Dear Shareholder:
I am very pleased to report to you that Avitar achieved several strategic
milestones in FY1999. Most significantly, in April we launched ORALscreen, the
first rapid oral fluid screening device for substance abuse testing. ORALscreen
uses our proprietary polyurethane and oral fluid technology to detect drugs of
abuse (opiates, marijuana and cocaine).
We believe ORALscreen will become the drug test of choice among customers in our
key corporate and public safety markets for several compelling reasons: it takes
only fifteen minutes to obtain accurate results and is highly cost-effective; it
is less invasive than urine- or blood-based testing; it eliminates the
indignities, off-site handling and chain of custody concerns with urine testing;
and, as an oral fluid-based product, it is preferred by users and test
administrators alike over both urine- and blood-based tests.
Shipments of ORALscreen commenced in July, and in the last quarter of the year,
we initiated a program of recruiting top talent from the laboratory diagnostics
industry to join our team in an intensive effort to strengthen our direct sales
and marketing organization.
Following our initial success with ORALscreen, we are now developing
next-generation oral fluid-based products that further simplify the testing
process and provide screening capability for additional substances of abuse.
Also in July, we acquired United States Drug Testing Laboratories (USDTL), an
established company whose state-of-the-art product line complements our own.
With this acquisition, which includes the proprietary HAIRscreen, we are now
able to offer customers both short- and long-term (90 days and beyond) drug
screening products and specialized testing services not available anywhere else.
All told, we now have the most comprehensive next-generation product portfolio
in the drugs of abuse testing field, positioning Avitar as the technological
leader in this $1 billion-plus industry.
1999 was also a year we pursued growth opportunities for our other core
technology, medical-grade hydrophilic polyurethane foam used in specialized
medical devices. Here, too, we have focused on bolstering our team through the
hiring of individuals with significant industry experience.
Our ongoing quality efforts in this area were recognized when we were awarded
ISO 9001 certification and EN 46001 registration for the quality management
systems used in all phases of our development, manufacturing, service and
distribution of Hydrasorb TM .
In FY1999, diagnostic test products accounted for approximately 22 percent of
revenues, with the balance, 78 percent, stemming from our polyurethane foam
disposable product line. Revenues for 1999 increased approximately 13 percent,
to $2,495,423, up from $2,203,646 for FY1998. This growth was due to sales of
substance abuse tests, including those from USDTL.
Net loss for FY1999 was $3,117,680, or $0.24 per share. In FY1998, the net loss
from continuing operations was $1,894,124, or $0.12 per share. These results
reflect the impact of accelerated research and development expenses to ramp up
the ORALscreen product line, as well as our investment in sales and marketing to
support all of our drug testing products.
In addition to the developments cited above, we see a significant opportunity
for extending our oral fluid technology into another very promising
area-clinical diagnostics. Initiatives we plan to take this coming year will
allow us to evaluate this vast potential, which includes use of oral fluid
testing for Lyme disease, diabetes, influenza and pregnancy, among a host of
other possible medical applications.
We have proven that Avitar is truly a company of the 21st century-in technology,
product line, quality and customer service. With the steps we are taking,
including a commitment to initiating web-based marketing and sales as a channel
for accelerating ORALscreen and HAIRscreen penetration, we are tremendously
enthusiastic about Avitar's prospects and feel confident that we are positioned
for significant future growth. We thank you for your continued confidence.
Sincerely,
Peter P. Phildius
Chairman and Chief Executive Officer
<PAGE>
ORALscreen: a breakthrough product
Oral fluid technology combines advances in laboratory analysis and improvements
in collection devices to create a breakthrough method of conducting diagnostic
tests. Avitar's pioneering efforts in developing, patenting and commercializing
this next-generation technology have fueled the company's leadership today in
oral fluid drug testing and in creating the potential for safer, more efficient
clinical diagnostic testing.
Until oral fluid technology became commercially viable, urine-based drug testing
predominated; however, as drug testing in the workplace, in government and in
law enforcement becomes commonplace, dissatisfaction with urine-based testing
has grown.
With the launch of ORALscreen, Avitar became the first company to market a rapid
point-of-contact oral fluid immunoassay kit for testing substances of abuse. It
offers a three-panel screen for opiates, cocaine and THC, the intoxicating
compound in marijuana. The product line will soon include an additional test for
methamphetamines. It has been found that together these four (4) drugs account
for some 96 percent of all positive drug screens.
Avitar's proprietary oral fluid technology-including two patents on its
ORALscreen collection system and three additional patents pending-is based on
the company's medical-grade hydrophilic polyurethane foam. This specialty foam
has qualities that make it extremely well suited to oral fluid sampling and
processing, thus enabling the first one-step, point-of-contact test.
ORALscreen offers a number of key advantages over conventional lab-based urine
drug testing:
* ORALscreen is a rapid test, delivering accurate results in fifteen minutes or
less.
* ORALscreen saves both time and costs.
* ORALscreen is performed face to face with the test subject, eliminating the
risk of sample substitution or
adulteration.
* ORALscreen eliminates the embarrassment and privacy concerns associated with
urine testing.
* ORALscreen is a better, real-time indicator of "current influence" of the test
subject.
* ORALscreen testing can be performed by any trained individual.
* ORALscreen minimizes chain of custody concerns.
<PAGE>
How ORALscreen works
ORALscreen consists of a three-panel self-contained test kit and collection
device-a wand tipped with our polyurethane AccusorbTM foam. The Accusorb tip is
inserted into the mouth for up to 2 minutes to absorb oral fluid, after which a
retractable hood is drawn over it. By squeezing the hood, a few drops of the
fluid are dripped onto the test device.
As the fluid migrates from the sample well, it reaches a pad of antibody-coated
particles. Drug in the sample binds to the appropriate antibody and the complex
migrates down the strip. The complex encounters three (3) bands of immobilized
drug in sequence. A fluid sample that does not contain one of the drugs will
bind to the immobilized drug in each band creating a thin red line. If one of
the drugs is present in the sample, nothing will bind to that band and no red
line will appear. Thus, a red line indicates a negative result, and a positive
result is indicated by the absence of a red line.
ORALscreen includes a procedural control to ensure that a sample has truly been
added to the well and the test is working properly.
Oral fluid technology applications
Avitar believes that oral fluid technology holds great promise as a much-needed
alternative to urine-based substance abuse testing. Although urine testing
currently accounts for the lion's share (95 percent) of workplace drug testing,
many employers believe adulteration is so commonplace as to undermine their
testing efforts altogether (according to MRO Alert, April 1999). Oral fluid
technology eliminates the barriers to successful drug testing with no compromise
in accuracy.
We project that by 2004, the vast majority of corporations will have adopted
oral fluid technology as the most reliable and user-friendly method to obtain
accurate screening results.
Clinical diagnostic testing
Clinical diagnostic testing is on the verge of a paradigm shift, as the trend to
non-invasive testing becomes reality. Oral fluid technology, we believe, holds a
key to safer, cheaper and more rapid diagnostics, and Avitar is currently
engaged in early-stage research and development to make this happen.
Generally speaking, oral fluid contains the same metabolites, analytes and
infectious agents found in blood. While they are less concentrated than in blood
or urine, they can now be detected thanks to developments in high-sensitivity
immunoassay, making it possible to accurately diagnose many diseases and
conditions using oral fluid as a test sample.
The potential, including the creation of new over-the-counter testing markets,
is tremendous, and Avitar is pursuing potential applications of oral fluid
technology in Lyme disease, diabetes, influenza and in testing for pregnancy. We
estimate that up to 85 percent of clinical testing could eventually be converted
to oral fluid-based testing.
<PAGE>
86 percent of all major
corporations test at
least some of their
employees for substance
abuse.
Drug abuse kills 14,000 Americans and costs taxpayers nearly $70 billion in
preventable healthcare costs per year, according to the U.S. Department of
Health and Human Services.
Driven by stark realities such as this, in 1985, President Ronald Reagan
introduced the Workplace Testing Act and inaugurated a nationwide effort to
establish a drug-free workplace for federal employees. It was the watershed
event that helped spur the meteoric growth of substance abuse testing from a $10
million industry into a $1 billion-plus global market with a 20 percent annual
growth rate today.
The market that drug testing has created is extremely broad. It encompasses
corporations, law enforcement agencies, correctional institutions and courts,
public safety agencies, probation and parole and, increasingly, professional
athletics and schools. The fastest growing segment-corporations-accounts for
approximately 60 percent of the market.
Corporate market: E-Commerce/Bricks and Mortar
A major thrust of Avitar's marketing strategy to the corporate market is to
aggressively target the segment comprised of small- to mid-size companies (250
employees or less) through E-Commerce. This will enable Avitar to use the
powerful leverage of the Internet to market to 60 percent of all corporations in
the U.S. where the need for a simple-to-use, rapid and cost-effective test- and
a manageable testing program-is greatest. Avitar's customers will not only be
able to learn about the company's products and services through its
sophisticated website, but will also have the ability to purchase products and
services, receive training and access laboratory test results through the
Internet. In addition, strategic partnerships will be formed with E-Commerce
based providers of human resources services to co-market Avitar's products and
services.
To large corporations, Avitar is pursuing a more traditional marketing approach
using established channels of distributions based on a highly experienced direct
sales force. This combination of E-Commerce plus bricks and mortar marketing
will enable Avitar to cost-effectively serve the entire corporate market.
Smaller corporations' unmet testing needs
It is estimated that less than 20 percent of small businesses currently have
drug testing programs in place, yet studies indicate that 75 percent are
interested in testing.
With ORALscreen, Avitar is uniquely positioned to penetrate this market and
serve high turnover industries such as temporary staffing, hospitality and food
services and retail with a solution that offers the ability to do high-volume
testing more quickly and less expensively than ever before.
<PAGE>
Larger corporations: more testing, plenty of dissatisfaction
U.S. companies report spending between $7,000 and $10,000 annually on each
drug-abusing employee. Health, safety and lost productivity are big issues in
the world of the large corporation.
Today, according to a recent study by the American Medical Association, 86
percent of all major corporations test at least some of their employees for
substance abuse. This is up 20 percent from five years ago. They use testing for
pre-employment screening, random screening, probable cause, post-accident and
follow-up testing utilized in Employment Assistance Programs (EAP).
The vast majority of drug testing is currently urine based. However, as the
demand continues to grow, the inherent flaws of urine-based sampling-including
privacy concerns as well as the risk of adulteration or substitution-are more
evident than ever. They are calling into question the value of this method,
particularly in pre-employment screening.
Again, Avitar has a better answer-an oral fluid technology that offers the first
commercially viable method to improve the process of drug testing with no
sacrifice in accuracy... drug testing with dignity.
Oral fluid technology gains government acceptance
The public safety market, comprised of courts, highway patrol, parole and
corrections, child protective services, law enforcement and other specialized
agencies, boasts tremendous market potential for oral fluid testing. Across the
board, ORALscreen overcomes the time delays, inconvenience and indignities of
urine-based testing.
In 1999, the Department of Health and Human Services' Drug Testing Advisory
Board (DTAB) reported that oral fluid and hair testing technology is valid and
beneficial for use in drug testing programs. The DTAB assists in policy-making
related to employer-sponsored substance abuse testing programs.
In the key area of transportation, greater government regulation, requiring
regular drug screening of all employees in safety-related positions, is fueling
the potential for oral fluid technology in a massive, nationwide industry.
Clinical diagnostics market estimated at $20 billion
ORALscreen's early success in the drug testing market has enabled Avitar to
begin pursuing its next strategic objective: entering the $20 billion diagnostic
testing market using oral fluid as the sample type. Conditions such as Lyme
disease, diabetes, influenza and pregnancy will be early targets for our
research and product development efforts.
There are a number of potential reasons favoring the eventual use of oral fluid
testing rather than blood- or urine-based tests for diagnostics:
* It is non-invasive to the patient.
* It is quick and easy to obtain samples.
* Costs are significantly less for collection and materials.
* It is less likely to cause cross-contamination.
Bottom line, Avitar is poised to take advantage of tremendous and exciting
market opportunities in the years ahead.
<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, 1999, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each of the two
years in the period ended September 30, 1999. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Avitar, Inc. and
subsidiaries as of September 30, 1999, and the results of their operations and
their cash flows for each of the two years in the period ended September 30,
1999, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Boston, Massachusetts
November 30, 1999
Except for Note 15 for
which the date is
January 13, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------
September 30, 1999
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Current:
Cash and cash equivalents $ 280,758
Accounts receivable, less allowance for doubtful
accounts of $35,000 (Notes 5 and 14) 458,859
Inventories (Note 6) 225,081
Prepaid expenses and other (including employee
receivables of $30,900) 141,108
Preferred stock subscription receivable (Note 12) 242,000
- - ----------------------------------------------------------------------------------------------------------------------
Total current assets 1,347,806
Property and equipment, net (Note 7) 314,220
Goodwill, net of accumulated amortization of $70,424 2,746,528
Other assets (Note 8) 366,071
- - ----------------------------------------------------------------------------------------------------------------------
$ 4,774,625
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-3
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------
September 30, 1999
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debt (including $7,063 due to affiliates) (Note 9) $ 485,856
Accounts payable 813,894
Accrued expenses (including $10,778 due to affiliates) 660,684
Current maturities of long-term debt (Note 10) 32,236
Current portion of capital lease obligation (Note 11) 93,891
- - ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,086,561
Long-term debt, less current maturities (Note 10) 50,650
Capital lease obligation, less current portion (Note 11) 99,180
- - ----------------------------------------------------------------------------------------------------------------------
Total liabilities 2,236,391
- - ----------------------------------------------------------------------------------------------------------------------
Commitments and contingency (Notes 11 and 14)
Stockholders' equity (Note 12):
Series A and B convertible preferred stock, $.01 par value; authorized 5,000,000 shares;
1,720,095 shares issued and outstanding, with aggregate liquidation value - Series A -
$53,548 plus 7% annual dividend; Series B - $3,994,382 17,201
Common stock, $.01 par value; authorized 75,000,000 shares; 24,498,642 shares
issued and outstanding 244,987
Additional paid-in capital 24,450,661
Accumulated deficit (21,718,147)
- - ----------------------------------------------------------------------------------------------------------------------
2,994,702
Less preferred stock subscription receivable (456,468)
- - ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,538,234
- - ----------------------------------------------------------------------------------------------------------------------
$ 4,774,625
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended September 30, 1999 1998
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales (Note 14) $ 2,495,423 $ 2,203,646
- - -----------------------------------------------------------------------------------------------------
Operating expenses:
Cost of sales 2,059,483 1,920,169
Selling, general and administrative 2,673,415 1,530,061
Research and development 792,211 546,233
Amortization of goodwill 70,424 -
- - --------------------------------------------------------------------------------------------------------
Total operating expenses 5,595,533 3,996,463
- - --------------------------------------------------------------------------------------------------------
Loss from operations (3,100,110) (1,792,817)
- - --------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 30,273 8,126
Interest expense and financing costs (includes $716 and
$565 to affiliates) (121,572) (135,398)
Other, net 73,729 25,965
- - --------------------------------------------------------------------------------------------------------
Total other expense (17,570) (101,307)
- - --------------------------------------------------------------------------------------------------------
Loss from continuing operations (3,117,680) (1,894,124)
Discontinued operations (Note 4):
Loss from operations of MHB - (71,914)
Gain on sale of MHB - 1,208,084
- - --------------------------------------------------------------------------------------------------------
Net loss $ (3,117,680) $ (757,954)
- - --------------------------------------------------------------------------------------------------------
Basic and diluted income (loss) per share (Note 12):
Loss per share from continuing operations $ (.24) $ (.12)
Income per share from discontinued operations .07
- - --------------------------------------------------------------------------------------------------------
Net loss per share $ (.24) $ (.05)
- - --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
(Note 12)
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- ------------------------
Years ended September 30, 1999 and 1998 Shares Amount Shares Amount
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 657,249 $ 6,572 15,234,218 $ 152,342
Sale of common stock, net of expenses - - 100,000 1,000
Conversion of notes payable - - 2,093,020 20,930
Issuance of common stock for services - - 84,315 843
Redemption of common stock - - (41,785) (417)
Sale of Series B preferred stock, net of expenses 135,339 1,354 - -
Net loss - - - -
- - ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 792,588 7,926 17,469,768 174,698
Conversion of Series A preferred stock into common stock (603,701) (6,037) 1,811,103 18,111
Conversion of Series B preferred stock into common stock (36,771) (368) 367,440 3,674
Conversion of notes payable from affiliates into Series B
preferred stock 24,570 246 - -
Issuance of common stock for services - - 87,111 871
Exercise of stock options - - 56,450 565
Sale of Series B preferred stock, net of expenses 1,542,966 15,430 - -
Exercise of warrants - - 2,244,200 22,442
Issuance of common stock in connection with settlement of
litigation - - 400,000 4,000
Issuance of common stock in connection with acquisition of
USDTL - - 2,062,570 20,626
Payment of preferred stock dividend, Series B preferred stock 443 4 - -
Accreted dividends, Series B preferred stock - - - -
Value of warrants issued in connection with Series B preferred
stock sales - - - -
Net loss - - - -
- - ----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 1,720,095 $17,201 24,498,642 $ 244,987
- - ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Preferred
Additional Stock
Paid-in Accumulated Subscription
Years ended September 30, 1999 and 1998 Capital Deficit Receivable
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at September 30, 1997 $14,866,017 $(16,351,255) $ -
Sale of common stock, net of expenses 24,000 - -
Conversion of notes payable 434,034 - -
Issuance of common stock for services 18,698 - -
Redemption of common stock (19,208) - -
Sale of Series B preferred stock, net of expenses 173,247 - -
Net loss - (757,954) -
- - ----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 15,496,788 (17,109,209) -
Conversion of Series A preferred stock into common stock (12,074) - -
Conversion of Series B preferred stock into common stock (3,306) - -
Conversion of notes payable from affiliates into Series B
preferred stock 199,754 - -
Issuance of common stock for services 27,875 - -
Exercise of stock options 20,625 - -
Sale of Series B preferred stock, net of expenses 3,642,870 - (456,468)
Exercise of warrants 844,650 - -
Issuance of common stock in connection with settlement of
litigation (4,000) - -
Issuance of common stock in connection with acquisition of
USDTL 2,746,225 - -
Payment of preferred stock dividend, Series B preferred stock 8,915 (8,919) -
Accreted dividends, Series B preferred stock 873,073 (873,073) -
Value of warrants issued in connection with Series B preferred
stock sales 609,266 (609,266) -
Net loss - (3,117,680) -
- - ----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $24,450,661 $(21,718,147) $(456,468)
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended September 30, 1999 1998
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,117,680) $ (757,954)
Adjustments to reconcile net loss to net cash used in
operating activities
Gain on sale of MHB - (1,208,084)
Depreciation and amortization 121,112 131,864
Amortization of goodwill 70,424 -
Noncash charge for services and compensation 28,746 19,541
Changes in operating assets and liabilities excluding effects
of purchase of USDTL:
Accounts receivable (108,051) (71,888)
Inventories (82,891) 263
Prepaid expenses and other current assets (8,177) (38,631)
Other assets (327,627) 15,358
Accounts payable and accrued expenses 77,540 434,413
- - ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (3,346,604) (1,475,118)
- - ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of USDTL, net of cash acquired 11,882 -
Purchases of property and equipment (69,179) (1,996)
- - ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (57,297) (1,996)
- - ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of MHB - 1,286,000
Proceeds from notes payable and long-term debt - 340,034
Repayments of notes payable and long-term debt (175,938) (381,925)
Sales of preferred stock, common stock and warrants 2,959,832 199,601
Exercise of stock options and warrants 888,282 -
Redemption of common stock - (19,625)
- - ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,672,176 1,424,085
- - ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 268,275 (53,029)
Cash and cash equivalents, beginning of year 12,483 65,512
- - ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 280,758 $ 12,483
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
Avitar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Concluded)
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended September 30, 1999 1998
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 122,300 $ 124,100
Taxes $ 500 $ 2,100
Supplemental schedule of noncash investing and
financing activities:
Notes payable of $200,000 were converted into preferred stock during 1999.
Notes payable of $454,964 were converted into common stock during 1998.
Accounts payable in the amount of $232,188, which was due to the Company's
landlord for past due rent obligations, was converted into notes payable
during 1999. (See Note 9).
During 1999, 400,000 shares of common stock was issued in connection with
settlement of litigation. (See Note 12).
During 1999, 603,701 shares of Series A preferred stock were converted into
1,811,103 shares of common stock.
During 1999, 36,771 shares of Series B preferred stock were converted into
367,440 shares of common stock.
During 1999, the Company acquired all the outstanding capital stock of United
States Drug Testing Laboratories, Inc. as follows:
Fair value of assets acquired excluding cash received of $11,882 $ 396,554
Liabilities assumed (375,085)
Direct costs of acquisition (83,452)
Common stock issued (2,766,851)
Goodwill 2,816,952
- - ---------------------------------------------------------------------------------------------------------------------
Net cash received $ (11,882)
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
1. Description of Avitar, Inc. ("Avitar" or the "Company")
Business and Basis through its wholly-owned subsidiaries,
Of Presentation Avitar Technologies, Inc. ("ATI") and
United States Drug Testing Laboratories,
Inc. ("USDTL") designs, develops,
manufactures, markets, and provides
healthcare and diagnostic test products
and services. Avitar sells its products
and services to large medical supply
companies, diagnostic test distributors,
governmental agencies and employers. The
Company operates in one reportable
segment.
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 in fiscal 1998. The MHB
business has been treated as a
discontinued operation (see Note 4).
F-9
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
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. The results
of USDTL are included from July 9, 1999,
the effective date of acquisition as
described in Note 3. All significant
intercompany balances and transactions
have been eliminated.
Revenue Sales of products and services are
Recognition recorded in the period the products are
shipped or services are provided.
Cash Equivalents The Company considers all
highly liquid investments and
interest-bearing certificates of deposit
with original maturities of three months
or less to be cash equivalents.
Inventories Inventories are recorded at the lower of
cost (determined 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.
F-10
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
2. Summary of
Significant
Accounting
Policies
(Continued)
Goodwill Goodwill resulting from the excess of cost
over fair value of net assets acquired is
being amortized on a straight-line basis
over 10 years. The Company evaluates the
recoverability and remaining life of its
goodwill and determines whether the
goodwill should be completely or partially
written-off or the amortization period
accelerated. The Company will recognize an
impairment of goodwill if undiscounted
estimated future operating cash flows of
the acquired business are determined to be
less than the carrying amount of the
goodwill. If the Company determines that
the goodwill has been impaired, the
measurement of the impairment will be
equal to the excess of the carrying amount
of the goodwill over the amount of the
undiscounted estimated future operating
cash flows. If an impairment of goodwill
were to occur, the Company would reflect
the impairment through a reduction in the
carrying value of goodwill.
Patents Patent costs are being amortized over
their estimated useful lives of 5 - 7
years by the straight-line method.
Research and Research and development costs are
Development expensed as incurred.
Income (Loss) The Company follows Statement of Financial
Per Share of Accounting Standards No. 128 ("SFAS 128")
Common Stock "Earnings per Share." Under SFAS 128,
basic earnings per share excludes the
effect of any dilutive options, warrants
or convertible securities and is computed
by dividing the net income (loss)
available to common shareholders by the
weighted average number of common shares
outstanding for the period. Diluted
earnings per share is computed by dividing
the net income (loss) available to common
shareholders by the sum of the weighted
average number of common shares and common
share equivalents computed using the
average market price for the period under
the treasury stock method.
F-11
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
2. Summary of
Significant
Accounting
Policies
(Continued)
Stock Options The Company follows the provisions
of Statement of Financial Accounting
Standard No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." The Company
accounts 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 13).
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 short and
long-term debt approximate fair value
because of the respective interest rates.
Advertising The Company expenses advertising costs as
incurred. Advertising expense was
approximately $265,000 and $0 in fiscal
1999 and 1998, respectively.
F-12
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
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
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, as amended by SFAS No. 137, is
effective for all fiscal quarters of
fiscal years beginning after June 15,
2000.
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 to
affect its financial statements.
F-13
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
3. Acquisition On July 9, 1999 the Company acquired all
the outstanding capital stock of United
States Drug Testing Laboratories, Inc.
("USDTL") in exchange for approximately 2
million restricted shares of common stock
of Avitar which were valued at fair value
at the date of acquisition. The amount of
consideration was determined by arm's
length negotiation between Avitar and the
majority stockholders of USDTL, taking
into account the revenues and prospects
for USDTL. The acquisition was recorded
using the purchase method of accounting.
USDTL is engaged in the business of
providing specialized laboratory testing
operations including substance abuse
identification and other related services.
The consolidated statements of operations
and cash flows for the year ended
September 30, 1999 include the results of
operations and cash flows of USDTL from
July 9, 1999 through September 30, 1999.
The unaudited pro forma combined results
of operations of the Company and the
business acquired in fiscal 1999 for the
years ended September 30, 1999 and 1998,
assuming that the transaction had occurred
at October 1, 1997 and after giving effect
to certain pro forma adjustments are as
follows:
<TABLE>
<CAPTION>
Years ended September 30, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 3,234,089 $ 3,363,692
Net loss from continuing operations $ (3,450,008) $ (2,161,080)
Net loss per common share:
Basic and diluted $ (.24) $ (.12)
</TABLE>
4. 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.
F-14
<PAGE>
Avitar, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Notes to Consolidated Financial Statements
- - -------------------------------------------------------------------------------------
4. Discontinued Following is a summary of the results of
Operations operations of MHB:
(Continued)
Year ended September 30, 1998
-----------------------------------------------
<S> <C>
Sales $ 13,737
Operating expenses (85,651)
-----------------------------------------------
Net loss $ (71,914)
-----------------------------------------------
5. Accounts At September 30, 1999, accounts receivable
Receivable in the amount of $110,689 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
$56,000 and $55,000 during the years ended
September 30, 1999 and 1998, respectively.
6. Inventories Inventories consist of the following:
September 30, 1999
-----------------------------------------------
Raw materials $ 86,983
Work-in-process 74,462
Finished goods 63,636
-----------------------------------------------
$ 225,081
-----------------------------------------------
</TABLE>
F-15
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
7. Property and Property and equipment consists of the
Equipment following:
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------
<S> <C>
Equipment $ 778,225
Furniture and fixtures 89,470
Leasehold improvements 28,217
Construction-in-progress 31,600
-----------------------------------------------
927,512
Less: accumulated depreciation
and amortization (613,292)
-----------------------------------------------
$ 314,220
-----------------------------------------------
</TABLE>
At September 30, 1999, the cost of
equipment under capital leases was
$663,562 and the related accumulated
amortization was $457,172. The estimated
cost to complete construction-in-progress
at September 30, 1999 is approximately
$15,000.
8. Other Assets Other assets consist of the following:
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------
<S> <C>
Restricted cash $ 270,000
Patents 108,257
Other 36,000
-----------------------------------------------
414,257
Less accumulated amortization (48,186)
-----------------------------------------------
Other assets, net $ 366,071
-----------------------------------------------
</TABLE>
F-16
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
8. Other Assets In connection with the purchase of USDTL,
(Continued) the Company entered into an escrow
agreement. Pursuant to this agreement,
$270,000 was deposited with an escrow
agent as additional security for certain
commitments of USDTL assumed by the
Company. The funds will be released back
to the Company as commitments are reduced,
no later than July 1, 2001, unless there
are unresolved claims outstanding. These
funds have been classified as restricted
cash.
9. Short-Term Debt Short-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------------------------
<S> <C>
Revolving Credit Agreement with a bank, due on
demand, monthly interest payments at prime plus 3%
(11% at September 30, 1999). $ 247,820
Note payable to landlord, interest at 12%, payable
in monthly installments of $20,425, including
interest, through September 2000. 195,800
Note payable to insurance company, interest at
7.95%, payable in monthly installments of $5,516,
including interest, through February 2000. 26,205
Note payable to bank, interest at 8.5%, payable in
monthly installments of $1,148, including interest,
through September 2000. 8,968
Funds advanced from various related parties,
interest at 10%. 7,063
-----------------------------------------------------------------
$ 485,856
-----------------------------------------------------------------
</TABLE>
The Revolving Credit Agreement (the
"Agreement") provides for borrowings up to
$250,000 and expires in July 2000.
Outstanding borrowings are collateralized
by the assets of the Company and
guaranteed by certain principals of the
Company. The Agreement requires the
Company to maintain certain financial and
other covenants.
F-17
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
9. Short-Term Debt In August 1999, the Company entered into
(Continued) the note payable to landlord for past due
rent obligations. The note was signed in
conjunction with a Forbearance Agreement
in which the landlord's rights and
remedies under the lease were waived until
September 2000.
10. Long-Term Debt Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------------------------
<S> <C>
Note payable to bank maturing February 5,
2002, principal and interest at 8.00% per
annum payable in monthly installments of
$3,138, including interest, collateralized
by general business assets of USDTL and
personal residence of USDTL's former
owner. $ 82,886
Less current maturities (32,236)
-----------------------------------------------------------------
Long-term debt $ 50,650
-----------------------------------------------------------------
</TABLE>
Maturities of long-term debt are as
follows:
September 30, Amount
------------------------------------------
2000 $ 32,236
2001 34,911
2002 15,739
------------------------------------------
$ 82,886
------------------------------------------
F-18
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
11. Commitments and
Contingency
Lease ATI and USDTL lease office space under
operating leases which expire in 2005 and
November 1999, respectively. 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 leases charged to continuing
operations for the years ended September
30, 1999 and 1998 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 at an exercise
price of $.50 per share. All warrants were
exercised during fiscal 1999.
Future minimum rentals are as follows:
<TABLE>
<CAPTION>
Capital Operating
-------------------------------------------------------------------------
<S> <C> <C>
2000 $ 105,384 $ 500,270
2001 62,213 503,120
2002 35,079 503,120
2003 5,707 503,120
2004 - 503,120
Thereafter - 209,633
-------------------------------------------------------------------------
Total minimum lease payments 208,383 $ 2,722,383
-----------
Less amount representing interest (15,312)
-----------------------------------------------------
Present value of net minimum
lease payments 193,071
Less current portion (93,891)
-----------------------------------------------------
Long-term portion $ 99,180
-----------------------------------------------------
</TABLE>
Total minimum rentals have not been
reduced by $60,000 to be received in the
future under a non-cancelable sublease
expiring July 31, 2000.
F-19
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
11. 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 1999 and
1998.
In July 1999, the Company entered into
employment agreements with two executives
of USDTL. The agreements provide for
annual compensation aggregating $226,000
per year, plus cost-of-living increases
and bonuses or commissions, as defined.
The agreements terminate on July 1, 2004.
Expenses under these agreements totaled
approximately $64,000 in 1999.
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 1999 or
1998.
F-20
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
12. Stockholders'
Equity
Preferred Stock Preferred stock consists of the following;
September 30, 1999
------------------------------------------
Series A 53,548
Series B 1,666,547
------------------------------------------
Total 1,720,095
------------------------------------------
The 53,548 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.
F-21
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
12. Stockholders'
Equity
(Continued)
Preferred Stock The 1,666,547 shares of Series B
(Continued) 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 payable in shares of Series B
preferred stock 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. In connection with
preferred stock issuances in 1999,
$698,468 of subscription receivables
remain outstanding as of September 30,
1999. Of this amount, $242,000 is
classified as a current asset as this cash
was collected subsequent to year end.
Approximately 101,100 shares of the Series
B convertible preferred stock were issued
with a conversion price below the common
stock's quoted value, and as a result,
accreted dividends of approximately
$873,073 were recorded and included in
the earnings per share calculation.
Undeclared and unpaid dividends amounted
to $274,677 at September 30, 1999.
F-22
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
12. Stockholders'
Equity
(Continued)
Common Stock The Company has outstanding warrants
Purchase entitling the holders to purchase one
Warrants share of common stock at the applicable
exercise price. No warrants were
exercised, expired or cancelled in fiscal
1998. Warrants were exercised for
2,244,200 shares in fiscal 1999 and
warrants covering 473,500 shares were
cancelled or expired in fiscal 1999. In
fiscal 1999 and 1998, warrants covering
8,061,000 and 949,200 shares were issued,
respectively, primarily in connection with
preferred stock issuances The value of the
warrants issued in connection with
preferred stock sales amounted to
$609,266. This amount was recorded and
included in the earnings per share
calculation. The value of the other
warrants issued was not material to the
financial statements. The following is a
summary of shares issuable upon the
exercise of warrants (9,420,800 of which
are exercisable) at September 30, 1999.
<TABLE>
<CAPTION>
Exercise Shares Expiration
Price Issuable Date
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Warrants issued to consultant for services provided $ .25 100,000 2001 - 2003
Warrants issued in connection with preferred
stock issuance .225 - 2.39 7,356,600 1999 - 2001
Warrants issued in connection with merger in
fiscal 1995 12.00 1,000,000 2000
Warrants issued in connection with services .26 - .75 274,400 2003 - 2004
Warrants issued in connection with repaid
notes payable .28 - 1.22 800,000 2000 - 2003
</TABLE>
F-23
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
12. Stockholders'
Equity
(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. For options
granted before fiscal 1999, 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.
Options granted in fiscal 1999 vest at a
rate of 20% 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
1999 and 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.
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.
F-24
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
12. Stockholders'
Equity
(Continued)
Stock Options During fiscal 1998 and 1999, 551,250 and
(Continued) 6,001,500 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. 5,677,500 of the 1999
options were granted outside of the
Company's established plans to management
and senior officers. 2,838,750 of these
options begin to vest on the anniversary
date of the grant at a rate of 20% per
year. 2,838,750 of these options vest the
earlier of 9 1/2 years from grant date,
retirement of optionee who has attained 65
years of age, or attainment of certain
performance objectives. During fiscal
1999, 420,000 options held by employees of
the Company expired and 56,450 options
held by employees were exercised.
A summary of option transactions is as
follows:
<TABLE>
<CAPTION>
Shares Price
--------------------------------------------------------------------
<S> <C> <C>
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
Cancelled/expired (420,000) .20 - 1.36
Exercised (56,450) .20 - .53
Granted 6,001,500 .28 - 2.24
--------------------------------------------------------------------
Outstanding at September 30, 1999 7,455,873 $.20 - $7.38
--------------------------------------------------------------------
</TABLE>
F-25
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
12. Stockholders'
Equity
(Continued)
Stock Options The following tables summarize information
(Continued) about stock options outstanding and
exercisable at September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise September 30, Contractual Exercise
Prices 1999 Life (years) Price
---------------------------------------------------------------------------
<S> <C> <C> <C>
$ - - $ .20 392,150 5.5 $ .20
.25 - .28 1,110,000 8.3 .25
.345 - .38 4,124,500 9.3 .35
.59 17,223 5.3 .59
1.19 - 1.36 1,255,000 9.7 1.35
2.24 537,000 10.0 2.24
7.38 20,000 3.0 7.38
---------------------------------------------------------------------------
$ .20 - $ 7.38 7,455,873 9.0 $ .65
---------------------------------------------------------------------------
<CAPTION>
Options Exercisable
---------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise September 30, Contractual Exercise
Prices 1999 Life (years) Price
---------------------------------------------------------------------------
<S> <C> <C> <C>
$ - - $ .20 302,125 4.7 $ .20
.25 - .28 787,000 8.2 .25
.345 - .38 430,000 9.1 .35
.59 17,223 5.3 .59
1.19 - 1.36 5,000 6.5 1.19
7.38 20,000 3.0 7.38
---------------------------------------------------------------------------
$ .20 - $ 7.38 1,561,348 7.7 $ .37
---------------------------------------------------------------------------
</TABLE>
F-26
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
12. Stockholders'
Equity
(Continued)
Stock Options The Company accounts for its stock-based
(Continued) compensation plan using the intrinsic
value method. Accordingly, no compensation
cost has been recognized for its stock
option plan. Had compensation cost for the
Company's stock option plan been
determined based on the fair value at the
grant dates for awards under the plan
consistent with the method of Statement of
Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation,
the Company's net loss and loss per share
would have been adjusted to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Years ended September 30, 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss As reported $ (3,117,680) $ (757,954)
Pro forma $ (3,264,120) $ (803,191)
Loss per share As reported $ (.24) $ (.05)
Pro forma $ (.25) $ (.05)
</TABLE>
In determining the pro forma amounts
above, the Company estimated the fair
value of each option granted using the
Black-Scholes option pricing model with
the following weighted-average assumptions
used for grants in 1999 and 1998: dividend
yield of 0% for both years and expected
volatility of 45.8% for 1999 and 46.60%
for 1998, risk free rates ranging from
4.60% to 6.13% for 1999 and 5.26% to 5.59%
for 1998, and expected lives of 5-9 years
for 1999 and 1-9 years for 1998.
The weighted average fair value of options
granted in fiscal 1999 and 1998 was $.41
and $.07, respectively.
F-27
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
12. Stockholders'
Equity
(Continued)
Earnings Per The following data show the amounts used
Share in computing earnings per share:
<TABLE>
<CAPTION>
September 30, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
Net loss from continuing operations $ (3,117,680) $ (1,894,124)
Less:
Preferred stock dividends (274,677) (5,494)
Accreted dividends (873,073) -
Value of warrants issued in
connection with Series B preferred
stock sales (609,266) -
------------------------------------------------------------------------------------
Loss available to common stockholders
used in basic and diluted EPS $ (4,874,696) $ (1,899,618)
------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 20,303,819 16,577,892
------------------------------------------------------------------------------------
</TABLE>
The following table summarizes securities
that were outstanding as of September 30,
1999 and 1998, but not included in the
calculation of diluted net loss per share
because such shares are antidilutive:
<TABLE>
<CAPTION>
September 30, 1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Stock options 7,455,873 1,930,823
Convertible preferred stock 16,826,744 3,325,137
Stock warrants 9,531,000 4,187,700
</TABLE>
F-28
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
12. Stockholders'
Equity
(Continued)
Settlement of A.S. Goldmen & Company, Inc.
Litigation ("Underwriter") and certain holders of the
Underwriter's warrants issued by the
Company had previously commenced a court
action against the Company in the Federal
Court for the Southern District of New
York (the "Court"). In December 1998, the
Court denied the Company's motion to
dismiss this action, but the Court did not
decide and expressly left open the
principal legal argument urged by the
Company in favor of dismissal. In March
1999, this action was settled and
discontinued with prejudice. In connection
with the settlement, the Company issued
400,000 shares of common stock.
13. Income Taxes No provision for Federal income taxes has
been made for the years ended September
30, 1999 and 1998, due to the Company's
operating losses. At September 30, 1999,
the Company has unused net operating loss
carryforwards of approximately $24,600,000
(including approximately $11,000,000
acquired from ATI) which expire at various
dates through 2019. 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, 1999 and 1998, 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.
F-29
<PAGE>
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- - ------------------------------------------------------------------------------
14. Major Customers Customers in excess of 10% of total sales
and Product are:
<TABLE>
<CAPTION>
Years ended September 30, 1999 1998
-----------------------------------------------------------
<S> <C> <C>
Customer A $ 350,000 $ 232,000
Customer B $ 746,000 $ 955,000
</TABLE>
At September 30, 1999, accounts receivable
from these major customers totaled
approximately $113,793.
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.
15. Subsequent Subsequent to year end, the Company
Events received $242,000 in connection with the
preferred stock subscription receivable,
as well as $2,598,000 in connection with
the sale of Series C convertible preferred
stock and the exercise of warrants.
F-30
<PAGE>
CORPORATE INFORMATION
Board of Directors
Peter P. Phildius
Douglas W. Scott
Neil R. Gordon
James Groth
Charles R. McCarthy
CORPORATE OFFICERS
Peter P. Phildius
Chairman and Chief Executive Officer
Douglas W. Scott
President and Chief Operating Officer
J.C. Leatherman, Jr.
Chief Financial Officer and Secretary
Carl M. Good III, Ph.D.
Vice President, Research & Development
Douglas E. Lewis
Chief Executive Officer and President
United States Drug Testing Laboratories, Inc
LEGAL COUNSEL
Dolgenos Newman & Cronin LLP
96 Spring Street
New York, NY 10012
INDEPENDENT ACCOUNTANTS
BDO Seidman, LLP
40 Broad Street, Suite 500
Boston, MA 02109
STOCKHOLDERS INFORMATION
STOCK TRADING INFORMATION
American Stock Exchange Symbol: AVR
INVESTOR RELATIONS CONTACT
Avitar, Inc.
65 Dan Road
Canton, MA 02021
Attn: Investor Relations Dept.
781-821-2440
[email protected]
SEC FORM 10-K
A copy of our Form 10-K, as filed with the Securities and
Exchange Commission, may be obtained without charge upon
written request to the Investor Relations contact.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer and Trust Company
2 Broadway
New York, NY 10004
212-509-4000
CORPORATE HEADQUARTERS
Avitar, Inc.
65 Dan Road
Canton, MA 02021
781-821-2440
www.avitarinc.com
ORALscreen, HAIRscreen, Hydrasorb and Accusorb are trademarks of Avitar, Inc.
copyright 2000 Avitar.
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APPENDIX
TO
AVITAR, INC. 1999 ANNUAL REPORT
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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, 1999 ("Fiscal 1999")increased
$291,777 or approximately 13% to $2,495,423 from $2,203,646 for the fiscal year
ended September 30, 1998 ("Fiscal 1998"). The results for Fiscal 1999 primarily
reflect the increase in sales of drug of abuse testing kits and services of
approximately $399,000 (including revenues from USDTL of approximately
$245,000); offset in part by a decrease in the sales of the wound dressing
products of approximately $107,000.
Operating Expenses
Costs of sales were approximately 83% of sales in Fiscal 1999 compared to
approximately 87% of sales for Fiscal 1998. The lower ratio of cost to sales for
Fiscal 1999 was primarily related to the increase in sales described above and
the change in the product mix.
Sales, general and administrative expenses for Fiscal 1999 increased
$1,143,354 or approximately 75%, to $2,673,415 from $1,530,061 for Fiscal 1998.
This increase resulted mainly from expanded sales, marketing and administrative
efforts associated with the Company's launching of its OralScreen(Trademark)
products of approximately $1,000,000 and USDTL's selling, general and
administrative expenses of approximately $171,000.
Research and development expenses for Fiscal 1999 amounted to $792,211
compared to $546,233 for Fiscal 1998. The increase of $245,978, or approximately
45%, was primarily attributable to increased research and development activities
related to the Company's OralScreen(Trademark) products.
For Fiscal 1999, amortization of goodwill of $70,424 was recorded in
connection with the Company's acquisition of USDTL compared to no amortization
of goodwill in Fiscal 1998.
Other Income and Expense
Interest income amounted to $30,273 for Fiscal 1999 compared to $8,126 for
Fiscal 1998. This increase resulted primarily from the interest earned on cash
management accounts and on the notes receivable from investors in connection
with the Company's sales of Series B Redeemable Convertible Preferred Stock.
Interest expense and financing costs were $121,572 for Fiscal 1999 compared
to $135,398 incurred during Fiscal 1998. This decrease resulted primarily from
reduced interest expense on loans from banks and related parties.
Other income amounted to $73,729 for Fiscal 1999 versus other income of
$25,965 for Fiscal 1998. This change mainly reflects rental income from the
Company subleasing excess square feet in its facility to a major department
store chain and a software maintenance company.
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Discontinued Operations
In October 1997, the Company consummated the sale of the net assets and
business of its MHB subsidiary and received $1,286,000. No income or expenses
from this subsidiary were recorded in Fiscal 1999 compared to income from
operations and sale of MHB of $1,136,170 in Fiscal 1998.
Net Loss
Primarily as a result of the factors described above, the Company had a net
loss of $3,117,680 for Fiscal 1999 compared to a net loss of $757,954 for Fiscal
1998.
Financial Condition and Liquidity
At September 30, 1999 and September 30, 1998, the Company had working
capital deficiencies of $738,755 and $1,569,085, respectively, and cash and cash
equivalents of $280,758 and $12,483, respectively. Net cash used in operating
activities during Fiscal 1999 amounted to $3,346,604 resulting primarily from
the operating loss of $3,117,680, an increase in accounts receivable of
$108,051, increases in inventories and prepaid expenses of $91,068 and an
increase in other assets of $327,627; partially offset by depreciation and
amortization of $121,112, amortization of goodwill of $70,424 and non-cash
charges for services and compensation of $28,746 and increases in accounts
payable and accrued expenses of $77,540. Net cash provided by financing and
investing activities during Fiscal 1999 was $3,614,879 which included proceeds
from the sale of preferred stock and warrants of $2,959,832, proceeds from the
exercise of options and warrants of $888,282 and proceeds, net of cash acquired,
from the acquisition of USDTL of $11,882; offset in part by re-payment of notes
payable and long-term debt of $175,938 and purchases of property and equipment
of $69,179.
During the period of Fiscal 1999, the Company received net proceeds of
approximately $3,658,300 ($2,959,832 in cash and $698,468 in notes receivable)
from the sale of 1,542,966 shares of Series B Convertible Preferred Stock
(convertible at any time into 15,429,660 shares of the Company's common stock)
which included warrants to purchase 7,386,600 shares of the Company's common
stock at exercise prices of approximately $.225-2.39 per share for periods of
twelve to thirty-six months. From February through September 1999, the Company
received net proceeds of approximately $888,282 from the exercise of warrants
and stock options to purchase approximately 2,300,650 shares of the Company's
common stock. In March 1999, both the Chairman of the Board and the President of
the Company converted notes payable (including the accrued interest thereon) and
accrued salaries totaling $200,000 into 24,570 shares of the Company's Series B
convertible preferred stock (convertible into 245,700 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 $1.22 per share for one year. During the period of
October through early January 2000, the Company received net proceeds of
$2,402,000 from the sale of 400,333 shares of Series C convertible preferred
stock and approximately $196,000 from the exercise of warrants to purchase
approximately 427,000 shares of the Company's common stock. From January 2000 to
April 2000, the Company expects to receive proceeds of approximately $3,000,000
to $4,000,000 from the exercise of warrants issued in connection with the sale
of the Series B convertible preferred stock. Currently, all such warrants are in
the money. In addition, the Company is actively attempting to raise up to
$3,000,000 from the sales of equity securities to provide working capital and
capital equipment funding to operate the Company, expand the Company's business
and to pursue the development of oral fluid diagnostic testing for disease.
However, there can be no assurance that these financings will be achieved or
that
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the warrants will be exercised. For the balance of fiscal year 2000, the
Company's cash requirements are expected to include primarily the funding of
operating losses, the payment of outstanding accounts payable, the repayment of
certain notes payable, the funding of operating capital to grow the Company's
drugs of abuse testing products and services and the initial funding for the
development of oral fluid diagnostic testing products for diseases.
Although operating revenues (exclusive of revenues from USDTL of $245,000)
of the Company rose only 2% in Fiscal 1999, sales are expected to grow at a more
rapid 15 pace during Fiscal 2000 as the Company continues to increase the
shipments of its OralScreen(Trademark) products and expands the business of
USDTL. 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 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, expand the existing business and develop new products 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.
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 completed 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. The steps
necessary to become Year 2000 Compliant are expected to be completed by January
31, 2000 at an estimated cost of less than $100,000.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued FSAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at their fir
values. If certain conditions are met, a derivative may be specifically designed
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 (i) the changes in
the fair value of the hedged assets or liability or (ii) the earnings effect of
the hedged forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized income in the period of change. SFAS
No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000.
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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 to effect its financial statements.
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. 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, 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:
Fiscal 1998 High Low
- ----------- ---- ---
First Quarter .34 .09
Second Quarter .31 .09
Third Quarter .28 .13
Fourth Quarter .29 .13
Fiscal 1999
- -----------
First Quarter .19 .16
Second Quarter 1.48 .22
Third Quarter 1.95 1.23
Fourth Quarter 4.15 1.38
As of December 31, 1999 the last sales price for the Company's Common Stock
was $ 2.94.
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 350 owners of record and, it
believes, in excess of 2,000 beneficial owners of the Company Common Stock as of
December 31, 1999.
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.
Sales of Unregistered Securities. During the quarter ended September 30,
1999, the Company issued 2,062,570 shares of the Company's common stock as
compensation for the acquisition of USDTL. In addition, the Company issued
352,760 shares in connection with the exercise of warrants and services provided
to the Company for which it received proceeds of approximately $87,000. The
exemption for registration of these securities is based on Section 4(2) of the
Securities Act.
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