,322
---------
$205,373
---------
At September 30, 1998, the cost of
equipment under capital leases was
$529,553 and the related accumulated
amortization was $367,897.
7. Short-Term Debt During 1998, various related parties
advanced funds totaling $46,204 to the
Company to fund operations and provide
working capital. These advances were due
on September 30, 1998 and bear interest at
10%. At September 30, 1998, the
outstanding balance amounted to $40,665.
During 1997, various related parties
advanced funds totaling $399,964 to the
Company to fund operations and provide
working capital. These advances were
converted to equity in 1998. The Company
also received partial settlement of a
separate note payable to a vendor via an
equity conversion amounting to $55,000.
On September 22, 1997, the Company
borrowed $12,500 from an individual
bearing interest at 20% all of which is
outstanding at September 30, 1998. The
principal balance was due on January 31,
1998.
</TABLE>
33
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
7. Short-Term Debt In May 1998, the Company incurred a note
(Continued) payable to an insurance company covering an
insurance policy in the amount of $37,372,
all of which is outstanding at
September 30, 1998. The note is
uncollateralized and is payable in monthly
installments through April 1999, with an
interest rate of 8%.
In April 1998, the Company entered into a
Revolving Credit Agreement (the
"Agreement") with a bank. Under the terms
of the Agreement as amended on June 3,
1998, the maximum available loan
commitment is $250,000. Outstanding
borrowings, which are due upon demand, are
collateralized by the assets of the
Company. The Agreement provides for
monthly interest payments at prime plus 3%
(11% at September 30, 1998). The Agreement
requires compliance with various covenants
including maximum amounts of quarterly
losses. The loan is guaranteed by certain
principals of the Company. Outstanding
borrowings under the revolving line of
credit amounted to $247,820 at September
30, 1998.
8. Long-Term Debt Long-term debt consists of the following:
September 30, 1998
-------------------------------------------
Obligations under capital leases
(see Notes 6 and 9) $165,335
Less: current maturities 99,250
--------
$ 66,085
--------
</TABLE>
34
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
9. Commitments and
Contingency
Lease ATI leases office space under an operating
lease which expires in 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 the noncancelable
operating lease charged to continuing
operations for the years ended September
30, 1998 and 1997 totaled approximately
$455,000 in each year.
In fiscal 1995, the Company issued
warrants to purchase 150,000 shares of its
common stock to its lessor. The warrants
are exercisable at $.50 per share and
expire in 1999. No warrants have been
exercised as of September 30, 1998.
Future minimum rentals are as follows:
Capital Operating
--------------------------------------------
1999 $118,205 $ 428,260
2000 54,264 492,087
2001 11,094 503,120
2002 5,342 503,120
2003 2,226 503,120
Thereafter - 712,753
-------- ----------
Total minimum
lease payments 191,131 $3,142,460
----------
Less amount
representing
interest 25,796
--------
Present value of
net minimum
lease payments $165,335
--------
Total minimum rentals have not been
reduced by $132,000 to be received in the
future under a non-cancelable sublease
expiring July 31, 2000.
</TABLE>
35
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
9. Commitments and
Contingency
(Continued)
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 renew automatically on an
annual basis and may be terminated upon 60
days written notice by either party.
Expenses under these agreements totaled
approximately $300,000 in each of 1998 and
1997.
Retirement Plan In February 1998, the Company adopted a
defined contribution retirement plan which
qualifies under Section 401(k) of the
Internal Revenue Code, covering
substantially all employees. Participant
contributions are made as defined in the
Plan agreement. Employer contributions are
made at the discretion of the Company. No
Company contributions were made in 1998.
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 10) for an
aggregate price of approximately $6.3
million, and (ii) damages of approximately
$1.6 million. Although the Company's
motion for dismissal has been denied, the
Company intends to continue to contest the
case vigorously. 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.
</TABLE>
36
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
10. Stockholders'
Deficit
Preferred Stock The 657,249 shares of Series A convertible
preferred stock issued and outstanding
entitle the holder of each share 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.
The 135,339 shares of Series B convertible
preferred stock issued and outstanding
entitle the holder of each share to:
convert it, at any time, at the option of
the holder, into ten shares of common
stock subject to antidilution provisions
and receive dividends amounting to an annual
8% cash dividend or 10% stock dividend
computed on the amount invested, at the
discretion of the Company. After one year
from the date of issuance, the Company may
redeem, in whole or in part, the
outstanding shares at the offering price
in the event that the average closing
price of ten shares of the Company's
common stock shall equal or exceed 300% of
the offering price for any 20 consecutive
trading days prior to the notice of
redemption; and liquidating distributions
of an amount per share equal to the
offering price. Undeclared and unpaid
dividends amounted to $5,494 at September
30, 1998.
</TABLE>
37
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
10. Stockholders'
Deficit
(Continued)
Common Stock The Company has outstanding warrants
Purchase entitling the holder to purchase one share
Warrants of common stock at the applicable exercise
price. No warrants were exercised, expired
or cancelled in fiscal 1998. Warrants were
exercised for 1,154,008 shares in fiscal
1997 and warrants covering 10,311,047
shares were cancelled or expired in fiscal
1997. In fiscal 1998 and 1997, warrants
covering 949,200 and 1,175,900 shares were
issued, respectively, primarily in
connection with preferred stock issuances.
The value of the other warrants issued was
not material. The following is a summary
of shares issuable upon the exercise of
warrants (all of which are exercisable) at
September 30, 1998.
<CAPTION>
<S>
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 1999
Warrants issued in connection with repaid notes payable .50 660,000 1999
Warrants issued to lessor .50 150,000 1999
Warrants issued to consultant for services provided .25 100,000 2001
Warrants issued in connection with stock sales .375 1,113,000 1999
Warrants issued in connection with notes payable .375 62,500 1999
Warrants issued in connection with preferred stock issuance .219 399,200 1999
Warrants issued in connection with merger in fiscal 1994 12.00 1,000,000 2000
Warrants issued in connection with repaid notes payable .28 400,000 2003
</TABLE>
* Antidilution adjustment not made as the terms of these warrants are
currently in litigation. Warrants remain exercisable until litigation
is settled.
38
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
10. Stockholders'
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. In fiscal
1998, no options were granted to directors
under the Directors' Plan, although
210,000 options were granted to directors
outside of the Director's Plan. In 1997,
10,000 options were granted to directors
under this plan.
During 1998, 1,227,350 options held
primarily by employees and directors of
the Company at exercise prices ranging
from $.38 to $1.19 were cancelled and
reissued at prices ranging from $.20 -
$.25 per share which represented the
current stock price at the reissue date.
These options are included in cancelled
and granted amounts in the following
table.
During fiscal 1997 and 1998, 210,000 and
551,250 options, respectively, were
granted primarily to employees and
directors of the Company with exercise
prices equal to the stock's fair value on
the issue date.
</TABLE>
39
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
10. Stockholders'
Deficit
(Continued)
Stock Options A summary of option transactions is as
(Continued) follows:
Shares Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Cancelled/expired (1,327,350) .38 - 1.19
Granted 1,778,600 .20 - .25
--------------------------------------------------------------------------------------
Outstanding at September 30, 1998 1,930,823 $ .20 - $7.38
--------------------------------------------------------------------------------------
The following tables summarize information
about stock options outstanding and
exercisable at September 30, 1998:
<CAPTION>
Options Outstanding
---------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise September 30, Contractual Exercise
Prices 1998 Life (years) Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ .20 448,600 6.6 $ .20
.25 1,330,000 6.2 .25
.38 - .53 50,000 3.4 .47
.59 77,223 6.1 .59
1.19 5,000 8 1.19
7.38 20,000 4 7.38
-------------- --------- --- -----
$ .20 - $ 7.38 1,930,823 6.2 $ .25
-------------- --------- --- -----
</TABLE>
40
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
10. Stockholders'
Deficit
(Continued)
Stock Options
(Continued) Options Exercisable
------------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise September 30, Contractual Exercise
Prices 1998 Life (years) Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ .20 268,550 4.6 $ .20
.25 920,000 4.4 .25
.38 - .53 50,000 3.4 .47
.59 77,223 6.1 .59
1.19 5,000 8 1.19
7.38 20,000 4 7.38
-------------- --------- --- -----
$ .20 - $ 7.38 1,340,773 4.7 $ .37
--------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
The Company accounts for its stock-based
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:
<CAPTION>
Years ended September 30, 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss As reported $ (757,954) $ (7,835,670)
Pro forma $ (803,191) $ (7,888,241)
Loss per share As reported $ (.05) $ (.71)
Pro forma $ (.05) $ (.71)
</TABLE>
41
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
10. Stockholders'
Deficit
(Continued)
Stock Options In determining the pro forma amounts
(Continued) 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 1998 and 1997: dividend
yield of 0% for both years and expected
volatility of 46.10% for 1998 and 46.50%
for 1997, risk free rates ranging from
5.26% to 5.59% for 1998 and 6.21% to 6.72%
for 1997, and expected lives of 1-9 years
for 1998 and 5-10 years for 1997.
The weighted average fair value of options
granted in fiscal 1998 and 1997 was $.07
and $.25, respectively.
Earnings Per In the first quarter of Fiscal 1998, the
Share Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings
per Share", which requires the
presentation of both basic and diluted
earning per share on the face of the
consolidated Statements of Operations and
the restatement of all prior periods
earnings per share amounts. Conversion of
the preferred stock and assumed exercise
of options or warrants are not included in
the calculation of diluted earnings per
share since the effect would be
antidilutive. Accordingly, basic and
diluted net loss per share do not differ
for any period presented.
The following data show the amounts used
in computing earnings per share:
<CAPTION>
September 30, 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss from continuing operations $(1,894,124) $(7,815,313)
Less: preferred stock dividends (5,494) -
----------- -----------
Loss available to common
stockholders used in
basic and diluted EPS $(1,899,618) $(7,815,313)
----------- -----------
Weighted average number of common shares 16,577,892 11,036,047
----------- -----------
</TABLE>
42
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
10. Stockholders'
Deficit
(Continued)
Earnings Per The following table summarizes securities
Share that were outstanding as of September 30,
(Continued) 1998 and 1997, but not included in the
calculation of diluted net loss per share
because such shares are antidilutive:
<CAPTION>
<S> <C> <C> <C>
September 30, 1998 1997
--------------------------------------------------------------------------------------
Stock options 1,930,823 1,479,573
Convertible preferred stock 3,325,137 1,971,747
Stock warrants 4,187,700 3,138,900
11. Income Taxes No provision for Federal income taxes has
been made for the years ended September
30, 1998 and 1997, 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, 1998, the Company has
unused net operating loss carryforwards of
approximately $22,000,000 (including
approximately $11,000,000 acquired from
ATI) which expire at various dates through
2013. 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, 1998 and 1997, 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.
</TABLE>
43
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
12. Major Customers Customers in excess of 10% of total sales
and Product are:
Years ended September 30, 1998 1997
--------------------------------------------
Customer A $232,000 $202,000
Customer B 955,000 168,000
Customer C -* 149,000
Customer D -* 123,000
Customer E -* 97,000
--------------------------------------------
*Customer was not in excess of 10% of total
sales in 1998.
At September 30, 1998, accounts receivable
from these major customers totaled
approximately $308,601.
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.
</TABLE>
44
<PAGE>
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, 1998, along
with certain biographical information (based solely on information supplied by
them), are as follows:
Name Age Title
- ---- --- -----
Peter P. Phildius 68 Chairman of the Board/Chief Executive Officer
Douglas W. Scott(1) 52 President and Chief Operating Officer/Director
Jay C. Leatherman Jr. 54 Chief Financial Officer and Secretary
Carl M. Good, III 54 Vice President, Research and Development
William Martin 51 Controller for ATI
George Witt, Ph.D.(2)(3) 68 Director
James Groth(1)(2) 60 Director
Neil R. Gordon(1)(2)(4) 50 Director
- --------------------------------------
1.Member of Audit Committee.
2.Member of Compensation Committee.
3.Resigned effective May , 1998
4.Elected to the Board on June 9, 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 Phildius, Kenyon & Scott ("PK&S") since the firm's founding
in 1985. Prior to 1985, Mr. Phildius was an independent consultant and Chairman
and co-founder of Nutritional Management, Inc., a company that operates weight
loss clinics (1983 - 1985), President and Chief Operating Officer of Delmed,
Inc., a medical products company (1982 - 1983), President and Chief Operating
Officer of National Medical Care, Inc., a dialysis and medical products company
(1979 - 1981), and held a variety of senior management positions with Baxter
Laboratories Inc. ("Baxter"), a hospital supply company and the predecessor of
Baxter Healthcare Corporation. During the last eight years of his 18 year
45
<PAGE>
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.
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.
46
<PAGE>
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 manufacturer 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.
GEORGE WITT, PH.D.
Dr. Witt has served as a director of the Company from November 1986 to
May 1998. Dr. Witt served as Chairman of the Board and Chief Executive Officer
of MHB from November 1986 to August 1988, and continued as its Chairman of the
Board through June 1989. Dr. Witt has maintained a private practice in clinical
psychology since 1962, and has written extensively in the field of clinical
psychology. Dr. Witt served as a professor at Quinnipiac College in Connecticut
and the Universidad de Puerto Rico in San Juan, Puerto Rico. He received his
doctorate in Clinical Psychology from the University of Wisconsin. He is a
member of the Connecticut Psychological Association and the American
Psychological Association.
JAMES GROTH
Mr. Groth has served as a director of the Company since January 1990.
Mr. Groth has been President of Mountainside Corporation, a provider of
corporate sponsored functions, for over the past 15 years.
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 1982 to 1995, he was
associated with Ekco Group, Inc. (formerly called Centronics) 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.
47
<PAGE>
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 1998, all
filing requirements applicable to its officers, directors and greater than
ten-percent shareholders were complied with except the following failures to
file timely reports required by Section 16(a):
* Two reports (Form 4) covering 4 transactions were filed late by
Peter Phildius.
* Two reports (Form 4) covering 5 transactions were filed late by
Douglas Scott.
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 1998 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 1996, 1997 or
1998. 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 1998 $150,000 0 100,000(2)
(Chairman of the Board/ 1997 $150.000 0 0
Chief Executive Officer 1996 $150,000 0 0
- -July 1996)
Douglas W. Scott 1998 $150,000 0 100,000(2)
(President/ 1997 $150,000 0 0
Chief Operating Officer 1996 $150,000 0 0
- -July 1996/Chief Executive
Officer-Until July 1996)
</TABLE>
(1) Does not include $11,371, $18,160 and $10,417 reimbursed to PK&S for fiscal
years 1996, 1997 and 1998, respectively, for business-related expenses
incurred by Mr. Phildius and Mr. Scott on behalf of the Company.
48
<PAGE>
(2) Reflects additional stock options granted to Mr. Phildius and Mr. Scott by
the Company's Board of Directors in February 1998.
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.
Stock Option Grants in Last Fiscal Year. On February 4, 1998, the
Outside Directors of the Company's Board of Directors were granted additional
options to purchase the Company's common stock in the amount of 100,000 to Mr.
Phildius and 100,000 to Mr. Scott. Such options have an exercise price of $.25
per share and will expire on February 4, 2008. These options vest and become
exercisable on the basis of 50% on February 4, 1999 and 50% on February 4, 2000.
Also on February 4, 1998, the Outside Directors of the Company's Board of
Directors canceled options to purchase an aggregate of 880,000 shares of the
Company's common stock that were granted to Messrs. Phildius and Scott under the
terms of their employment agreements with the Company. Such options were
replaced by the Outside Directors of the Company's Board of Director with
options to purchase an aggregate of 880,000 shares of the Company's common stock
at an exercise price of $.25 per share. See "Employment Agreements" below.
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 1998.
As of September 30, 1998, Mr. Phildius and Mr. Scott each held options
covering 540,000 shares of Common Stock, 440,000 of which are exercisable, but
none of which are in the money.
Employment Agreements. In 1993, Messrs. Phildius and Scott entered into
Employment Agreements (the "Employment Agreements") with the Company. These
Employment Agreements commenced May 19, 1995, the effective date of the merger.
Under these Employment Agreements, 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
49
<PAGE>
for a period of up to 18 months following such termination. In addition, if
there is a "Change of Control" of the Company (as such term is defined in the
Employment Agreements) and, within two years following such "Change of Control",
either of Messrs. Phildius or Scott is terminated without cause by the Company
or terminates his employment as a result of a breach by the Company, such
executive will be entitled to certain payments and benefits, including the
payment, in a lump sum, of an amount equal to up to two times the sum of (i) the
executive's annual base salary and (ii) the executive's most recent annual bonus
(if any). In addition, pursuant to the Employment Agreements, which have a
three-year term (subject to extension), Messrs. Phildius and Scott are each
entitled to annual bonus payments of up to $150,000 if the Company achieves
certain levels of Pre-tax Income (as such term is defined in such Agreements).
In August 1994, the Employment Agreements were amended to cancel the
stock options granted thereunder (covering an aggregate of 203,000 shares and
subject to the effectiveness of the Merger), and new options to purchase an
aggregate of 380,000 shares of the Company's Common Stock at an exercise price
of $0.59 per share were granted unconditionally and independently of the
Employment Agreements. Such options will expire no later than June 16, 2004, and
are vested and exercisable . In July 1995, the Company's Board of Directors
granted additional options in the amount of 250,000 to Mr. Phildius and 250,000
to Mr. Scott. Such options have an exercise price of $0.375 per share and will
expire no later than July 12, 2005. These options are vested and exercisable.
All options described herein were canceled and replaced during Fiscal 1998. See
"Stock Option Grants in Last Fiscal Year" above.
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. During Fiscal 1998, all options described above were canceled and
replaced with options that have an exercise price of $.25 per share with no
change in the expiration dates. Also during Fiscal 1998, the Company's Outside
Directors were each granted options to purchase 70,000 shares of the Company's
Common Stock at an exercise price of $.25 per share until February 4, 2008.
These new
50
<PAGE>
options vest and become exercisable on the basis of 50% on February 4, 1999 and
50% on February 4, 2000.
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 31, 1998 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) 3,795,972 20.4
Douglas W. Scott(2)(4)(5) 2,713,365 14.7
Phildius, Kenyon & Scott("PK&S")(2)(5) 1,342,460 7.6
James Groth(2)(7)(10) 121,003 *
Neil R.Gordon(2)(8) 239,083 1.4
A.S. Goldmen & Co., Inc.(6) 278,000 1.6
All directors and executive officers
as a group(3)(4)(5)(7)(8)(9)(10) 5,789,816 28.6
* Indicates beneficial ownership of less than one (1%) percent.
(1) Information with respect to holders of more than five (5%) percent of the
outstanding shares of the Company's Common Stock was derived from, to the
extent available, Schedules 13D and the amendments thereto on file with the
Commission.
(2) The business address of such persons, for the purpose hereof, is c/o
Avitar, Inc., 65 Dan Road, Canton, MA 02021.
(3) Includes 1,577,530 shares of the Company's Common Stock, options and
warrants to purchase 807,492 shares of the Company's Common Stock and
preferred stock convertible into 68,490 shares of the Company's Common
Stock. Also includes the securities of the Company beneficially owned by
PK&S as described below in Note 5.
(4) Includes 689,911 shares of the Company's Common Stock, options and warrants
to purchase 612,504 shares of the Company's Common Stock and preferred
stock
51
<PAGE>
convertible into 68,490 shares of the Company's Common Stock. Also includes
the securities of the Company beneficially owned by PK&S as described below
in Note 5.
(5) Represents ownership of 1,099,895 shares of the Company's Common Stock and
options 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 66,003 shares of the Company's Common Stock and options to
purchase 55,000 shares of the Company's Common Stock.
(8) Includes 104,083 shares of the Company's Common Stock, warrants to purchase
100,000 shares of the Company's Common Stock granted to such director under
a consulting agreement to provide services to the Company and options to
purchase 35,000 shares of the Company's Common Stock.
(9) Includes 90,853 shares of the Company's Common Stock and options to
purchase 235,000 shares of the Company's Common Stock beneficially owned by
Jay C. Leatherman, Jr., 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PK&S, a 7.6% 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, salaries, fringe benefits and reimbursement of expenses paid to
PK&S by the Company for fiscal years 1998, 1997 and 1996 totaled $335,137,
$318,160 and $311,371 respectively.
52
<PAGE>
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 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.
53
<PAGE>
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 was to act as Chairman of
ATI's Medical Advisory Board and was 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. In March 1998, these loans totaling $368,723 plus
accrued interest theron of approximately $31,000 were repaid by the Company with
1,818,020 shares of the Company's common stock and warrants to purchase 400,000
shares of the Company's common stock for $.28 per share until March 2003.
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. provided 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. During Fiscal 1998, the Company amended its consulting
agreement with N.R. Gordon & Company, Inc. to eliminate any fees associated with
raising capital. As compensation for this amendment, the Company canceled the
50,000 warrants granted to N.R. Gordon & Company in 1996 and replaced them with
100,000 warrants to purchase the Company's Common Stock for $.25 per share until
October 2001.
54
<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.
(D) 10.7 Consulting Agreement between MHB and Phildius, Kenyon &
55
<PAGE>
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 reference.
56
<PAGE>
(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:
None
57
<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, 1999
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, 1999
- ----------------------------------- Chief Executive Officer
Peter P. Phildius (Principal Executive Officer);
and Director
/s/ Douglas W. Scott President and Chief Operating January 13, 1999
- ----------------------------------- Officer and Director
Douglas W. Scott
/s/ J.C. Leatherman, Jr. Chief Financial Officer and January 13, 1999
- ----------------------------------- Secretary (Principal Financial
J.C. Leatherman, Jr. and Accounting Officer)
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Neil R. Gordon
- ----------------------------------- Director January 13, 1999
Neil R. Gordon
/s/ James Groth Director January 13, 1999
- -----------------------------------
James Groth
</TABLE>
59
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Document Page No.
- ----------- -------- ---------
<S> <C> <C>
(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. Certificate of Designations, Rights and Preferences
of Series A Redeemable
(J) 4.4 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,
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document Page No.
- ----------- -------- ---------
<S> <C> <C>
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. 61
23.1 Consent from BDO Seidman, LLP 63
27.1 Financial Data Schedule 65
</TABLE>
- --------------------------------------------
(A) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Company's Registration Statement on Form S-18, including all
amendments filed thereto (Commission File No. 33-47365-B), and incorporated
herein by reference.
(B) Previously filed with the Securities and Exchange Commission as an Exhibit
to 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
61
<PAGE>
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.
62
<PAGE>
Avitar, Inc.
List of Subsidiaries
Avitar Technologies, Inc.
Avitar Industries, Inc. (formerly Managed Health Benefits Corporation)
<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 23,
1998, 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, 1998. 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, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AVITAR'S
ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> SEP-30-1998
<CASH> 12,483
<SECURITIES> 0
<RECEIVABLES> 171,908
<ALLOWANCES> 0
<INVENTORY> 142,190
<CURRENT-ASSETS> 441,082
<PP&E> 700,695
<DEPRECIATION> 495,322
<TOTAL-ASSETS> 646,455
<CURRENT-LIABILITIES> 2,010,167
<BONDS> 0
0
7,926
<COMMON> 174,698
<OTHER-SE> (1,612,421)
<TOTAL-LIABILITY-AND-EQUITY> 646,455
<SALES> 2,203,646
<TOTAL-REVENUES> 2,203,646
<CGS> 1,920,169
<TOTAL-COSTS> 3,996,463
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135,398
<INCOME-PRETAX> (757,954)
<INCOME-TAX> 0
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</TABLE>
