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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1999
Commission file number: 0-20316
AVITAR, INC.
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(Name of small business issuer in its charter)
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<TABLE>
<S> <C>
Delaware 06-1174053
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
65 Dan Road, Canton, MA 02021
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(Address of principal executive offices) (Zip code)
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(781) 821-2440
Issuer's telephone number
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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: $2,495,423
Page 1 of 109 pages.
Exhibit Index is on page 60 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, 1999:
$61,092,938.
The approximate number of shares of Common Stock outstanding (including shares
held by affiliates of the Registrant) as of December 31, 1999: 25,292,586
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 diagnostic test products and proprietary hydrophilic polyurethane foam
disposables fabricated for medical, diagnostics, dental and consumer use. During
the past year, the Company completed the development and began marketing
innovative point of care oral fluid drugs of abuse tests, which use the
Company's foam as the means for collecting the oral fluid sample.
On July 9, 1999, the Company completed its acquisition of United States
Drug Testing Laboratories, Inc. ("USDTL"), which became a wholly-owned
subsidiary of Avitar. USDTL operates a certified laboratory and provides
specialized drug testing services primarily utilizing hair as the sample.
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 and offers services for the diagnostic test
applications described below. These products accounted for approximately 22% of
the Company's revenue in Fiscal 1999 and approximately 8% of the Company's
revenue in Fiscal 1998.
Drugs of Abuse Test Kits. Under a joint development agreement with Sun
Biomedical Laboratories ("SBL") of Cherry Hill, New Jersey, the Company
completed the development of OralScreen 3(Trademark), an oral fluid-based rapid
on-site assay system for detecting drugs of abuse (heroin, cocaine and
marijuana) in the workplace. In addition, the Company is currently developing
similar tests to include other drugs of abuse. Approximately $1 billion annually
is spent worldwide for drugs of abuse tests.
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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
Oral Fluid Sampling and Processing System, the Company has entered into this
large and growing market for testing for drugs of abuse.
Drugs of Abuse Laboratory Tests. The Company's HairScreen(Trademark), a
hair-based test, can detect both short and long-term (90 days and beyond) drug
abuse. The Child Guard(Trademark) tests provide the ability to detect a child's
exposure to drugs and possible drug abuse through testing of a child's hair. In
addition, the MecStat testing services offer highly specialized testing to
detect in utero exposure to alcohol and other drugs of abuse in newborns.
Foam Disposable Products
The Company produces medical-grade hydrophilic polyurethane foam
disposables fabricated for the applications described below. These products
accounted for approximately 78% of the Company's revenue in Fiscal 1999 and
approximately 92% of the Company's revenue in Fiscal 1998.
Wound Dressings. Avitar's Hydrasorb(Trademark) ("Hydrasorb") wound
dressing product is a highly absorbent topical dressing for moderate to heavy
exudating wounds. These dressings have a unique construction that provide a
moist wound healing environment which promotes skin growth and closure. The
Hydrasorb product is marketed internationally by the ConvaTec Division of
Bristol-Myers Squibb ("Convatec") (until December 31, 1999), by the Knoll Pharma
Division of BASF ("Knoll") and other specialty distributors worldwide. Effective
January 1, 2000, the Hydrasorb product will be marketed in the United States by
the Kendall Company ("Kendall"). 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.
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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 or entities in diagnostic
testing and foam products application areas. 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 governmental approvals, if necessary, 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 and services such as the tests
for drugs of abuse, the Company may decide to establish a distribution network
or directly market and distribute these products. See "Sales and Marketing"
below.
Avitar currently employs seven 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. To sell its OralScreen(Trademark) test kits, the Company
is developing a network of established distributors that currently sell to the
drugs of abuse test kit market. For the HairScreen(Trademark), Child
Guard(Trademark), and MecStat services, the Company sells these services
directly to end
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users such as employers and through the distributor network being established
for the OralScreen(Trademark) products. Avitar's sales and marketing staff
consists of eight full-time employees. If the Company is unable to establish
satisfactory product distribution arrangements in this manner described above,
it will be required to devote substantial resources to the establishment of a
direct sales force. There can be no assurance that Avitar would have the
resources required for such an endeavor. The Company also intends to develop
strategic partnering arrangements with significant diagnostic test, health care
and dental companies with established distribution channels. Avitar anticipates
that such arrangements may involve the grant by Avitar of the exclusive or
semi-exclusive rights to sell specific products to specified market segments
and/or in particular geographic territories in exchange for a royalty, joint
venture or other financial interest.
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. Under a development agreement signed in
February 1999, Avitar and SBL developed OralScreen3(Trademark) described above
under Products and are currently developing new oral fluid-based rapid screening
tests for additional drugs of abuse. These tests use the Company's proprietary
oral fluid collection system with Avitar having the exclusive, world-wide
manufacturing and distribution rights to the tests.
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.
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It distributes products through its direct specialty sales force and distributes
Avitar's product on a private label basis.
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(Trademark) products throughout Canada. The
Knoll Agreement provides that Hydrasorb(Trademark) products are to be sold at
agreed upon prices (subject to annual inflation adjustments) and that certain
minimum quantities are maintained.
In December 1999, the Company entered into a Supply Agreement with the
Kendall Company for the distribution of its Hydrasorb(Trademark) products in the
United States beginning January 1, 2000. Kendall replaces Convatec as the
distributor for these products in the United States.
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 manufacturing 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 written agreements with most of its suppliers
of raw materials and laboratory supplies. While the Company purchases some
product components from single sources, most of the laboratory supplies used by
USDTL can be obtained from more than one source. Avitar acquires the same key
component for its Flureze(Trademark) fluoride application product, customized
foam products and Hydrasorb(Trademark) wound dressings from a single supplier.
The Company also purchases main components of its OralScreen(Trademark) products
from a single source. Avitar's current suppliers of such key components are the
only vendors, which presently meet Avitar's specifications for such
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components. The loss of these suppliers would, at a minimum, require the Company
to locate other satisfactory vendors, which would result in a period of time
during which manufacturing and sales of products utilizing such a components 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 components and expects that the cost of such components 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 in1990. This legislation, which also affected numerous other changes
in device regulations, is still being interpreted and implemented by the FDA. In
addition, there can be no assurance that the FDA or the U.S. Federal Government
will not enact further changes in the current rules and regulations with respect
to products, which Avitar already markets or may plan to market in the future.
If Avitar is unable to demonstrate compliance with such new or modified
requirements, sales of affected products may be significantly limited or
prohibited until such requirements are met (if ever).
Competition
The Company believes that the principal competitive factors in Avitar's
markets are innovative product design, product quality, established customer
relationships, name recognition, distribution and price. Many companies of all
sizes, including major diagnostic test, dental and health care companies, are
engaged in activities similar to those of Avitar. Most of Avitar's competitors
have substantially greater financial, marketing, administrative and other
resources and larger research and development staffs.
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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 providing innovative products and services in
Avitar's markets. Avitar's OralScreen(Trademark) products are the only oral
fluid drugs of abuse tests currently being marketed in the United States and
USDTL's HairScreen(Trademark), ChildGuard(Trademark) and MecStat services
represent comprehensive, state-of-the-art tests for drugs of abuse currently
being provided in the United States and South America. Furthermore, the Company
believes that its Hydrasorb(Trademark) wound dressings, and custom foam products
possess qualities with significant advantages over competing products, including
cost effectiveness. Although the Company does not have an established internal
distribution network, Medi, Knoll and Kendall are distributing the Company's
Hydrasorb(Trademark) wound dressings while Armor Holdings, CMI, Edwards Medical
and many smaller, local companies are distributing the Company's
OralScreen(Trademark) products. 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 market, the largest competitors are Roche Diagnostic Systems, Biosite
Diagnostics, Editek, Inc., Princeton Biomedical, American Biomedical and
Psychemetics.
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, has applications pending
for additional patents and has licenses to use certain 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.
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Product Liability; Insurance Coverage
The testing, marketing and sale of diagnostic test, medical and dental
products and services entail a high risk of product liability and professional
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, 1999, the
Company had product liability insurance coverage in the amount of $5,000,000 and
professional liability insurance coverage in the amount of $1,000,000 each
incident and $3,000,000 in the aggregate. No claims had been asserted against
either coverage. Amounts payable pursuant to such coverage are subject to a
deductible on each occurrence ranging from $500 to $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 diagnostic test, 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, 1999, the Company had 55 full-time employees,
including 7 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), 30 in manufacturing, supply and laboratory
operations (one of whom devotes a portion of his time to research and
development), 8 in sales and marketing and 10 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 57,000 square feet (53,000 square feet
in Canton, Massachusetts for its manufacturing facility and administrative
offices and 4,000 square feet in DesPlaines, Illinois for the laboratory
operation of USDTL). The current annual rent for the Canton facility (excluding
assessment for operating expenses) is approximately $455,000 and the lease
expires in June 2005. The lease for the DesPlaines facility expired in November
1999 and a new lease covering approximately 8,000 square feet at the same
location is currently being negotiated. Both facilities are in satisfactory
condition for their pruposes.
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.
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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 sought additional underwriting compensation in
defiance of NASD rules that proscribe underwriters and their associates from
receiving the kind of compensation 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 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. 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.
In 1997, former attorneys for the Company commenced an action (and made
a motion for summary judgment) against the Company in New York Supreme Court.
This proceeding was based on a note given by the Company in connection with such
former attorneys' claim for legal fees. Plaintiff sought judgment 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. 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
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First Quarter .34 .09
Second Quarter .31 .09
Third Quarter .28 .13
Fourth Quarter .29 .13
Fiscal 1999
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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.
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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.
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.
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, 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.
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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.
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
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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 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
<PAGE>
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.
16
<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Index on page F-1 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, 1999 and 1998
<PAGE>
Avitar, Inc. and Subsidiaries
Contents
- --------------------------------------------------------------------------------
Report of independent certified public accountants F-2
Consolidated financial statements:
Balance sheet F-4
Statements of operations F-5
Statements of stockholders' equity (deficit) F-6
Statements of cash flows F-7-8
Notes to consolidated financial statements F-9-30
F-1
<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>
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, 1999, along
with certain biographical information (based solely on information supplied by
them), are as follows:
Name Age Title
- ---- --- -----
Peter P. Phildius 69 Chairman of the Board/Chief Executive
Officer
Douglas W. Scott (1) 53 President and Chief Operating Officer/Director
Jay C. Leatherman Jr. 55 Chief Financial Officer and Secretary
Carl M. Good, III 55 Vice President, Research and Development
Douglas Lewis 50 Vice President and President of USDTL
James Groth (1)(2) 61 Director
Neil R. Gordon (1)(2) 51 Director
Charles R. McCarthy (3) 61 Director
- --------------------------------------------------------------------------------
1. Member of Audit Committee.
2. Member of Compensation Committee.
3. Elected to the Board on February 19, 1999
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
18
<PAGE>
and Chief Operating Officer of Delmed, Inc., a medical products company (1982 -
1983), President and Chief Operating Officer of National Medical Care, Inc., a
dialysis and medical products company (1979 - 1981), and held a variety of
senior management positions with Baxter Laboratories Inc. ("Baxter"), a hospital
supply company and the predecessor of Baxter Healthcare Corporation. During the
last eight years of his 18 year career at Baxter (1961 - 1979), 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
19
<PAGE>
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.
DOUGLAS LEWIS
Mr. Lewis has been the President of USDTL since 1990 and was appointed
Vice President of the Company upon the acquisition of USDTL by the Company. He
has over 25 years experience in the operation and management of laboratories,
which specialize in diagnostic testing for drugs of abuse. Mr. Lewis has held
senior level management and consulting positions with various hospital and
private laboratories in the Chicago, Illinois area. He received a Bachelor of
Arts Degree in Chemistry from Grinnell College and was a Pre-Doctoral Fellow at
the University of Illinois.
JAMES GROTH
Mr. Groth has served as a director of the Company since January 1990.
Mr. Groth has been President of Mountainside Corporation, a provider of
corporate sponsored functions, for over the past 15 years.
NEIL R. GORDON
Mr. Gordon has served as a director since June 1997. He has been
President of N.R. Gordon & Company, Inc., a company that provides a broad range
of financial consulting services, since 1995. From 1981 to 1995, he was
associated with Ekco Group, Inc. and served as its Treasurer from 1987 to 1995.
Mr. Gordon has also served as Director of Financing and Accounting for Empire of
Carolina, Inc. He received a Bachelor of Science Degree from Pennsylvania State
University.
CHARLES R. MCCARTHY, JR.
Mr. McCarthy has served as a director since February 1999. He has been
counsel in the Washington D.C. law firm, O'Connor & Hannan, since 1993. He is
currently a director of Interactive Technology.Com, Limited. Previously, Mr.
McCarthy was General Counsel to the National Association of Corporate Directors,
served as a trial attorney with the Securities and Exchange Commission, was Blue
Sky Securities Commissioner for the District of Columbia and was a law professor
teaching securities law topics and served as a Board member of and counsel to a
number of public companies over the last 30 years.
Section 16(a) Compliance.
Section 16(a) of the Securities Exchange Act ("SEC") of 1934 requires
the Company's officers and directors, and persons who own more than ten percent
of a
20
<PAGE>
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 than 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 1999, 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):
* One report (Form 4) covering 2 transactions was filed late by Peter
Phildius.
* One report (Form 4) covering 3 transactions was filed late by Douglas
Scott.
* Two reports (Form 4) covering 3 transactions were filed late by Carl
Good.
* One report (Form 3) covering 1 transaction was filed late by Douglas
Lewis
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 1999 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 1997, 1998 or
1999. 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.
Annual Compensation
------------------- Long-Term
Name/Position Year Salary(1) Bonus Compensation Options
- ------------- ---- --------- ----- --------------------
Peter P. Phildius 1999 $150,000 0 1,450,000 (2)
(Chairman of the Board/ 1998 $150.000 0 100,000 (3)
Chief Executive Officer) 1997 $150,000 0 0
Douglas W. Scott 1999 $150,000 0 850,000 (2)
(President/ 1998 $150,000 0 100,000 (3)
Chief Operating Officer) 1997 $150,000 0 0
(1) Does not include $18,160, $10,417 and $62,589 reimbursed to PK&S for fiscal
years 1997, 1998 and 1999, respectively, for business-related expenses
incurred by Mr. Phildius and Mr. Scott on behalf of the Company.
21
<PAGE>
(2) Reflects additional stock options granted to Mr. Phildius and Mr. Scott by
the Company's Board of Directors in January 1999.
(3) 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 January 18, 1999, the
Outside Directors of the Company's Board of Directors granted options to
purchase the Company's common stock in the amount of 1,450,000 to Mr. Phildius
and 850,000 to Mr. Scott. Such options have an exercise price of $.345 per share
and will expire on January 18, 2009. Of the 2,300,000 options granted to Mr.
Phildius and Mr. Scott, 380,000 are vested and exercisable, 960,000 options vest
and become exercisable at the rate of 20% per year for five years and the
remaining 960,000 options vest and become exercisable on the earlier of meeting
certain performance objectives, retirement of optionee who has attained 65 years
of age, or July 18, 2009. 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 1999.
As of September 30, 1999, Mr. Phildius held options covering 1,800,000
shares of Common Stock, 490,000 of which are exercisable, all of which are in
the money. Mr. Scott held options covering 1,200,000 shares of Common Stock,
490,000 of which are exercisable, all of which are in the money.
Employment Agreements. Under Employment Agreements (the "Employment
Agreements") which commenced on May 19, 1995, Messrs. Phildius and Scott each
receive an annual salary of $150,000 (subject to cost of living increases).
Pursuant to the Employment Agreements, if Messrs. Phildius and/or Scott are
terminated with "Cause" (as such term is defined in the Employment Agreements)
by the Company or if Messrs. Phildius and/or Scott terminate their employment as
a result of a breach by the Company of its obligations under such Agreements, he
will be entitled to receive his annual base salary for a period of up to 18
months following such termination. In addition, if there is a "Change of
Control" of the Company (as such term is defined in the Employment Agreements)
and, within two years following such "Change of Control", either of Messrs.
22
<PAGE>
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). The stock options granted
under the Employment Agreements (covering an aggregate of 203,000 shares) were
canceled by the Company, 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 expired on June 16, 1999 and were replaced by the Company in with
options, which are vested and exercisable, to purchase an aggregate of 380,000
shares of the Company's common stock at $.345 per share until January 18, 2009.
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 at exercise prices of
$.375 per share until July 12, 2005. These options, which are vested and
exercisable, were canceled and replaced during Fiscal 1998 with options having
the same expiration dates and exercise prices of $.25 per share.
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 options vest and become exercisable on the basis of 50% on February 4,
1999 and 50% on February 4, 2000.
23
<PAGE>
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, 1999 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.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner (1) No. Owned %
- ---------------------------------------- --------- -
<S> <C> <C>
Peter P. Phildius (2)(3)(5)(14) 4,294,822 16.2
Douglas W. Scott (2)(4)(5) 3,087,215 11.8
Phildius, Kenyon & Scott("PK&S") (2)(5) 1,342,460 5.3
James Groth (2)(6)(9) 164,699 *
Neil R.Gordon (2)(7) 238,333 *
Charles R. McCarthy (2)(10) 172,620 *
GIN99 LLC (11) 9,764,500 28.2
David Brown (12) 4,950,000 16.6
Alan Aker (13) 1,439,160 5.5
All directors and executive officers
as a group (3)(4)(5)(6)(7)(8)(9)(10)(14)(15)(16) 7,975,786 29.2
* Indicates beneficial ownership of less than one (1%) percent.
</TABLE>
(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 and the Company's records regarding Preferred Stock issuances.
(2) The business address of such persons, for the purpose hereof, is c/o
Avitar, Inc., 65 Dan Road, Canton, MA 02021.
(3) Includes 1,597,530 shares of the Company's Common Stock, options and
warrants to purchase 1,163,492 shares of the Company's Common Stock and
preferred stock convertible into 191,340 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.
24
<PAGE>
(4) Includes 644,911 shares of the Company's Common Stock, options and warrants
to purchase 908,504 shares of the Company's Common Stock and preferred
stock convertible into 191,340 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) Includes 74,699 shares of the Company's Common Stock and options to
purchase 90,000 shares of the Company's Common Stock.
(7) Includes 68,333 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 70,000 shares of the Company's Common Stock.
(8) Includes 1,025,307 shares of the Company's Common Stock and options to
purchase 335,250 shares of the Company's Common Stock beneficially owned by
Jay C. Leatherman, Jr., Carl Good and Doug Lewis, executive officers of the
Company.
(9) 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.
(10) Represents 2,000 shares of the Common Stock, preferred stock convertible
into 70,620 shares of the Common Stock and warrants to purchase 100,000
shares of the Common Stock.
(11) The address for such entity is c/o Rogers and Wells LLP, 200 Park Avenue,
New York, NY 10166. Represents preferred stock convertible into 7,364,500
shares of the Common Stock and warrants to purchase 2,400,000 shares of the
Common Stock.
(12) The business address for such person is 4101 Evans Avenue, Fort Meyers, FL
33901. Represents preferred stock convertible into 3,750,000 shares of the
Common Stock and warrants to purchase 1,200,000 shares of the Common Stock.
(13) The business address for such person is 1445 Northwest Boca Raton, Boca
Raton, FL 33432. Represents preferred stock convertible into 839,160 shares
of the Common Stock and warrants to purchase 600,000 shares of the Common
Stock.
(14) Does not include 67,000 shares of the Common Stock owned by Mr. Phildius'
wife, all of which he disclaims beneficial ownership.
(15) Does not include 15,000 shares of the Common Stock owned by Mr. Scott's
children, all of which he disclaims beneficial ownership.
25
<PAGE>
(16) Does not include 1,123,243 shares of the Common Stock owned by Mr. Lewis'
wife, all of which he disclaims beneficial ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PK&S, a 5.3 % 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 1999, 1998 and 1997 totaled $387,310,
$335,137 and $318,160 respectively.
In connection with its consulting arrangement with the Company, PK&S
was granted options to purchase an aggregate of 1.6 million shares of the
Company Common Stock prior to the one for 54.9 stock split effected by the
Company in November 1991 (the "Stock Split"). In December 1991, following the
Stock Split, the Company's Board of Directors canceled these previously granted
options and replaced them with five-year options covering an aggregate of
120,000 shares of the Company Common Stock, of which options covering 60,000
shares are exercisable at $0.80 per share and options covering an additional
60,000 shares were exercisable at $2.00 per share. Such options were granted to
PK&S as compensation for services rendered to the Company. The number of shares
of Company Common Stock covered by such options was approximately 91,000 shares
more than those which PK&S would have received pursuant to the Stock Split
alone, and the exercise prices and other terms of such options were more
favorable than those of the options that they replaced. On June 16, 1994, the
Company's Board of Directors canceled the options covering 60,000 shares with an
exercise price of $2.00 per share and replaced them with options covering a like
number of shares, at $0.59 per share, the fair market value of the Company
Common Stock as of June 16, 1994. The options covering 60,000 shares of common
stock at the exercise price of $0.80 per share expired in December 1996. The
remaining 60,000 shares of Company Common Stock covered by such options are
subject to certain demand registration rights granted to PK&S. Pursuant to these
registration rights, PK&S has the right, which commenced on September 18, 1993,
to cause the Company to register the shares of the Company Common Stock
underlying these options.
On September 3, 1994, PK&S made a bridge loan to the Company in the
amount of $300,000, with interest payable thereon monthly in arrears at 10% per
annum. The loan is to be repaid in the amount of one-third of the net proceeds
to the Company (up to $300,000 plus accrued interest thereon) resulting from a
private placement of the
26
<PAGE>
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.
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 was due on or before September 30, 1997 with the
balance of $60,000 due on
27
<PAGE>
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
thereon 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, 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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Document
- ----------- --------
(D) 2.1 Asset Purchase Agreement made as of October 24,1997 by and among
Prompt Associates, Inc., Managed Health Benefits Corporation, and
Avitar, Inc.
(E) 2.2 Purchase and Sale Agreement made as of June 30, 1999 by and among
Avitar, Inc., Douglas Lewis, Veronica Lewis and United States
Drug Testing Laboratories, Inc.
(F) 3.1 Certificate of Amendment of the Certificate of Incorporation of
the Company dated June 23, 1999.
4.1 Certificate of Designations, Rights and Preferences of Series B
Redeemable Convertible Preferred Stock
(A) 10.1 Employment Agreement between MHB and Peter P. Phildius, dated as
of July 23, 1993.
(B) 10.2 Amended and Restated Employment Agreement between MHB and Peter
P. Phildius, dated as of August 15, 1994.
(A) 10.3 Employment Agreement between MHB and Douglas W. Scott, dated as
of July 23, 1993.
(B) 10.3.1 Amended and Restated Employment Agreement between MHB and Douglas
W. Scott, dated as of August 15, 1994.
(B) 10.4.1 Form of Warrant Agreement respecting the Class A Warrants between
the Company and Continental Stock Transfer and Trust Company
(C) 10.5 Agreement between the Company and Simplex Medical Systems, Inc.
dated March 14, 1996
28
<PAGE>
10.6 Form of Subscription Agreement between the Company and parties
purchasing preferred stock during Fiscal 1998 and Fiscal 1999
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-4 (Commission File No.
33-71666), and incorporated herein by reference.
(B) 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.
(C) 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.
(D) 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.
(E) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Current Report dated July 14, 1999 (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 June 30,
1999 (Commission File No. 0-20316), and incorporated herein by reference.
(b) Reports on Form 8-K:
On July 14, 1999, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8K and 8K/A reporting on Items 2 and 7.
On September 22, 1999, the Company filed with the Securities and
Exchange Commission a Current Report on Form 8K/A reporting on Item 7.
29
<PAGE>
SIGNATURES
In accordance with Section 13 of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: January 12, 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 12, 1999
- ------------------------------------ Chief Executive Officer
Peter P. Phildius (Principal Executive Officer);
and Director
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Douglas W. Scott President and Chief Operating January 12, 1999
- ------------------------------------ Officer and Director
Douglas W. Scott
/s/ J.C. Leatherman, Jr. Chief Financial Officer and January 12, 1999
- ------------------------------------ Secretary (Principal Financial
J.C. Leatherman, Jr. and Accounting Officer)
/s/ Neil R. Gordon
- ------------------------------------ Director January 12, 1999
Neil R. Gordon
/s/ James Groth Director January 12, 1999
- ------------------------------------
James Groth
/s/ Charles R. McCarthy Director January 12, 1999
- ---------------------------
Charles R. McCarthy
</TABLE>
31
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Document Page No.
- ----------- -------- --------
<S> <C>
(D) 2.1 Asset Purchase Agreement made as of October
24,1997 by and among Prompt Associates, Inc.,
Managed Health Benefits Corporation, and Avitar,
Inc.
(E) 2.2 Purchase and Sale Agreement made as of June 30,
1999 by and among Avitar, Inc., Douglas Lewis,
Veronica Lewis and United States Drug Testing
Laboratories, Inc.
(F) 3.1 Certificate of Amendment of the Certificate of Incorporation of the Company
dated June 23, 1999.
4.1 Certificate of Designations, Rights and Preferences of Series B
Redeemable Convertible Preferred Stock
(A) 10.1 Employment Agreement between MHB and Peter P. Phildius, dated as of July 23,
1993.
(B) 10.2 Amended and Restated Employment Agreement between MHB and Peter P. Phildius,
dated as of August 15, 1994.
(A) 10.3 Employment Agreement between MHB and Douglas W. Scott, dated as of July 23,
1993.
(B) 10.3.1 Amended and Restated Employment Agreement
between MHB and Douglas W. Scott, dated as of August
15, 1994.
(B) 10.4.1 Form of Warrant Agreement respecting the Class A Warrants
between the Company and Continental Stock Transfer and Trust Company
(C) 10.5 Agreement between the Company and Simplex Medical Systems, Inc. dated March
14,1996
10.6 Form of Subscription Agreement between the Company
and parties purchasing preferred stock during Fiscal
1998 and Fiscal 1999
21.1 Subsidiaries of the Company.
23.1 Consent from BDO Seidman, LLP
27.1 Financial Data Schedule
</TABLE>
- --------------------------------------
(A) 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.
(B) 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.
(C) 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.
32
<PAGE>
(D) 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.
(E) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Current Report dated July 14, 1999 (Commission File No.
0-20316), and Incorporate 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 June 30,
1999 (Commission File No. 0-20316), and incorporated herein by reference.
33
<PAGE>
EXHIBIT 4.1
CERTIFICATE OF DESIGNATIONS, RIGHTS AND PREFERENCES
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
1
<PAGE>
CERTIFICATE OF DESIGNATIONS,
RIGHTS AND PREFERENCES
OF
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151(g) of the General
Corporation Law of the State of Delaware)
We, the undersigned duly authorized officers of AVITAR, INC., a
corporation organized and existing under the laws of the State of Delaware, do
hereby certify that:
A. AVITAR, INC. (the "Corporation") was incorporated in the State of
Delaware on November 20, 1986.
B. Pursuant to the authority conferred upon the Board of Directors of
the Corporation (the "Board of Directors") by the provisions of the
Corporation's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), and the provisions of Sections 141 and 151 of the General
Corporation Law of the State of Delaware, the Board of Directors has duly
adopted the following recitals and resolutions, which are not in conflict with
any provisions of the Certificate of Incorporation or the Corporation's By-Laws,
setting forth the number, terms, designations, relative rights, preferences,
privileges and restrictions of a series of Preferred Stock, par value $0.01 per
share, of the Corporation.
WHEREAS, the Certificate of Incorporation provides for a class of
shares known as Preferred Stock, consisting of 5,000,000 shares;
WHEREAS, the Certificate of Incorporation authorizes the issuance of
Preferred Stock from time to time in one or more series and authorizes the Board
of Directors to (a) determine or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock, (b) fix the number of shares constituting any such series and
(c) determine the designation thereof; and
2
<PAGE>
WHEREAS, the Corporation plans to issue a second series of Preferred
Stock and the Board of Directors desires to determine and fix the rights,
privileges, and restrictions relating to this series of Preferred Stock and the
number of shares constituting, and the designation of, such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
determines and fixes the designations of, the number of shares constituting, and
the rights, preferences, privileges and restrictions relating to, a second
series of Preferred Stock, as follows:
1. Designation. 600,000 shares of Preferred stock shall be designated
hereby as "Series B Redeemable Convertible Preferred Stock" (hereinafter
referred to as the "Series B Preferred Stock") with the rights, preferences,
privileges and restrictions specified herein.
2. Voting Rights. On all matters submitted to a vote of the holders of
the Corporation's common stock, par value $0.01 per share (the "Common Stock),
the holders of Series B Preferred Stock shall be entitled to exercise one vote
per share of Series B Preferred Stock.
3. Dividends. The holders of Series B Preferred Stock shall be entitled
to receive, at the discretion of the Company, an annual 8% cash dividend or 10%
stock dividend computed on the amount invested in the Series B Preferred Stock.
Stock dividends shall be paid in shares of Series B Preferred Stock based on the
average closing price of ten (10) shares of the Common Stock for the five
trading days prior to the five days before the dividend is paid. Such dividend
shall be payable within ninety (90) days after the anniversary date of the
investment upon which the dividend is based.
4. Liquidation Preference.
A. Upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Company, the holders of Series B Preferred Stock shall be
entitled to receive out of the assets of the Corporation which remain after
satisfaction in full of all valid claims of creditors of the Corporation,
liquidating distributions of an amount per share of Series B Preferred Stock
equal to the amount per share for Series B Preferred Stock paid by the holder
when making the investment. If these liquidation distributions are not paid in
full, the holders of the Series B Preferred Stock shall share ratably in any
distribution of assets in proportion to the full respective preferential amount
to which they are entitled.
B. The merger or consolidation of the Corporation with or into any
other corporation and the sale or transfer of all or substantially all of the
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assets of the Corporation shall be deemed to be a dissolution, liquidation or
winding-up of the Corporation for the purposes of this Section 4.
C. Written notices of any voluntary liquidation, dissolution or
winding-up of the Corporation, stating the payment date or dates when, and the
place or places where, the amounts distributable to holders of Series B
Preferred Stock in such circumstances shall be payable, shall be given by
first-class mail, postage pre-paid, mailed not less than twenty (20) days prior
to any payment stated therein, to the holders of Series B Preferred Stock, at
the address shown on the books of the Corporation or any transfer agent for the
Series B Preferred Stock.
D. The Corporation may issue shares of its Preferred Stock which
have liquidation, dividend, voting, and/or redemption rights which are senior or
junior to, or pari passu with, the Series B Preferred Stock.
5. Conversion.
A. A holder of Series B Preferred Stock shall be entitled, at any
time prior to the close of business on any date fixed for the redemption of such
shares pursuant to Section 6 hereof, to cause any or all such shares to be
converted (the "Conversion") into ten shares of Common Stock for each share of
Series B Preferred Stock (the "Conversion Price"), subject to adjustment as
provided herein.
B. The issuance by the Corporation of shares of Common Stock upon
any Conversion of shares of the Series B Preferred Stock made at the option of
the holder thereof, shall be effective the earlier of (i) the delivery to such
holder or such holders' designee of certificates representing the shares of
Common Stock issued upon Conversion thereof or (ii) the commencement of business
on the second business day after the surrender of the certificate or
certificates for the shares of Series B Preferred Stock to be converted, duly
assigned or endorsed for transfer to the Corporation ( or accompanied by duly
executed stock powers relating thereto) as provided hereby. On and after the
effective date of any Conversion, the converted shares of Series B Preferred
Stock shall no longer be deemed to be outstanding and all rights whatsoever with
respect thereto shall terminate, and the person or persons entitled to receive
the Common Stock issuable upon such Conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock. All shares of
Series B Preferred Stock upon Conversion shall be restored to the status of
authorized but unissued shares of preferred stock without designation as to
Class, and may be issued thereafter.
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C. The Conversion Price shall be subject to adjustment from time to
time as follows:
(i) If the Corporation shall, at any time or from time to time
while shares of the Series B Preferred Stock shall be outstanding, (1)
subdivide its outstanding shares of Common Stock into a greater number
of shares, (2) combine its outstanding shares of Common Stock into a
smaller number of shares or (3) pay a dividend (exclusive of the stock
dividend provided herein), or make a distribution in Common Stock (or
securities convertible into or exchangeable for shares of Common Stock)
to holders of the Common Stock or other class or series of capital
stock of the Corporation convertible into or exchangeable for shares of
Common Stock, then the Conversion Price in effect immediately prior to
such subdivision or combination, as the case may be, or immediately
prior to the record date fixed for the determination of shareholders
entitled to such dividend or distribution, shall be increased or
decreased, as the case may be, to produce such results as would have
been obtained prior to the occurrence of such event. An adjustment made
pursuant hereto shall become effective immediately after the record
date, in the case of a dividend or distribution payable in Common Stock
(or other securities) and immediately after the effective date, in the
case of a subdivision or combination.
(ii) If the Corporation shall, at any time or from time to
time while shares of Series B Preferred Stock shall be outstanding,
sell or issue rights, options, warrants or convertible securities
containing the right to subscribe for or purchase shares of Common
Stock at a purchase price less than the Conversion Price (i.e. 10% of
the amount invested per share for Series B Preferred Stock), then the
Conversion Price in effect immediately prior to such event shall be
reduced by an amount equal to the quotient determined by dividing:
(a) an amount equal to the sum of (x) the product of the total
number of shares of Common Stock outstanding immediately prior to the
date of such sale or issuance of such rights, options, warrants or
convertible securities and the Conversion Price in effect immediately
prior to such sale or issuance, plus (y) the aggregate consideration
(if non-cash consideration, the fair market value of which shall be
determined by the Board of Directors in its good faith judgment), if
any, received by the Corporation upon such sale or issuance; by
(b) the total number of shares of Common Stock outstanding
immediately after such sale or issuance.
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(iii) Whenever any adjustment is made in the Conversion Price
pursuant to the foregoing provisions (i) or (ii), the Corporation
shall, as soon as reasonably practicable thereafter, prepare a written
statement signed by an executive officer of the Corporation setting
forth the adjusted Conversion Price, determined as provided herein,
and, in reasonable detail, the facts requiring such adjustment. The
Corporation shall mail such statement to all holders of record of
shares of Series B Preferred Stock at their respective addresses
appearing on the stock records of the Corporation.
D. The Corporation shall at all times reserve and keep available out
of its authorized and unissued Common Stock, solely for issuance upon the
Conversion of shares of Series B Preferred Stock as provided herein, free from
any preemptive rights, such number of shares of Common Stock as shall from time
to time be issuable upon the Conversion of all the shares of Series of Series B
Preferred Stock then outstanding.
6. Redemption.
A. In the event that the average of the last sales price ten shares
of Common Stock equal or exceeds 300% of the amount invested per share for
Series B Preferred Stock for any (20) consecutive trading days immediately prior
to the date of the notice discussed in Section 6.B below, the Corporation shall
have the right, at any time, to redeem all, or any portion of, the outstanding
shares of Series B Preferred Stock, at the price per share paid by the holder
upon making the investment in Series B Preferred Stock. If less than all of the
outstanding shares of Series B Preferred Stock shall be redeemed, the
Corporation shall redeem a pro rata portion of the shares of each holder. From
and after the date of redemption of any shares of Series B Preferred Stock, such
shares shall no longer be deemed to be outstanding and all rights in respect of
such shares of Series B Preferred Stock shall cease, except the right to receive
the redemption price.
B. Notice of any redemption made pursuant to this Section 6 shall be
sent to the holders of Series B Preferred Stock at the address shown on the
books of the Corporation or any transfer agent for the Series B Preferred Stock
by first class mail, postage prepaid, mailed not less than thirty (30) days'
prior to the redemption date. Each notice shall state (i) the redemption date,
(ii) the total number of shares of Series B Preferred Stock to be redeemed and,
if fewer than all the shares held by such holder are to be redeemed, the number
of shares to be redeemed from such holder, (iii) the redemption price, (iv) the
place or places where certificates for such shares are to be surrendered for
payment of the redemption price and (v) Conversion rights of the shares to be
redeemed, the period within which Conversion
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rights may be exercised, and the Conversion Price and number of shares Common
Stock issuable upon Conversion of a share of Series B Preferred Stock at the
time. Promptly following receipt of such notice, the holders of Series B
Preferred Stock shall surrender their certificates representing such shares to
the Corporation unless they shall Convert in accordance with Sections 5 and 6
hereof.
7. Registration Rights. The holders of Series B Preferred Stock
shall be entitled to "piggyback" registration rights with respect to such shares
on each occasion that the Corporation shall propose to file a registration
statement on Form S-3 (the "Registration Statement") under the Securities Act of
1933, as amended, covering any shares of Common Stock. The Corporation shall, at
least thirty (30) days before filing such Registration Statement, notify the
holders of Series B Preferred Stock in writing of such filing. For a period of
ten (10) days from the receipt of such notice, each holder of the Series B
Preferred Stock shall be entitled to provide written notice to the Corporation
of such holder's election to include in the Registration Statement up to the
number of Common Stock covered by his/her Series B Preferred Stock; provided,
however, that simultaneously with such notice, such holder shall agree to
Convert his/her shares of Series B Preferred Stock into Common Stock upon
effectiveness of the Registration Statement. The Corporation shall have the
right at any time thereafter to elect not to file any such Registration
Statement or to withdraw the same after filing but prior to the effective date
thereof. The Corporation shall pay all expenses relating to the Registration
Statement except sales commissions attributable to these securities and except
expenses incurred by the holders such as counsel for holders. Such sales
commissions and other expenses incurred by the holders shall be borne by the
holders.
8. Pre-emptive Rights. The holders of Series B Preferred Stock shall
have no pre-emptive rights.
9. Stated Capital. The amount to be capital at all times for each
share of Series B Preferred Stock shall be its par value (i.e., $0.01 per
share).
RESOLVED, FURTHER, that the Chairman of the Board/Chief Executive
Officer and the Secretary of the Corporation be, and they are hereby are,
authorized and directed to prepare and file a Certificate of Designation in
accordance with this resolution and as required by law.
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IN WITNESS WHEREOF, we have executed this Certificate of Designation
and affirm the foregoing as true under the penalties of perjury this 30thday of
April, 1998.
/s/ J.C. Leatherman, Jr. /s/ Peter P. Phildius
- --------------------------------- ------------------------------------
Secretary Chairman of the Board/Chief
Executive Officer
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EXHIBIT 10.6
FORM OF SUBSCRIPTION AGREEMENT FOR PREFERRED STOCK INVESTORS
DURING FISCAL 1998 AND FISCAL 1999
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SUBSCRIPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (the "Act"), AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD IN
RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF
SAID ACT AND SUCH LAWS. THE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE
TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID ACT AND
SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE
SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY. NOR
HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED
THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE
DISCLOSURE DOCUMENTS. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
AGREEMENT, dated as of , by and between Avitar, Inc., a Delaware
corporation (the "Company"), and the undersigned investor (the "Purchaser").
WITNESSETH:
WHEREAS, the Company is seeking to raise up to $3,000,000 from a
targeted group of potential investors;
WHEREAS, in order to effectuate such financing, the Company is offering
(the "Offering") for sale shares of its Series B Redeemable Convertible
Preferred Stock, par value $.01 (the "Preferred Stock"), in an aggregate amount
up to $3,000,000 (the "Maximum Amount");
WHEREAS, as hereinafter provided, a holder will be entitled to convert
one share of the Preferred Stock in to ten shares of Common Stock, and
WHEREAS, all authorized shares of Common Stock have been issued or
otherwise committed to be issued, including without limitation to be issued upon
the conversion of the Preferred Stock into Common Stock, and
WHEREAS, subject to the approval of shareholders, the
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Company intends to increase the authorized shares of Common Stock from 25
million to 60 million as soon as practicable, and
WHEREAS, the Company is making the Offering pursuant to Regulation D
promulgated under the Securities Act of 1933, as amended; and
WHEREAS, in order to comply with the requirements of Regulation D, the
Company requires the Purchaser to make the representations, warranties and
agreements contained herein to, and for the reliance of, the Company.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, and subject to the terms and conditions set forth herein, the Company
and the Purchaser hereby agree as follows:
1. Subscription. The Purchaser, intending to be legally bound,
hereby irrevocably agrees to purchase from the Company the number
of shares of Preferred Stock (the "Shares") set forth on the
signature page hereof, at a per share purchase price of the
average closing price of ten shares of the Company's Common Stock
for the five prior trading days (the "Offering Price"), together
with warrant in the form attached hereto as Exhibit A with a
right to purchase on the terms set forth therein shares of the
Company's Common _______________________________ Stock at
an exercise price of $________ per share. The Purchaser hereby
acknowledges and _____________ agrees that the minimum
subscription amount for Shares is $25,000 (subject to the right
of the Company, in its sole discretion, to reduce such minimum
subscription amount).
2. Rights and Preferences. The following rights and preferences have
been determined by the Company for the Preferred Stock:
a. Voting Rights. On all matters submitted to a vote of the
holders of the Company's Common Stock, the holders of the
Preferred Stock shall be entitled to exercise one vote per
share of Preferred Stock.
b. Dividends. The holders of the Preferred Stock shall be
entitled to receive, at the discretion of theCompany, an
annual 8% cash dividend or 10% stock dividend computed on
the amount invested under this Subscription Agreement. Any
stock dividend shall be paid in shares of the Preferred
Stock based on the average closing price of ten shares of
the Company's Common Stock for the five days prior to the
five days before the dividend is paid. Such dividend shall
be payable within 90 days after the anniversary date of the
investment made hereunder.
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c. Liquidation Preference. Upon any voluntary liquidation,
dissolution or winding-up of the Company, the holders of the
Preferred Stock shall be entitled to receive out of the
assets of the Company which remain after satisfaction in
full of all valid claims of creditors of the Company,
liquidating distributions of an amount per share equal to
the Offering Price. Should these liquidation distributions
not be paid in full, the holders of the Preferred Stock
shall share ratably in any distribution of assets in
proportion to the full respective preferential amount to
which they are entitled. The Company may issue shares of
other preferred stock which have liquidation, dividend,
voting, and/or redemption rights which are senior or junior
to, or pari passu with, the Preferred Stock.
d. Conversion. A holder of the Preferred Stock shall be
entitled, at any time prior to the close of business on any
date fixed for the redemption of such shares, to cause any
or all such shares to be converted into ten shares of the
Company's Common Stock for each share of Preferred Stock (
the "Conversion Price"), subject to the anti-dilution
provisions provided herein. The issuance by the Company of
shares of Common Stock upon any conversion of shares of the
Preferred Stock made at the option of the holder thereof,
shall be effective as of the earlier of (i) the delivery to
such holder or such holders' designee of certificates
representing the shares of Common Stock issued upon
Conversion thereof or (ii) the commencement of business on
the second business day after the surrender of the
certificate or certificates for the shares of Preferred
Stock to be converted, duly assigned or endorsed for
transfer to the Company (or accompanied by duly executed
stock powers relating thereto) as provided hereby. On or
after the effective date of any Conversion, the converted
shares of the Preferred Stock shall no longer be deemed to
be outstanding and all rights whatsoever with respect
thereto shall terminate, and the person or persons entitled
to receive the Common Stock issuable upon such Conversion
shall be treated for all purposes as the record holder or
holders of such shares of Common Stock. All shares of the
Preferred Stock upon Conversion shall be restored to the
status of authorized but unissued shares of preferred stock
without designation as to Class, and may be issued
thereafter. The Conversion Price shall be
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subject to adjustment in the event of (i) any subdivision or
combination of the Company's outstanding Common Stock, (ii)
any payment by the Company of a stock dividend to the
holders of the Company's Common Stock holders or holders of
any other of stock convertible into Common Stock, or (iii)
any future issue of stock or securities convertible into the
Common Stock of the Company at a price less than the
Offering Price.
e. Redemption. In the event that after one year of date of
issuance of Preferred Stock, that the average closing price
of ten shares of Company's Common Stock shall equal or
exceed 300% of the Offering Price for any twenty (20)
consecutive trading days prior to the notice of redemption,
the Company shall have the right, at any time, to redeem all
or any portion of, the outstanding shares of the Preferred
Stock, at the Offering Price. If less than all outstanding
shares of the Preferred Stock shall be redeemed, the Company
shall redeem a pro rata portion of the shares of each
holder. Notice of any redemption shall be sent to the
holders of the Preferred Stock at the address shown on the
books of the Company or its transfer agent by first class
mail, postage prepaid, mailed not less than thirty (30)
days' prior to the redemption date.
3. Payment. The Purchaser encloses herewith a check payable to the
order of, or will immediately make a wire transfer payment to,
"Avitar, Inc." in the full amount of the purchase price of the
Shares being subscribed for. To request wire transfer
instructions, please contact Jay Leatherman, Jr., Chief Financial
Officer of the Company, at (203) 453-2126 or (781) 821-2440. Such
funds will be held for the Purchaser's benefit, and will be
returned promptly, without interest, penalty, expense or
deduction if this Subscription Agreement is not accepted by the
Company, or the Offering is terminated pursuant to its terms or
by the Company.
4. Acceptance of Subscription. The Purchaser understands and agrees
that the Company, in its sole discretion, reserves the right to
accept or reject this or any other subscription for Shares, in
whole or in part and in any order, notwithstanding prior receipt
by the Purchaser of notice of acceptance of this subscription.
The Company shall have no obligation hereunder until the Company
shall execute and deliver to the Purchaser an executed copy of
this Subscription Agreement. If this subscription is rejected in
whole
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or the Offering is terminated, all funds received from the
Purchaser will be returned without interest, penalty, expense or
deduction, and this Subscription Agreement shall thereafter be of
no further force or effect. If this subscription is rejected in
part, the funds for the rejected portion of this subscription
will be returned without interest, penalty, expense or deduction,
and this Subscription Agreement will continue in full force and
effect to the extent this subscription was accepted. The Company
reserves the right to, in its sole discretion and without notice
to the Purchaser or any other subscribers, increase or decrease
the Maximum Amount.
5. Representations, Warranties and Agreements of the Company. The
Company hereby represents and warrants to the Purchaser, and
covenants and agrees with the Purchaser, as follows:
a. The Company has been duly organized, is validly existing and
is in good standing under the laws of the State of Delaware.
b. This Agreement and the issuance of the Shares have been duly
authorized by the Company.
c. The Company is in compliance in all material respects with
the Federal securities laws applicable to the issuance of
the Shares to the Purchaser; provided, however, that in
making such representation and warranty, the Company is
relying upon the truth and accuracy of the Purchaser's
representations and warranties set forth in this Agreement.
d. The Shares, when issued upon payment of the appropriate
purchase price, will be validly issued, fully paid and
non-assessable and free from preemptive rights.
e. (i) The Common Stock is registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), (ii) the Company files periodic reports
pursuant to the Exchange Act and has filed all reports
required to be filed thereunder and (iii) the Common Stock
is quoted on the NASD OTC Bulletin Board.
6. Representations, Warranties and Agreements of the Purchaser. The
Purchaser hereby represents and warrants to the Company, and
covenants and agrees with the Company, as follows:
a. The Purchaser understands and acknowledges that
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none of the Shares offered by the Company pursuant to the
Offering are registered under the Securities Act of 1933, as
amended (the "Securities Act"), or any state securities
laws. The Purchaser understands that the offering and sale
of the Shares is intended to be exempt from registration
under the Securities Act, by virtue of Section 4(2) and/or
Section 4(6) thereof and the provisions of Regulation D
promulgated thereunder, based, in substantial part, upon the
representations, warranties and agreements of the Purchaser
contained in this Subscription Agreement.
b. The Purchaser and the Purchaser's attorney, accountant,
purchaser representative and/or tax advisor, if any
(collectively, the "Advisors") have received, or had made
available to it, copies of the following documents of the
Company (the "Disclosure Documents"): the Annual Report on
Form 10-KSB of the Company for its fiscal year ended
September 30, 1998, the Quarterly Report on Form 10-QSB of
the Company for the fiscal quarter ended December 31, 1998
and all other documents reasonably requested by the
Purchaser. The Purchaser has carefully reviewed the
Disclosure Documents and understands the information
contained therein.
c. Neither the Securities and Exchange Commission
("Commission") nor any state securities commission has
approved the Shares or the Offering, or passed upon or
endorsed the merits of the Offering or confirmed the
accuracy or determined the adequacy of this Subscription
Agreement. This Subscription Agreement has not been reviewed
by any Federal, state or other regulatory authority.
d. The Purchaser acknowledges that all documents, records, and
books pertaining to an investment in the Shares have been
made available for inspection by such Purchaser and the
Advisors, if any.
e. The Purchaser and the Advisors, if any, have had a
reasonable opportunity to ask questions of and receive
satisfactory answers from a person or persons acting on
behalf of the Company concerning the Offering, the Shares
and the Company and all such questions have been answered to
the full satisfaction of the Purchasers and the Advisors, if
any.
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f. In evaluating the suitability of an investment in the
Company, the Purchaser has not relied upon any
representation or other information (oral or written) other
than as stated in this Subscription Agreement and/or as
contained in the Disclosure Documents.
g. The Purchaser is unaware of, is no way relying on, and did
not become aware of the Offering of the Shares through or as
a result of any form of general solicitation or general
advertising, including, without limitation, any article,
notice, advertisement or other communication published in
any newspaper, magazine or similar media or broadcast over
television or radio, in connection with the Offering and is
not subscribing for the Shares and did not become aware of
the Offering through or as a result of any seminar or
meeting to which the Purchaser was invited by, or any
solicitation of a subscription by, a person not previously
known to the Purchaser in connection with investments in
securities generally.
h. The Purchaser has taken no action which would give rise to
any claim by any person for brokerage commissions, finders'
fees or the like relating to this Subscription Agreement or
the transactions contemplated hereby.
i. The Purchaser, together with the Advisors, have such
knowledge and experience in financial, tax, and business
matters, and, in particular, investments in securities, so
as to enable them to utilize the information made available
to them in connection with the Offering to evaluate the
merits and risks of an investment in the Shares and to make
an informed investment decision with respect thereto.
j. The Purchaser is not relying on the Company or any of its
officers, directors, employees or agents with respect to the
legal, tax, economic and related considerations of an
investment in the Shares, and the Purchaser has relied on
the advice of, or has consulted with, only his own Advisors
(if any).
k. The Purchaser is acquiring the Shares solely for such
Purchaser's own account for investment and not with a view
to resale or distribution
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thereof, in whole or in part. The Purchaser has no agreement
or arrangement, formal or informal, with any person to sell
or transfer all or any part of the Shares, and the Purchaser
has no plans to enter into any such agreement or
arrangement.
l. The Purchaser must bear the substantial economic risks of an
investment in the Shares indefinitely because the Shares may
not be sold, hypothecated or otherwise disposed of unless
subsequently registered under the Securities Act and
applicable state securities laws or an exemption from such
registration is available. The Purchaser acknowledges that
legends shall be placed on the shares of Common Stock,
issued pursuant to the conversion of the Preferred Stock, to
the effect that they have not been registered under the
Securities Act or applicable state securities laws and
appropriate notations thereof will be made in the Company's
stock books. Stop transfer instructions will be placed with
the transfer agent of the Company.
m. The Purchaser has adequate means of providing for such
Purchaser's current financial needs and foreseeable
contingencies and has no need for liquidity of the
investment in the Shares for an indefinite period of time.
n. The Purchaser is aware that an investment in the Shares
involves a number of very significant risks and investment
considerations.
o. The Purchaser meets the requirements of at least one of the
suitability standards for an "accredited investor" under
Regulation D promulgated under the Securities Act and as set
forth on the Accredited Investor Certification contained
herein.
p. The Purchaser: (i) if a natural person represents that the
Purchaser has reached the age of 21 and has full power and
authority to execute and deliver this Subscription Agreement
and all other related agreements or certificates and to
carry out the provisions hereof and thereof and has adequate
means for providing for his or her current financial needs
and anticipated future needs and possible personal
contingencies and emergencies and has no need for liquidity
in the investment in the Shares; (ii) if a corporation,
partnership, limited liability company or
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partnership, association, joint stock company, trust,
unincorporated organization or other entity represents that
such entity was not formed for the specific purpose of
acquiring the Shares, such entity is duly organized, validly
existing and in good standing under the laws of the state of
its organization, the consummation of the transactions
contemplated hereby is authorized by, and will not result in
a violation or breach of any law, regulation, agreement to
which it is a party or is otherwise bound or of its charter
or other organizational documents; such entity has full
power and authority to execute and deliver this Subscription
Agreement and all other related agreements or certificates
and to carry out the provisions hereof and thereof and to
purchase and hold the Shares; the execution and delivery of
this Subscription Agreement has been duly authorized by all
necessary action; this Subscription Agreement has been duly
executed and delivered on behalf of such entity and is a
legal, valid and binding obligation of such entity; and
(iii) if executing this Subscription Agreement in a
representative or fiduciary capacity, represents that it has
full power and authority to execute and deliver this
Subscription Agreement in such capacity and on behalf of the
subscribing individual, ward, partnership, trust, estate,
corporation, limited liability company or partnership, or
other entity for whom the Purchaser is executing this
Subscription Agreement, and such individual, ward,
partnership, trust, estate, corporation, limited liability
company or partnership, or other entity has full right and
power to perform pursuant to this Subscription Agreement and
make an investment in the Company; and that this
Subscription Agreement constitutes a legal, valid and
binding obligation of such entity. The execution and
delivery of this Subscription Agreement will not violate or
be in conflict with any order, judgment, injunction,
agreement or document to which the Purchaser is a party or
by which it is bound.
q. Any information which the Purchaser has heretofore furnished
or furnishes herewith to the Company is complete and
accurate and may be relied upon by the Company in
determining the availability of an exemption from
registration under Federal and state securities laws in
connection with the Offering. The Purchaser will notify and
supply corrective information to the Company immediately
(and without a specific
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request therefor) upon the occurrence of any change therein
occurring prior to the Company's issuance of the Shares.
r. The Purchaser has significant prior investment experience,
including investment in non-registered securities. The
Purchaser has a sufficient net worth to sustain a loss of
its entire investment in the Company in the event such a
loss should occur. The Purchaser's overall commitment to
investments which are not readily marketable is not
excessive in view of his/its net worth and financial
circumstances and the purchase of the Shares will not cause
such commitment to become excessive. The investment is a
suitable one for the Purchaser.
s. No oral or written representations have been made, or oral
or written information furnished, to the Purchaser in
connection with the Offering which are in any way
inconsistent with the information contained herein.
t. The Purchaser acknowledges that, even if the Maximum Amount
is raised from the sale of the Shares, the net proceeds
thereof will provide the Company with the funds to meet only
its most immediate needs and that additional funds will be
required by the Company (with the consequent dilution of
value and/or ownership) through additional equity and/or
debt financing(s), and no assurance can be given as to the
availability or adequacy of terms of any such financing(s).
In the event that the Company does not obtain the requisite
funds, it may be necessary for the Company to reduce,
suspend or cease certain of its operations. The Purchaser
acknowledges that the Company intends to use the net
proceeds of the offering for its working capital
requirements.
u. Blue Sky Information:
FOR RESIDENTS OF ALL STATES:
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1993, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND ARE BEING OFFERED
AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID
ACT AND SUCH LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED
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<PAGE>
UNDER SAID ACT AND SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING
AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY
OR ADEQUACY OF THE MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
FOR CONNECTICUT RESIDENTS:
THE SECURITIES HAVE NOT BEEN REGISTERED UNDER SECTION 36-485 OF THE CONNECTICUT
UNIFORM SECURITIES ACT AND THEREFORE CANNOT BE RESOLD UNLESS THEY ARE REGISTERED
UNDER THE CONNECTICUT UNIFORM SECURITIES ACT OR UNLESS AN EXEMPTION FROM
REGISTRATION IS AVAILABLE.
FOR FLORIDA RESIDENTS:
IF SALES OF THESE SECURITIES ARE CONSUMMATED WITH FIVE OR MORE OFFEREES IN THE
STATE OF FLORIDA, ANY SUCH OFFEREE MAY, AT SUCH OFFEREE'S OPTION, VOID ANY
PURCHASE HEREUNDER WITHIN THREE DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS
MADE BY THE PURCHASER TO THE COMPANY, AN AGENT OF THE COMPANY OR AN ESCROW
AGENT, OR WITHIN THREE DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE IS
COMMUNICATED TO THE PURCHASER, WHICHEVER OCCURS LATER.
FOR VERMONT RESIDENTS:
EACH PERSON WHO ACCEPTS AN OFFER TO PURCHASE SECURITIES DIRECTLY FROM THE ISSUER
OR AN AFFILIATE OF THE ISSUER SHALL HAVE THE RIGHT TO WITHDRAW HIS ACCEPTANCE
WITHOUT INCURRING ANY LIABILITY TO THE SELLER, UNDERWRITER (IF ANY) OR ANY OTHER
PERSON WITHIN THREE BUSINESS DAYS AFTER HE MAKES THE INITIAL PAYMENT FOR THE
SECURITIES BEING OFFERED.
7. Indemnification. The Purchaser hereby agrees to indemnify and
hold harmless the Company and its officers, directors, employees,
agents, control persons and affiliates against all losses,
liabilities, claims, damages, and expenses whatsoever (including,
but not limited to, any and all expenses incurred in
investigating, preparing, or defending against any litigation
commenced or threatened) based upon or arising out of any actual
or alleged false acknowledgment, representation or warranty, or
misrepresentation or omission to state a material fact, or breach
by the Purchaser of any covenant or agreement made by the
Purchaser herein or any other document delivered in connection
with this Subscription Agreement.
8 Irrevocability; Binding Effect. The Purchaser hereby acknowledges
and agrees that the subscription hereunder is irrevocable by the
Purchaser, except as
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required by applicable law, and that this Subscription Agreement
shall survive the death, disability or bankruptcy, as the case
may be, of the Purchaser and shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs,
executors, administrators, successors, legal representatives, and
permitted assigns. If the Purchaser is more than one person, the
obligations of the Purchaser hereunder shall be joint and several
and the agreements, representations, warranties, and
acknowledgments herein shall be deemed to be made by and be
binding upon each such person and such person's heirs, executors,
administrators, successors, legal representatives, and permitted
assigns.
9. Modification. This Subscription Agreement shall not be modified
or waived except by an instrument in writing signed by the party
against whom any such modification or waiver is sought.
10. Notices. Any notice or other communication required or permitted
to be given hereunder shall be in writing and shall be mailed by
certified mail, return receipt requested, or delivered against
receipt to the party to whom it is to be given (a) if to Company,
at 65 Dan Road, Canton, Massachusetts 02021, Attn.: Peter P.
Phildius, Chairman of the Board, or (b) if to the Purchaser, at
the address set forth on the signature page hereof (or, in either
case, to such other address as the party shall have furnished in
writing in accordance with the provisions of this Section 10).
Any notice or other communication given by certified mail shall
be deemed given at the time of certification thereof, except for
a notice changing a party's address which shall be deemed given
at the time of receipt thereof.
11. Assignability. This Subscription Agreement and he rights,
interests and obligations hereunder are not transferable,
assignable or delegable by the Purchaser and the transfer or
assignment of the Shares shall be made only in accordance with
all applicable laws and this Subscription Agreement.
12. Applicable Law. This Subscription Agreement shall be governed by
and construed in accordance with the laws of the State of New
York without regard to its conflicts of laws principles. The
Purchaser hereby irrevocably submits to the non-exclusive
jurisdiction of any New York State court or United States Federal
court sitting in New York County over any action or proceeding
arising out of or relating to this Subscription Agreement or any
agreement contemplated hereby, and the Purchaser hereby
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<PAGE>
irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such New York State or
Federal court. The Purchaser further waives any objection to
venues in such State on the basis of a non-convenient forum. The
Purchaser further agrees that any action or proceeding brought
against the Company shall be brought only in New York State or
United States Federal courts sitting in New York County. THE
PURCHASER HEREBY AGREES TO WAIVE ITS RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
SUBSCRIPTION AGREEMENT OR ANY DOCUMENT OR AGREEMENT CONTEMPLATED
HEREBY.
13. Blue Sky Qualification. The purchase of the Shares under this
Subscription Agreement is expressly conditioned upon the
exemption from registration and/or qualification of the offer and
sale of the Shares from applicable Federal and state securities
laws. The Company shall not be required to qualify this
transaction under the securities laws of any jurisdiction and,
should qualification be necessary, the Company shall be released
from any and all obligations to maintain the Offering, and may
rescind any sale contracted, in the jurisdiction.
14. Piggyback Registration. If, at any time commencing after the date
hereof until such time as the Purchaser has sold or otherwise
disposed of the Shares, the holders of shares of the Preferred
Stock shall be entitled to "piggyback" registration rights with
respect to such shares on each occasion that the Company shall
propose to file a registration statement on Form S-3 ( the
"Registration Statement") under the Securities Act of 1933, as
amended, covering any shares of Common Stock. The Company shall,
at least thirty (30) days before filing any such Registration
Statement, notify the holders of the Preferred Stock in writing
of such filing. For a period of ten (10) days from the receipt of
such notice, each holder of the Preferred Stock shall be entitled
to provide written notice to the Company of such holder's
election to include in the Registration Statement up to the
number of shares of Common Stock covered by his/her Preferred
Stock; provided, however, that simultaneously with such notice
such holder shall agree to convert his/her Preferred Stock into
Common Stock upon effectiveness of the Registration Statement.
The Company shall have the right at any time thereafter to elect
not to file any such Registration Statement or to withdraw the
same after filing but prior to the effective date thereof. The
Company shall pay all expenses relating to the Registration
Statement except sales commissions
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<PAGE>
attributable to these securities and except expenses incurred by
the Purchaser such as counsel for the Purchaser. Such sale
commissions and other expenses incurred by the Purchaser will be
borne by the Purchaser.
15. Use of Pronouns. All pronouns and any variations thereof used
herein shall be deemed to refer to the masculine, feminine,
neuter, singular or plural as the identity of the person or
persons referred to may require.
16. Miscellaneous.
a. This Agreement constitutes the entire agreement between the
Purchaser and the Company with respect to the subject matter
hereof and supersedes all prior oral or written agreements
and understandings, if any, relating to the subject matter
hereof. The terms and provisions of this Agreement may be
waived, or consent for the departure therefrom granted, only
by a written document executed by the party entitled to the
benefits of such terms or provisions.
b. The Purchaser's representations and warranties made in this
Agreement shall survive the execution and delivery hereof
and the sale and delivery of the Shares.
c. Each of the parties hereto shall pay its own fees and
expenses (including the fees of any attorneys, accountants,
advisors, appraisers or others engaged by such party) in
connection with this Agreement and the transactions
contemplated hereby whether or not the transactions
contemplated hereby are consummated.
d. This Agreement may be executed in one or more counterparts
each of which shall be deemed an original, but all of which
shall together constitute one and the same instrument.
e. Paragraph titles are for descriptive purposes only and shall
not control or alter the meaning of this Subscription
Agreement as set forth in the text.
Accredited Investor Certification
(Check the appropriate line(s)
____(i) I am a natural person who had individual income of more than
$200,000 in each of the most recent two years or joint
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income with my spouse in excess of $300,000 in each of the most recent two years
and reasonably expect to reach that same income level for the current year
("income", for purposes hereof, should be computed as follows: individual
adjusted gross income, as reported (or to be reported) on a Federal income tax
return, increased by (1) any deduction of long-term capital gains under section
1202 of the Internal Revenue Code of 1986, as amended (the "Code"),(2) any
deduction for depletion under Section 611 et seq. of the Code, (3) any exclusion
for interest under Section 103 of the Code and (4) any losses of a partnership
as reported on Schedule E of Form 1040);
____(ii) I am a natural person whose individual net worth (i.e., total
assets in excess of total liabilities), or joint net worth with my spouse, will
at the time of purchase of the Shares be in excess of $1,000,000;
____(iii) The Purchaser is an investor satisfying the requirements of
Section 501(a)(1), (2) or (3) of Regulation D promulgated under the Securities
Act, which includes but is not limited to, a self-directed employee benefit plan
where investment decisions are made solely by persons who are "accredited
investors" as otherwise defined in Regulation D;
____(iv) The Purchaser is a trust, which trust has total assets in
excess of $5,000,000, which is not formed for the specific purpose of acquiring
the Shares offered hereby and whose purchase is directed by a sophisticated
person as described in Rule 506(b)(ii) of Regulation D and who has such
knowledge and experience in financial and business matters that he is capable of
evaluating the risks and merits of an investment in the Shares;
____(v) I am a director or executive officer of the Company; or
____(vi) The Purchaser is an entity (other than a trust) in which all
of the equity owners meet the requirements of at least one of the above
subparagraphs.
FOR MASSACHUSETTS RESIDENTS:
MY INVESTMENT IN THE SHARES DOES NOT EXCEED 25% OF MY AND MY SPOUSE'S
JOINT NET WORTH (EXCLUDING OUR PRINCIPAL RESIDENCE AND FURNISHINGS).
IN WITNESS WHEREOF, the Purchaser has executed this Subscription Agreement this
____ day of ____________, 1999.
Preferred Stock*
______________ x __________________ $__________________
(Shares being (Share Price) Subscription
purchased) (Minimum of
$25,000)
*Convertible into____________ shares of Common Stock
16
<PAGE>
If the purchaser is an INDIVIDUAL, and if purchased as JOINT TENANTS, as TENANTS
IN COMMON, or as COMMUNITY PROPERTY:
_______________________________
Print Name(s) Social Security Number
_______________________________ _______________________________
Signature(s) of Purchaser(s)
_______________________________
Date
If the purchaser is a PARTNERSHIP, CORPORATION, or TRUST:
_______________________________ _______________________________
Name of Partnership, Federal Taxpayer
Corporation or Trust Indemnification Number
_______________________________
Date
By:____________________________ _______________________________
Name State of Organization
Title:_________________________
Address:_______________________
_______________________
17
<PAGE>
SUBSCRIPTION ACCEPTED AND AGREED TO this______ day of _____, 1999.
AVITAR, INC.
By:__________________________________
Title:_______________________________
18
<PAGE>
(EXHIBIT A ATTACHED)
19
<PAGE>
EXHIBIT A
Void after 5:00 p.m. New York City Time,
on _________, 2000
Warrant to Purchase an Aggregate of _______ Shares
of Common Stock
WARRANT TO PURCHASE COMMON STOCK
OF
AVITAR, INC.
a Delaware Corporation
THIS WARRANT AND THE SHARES OF COMMON STOCK
UNDERLYING THIS WARRANT (collectively, the
"Securities") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (the "Act") OR
THE SECURITIES LAWS OF ANY STATE AND ARE BEING
OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM
REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH
LAWS. THIS WARRANT MAY NOT BE EXERCISED UNLESS THE
SECURITIES ARE REGISTERED UNDER THE ACT OR
EXEMPTION FROM SUCH REGISTRATION UNDER THE ACT IS
APPLICABLE. THE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY
NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED
UNDER SAID ACT AND SUCH LAWS PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. THE
SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES COMMISSION OR ANY OTHER
REGULATORY AUTHORITY. NOR HAVE ANY OF THE
FOREGOING AUTHORITIES
20
<PAGE>
PASSED UPON OR ENDORSED THE MERITS OF THIS
OFFERING OR THE ACCURACY OR ADEQUACY OF THE
DISCLOSURE DOCUMENTS. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
This is to certify that, FOR VALUE RECEIVED, or assigns (the "Holder"),
is entitled to purchase, subject to the provisions of this Warrant, from AVITAR,
INC. a Delaware Corporation (the "Company"),
_____________________________________ fully paid, validly issued and
non-assessable shares of Common Stock, $0.01 par value, of the Company ("Common
Stock") at any time or from time to time from the date hereof, through and
including _____________, 2000, (the "Termination Date") but not later than 5:00
p.m. New York City, New York Time on the Termination Date (the "Exercise
Period") at an initial exercise price equal to $______ per share. The number of
shares of Common Stock to be received upon the exercise of this Warrant and the
price to be paid for each share of Common Stock may be adjusted from time to
time as hereinafter set forth. The shares of Common Stock deliverable upon such
exercise, and as adjusted from time to time, are hereinafter sometimes referred
to as "Warrant Shares" and the exercise price of a share of Common Stock in
effect at any time and as adjusted from time to time is hereinafter sometimes
referred to as the "Exercise Price".
(a) Exercise of Warrant. This Warrant may be exercised in whole
or in part at any time during the Exercise Period. This Warrant, subject to the
provisions hereof, may be exercised by presentation and surrender hereof to the
Company at its principal office, or at the office of its stock transfer agent,
if any, with the Purchase Form annexed hereto duly executed and accompanied by
payment of the Exercise Price for the number of Warrant Shares specified in such
exercise. The Company shall issue and deliver to the Holder a certificate or
certificates for the Warrant Shares issuable upon such exercise, registered in
the name of the Holder or its designee. If this Warrant should be exercised in
part only, the Company shall, upon surrender of this Warrant for cancellation,
execute and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the Warrant Shares purchasable thereunder. Upon receipt
by the Company of this Warrant at its office, or by the stock transfer agent of
the Company at its office, in proper form for exercise shall be deemed to be the
holder of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be physically delivered to the Holder.
(b) Reservation of Shares. The Company shall at all
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<PAGE>
times reserve for issuance and/or delivery upon exercise of this Warrant such
number of shares of its Common Stock as shall be required for issuance and
delivery upon exercise of this Warrant.
(c) Fractional Shares. No fractional shares or script
representing fractional shares shall be issued upon the exercise of this
Warrant. All fractional shares shall be eliminated by rounding any fraction up
to the nearest whole number of shares of Common Stock.
(d) Exchange, Transfer, Assignment or Loss of Warrant. Subject to
the legend first appearing above, this Warrant is exchangeable, without expense,
at the option of the Holder, upon presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, for other warrants
of different denominations entitling the Holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder.
Subject to the legend first appearing above, upon surrender of this Warrant to
the Company at is principal office or at the office of its stock transfer agent,
if any, with the Assignment Form annexed hereto duly executed and funds
sufficient to pay any transfer tax, the Company shall, without charge, execute
and deliver a new Warrant in the name of the assignee named in such instrument
of assignment and this Warrant shall promptly be canceled. This Warrant may be
divided or combined with other Warrants which carry the same rights upon
presentation hereof at the principal office of the Company or at the office of
its stock transfer agent, if any, together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrant into which
this Warrant may be divided or exchanged. Upon receipt by the Company of
evidence satisfactory to it of the loss, destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will execute and deliver a new Warrant of like tenor and
date.
(e) Rights of the Holder. The Holder shall not, by virtue hereof,
be entitled to any rights of a shareholder in the Company, either at law or
equity, and the rights of the Holder are limited to those expressed in this
Warrant and are not enforceable against the Company except to the extent set
forth herein.
(f) Anti-Dilution Provisions. The Exercise Price in effect at any
time and the number and kind of securities purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(1) In case the Company shall (i) declare a dividend or
make a distribution on its outstanding shares of Common Stock in shares of
Common Stock, or (ii) subdivide or reclassify its outstanding shares of Common
Stock into a greater
22
<PAGE>
number of shares of Common Stock or into a smaller number of shares, the
Exercise Price immediately prior to such adjustment shall be adjusted by
multiplying it by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(2) Whenever the Exercise Price payable upon exercise of
each Warrant is adjusted pursuant to Subsection (1) above, the number of shares
purchasable upon exercise of this Warrant shall simultaneously be adjusted by
multiplying the number of shares initially issuable upon exercise of this
Warrant by the Exercise Price in effect on the date hereof and dividing the
product so obtained by Exercise Price, as adjusted.
(3) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly cause a notice setting forth the adjusted
Exercise Price and adjusted number of shares issuable upon exercise of each
Warrant to be mailed to the Holders, at their last addresses appearing in the
Warrant Register, and shall cause a certified copy thereof to be mailed to its
transfer agent, if any. The Company may retain a firm of independent certified
public accountants selected by the Board of Directors (who may be the regular
accountants employed shall be conclusive evidence of the correctness of such
adjustment.
(g) Officer's Certificate. Whenever the Exercise Price shall be
adjusted as required by the provisions of Section (f), the Company shall
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided,
setting forth in reasonable detail the facts requiring such adjustment,
including a statement of the number of additional shares of Common Stock, if
any, and such other facts as shall be necessary to show the reason for and the
manner computing such adjustment.
(h) Notices to Warrant Holders. So long as this Warrant shall be
outstanding, (1) if the Company shall pay any dividend or make any distribution
upon the Common Stock or (2) if the Company shall offer to the holders of Common
Stock for subscription or purchase by them any share of any class or any other
rights or (3) if the capital reorganization of the Company, reclassification or
merger of the Company with or into another corporation, sale of all or
substantially all of the property and assets of the Company or voluntary or
involuntary dissolution, liquidation or winding up of the Company shall be
effected, then in any such case, the Company shall cause to be mailed by
certified mail to the Holder, at least ten (10) days prior to the date specified
in (x) or (y) below, as the case may be, a notice
23
<PAGE>
containing a brief description of the proposed action and stating the date on
which (x) a record is to be taken for the purpose of such dividend, distribution
or rights, or (y) such reclassification, reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to take place and
the date, if any, is to be fixed, as of which the holders of Common Stock or
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
(i) Piggyback Registration. If, at any time commencing after the
date hereof until such time as the Holder has sold or otherwise disposed all of
the Warrant Shares, the Company proposes to register any of its equity
securities under the Act (other than in connection with a merger or
consolidation or pursuant to a Registration Statement on Form S-3 or S-4 or
comparable registration statement) it will give written notice, at least thirty
(30)days prior to the filing of such registration statement, to the Holder and
to all other holders of Warrants and Warrant Shares (collectively, "Warrant
Securities") of its intention to do so. If the Holder and/or other holders of
Warrant Securities notify the Company within twenty (20) days after receipt of
such notice of its or their desire to include any Warrants (including the shares
of Common Stock underlying any such Warrants) and/or Warrant Shares (whether
issued or issuable) in such proposed registration statement, the Company shall,
subject to the provisions set forth below, afford the Holder and such holders of
Warrant Securities the opportunity to have any such securities registered under
such registration statement. If such registration is an underwritten
registration, and the managing underwriters advise the Company that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering without materially
adversely affecting such underwriters' ability to effect an orderly distribution
of such securities, the Company will include in such registration first, the
securities proposed to be sold thereunder and, second, the Warrant Securities
and such other securities of the Company having registration rights requested to
be included in such registration registered on a pro-rata basis. The Company
shall have the right at any time thereafter it shall give written notice to
elect not to file any such proposed registration statement or to withdraw the
same after filing but prior to the effective date thereof. The Company shall pay
all such expenses relating to registration except sales commissions attributable
to Warrant Securities requested to be offered by the holders thereof and except
expenses incurred by the holders such as counsel for the holders. Such sales
commissions and other such expenses will be borne by the holders requesting
inclusion in such registration.
(j) Indemnification. In the event Warrant Securities are included
in a registration statement by the Company, the
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<PAGE>
Company will indemnify and hold harmless each holder of registered Warrant
Securities against all claims and losses arising out of securities law
violations by the Company and each holder of registered Warrant Securities will
indemnify and hold harmless the Company against all claims and losses arising
out of the information supplied to the Company by such holder for use in
connection with such registration.
(k) Reclassification, Reorganization or Merger. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or in which merger the Company is the continuing corporation and
which does not result in any reclassification, capital reorganization or other
change of outstanding shares of Common Stock of the class issuable upon exercise
of this Warrant or in case of any sale to another corporation of the property of
the Company as an entirety, the Company shall, as a condition precedent to such
transaction, cause effective provisions to be made so that the Holder shall have
the right thereafter by exercising this Warrant at any time prior to the
expiration of the Warrant, to purchase the kind and amount of shares upon
exercise of this Warrant immediately prior to such reclassification, change,
consolidation, merger or sale. Any such transaction shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant. The foregoing provisions of this
Section (k) shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers or sales. In the event that in connection with any such
capital reorganization, a share of Common Stock shall be issued in exchange,
conversion, substitution or payment, in whole or in part, for a security of the
Company other than Common Stock, any such issue shall be treated as an issue of
Common Stock covered by the provisions of Subsection (1) of Section (f) hereof.
(l) Redemption.
(1) Commencing one year after the date hereof (the
"Initial Warrant Redemption Date") the Company may, on 30 days prior written
notice redeem all the Warrants at $0.01 provided, however, that before any such
call for redemption of Warrants can take place, the (A) high closing bid price
for the Common Stock in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") or (B)
the closing sale price on the primary exchange on which the Common Stock is
traded, if the Common Stock is traded on a national securities exchange or if
the Common Stock is a National Market Security on NASDAQ, shall have for five
(5) consecutive trading days within a period of thirty (30) consecutive trading
days ending on the fifth trading day prior to the date on which the notice
contemplated by (2)and (3) below is given, equaled or exceeded $0.75 per share
(subject to adjustment
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<PAGE>
in the event of any stock splits or other similar events as provided in Section
(f) hereof).
(2) In case the Company shall exercise its right to redeem
all of the Warrants, it shall give or cause to be given notice to the registered
Holders of the Warrants by mailing to such registered Holders a notice of
redemption, first class, postage prepaid, at their last address as shall appear
on the records of the Company. Any notice mailed in the manner provided herein
shall be conclusively presumed to have been duly given whether or not the
registered Holder receives such notice.
(3) The notice of redemption shall specify (i) the
redemption price, (ii) the date fixed for redemption, which shall in no event be
less than thirty (30) days after the date of mailing of such notice, (iii) the
place where the Warrant Certificate shall be delivered and the redemption price
shall be paid and (iv) that the right to exercise the Warrant shall terminate at
5:00 p.m. (New York time) on the business day immediately preceding the date
fixed for redemption. The date fixed for the redemption of the Warrants shall be
the Redemption Date. No failure to mail such notice nor any defect therein or in
the mailing thereof shall affect the validity of the proceedings for such
redemption except as to a Holder (a) to whom notice was not mailed or (b) w of
the Company that notice of redemption has been mailed shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
(4) Any right to exercise a Warrant shall terminate at
5:00 p.m. (New York time) on the business day immediately preceding the
Redemption Date. The redemption price payable to the registered Holders shall be
mailed to such persons at their addresses of record.
(m) Addresses for Notices.Any notices to be given to the Company
or to the Holder pursuant hereto shall be delivered personally or sent by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
(1) If to the Company, until another address is supplied
by the Company to the Holder, in accordance with the provisions of this Section
(m):
Avitar, Inc.
65 Dan Road
Canton, Massachusetts 02021
Attn.: Secretary
(2) If to the Holder, until another address is supplied by
the Holder to the Company, in accordance with the provisions of this Section
(k), at the address specified on the transfer books of the Company.
(n) Governing Law. This Warrant shall be governed
26
<PAGE>
by and construed in accordance with the law of the State of New York, without
reference to any choice of law provisions thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
and attested by the undersigned, each being duly authorized, as of the date
below.
AVITAR, INC.,
a Delaware Corporation
By:____________________
Chief Executive Officer
Dated:_______________________________, 1999
Attest:
By:_______________________________
Secretary
PURCHASE FORM
Dated:______________, 199
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing _________ Shares of Common Stock and hereby
makes payment of $________ in payment of the actual exercise price thereof.
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<PAGE>
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name:______________________________________________________________
(Please typewrite or print in block letters)
Address:___________________________________________________________
Signature:_________________________________________________________
ASSIGNMENT FORM
FOR VALUE RECEIVED, _________________________ hereby sells, assigns
and transfers unto
Name: _________________________________________________
(Please typewrite or print in block letters)
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<PAGE>
Social Security or Taxpayer I.D. No.: _________________
Address: _______________________________________________
the right to purchase Common Stock represented by this Warrant to the extent of
__________ shares as to which such right is exercisable and does irrevocably
constitute and appoint ___________, Attorney, to transfer the same on the books
of the Company with full power of substitution in the premises.
Date:___________________________________________, 199
Signature: _______________________________________
29
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Avitar, Inc.
List of Subsidiaries
Avitar Technologies, Inc.
Avitar Industries, Inc. (formerly Managed Health Benefits Corporation)
United States Drug Testing Laboratories, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
1
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
Avitar, Inc.
Canton, MA
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statements filed on Forms S-3 and S-8 of
our report dated November 30, 1999, 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, 1999.
BDO Seidman, LLP
/s/ BDO Seidman
Boston, MA
January 13, 2000
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AVITAR'S
ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 280,758
<SECURITIES> 0
<RECEIVABLES> 493,859
<ALLOWANCES> 35,000
<INVENTORY> 225,081
<CURRENT-ASSETS> 1,347,806
<PP&E> 927,512
<DEPRECIATION> 613,292
<TOTAL-ASSETS> 4,774,625
<CURRENT-LIABILITIES> 2,086,561
<BONDS> 0
0
17,201
<COMMON> 244,987
<OTHER-SE> 2,276,046
<TOTAL-LIABILITY-AND-EQUITY> 2,538,234
<SALES> 2,495,423
<TOTAL-REVENUES> 2,495,423
<CGS> 2,059,483
<TOTAL-COSTS> 5,595,533
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121,572
<INCOME-PRETAX> (3,117,680)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,117,680)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,117,680)
<EPS-BASIC> (.24)
<EPS-DILUTED> (.24)
</TABLE>
