<PAGE>
As filed with the Securities and Exchange Commission on June 27, 1996
Registration No. 333-4552
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_________________________
FORM SB-2
AMENDMENT NO. 1
_________________________
ONGARD SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
_________________________
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DELAWARE 5047 84-1149380
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
Mark E. Weiss
40 Commerce Drive 40 Commerce Drive
Hauppauge, New York 11788 Hauppauge, New York 11788
516-231-8989 516-231-8989
(Address and telephone number of (Name, address and telephone number
principal executive offices and of agent for service)
principal place of business)
Copies to:
Arnold R. Kaplan, Esq.
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.
1700 Lincoln Street, Suite 3725
Denver, Colorado 80203
(303) 831-0909
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount to be Proposed Maximum Offering Proposed Maximum Amount of
Securities to be Registered Registered(1) Price Per Share(1) Aggregate Offering Price(1) Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock par value 4,637,227 shares $6.50 $30,141,975 $10,393.78
$.001 per share
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</TABLE>
(1) Based on the closing price of the Company's Common Stock as reported on the
NASDAQ (Small CapSM) system as of April 26, 1996 pursuant to paragraph (c)
of Rule 457.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
ONGARD SYSTEMS, INC.
CROSS REFERENCE SHEET BETWEEN ITEMS OF FORM SB-2
AND PROSPECTUS
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ITEM IN FORM SB-2 LOCATION IN PROSPECTUS
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1. Front of Registration Statement and Outside
Front Cover of Prospectus .................................. Outside Front Cover Page.
2. Inside Front and Outside Back
Cover Pages of Prospectus .................................. Inside Front Cover Page; Outside Back Cover Page.
3. Summary Information and Risk Factors ....................... Prospectus Summary; Risk Factors.
4. Use of Proceeds ............................................ Prospectus Summary; Use of Proceeds.
5. Determination of Offering Price ............................ Plan of Distribution.
6. Dilution ................................................... Not applicable.
7. Selling Security Holders ................................... Selling Stockholders; Plan of Distribution.
8. Plan of Distribution ....................................... Plan of Distribution.
9. Legal Proceedings .......................................... Business - Legal Proceedings.
10. Directors, Executive Officers, Promoters
and Control Persons ........................................ Management.
11. Security Ownership of Certain Beneficial
Owners and Management ...................................... Principal Shareholders.
12. Description of Securities .................................. Outside Front Cover Page; Description of Capital Stock.
13. Interest of Named Experts and Counsel ...................... Experts.
14. Disclosure of Commission Position
on Indemnification for Securities of Act Liabilities ....... Description of Capital Stock -
Liability Limited on Directors and Officers.
15. Organization Within Last Five Years ........................ Not applicable.
16. Description of Business .................................... Prospectus Summary; Business.
17. Management's Discussion and Analysis
or Plan of Operation ....................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations.
18. Description of Property .................................... Business - Facilities.
19. Certain Relationships and Related Transactions ............. Certain Transactions.
20. Market For Common Equity and
Related Stockholder Matters ................................ Price Range of Securities and Dividend Policy.
21. Executive Compensation ..................................... Management - Executive Compensation.
22. Financial Statements ....................................... Financial Statements.
23. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure ..................... Not applicable.
</TABLE>
<PAGE>
ONGARD SYSTEMS, INC.
4,637,227 SHARES OF COMMON STOCK
The Prospectus relates to the sale of up to 4,637,227 shares (the
"Shares") of Common Stock, $0.001 par value (the "Common Stock") of OnGard
Systems, Inc. (the "Company") which may be offered by certain Selling
Stockholders. The Shares or rights to purchase the Shares were acquired by
the Selling Stockholders in various transactions as described under the
caption "Selling Stockholders," herein. The Selling Stockholders may offer
the shares for sale as described under the caption "Plan of Distribution."
Investment in the Company involves substantial risk and should be
considered only by persons able to sustain a total loss of their investment.
See "Risk Factors."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF
AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY IN ANY STATE IN WHICH, OR TO
ANY PERSON TO WHOM, SUCH AN OFFER WOULD BE UNLAWFUL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNDERWRITING
DISCOUNTS AND PROCEEDS TO SELLING
COMMON STOCK PRICE TO PUBLIC(1) COMMISSIONS(2) SHAREHOLDERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Per Share $5.25 N/A $5.25
Maximum Total $24,345,442 N/A $24,345,442
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Based on the average of the high and low price of the Company's Common
Stock as reported on the NASDAQ (Small-CapSM) system as of April 26, 1996.
(2) No underwriter will participate in any sales on behalf of the Selling
Stockholders. See "PLAN OF DISTRIBUTION." All expenses of the offering,
which are estimated to be $50,000 will be paid by the Company.
OnGard Common Stock is quoted in the NASDAQ (Small-CapSM) system under
the symbol "OGSI." The closing bid of OnGard Common Stock on June 24, 1996
was $5.25 See "Price Range of Securities and Dividend Policy."
THE DATE OF THIS PROSPECTUS IS JUNE 7, 1996.
1
<PAGE>
AVAILABLE INFORMATION
OnGard is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy and
information statements and other information filed by OnGard can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices located at Northwestern Atrium Center, 500 West Madison
Street, Suite 1600, Chicago, Illinois 60661, and Seven World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto contained elsewhere in
this Prospectus.
THE COMPANY
The Company designs, develops and markets products and services within
the infection control market. Although the Company initially focused on the
handling, storage and disposal of contaminated medical waste, more recently
it has expanded the scope of its products to include production of
sterilization supplies and equipment.
The Company's infection control activities are divided into three
primary components. The first component includes medical waste services and
products. OnGard's medical waste product line, which features a mail-back
service, allows for comprehensive product and service offerings within
non-hospital, clinical markets. See "Business-Medical Waste Services."
The second component previously consisted of sterile medical packaging,
which is designed and manufactured for medical device manufacturers.
Sterilization medical packaging is used to contain new, unused medical
devices during the sterilization process and maintain sterility during
transport and presentation. These products were primarily sold under private
label. Sterile medical packaging is constructed on specially designed
machines that are capable of handling multiple webs and completing sealing
operations through the application of heat and adhesives. In 1993, the
Company acquired substantially all of the assets of Med-Device Packaging,
Inc. ("MDPI"), a company engaged in the design, production and distribution
of sterile medical packaging. A number of customers of MDPI became customers
of the Company. See "Business-Sterilization Medical Packaging." Customers
included Boston Scientific, U.S. Surgical, Symbiosis and Baxter HealthCare.
The Company announced on November 3, 1995 it had signed a letter of intent to
sell its medical packaging line to Oliver Products of Grand Rapids, Michigan
and consummated the transaction on December 7, 1995. The sale included
production equipment and inventory with proceeds from the sale aggregating
$620,500. The gain on the sale was $233,000. The Company retained related
accounts receivable. The Company intends to focus its efforts on
sterilization supplies and equipment, described below.
The third component of the infection control market consists of
sterilization supplies and equipment. Sterilization involves the complete
elimination or destruction of all forms of microbial life, including high
numbers of bacterial spores. Sterilization is required for those instruments
or devices that penetrate skin or contact normally sterile areas of the body.
Through its acquisition of Pharmetics, now OST, the Company manufactures and
markets a complete line of institutional and pharmaceutical grade
sterilizers, washers and dryers. Sterilization supplies may include
containers, wraps and pouches and indicators and monitors which indicate that
the sterilization process has been completed. Sterilization supplies are
primarily utilized by hospital and clinical facilities during the
reprocessing of reusable instrumentation. Sterilization equipment may be
used by hospitals in the sterilization process for reusable instrumentation
or for the sterilization of materials prior to the disposal of medical waste,
and by pharmaceutical companies. The Company has developed three proprietary
products which it has begun to commercialize. These products and the markets
they serve are central to the Company's marketing efforts. See
"Business--Products Under Development and Commercialization Activities".
The Company, a Delaware corporation, was founded in 1989 as a successor
by merger to a Colorado corporation, On Guard Systems, Inc., which was
founded during December 1988. The Company's headquarters are currently
located at 40 Commerce Drive, Hauppauge, New York 11788 and its telephone
number is (516) 231-8989. On November 3, 1995, the Company announced its
plan to consolidate its two facilities at its Hauppauge, New York facility.
This occured by December 31, 1995. (See "Business Facilities"). In the third
quarter of 1992, the Company completed its initial public offering of
920,000 shares of its Common Stock and 920,000 Warrants. Effective October
1, 1994, the Company acquired Pharmetics Incorporated ("Pharmetics"), a
sterilization equipment manufacturer, pursuant to a merger (the "Merger") of
Pharmetics with and into the Company's wholly owned subsidiary, OnGard
Pharmetics, Inc., which is now called OnGard Sterilization Technology, Inc.
("OST"). The Company acquired OST in a stock transaction for 359,602 shares
of the Company's common stock with a value of $2.6 million. See
"Business--Acquisition of Pharmetics."
3
<PAGE>
THE OFFERING
Securities offered hereby .............. 4,637,227 shares of Common Stock,
$.001 par value, by the Selling
Stockholders, including 1,744,912
shares issuable upon exercise of
warrants, when and if such
Selling Stockholders exercise
their warrants, and 253,292
shares issuable when and if
holders of Series A preferred
stock convert their shares to
common stock.
Common Stock outstanding prior to the
offering .............................. 6,488,721 shares including
1,129,940 shares sold in March
and April 1996 pursuant to the
exercise of warrants issued in
the Company's initial public
offering in 1992. See "Price
Range of Securities and Dividend
Policy."
Use of proceeds ....................... The Company will not receive any
proceeds from this offering.
However, in the event certain
stockholders exercise their
warrants, the Company may receive
up to $7.7 million. Because the
Company is unable to predict the
number of warrants that will be
exercised pursuant to this
offering, it has not allocated
the proceeds for specific
purposes. The Company
anticipates using the proceeds
from such excercise for working
capital and marketing.
Risk Factors .......................... Investment in the Company
involves substantial risk and
should be considered only by
persons able to sustain a total
loss of their investment. See
"Risk Factors."
NASDAQ symbols ........................ Common Stock .............. OGSI
The Company's Common Stock is
quoted in the NASDAQ
(Small-CapSM) system. Warrants
also quoted in the NASDAQ System
expired April 30, 1996. Units,
each consisting of one share of
Common Stock and one Warrant,
were quoted in NASDAQ but were
withdrawn by the Company from
quotation effective October 26,
1993.
4
<PAGE>
ONGARD SYSTEMS, INC.
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31 MARCH 31
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1995 1994(1) 1994 1996 1995
----------- ----------- ----------- ----------- -----------
(PROFORMA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 4,975,069 $ 4,915,638 $ 3,928,345 $ 727,750 $ 1,292,218
Operating Margin (Deficit)............... (311,289) (524,657) 457,636 (159,539) (95,955)
Operating Expenses....................... 6,485,513 7,443,469 6,174,390 1,447,578 1,083,701
Loss From Operations..................... (6,797,102) (7,968,126 (5,716,754) (1,607,117) (1,179,656)
Net Loss................................. (6,988,000) (7,220,609) (5,890,008) (1,761,439) (1,257,166)
SHARE DATA:
Net Loss Per Share....................... $(1.76) $(2.60) $(2.32) $(.32) $(.41)
Weighted Average Shares Outstanding...... 3,961,700 2,776,450 2,534,900 5,515,190 3,065,318
</TABLE>
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BALANCE SHEET DATA: DECEMBER 31, 1995 MARCH 31, 1996
Working Capital............................... $ 1,973,805 4,627,300
Total Assets.................................. 10,129,438 13,607,088
Accumulated Deficit........................... (17,990,995) (19,752,827)
Stockholders' Equity.......................... 6,036,840 8,969,125
Common Stock Outstanding...................... 5,355,281 6,314,733
</TABLE>
(1) The 1994 proforma data is based on estimates and assumptions which have
been applied solely for the purpose of combining the historic financial
statements of OnGard and OST for the twelve months ended therein. Actual
results may vary from this unaudited proforma presentation. See "Proforma
Financial Information".
5
<PAGE>
RISK FACTORS
Investment in the Company involves substantial risk and should be
considered only by persons able to sustain a total loss of their investment. In
addition to the other information contained in the Prospectus, prospective
investors should carefully consider the following risk factors in evaluating the
Company and its business.
ACCUMULATED LOSSES
OnGard was founded in June 1989 and made its first commercial shipments in
1990. OnGard has recorded a loss in each quarter since its inception, which
losses have increased annually. OnGard expects losses to continue through much
of 1996. The accumulated losses of OnGard at March 31, 1996 were $19,753,000.
Stockholders' equity totaled $8,969,000 as of March 31, 1996. There can be no
assurance that OnGard will ever be able to operate profitably.
NEW BUSINESS COMBINATION
Effective October 1, 1994, the Company acquired Pharmetics pursuant to the
Merger. Investors bear inherent risks in any relatively new business
combination that has not competed in the market as an aggregate entity for an
extended period of time (see "Pharmetics Acquisition"). OnGard has historically
been engaged in disposable sterility products and their manufacture; Pharmetics
has competed in equipment sterilization products and their manufacture. There
is no assurance that OnGard can operate successfully in this new market.
WORKING CAPITAL DEMANDS
At March 31, 1996, OnGard had working capital of $4,627,000 resulting from
the exercise of warrants in March 1996 described below. However, OnGard's
working capital demands have continued to increase since its acquisition of OST
and due to the development and production prototypes of three new products,
their related commercialization, and for funding of OnGard's operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." In order to fund its working
capital requirements, OnGard has had to continually obtain funds from the
capital markets.
For example, OnGard completed a private placement aggregating $7,714,070 in
gross proceeds on September 29, 1995 (the "September 1995 Private Placement")
resulting from the sale of 2,204,021 shares of its common stock; it raised
$2,100,000 in gross proceeds from a private and offshore offering of units in
July 1994 (the "July 1994 Private Placement"); $1,500,000 in gross proceeds from
a private offering of convertible debentures in October 1994 (the "October 1994
Private Placement"); and $320,000 in gross proceeds from the exercise of Class A
Warrants during February 1995. Subsequent to December 31, 1995, and through
April 30, 1996, the Company received $6.0 million (gross proceeds) resulting
from the conversion of Common Stock Purchase Warrants.
Although OnGard has been successful to date in obtaining sources of
financing sufficient to meet current and past due trade obligations and other
expenses and to enable it to pursue its business plans generally, there is no
assurance that it will be successful in this regard in the future. OnGard's
expenses have exceeded its revenues since inception, and if they continue to do
so, OnGard will need additional capital in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
PHARMETICS ACQUISITION AND FINANCIAL INFORMATION; GOING CONCERN OPINION FROM
PHARMETICS' AUDITORS
Effective October 1, 1994, OnGard and Pharmetics completed the Merger in
which OnGard acquired the entire equity interest of Pharmetics in consideration
for Common Stock of OnGard and Pharmetics merged with OnGard Pharmetics, Inc.
("OGPI"), a wholly-owned subsidiary of OnGard, now called OnGard Sterilization
Technology, Inc. ("OST").
6
<PAGE>
OST has incurred significant operating losses in recent fiscal years and
has encountered problems in paying its trade creditors and other obligations.
OnGard has been required to reverse this condition. The Company believes it has
already resolved the majority of OST's creditor issues; however, during the
period in which the creditors are paid and in order to reverse operating losses,
OST has and will require additional amounts of operating capital, which amounts
could be significant.
As of September 30, 1994, immediately preceding its acquisition by OnGard,
Pharmetics had a working capital deficiency of approximately $1,186,000
(including Pharmetics' demand loan payable to OnGard of $1,883,824) and an
accumulated deficit of $3,799,789. It had a net loss for the nine months ended
September 30, 1994 of $1,371,415. The losses resulted in significant liquidity
problems for Pharmetics. OnGard extended intercompany loans to Pharmetics
totaling approximately $2,927,000 through December 31, 1994. The independent
auditors for Pharmetics issued their report, dated March 28, 1994, for the year
ended December 31, 1993, which indicated that Pharmetics' losses and liquidity
problems have raised substantial doubt about Pharmetics' ability to continue as
a going concern.
REGISTRATION REQUIREMENTS
The Shares cannot be exercised unless at the time of exercise the Shares
are qualified for sale in such person's state of residence or an exemption from
such qualification is available. In addition, unless the prospectus relating to
the shares is current as specified by the Securities Act of 1933, as amended,
the Company may decline to permit their exercise. No assurance can be given
that the Company will be able to maintain a current prospectus or effect any
required qualification.
DISCRETION OF BOARD OF DIRECTORS REGARDING USE OF PROCEEDS
If the Warrants to acquire 1,744,912 shares are exercised, the Board of
Directors of the Company will have broad discretion regarding the use of
proceeds from such exercise. See "Use of Proceeds." The Board's discretion in
this regard is particularly critical in light of the Company's need for
additional capital. See "Risk Factors - Working Capital Demands." The Board
of Directors will carefully determine that the use of any proceeds is consistent
with the Company's near and long term objectives regarding the need for
additional capital and product development. However, it is necessary that
investors trust the ability of the Company's directors to implement these
objectives in the best interest of the Company. See "Management."
OUTSTANDING WARRANTS
A portion of the Shares being offered hereby have not been issued by the
Company but are subject to Warrants issued by the Company to purchase such
Shares. Such Shares may not be sold by the owners of such warrants unless and
until they exercise such warrants. The following is a description of
outstanding warrants.
7
<PAGE>
GUARANTORS' WARRANTS
OnGard has obtained debt financing facilitated by third party Guarantors,
John Pappajohn ($2 million) and Edgewater Private Equity Fund, L.P. ($.5
million), both of Des Moines, Iowa, totaling $2.5 million. The $2.5 million
loans were pursuant to notes ("Notes") executed by OnGard in favor of a
commercial lender, Norwest Bank Colorado ("Bank"). The Notes are secured by
OnGard's inventory, equipment, accounts receivable and intangible assets as well
as certificates of deposit provided by the Guarantors for the most recent $1.0
million. In consideration for the $2.5 million guarantee, OnGard issued the
Guarantors or its assigns five year warrants ("Guarantors' Warrants") to
purchase an aggregate of 600,000 shares of Company Common Stock at an exercise
price of $4 per share. The Notes, of which there are three, matured in April
1996 and were paid in full. The market price of OnGard Common Stock on the date
of the three dates of the Guarantors' Warrant was $5-5/8, $6-5/8 and $5. The
issuance of these Guarantors' Warrants resulted in OnGard recording debt
issuance costs which are amortized as a non-cash charge against earnings over
the life of the loan. The 600,000 warrants have an anti-dilution provision
which has been triggered by some of the Company's securities transactions.
OnGard believes that the exercise price of the initial 400,000 warrants issued
in connection with the original credit line of $1.5 million would be $3.41 and
the shares issuable upon exercise would be 468,700. OnGard believes the
remaining 200,000 warrants issued in connection with the subsequent $1.0
million, would be adjusted to 224,080 shares and the exercise price would be
$3.57.
CLASS A WARRANTS
The July 1994 Private Placement contained Warrants (the "Class A Warrants")
to purchase one share of the Company's Common Stock for $6. The Class A
Warrants will be exercisable until 5:00 p.m., Mountain Time, three years from
the final closing date of the July 1994 Private Placement, i.e., July 18, 1997.
The Class A Warrants contain an anti-dilution provision which is triggered by
(i) a sale of any shares of the Company's Common Stock for a consideration per
share less than the then current fair market value per share of Common Stock or
the purchase price pursuant to the Class A Warrants on the date of sale, (ii)
the issuance of any shares of Common Stock as a stock dividend to the holders of
Common Stock, and (iii) a subdivision or combination of the outstanding shares
of Common Stock into a greater or lesser number of shares. The Warrant
agreement specifically provides that anti-dilution provisions are NOT triggered
by the Pharmetics Merger or the initial 400,000 Guarantor's Warrants. Three
hundred thousand (300,000) Class A Warrants were issued, of which 71,429 were
exercised during the first quarter of 1995. The Company believes the adjusted
exercise price of each Class A Warrant would be $5.20 and the number of shares
issuable upon exercise of remaining Class A Warrants would be 268,341.
CLASS B WARRANTS
The sale of Series A Preferred Shares sold in the October 1994 Private
Placement, which was completed in February 1995, contained warrants (the "Class
B Warrants") to purchase one share of the Company's common stock for $6. A
total of 375,000 Warrants were issued. The Class B Warrants are identical in
terms as the Class A Warrants described above. The three year exercise period,
during which time the Class B Warrants are exercisable, expires on February 16,
1998. The Class B Warrants contain an anti-dilution provision that has been
triggered by the securities transactions which have occurred since the October
1994 Private Placement. The Company believes that the exercise price of each
Class B Warrant would be $5.23 for 287,471 warrants, and $5.31 for 141,060
warrants, and the number of shares issuable upon exercise of each Class B
Warrant would be 428,531.
UNDERWRITER'S WARRANTS AND EXERCISE THEREOF
Underwriter's warrants ("Underwriter's Warrants") to purchase a total of
80,000 units at a unit exercise price of $7.00 per unit (each unit consisting of
one share of Common Stock and one stock purchase warrant with an exercise price
of $9.45) were issued to the Royce Investment Group, the underwriter
("Underwriter") as part of the Company's initial public offering. For the five-
year life of these warrants the Underwriter is given, at a nominal cost, the
opportunity to profit from a rise in the market value of Common Stock. The
Underwriter's Warrants contain an anti-dilution provision that has been
triggered by the securities transactions described
8
<PAGE>
above. The Company believes the exercise price of each Underwriter's Warrant
would be $4.65 and the number of shares issuable upon exercise of such
Underwriter's Warrants would be 120,391.
The warrants underlying the Underwriter's Warrants also contain an anti-
dilution provision that has been triggered. OnGard believes the exercise price
of each warrant underlying the Underwriter's Warrants would be $6.25 and the
number of shares issuable upon exercise of the Warrants underlying the
Underwriter's Warrants would be 120,391.
The Underwriter of the Company's initial public offering has been granted
warrants to purchase a total of 30,000 Units (each Unit consisting of two shares
of common stock and one purchase warrant) at $7 per unit in connection with the
Company's July 1994 Private Placement. The 30,000 warrants underlying the
Underwriter's private placement warrants are identical in terms to the Class A
Warrants discussed above except that they are not subject to redemption. The
shares issuable upon exercise of these 30,000 warrants are not being offered
pursuant to this Prospectus. The Company believes that the exercise price of
the 60,000 shares underlying units would be $3.01 and the number shares would be
69,652 and that the exercise price of the purchase warrants would be $5.17 and
the number of shares would be 34,826.
LESSOR'S GRANTED RIGHTS
In connection with the acquisition of Pharmetics Incorporated, the Company
became liable for certain amounts of lease payments in arrears and owed by
Pharmetics to the lessor of its facilities in Hauppauge, New York. In December
1994, the Company entered into an agreement with EEC Corp., the lessor.
Pursuant to the agreement, OnGard issued 22,700 shares of its common stock to
EEC Corp. in settlement of the payments in arrears. The agreement provided
that if OnGard did not file a registration statement which included such shares
within 12 months of the date of the agreement, then it would grant the right to
purchase 10,000 shares of its common stock to EEC Corp. at an exercise price of
$7.50 per share.
GOVERNMENT REGULATION--GENERAL
OnGard sells integrated systems that allow generators of infectious waste
to handle, store, and dispose of such waste in compliance with applicable
federal and state regulations. The Company is, or its products are, currently
subject to regulations of the Occupational Safety and Health Administration
("OSHA"), the U.S. Postal Service, and state and local regulation relating to
the handling and disposal of infectious waste. The Company's medical waste
disposal products meet or exceed Postal Service regulations regarding the
transport of medical waste, and its mail-back waste kits bear the Company's
Postal Code numbers, U.S.P.S. -002 A-F. The enactment by federal, state or
local governments of significant new laws or regulations, or a change in
existing laws and regulations, including their interpretation, relating to the
handling, storage and disposal of medical waste, could increase the cost of
producing the Company's products or otherwise adversely affect or eliminate the
demand for its current products and could require the Company to change
substantially its products to address such changes.
The Company's medical waste product line, in its current form, is dependent
upon the ability of the U.S. Post Office to transport medical waste. Although
the Post Office has been transporting medical waste on a regulated basis since
1989, the Company cannot predict whether it will continue to do so. A decision
by the Post Office to discontinue the transport of medical waste would have a
material adverse effect on the Company.
STATE REGULATION
Although the U.S. Postal Service is authorized to, and does, transport
medical waste pursuant to federal regulations, and the Company believes its
products comply with such regulations, most states also have regulations that
determine appropriate methodologies for the handling and disposal of medical
waste. Typically, the state laws in question refer to generators of medical
waste as opposed to manufacturers of medical waste disposal products. Several
states, including New York, California, and New Jersey, require specific
approval of medical waste disposal programs including mail-back medical waste
products. During 1993, Minnesota and Maine took the position that mail-back
medical waste programs were not consistent with state regulations. The
9
<PAGE>
Company made its distributors aware of these regulatory developments. The
Director of Pollution Control in Minnesota recently informed the Company that
he intended to address the situation through the proposal of new regulations
that, if adopted, would provide exemptions relating to the disposal of
medical waste through the U.S. Postal Service, and that no enforcement action
would be taken in this regard pending adoption of the new rules. There is no
assurance, however, that the State of Minnesota will not take such enforcement
action. The Company does not actively pursue mail-back medical waste
programs in states that do not encourage or that prohibit its use. Maine and
Minnesota represent a small percentage of the Company's current market and a
correspondingly small percentage of the potential market for the Company's
medical waste kits. Although the Company attempts to monitor regulatory
developments in all states in order to maintain regulatory compliance, because
of the large number of regulators it is possible the Company might not be
immediately aware of changes in relevant regulations. Regulations may change
frequently, and the Company's activities may be curtailed or limited to the
extent that certain states restrict the use of medical mail-back systems. The
Company is not aware of any attempt by a state to challenge the authority of
the U.S. Postal Service under applicable federal regulations to transport
medical waste.
FDA REGULATION
The Company's medical waste product line and sterile medical packaging
products are considered medical devices and as such are subject to regulation by
the U.S. Food and Drug Administration (the "FDA"). The FDA is imposing more
stringent regulatory requirements with respect to these products. If the
Company ultimately were unable to obtain FDA regulatory clearances and maintain
Good Manufacturing Practice standards, the Company would be unable to sell these
products to its customers. It is possible that the FDA could exercise its
discretionary authority to prohibit manufacturers from commercially distributing
certain of its products and could require product recalls of specific companies'
products or on an industry-wide basis.
Although the FDA historically has not exercised device regulatory authority
over sharps containers, more recently the Company has learned that the FDA
intends to apply its statutory authority over devices to sharps containers on an
industry-wide basis. The Company subsequently received clearances for its
current line of sharps containers. Sharps containers are containers that are
used for the disposal of certain medical instruments which are defined as
"sharp." Various jurisdictions and entities have defined the term "sharp."
Generally speaking, sharps include used needles and syringes, broken glass and
other objects with exposed edges capable of inflicting puncture wounds.
Containers manufactured for disposal of sharps are generally made from plastic
resins, but can also be made from metal and certain configurations of paper-like
resins. The use of sharps containers is defined and described in the OSHA
Bloodborne Pathogen Rule. Generally speaking, sharps containers must be
resistant to puncture and leakage and capable of closure after use.
In June 1994 the Company received notification that all of its 510(k)
submittals for sharps containers had been approved and cleared for marketing.
The Company has an additional submittal for one of its sharps containers which
the FDA had advised it to withhold until the others had cleared, and which the
Company is now preparing for submission.
COMPETITION
The markets for the Company's products and services and those of OST are
highly competitive. Compared to the Company, the Company's primary competitors
have greater experience, financial, distribution and marketing resources, as
well as a more established market presence and reputation. There can be no
assurances that additional competition or alternatives will not develop. See
"Business--Competition."
DEPENDENCE ON KEY CUSTOMERS AND SUPPLIERS
In 1993, the Company entered into a five-year supply, distribution and
licensing agreement with Sherwood Medical Company ("Sherwood"), pursuant to
which the Company sells products to Sherwood for resale where Sherwood takes the
inventory risk of such resale. This arrangement is limited to the Company's
mail-back medical waste products and accessories. These products appear on the
market with both the Sherwood Monoject trademark and the OnGard Systems
trademark. The distribution arrangement was exclusive, with several exceptions
which the Company and Sherwood continue to negotiate as the Company analyzes new
10
<PAGE>
markets it may want to pursue independently. Currently, these exceptions
include the Company's direct sales relationships with Caremark, Inc.
("Caremark"), Quantum Health Resources ("Quantum"), and a group of individual
customers that have had an existing direct purchasing arrangement with the
Company, and certain retail markets. As a result of the Company's continuing
increase in direct selling, its arrangement with Sherwood has been concluded.
It accepts sales from Sherwood similar to other non-exclusive distributors. For
the year ended December 31, 1995, Boston Scientific was the Company's only major
customer, comprising $512,000 in revenues or 10% of the Company's total
revenues. For the year ended December 31, 1994 the Company had three major
customers which accounted for an aggregate of 41% of revenues: Boston
Scientific, 16%; Caremark, 13% and Omni Construction, 12%. For the year ended
December, 31, 1993, the Company had three customers that accounted for an
aggregate of 52% of the Company's revenues: Sherwood, 14%; Caremark, 12%; and
Boston Scientific, 26%. Boston Scientific continued to be a key customer in
1994, but when the Company relocated the manufacturing of sterile packaging from
Pennsylvania to Denver in 1993, it was unable to reach agreement on rescheduling
product shipments with the Milford branch of Boston Scientific, which accounted
for 8% of the Company's revenue. During 1994, the Company recovered
approximately 4% or half of the sales it lost to the Milford branch due to
increased sales at other Boston Scientific locations. During 1992, the Company
had four customers that accounted for an aggregate of 45% of the Company's
revenues. The Company had two customers that accounted for an aggregate of 57%
of the Company's revenues during 1991. The Company no longer sells to two of
the customers which represented an aggregate of 25% and 57% of revenues during
1992 and 1991, respectively. In management's opinion, the loss of Sherwood as
an exclusive distributor could impact the Company's mail-back medical waste
program by approximately $15,000 per month. The Company has already increased
its expenditures in sales and marketing and to make direct arrangements with the
distribution channels served by Sherwood, and believes it can recoup a portion
of these sales. Due to the sale of the Company's medical packaging line, Boston
Scientific will cease to be relevant to OnGard's future business.
As certain films which are used in the production of AutoPak are available
only from single source, the loss of supply from such sources could disrupt the
Company's manufacturing operation. The Company has had ongoing relations with
its suppliers, many of which are large corporations, and does not anticipate
such disruptions. However, there can be no assurance that such disruptions will
not occur.
DEPENDENCE ON PATENTED AND PROPRIETARY TECHNOLOGY
The Company has obtained patents covering different aspects of its
technology. To the extent competitors develop equivalent or superior
non-infringing technology in these areas, or to the extent that the Company is
unable to enforce any patent, the Company's ability to market and sell its
products could be materially adversely affected. In addition, the Company may
incur significant costs defending its patents from infringement by others. See
"Business--Patents and Trademarks." The Company has also filed several patent
applications relating to certain of its key products, such as the mail-back
system and AutoPak-TM-. There is no assurance that any of these applications
will be granted.
DEPENDENCE ON KEY PERSONNEL
The Company relies to a substantial degree on its president, Mark E. Weiss.
Mr. Weiss had an employment agreement with the Company through December 31,
1995. The Board of Directors has agreed to extend the employment agreement
through three additional years. The agreement is terminable by OnGard for
cause, as defined therein, without further obligation. Mr. Weiss has agreed not
to compete in the business of providing medical waste regulatory compliance
services to health care facilities and providers without the written consent of
the Company for two years after the termination of the employment agreement.
See "Management--Employment Agreements."
The loss of Mr. Weiss would materially adversely affect the Company. See
"Management--Executive Officers and Directors." The Company does not maintain
key man life insurance on any of its employees.
PRODUCT LIABILITY EXPOSURE
As a seller of medical infection control and waste handling systems, the
Company could face product liability claims potentially based on accidental
infections, loss of waste disposal packages in the mail, or other
11
<PAGE>
unforeseen circumstances. See "Business--Legal Proceedings." For example, the
Company's sharps containers are used to store "sharps" such as contaminated
needles; such needles and other "sharps" pose obvious risks to persons using or
coming in contact with them. The Company cannot guarantee that its products
will not be misused, or even if used correctly, that accidents will not occur.
Risks posed to persons using, handling, storing or shipping sharps are
especially severe in today's environment of serious blood-borne diseases, such
as acquired immune deficiency syndrome. The Company maintains product liability
insurance in an aggregate amount of $1 million. There can be no assurance that
such coverage will be adequate to cover future product liability claims, if any,
or that it will continue to be available at reasonable prices. See
"Business--Insurance" and "Business--Legal Proceedings."
PRODUCTS UNDER DEVELOPMENT
The Company has designed a new product line consisting of sterilization
supplies and equipment. Sterilization supplies and equipment are used by health
care facilities during reprocessing of reusable instruments and devices. The
Company's sterilization product line includes a variety of pouches and bags used
to contain devices and instruments during sterilization as well as sterilization
indicators and monitors that are used to indicate that sterilization conditions
have been achieved. The Company's primary product in this line is AutoPak, a
proprietary product for which it has received 510(k) notice from the FDA and has
just commenced selling activities. See also "Business--Acquisition of
Pharmetics." Sterilization equipment may include products for the sterilization
of reusable instruments or sterilization for treatment of materials prior to
disposal of medical waste. The Company has developed and sold, in limited
quantities, Waste Clave, a highly efficient hospital autoclave. In addition,
HiVac, a tabletop steam sterilizer, has been sold in limited quantities into the
European market but continues to be refined. As some of these products are
currently commencing sales, the Company will rely on its existing products,
primarily its medical waste products, and the sale of institutional grade
sterilizers, washers and dryers to generate revenues. The Company has expended
funds on product development and may continue to incur expenses without
offsetting revenue or the assurance that it will ever derive revenue from its
activities. No assurances can be given that the new products being developed by
the Company, if introduced, will be accepted or competitive in the market or
that the Company will be able to sell such products on a profitable basis.
RELIANCE ON THIRD PARTIES
Although the Company owns the molds and tooling used to manufacture its
products, the Company does not manufacture the components of its waste handling
and waste disposal products and is therefore dependent on other manufacturers
with whom the Company contracts for the manufacture of these components.
Although the Company has not experienced any difficulty in procuring the
manufacture of those products, there can be no assurance that the Company's
needs for products will continue to be met on a timely basis. The Company
contracts for incineration services for its waste disposal systems with National
Medical Waste, Inc., a subsidiary of BioMedical Waste Systems, Inc. ("BioMedical
Waste"). National Medical Waste had incurred recurring operating losses and
experienced a working capital deficiency that raised substantial doubts about
its ability to continue as a going concern. National Medical Waste has merged
with BioMedical Waste. The inability to continue shipping medical waste to the
Company's present incinerator would require the Company to seek alternative
arrangements. Although other companies offer medical waste incineration
services, changing incinerator companies would necessitate expenditures on
preprinted forms and training. The Company has obtained an alternate source of
medical waste disposal. See "Business -- Medical Waste Services -- INCINERATION
CONTRACT".
The Postal Service subcontracts with other carriers, such as airlines, to
perform some functions relating to the transport of medical waste. If these
carriers determined that they were unwilling or unable to continue providing
transportation services, the Company's mail-back program in its current form
would be adversely affected. There is no guarantee that third-party
transporters, including the U.S. Postal Service, will continue their present
policies and practices with respect to the transport of medical waste.
12
<PAGE>
NO DIVIDENDS
The Company has paid no cash dividends on its Common Stock since its
inception and does not expect to declare or pay any cash dividends in the
foreseeable future. Any future dividends will depend upon the earnings if any,
of the Company, its financial requirements, and other factors. The Common Stock
should not be purchased by investors who anticipate the need for dividends from
their investments.
POTENTIAL FUTURE SALES PURSUANT TO RULE 144
Of the 6,488,721 shares of Common Stock currently issued and outstanding as
of April 30, 1996, 2,762,044 are currently freely traded, an additional
2,639,023 are being registered pursuant to the Prospectus and 1,087,654 are
"restricted securities," as that term is defined in Rule 144 promulgated under
the Securities Act. In general, under Rule 144, a person who has satisfied a
two-year holding period may, under certain circumstances, sell within any three-
month period a number of shares which does not exceed the greater of 1% of the
then outstanding shares of Common Stock or the average weekly trading volume in
shares during the four calendar weeks immediately prior to such sale. Rule 144
also permits, under certain circumstances, the sale of shares without any
quantity or other limitation to a person who is not an affiliate of the Company
and who has satisfied a three-year holding period. The holders of all shares
of the Company's Common Stock outstanding on August 11, 1992, the date of the
Company's initial public offering, agreed not to publicly offer, sell or
otherwise dispose of any of their shares of Common Stock for a period of 24
months after that date without prior written consent of the Underwriter. The
1,087,654 shares of restricted stock are available for sale pursuant to Rule 144
at this time. Any sales of substantial amounts of the Common Stock in the open
market could have a significant effect on the market price of securities of the
Company. See "Description of Securities--Shares Eligible for Future Sale.
NASDAQ LISTING AND MAINTENANCE REQUIREMENTS
The Company's Common Stock are quoted in the NASDAQ (Small-CapSM) system.
Units, each consisting of one share of Common Stock and one Warrant, were quoted
in the NASDAQ (Small-CapSM) system but were withdrawn by the Company from
quotation effective October 26, 1993. The Company's warrants were quoted
separately on that exchange until they expired on April 30, 1996.
There is no assurance that any class of the Company's securities will
continue to be quoted in the NASDAQ (Small-CapSM) system. Failure to continue
to be quoted in the NASDAQ (Small-CapSM) system would be likely to decrease
liquidity in the market for the Company's securities because non-NASDAQ
securities traded over-the-counter generally trade at lower volume levels.
13
<PAGE>
THE COMPANY
The Company designs, develops and markets products and services within the
infection control market. Although the Company initially focused on the
handling, storage and disposal of contaminated medical waste, more recently it
has expanded the scope of its products to include production of sterilization
supplies and equipment.
The Company's infection control activities are divided into three primary
components. The first component includes medical waste services and products.
OnGard's medical waste product line, which features a mail-back service, allows
for comprehensive product and service offerings within non-hospital, clinical
markets. See "Business-Medical Waste Services."
The second component previously consisted of sterile medical packaging,
which is designed and manufactured for medical device manufacturers.
Sterilization medical packaging is used to contain new, unused medical devices
during the sterilization process and maintain sterility during transport and
presentation. These products were primarily sold under private label. Sterile
medical packaging is constructed on specially designed machines that are capable
of handling multiple webs and completing sealing operations through the
application of heat and adhesives. In 1993, the Company acquired substantially
all of the assets of Med-Device Packaging, Inc. ("MDPI"), a company engaged in
the design, production and distribution of sterile medical packaging. A number
of customers of MDPI became customers of the Company. See
"Business-Sterilization Medical Packaging." Customers include Boston
Scientific, U.S. Surgical, Symbiosis and Baxter HealthCare. The Company
announced on November 3, 1995 it had signed a letter of intent to sell its
medical packaging line to Oliver Products, of Grand Rapids, Michigan. This
transaction closed on December 7, 1995. The sale, which was in the form of an
asset transaction, was comprised of production equipment, including three pouch
manufacturing machines, a printing press, plates and dies and testing equipment,
open customer accounts and historic records and inventory. The purchase price
for these assets was $620,500. The gain on the sale was $233,000. The Company
retained related accounts receivable of approximately $316,000. No warranties
or guarantees were provided with the assets delivered. Approximately $45,500
was retained in escrow for claims, if any, which arise from products shipped by
the Company prior to the effective date of the sale. The escrow account is to
be released 180 days after the effective date of transaction. The Company
intends to focus its efforts on sterilization supplies and equipment, described
below.
The third component of the infection control market consists of
sterilization supplies and equipment. Sterilization involves the complete
elimination or destruction of all forms of microbial life, including high
numbers of bacterial spores. Sterilization is required for those instruments or
devices that penetrate skin or contact normally sterile areas of the body.
Through its acquisition of Pharmetics, now OST, the Company manufacturers and
markets a complete line of institutional and pharmaceutical grade sterilizers,
washers, and dryers. Sterilization supplies may include containers, wraps and
pouches and indicators and monitors which indicate that the sterilization
process has been completed. Sterilization supplies are primarily utilized by
hospital and clinical facilities during the reprocessing of reusable
instrumentation. Sterilization equipment may be used by hospitals in the
sterilization process for reusable instrumentation or for the sterilization of
materials prior to the disposal of medical waste, and by pharmaceutical
companies. The Company has developed three proprietary products which it has
begun to commercialize. These products and the markets they serve are central
to the Company's marketing efforts. See "Business--Products Under Development
and Commercialization Activities".
The Company, a Delaware corporation, was founded in 1989 as a successor by
merger to a Colorado corporation, On Guard Systems, Inc., which was founded
during December 1988. The Company's headquarters are currently located at 40
Commerce Drive, Hauppauge, New York, 11788 and its telephone number is
(516) 231-8989. On November 3, 1995 the Company also announced its plan to
consolidate its two facilities at its Hauppauge, New York facility. This
occurred by December 31, 1995. (See "Business Facilities"). In the third
quarter of 1992, the Company completed its initial public offering of
920,000 shares of its Common Stock and 920,000 Warrants. Effective October 1,
1994, the Company acquired Pharmetics Incorporated in a stock transaction for
359,602 shares of the Company's common stock, with a value of $2.6 million
("Pharmetics"), a sterilization equipment manufacturer. See "Business--
Acquisition of Pharmetics."
14
<PAGE>
USE OF PROCEEDS UPON EXERCISE OF WARRANTS
The Company is not able to predict the number of such warrants that will be
exercised; however, the holders of such warrants have requested that the Company
include the shares issuable upon exercise of the warrants in this offering. The
holders of the warrants may not offer the shares for sale unless they exercise
the warrants. If all of the warrants are exercised, the Company would receive an
aggregate of approximately $6.5 million. See "Risk Factors -- Outstanding
Warrants".
Because the Company is unable to predict the number of warrants that will
be exercised, it has not allocated the proceeds for a specific purpose. The
Company anticipates using the net proceeds from the exercise of the warrants, if
the maximum amount is raised, for working capital ($7.2 million), and enhanced
marketing ($.5 million). However, as the Company cannot predict when or if the
warrants will be exercised, or the amount of proceeds therefrom, it cannot rely
on the proceeds for budgeting purposes. The Company will utilize these funds
when and if they are available to further the objectives of its business
activities. Such activities include further investment in the sterilization
product line and completion thereof and purchase of additional equipment to
increase capacity. In addition, the Company will continue to look for strategic
acquisitions that will enhance the Company's ability to serve infection control
and other markets. However, the Company does not have any agreements,
agreements in principle, arrangements or understandings relating to any possible
acquisition.
15
<PAGE>
PRICE RANGE OF SECURITIES AND DIVIDEND POLICY
The Company's Common Stock is quoted in the NASDAQ (Small-CapSM) system and
its trading symbol is OGSI. As of December 31, 1995, there were approximately
142 record holders and approximately 1,357 beneficial holders of Common Stock.
There were 6,488,721 shares outstanding as of April 30, 1996. Prior to the
initial public offering in August 1992, there was no market for the Company's
Common Stock.
The tables below set forth the high and low closing bid prices of the
Company's Common Stock, Warrants and Units (each unit consisting of one share of
Common Stock and one Warrant) as reported by the National Association of
Securities Dealers, Inc. ("NASD") for each of the quarters indicated since the
Company's initial public offering (such quotations represent prices between
dealers, not actual transactions, and do not include retail mark-ups, mark-
downs, or commissions). The Company withdrew the Units from quotation in NASDAQ
(Small-CapSM) system effective October 26, 1993. The warrants expired on
April 30, 1996.
<TABLE>
<CAPTION>
Year: Quarter Common Stock Year: Quarter Common Stock
----- ------- ------------ -------------- ------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
<S> <C> <C> <C> <C>
1992: 1994:
Third Quarter 4-1/2 4-1/2 First Quarter 7-3/4 6-3/4
Fourth Quarter 4-1/2 4-1/2 Second Quarter 8-1/4 4-1/8
1993: Third Quarter 9 6
First Quarter 4-7/8 4-1/2 Fourth Quarter 9 6-1/2
Second Quarter 5-1/8 4-7/8 1995:
Third Quarter 6-3/4 5-1/8 First Quarter 8-1/4 6-1/2
Fourth Quarter 8-3/8 6-5/8 Second Quarter 7 4-1/2
Third Quarter 9-1/2 4
Fourth Quarter 8-3/4 6-5/8
1996:
First Quarter 9-14 6-5/8
</TABLE>
<TABLE>
<CAPTION>
Warrants Units
-------- -----
Year: Quarter High Bid Low High Low Bid
------------- -------- Bid Bid -------
--- ---
<S> <C> <C> <C> <C>
1992:
Third Quarter 7/8 1/2 5-3/8 5
Fourth Quarter 13/16 3/4 5-1/4 5-1/8
1993:
First Quarter 1 3/4 5-3/4 5-1/4
Second Quarter 1-1/8 7/8 6 5-3/4
Third Quarter 1-7/8 1 8-3/8 6-1/8
Fourth Quarter 4-1/4 1-3/4 12-1/4* 8-1/4*
1994:
First Quarter 4 3-1/4
Second Quarter 2-13/16 1/2
Third Quarter 4 2-1/2
Fourth Quarter 3-3/8 3
1995:
First Quarter 3-3/4 2
Second Quarter 2-1/2 1
Third Quarter 5-1/4 1
Fourth Quarter 3-5/8 1-7/8
1996:
First Quarter 4-7/8 1-7/8
</TABLE>
- -----------------------------------------
* Through October 25, 1993.
16
<PAGE>
The closing bid price of OnGard Common Stock in the NASDAQ (Small-CapSM)
system on June 24, 1996 was $5.25.
The Company has never paid any cash dividends on its Common Stock and does
not expect to pay any cash dividends in the foreseeable future. The Company
intends to reinvest its earnings in the continues development and expansion of
its business.
17
<PAGE>
SELLING STOCKHOLDERS
The following table provides certain information with respect to the
persons offering the Shares pursuant to this prospecus (the "Selling
Stockholders) including the transaction in which they acquired the Shares,
their name, the number of issued Shares being offered, the number of Shares
underlying warrants held by certain Selling Stockholders and the percentage
of the outstanding common stock of the Company being offered by each Selling
Stockholder if that amount equals 1% or more of the common stock outstanding.
<TABLE>
<CAPTION>
TRANSACTION IN PERCENT OF
WHICH SHARES RIGHTS TO COMMON STOCK
SHARES/RIGHTS PRESENTLY ACQUIRE SHARES TO OWNED AFTER
ISSUED NAME OWNED SHARES(8) BE OFFERED SALE(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
July 1994 Private Northwest Holdings, Ltd. ------- 92,243 92,243 1.1%
Placement
Planate Business S.A. 71,429 ------- 71,429 ---
William C. and Edna Bartlet 3,570 2,095 5,665 ---
Patrick Bennett 42,856 25,156 68,012 ---
Charles E. Bohmert Jr. 14,284 8,385 22,669 ---
Richard M. and Patricia H. Clark 14,284 8,385 22,669 ---
Robert A. Epstein 14,284 8,385 22,669 ---
Robert A. Epstein Pension Plan 14,284 8,385 22,669 ---
Charles T. Genovese 3,570 2,095 5,665 ---
Herman Jeffer 57,142 33,542 90,684 1.1%
Eng-Chye Low 57,140 33,541 90,681 1.1%
Dennis Scott Mair 28,570 16,771 45,341 ---
V.J. Melone Trust 28,570 16,771 45,341 ---
Elliot S. and Lois Schlissel 14,306 8,398 22,704 ---
Nicholas Veenstra 3,570 2,095 5,665 ---
Neil Wager 3,570 2,095 5,665 ---
Placement Agent's Unit Royce Investment Group Inc.(2) ------- 345,260 345,260
Purchase Option 4.5%
Pharmetics Acquisition Royce Investment Group, Inc.(2) 16,000 ------- 16,000
Loan Guarantee John Pappajohn(3) ------- 580,740 580,740 7.2%
Edgewater Private Equity Fund(3) ------- 112,040 112,040 8.1%
October, 1994 Edgewater Private Equity Fund 253,292 287,471 540,763
Private Placement
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION IN PERCENT OF
WHICH SHARES RIGHTS TO COMMON STOCK
SHARES/RIGHTS PRESENTLY ACQUIRE SHARES TO OWNED AFTER
ISSUED NAME OWNED SHARES(8) BE OFFERED SALE(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
October, 1994 Private Waal Investments, Ltd. Sold 141,060 141,060 1.7%
Placement
Lease Settlement EEC Corp. 22,700 10,000 32,700 ---
September, 1995 Private Haussman Holdings(4) 456,000 ------- 456,000 5.7%
Placement
Montgomery Growth Partners (4) 64,000 ------- 64,000
2.5%
Montgomery Growth Partners II (4) 140,000 ------- 140,000
Nosrob Investments 72,000 ------- 72,000 ---
Quota Fund(4) 360,000 ------- 360,000 4.5%
Montgomery Small Capital Partners 56,000 ------- 56,000 ---
II(4)
Oak Hall Investors, L.P. 71,500 ------- 71,500
1.8%
Oak Hall Equity Fund 71,500 ------- 71,500
Okebena Partnership K 143,000 ------- 143,000 1.8%
Bank of New York as Trustee 143,000 ------- 143,000 1.8%
Joe Riccardo 40,000 ------- 40,000 ---
Steve Frank 20,000 ------- 20,000 ---
Anthony Pace 29,000 ------- 29,000 ---
Scott Shevick 14,500 ------- 14,500 ---
Jerry Callaghan 40,000 ------- 40,000 ---
Thomas Kearns(5) 50,000 ------- 50,000 ---
Oscar Schafer 14,500 ------- 14,500 ---
Lawrence Kohn 14,500 ------- 14,500 ---
Peter Riccardo 4,000 ------- 4,000 ---
Frank Morris 10,000 ------- 10,000 ---
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION IN PERCENT OF
WHICH SHARES RIGHTS TO COMMON STOCK
SHARES/RIGHTS PRESENTLY ACQUIRE SHARES TO OWNED AFTER
ISSUED NAME OWNED SHARES(8) BE OFFERED SALE(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September, 1995 H. Michael Weaver 15,000 ------- 15,000 ---
Private Placement
Paul Rizzo(6) 20,000 ------- 20,000 ---
Stuart Bondurant & Susan Ehringhaus 5,000 ------- 5,000 ---
Leonard Weiss 27,500 ------- 27,500 ---
Eric Steiner(7) 14,500 ------- 14,500 ---
Domenick Treschitta(6) 29,000 ------- 29,000 ---
Barbara Treschita 10,000 ------- 10,000 ---
D. Ware Branch, M.D. 8,500 ------- 8,500 ---
Gregg and Sallee Middlekauff 7,142 ------- 7,142 ---
Ronald Katz, M.D. 7,150 ------- 7,150 ---
Michael R. Barr 7,000 ------- 7,000 ---
Courtney Brown 7,000 ------- 7,000 ---
Dennis LaValle 10,000 ------- 10,000 ---
David Cohn 7,000 ------- 7,000 ---
Frank Eagan 20,000 ------- 20,000 ---
JAM Enterprises 29,000 ------- 29,000 ---
Frisian Holdings, Ltd.(9) 71,428 ------- 71,428 ---
Herb Lyman 7,000 ------- 7,000 ---
Peter Salas 7,000 ------- 7,000 ---
George Wood 8,925 ------- 8,925 ---
Jerry Armstrong 8,925 ------- 8,925 ---
Ray Brownlie 8,925 ------- 8,925 ---
James Wallace 8,925 ------- 8,925 ---
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION IN PERCENT OF
WHICH SHARES RIGHTS TO COMMON STOCK
SHARES/RIGHTS PRESENTLY ACQUIRE SHARES TO OWNED AFTER
ISSUED NAME OWNED SHARES(8) BE OFFERED SALE(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September, 1995 John Mack 28,600 ------- 28,600 ---
Private Placement
Priscilla Perez 3,000 ------- 3,000 ---
Abbey Herman 14,000 ------- 14,000 ---
Other Akin Gump 12,500 ------- 12,500 ---
Lou Wertman 2,105 ------- 2,105 ---
Eric Steiner 10,268 ------- 10,268 ---
</TABLE>
(1) Assumes exercise of all warrants. Presented for all share ownership which
would comprise 1% or more of the Company's outstanding common stock.
(2) Royce Investment Group, Inc. was (a) underwriter of the Company's initial
public offering in August, 1992, (b) placement agent for the Company's
April and July 1994 private placement, (c) investment banker with respect
to the Company's acquisition of Pharmetics, and (d) receives fees with
respect to the exercise of the Company's warrants issued in its August,
1992 public offering.
(3) John Pappajohn and Edgewater Private Equity Fund have guaranteed certain
bank debt of the Company. See "RISK FACTORS -- Outstanding Warrants --
Guarantors' Warrants."
(4) Haussman Holdings, Montgomery Growth Partners, Montgomery Growth Partners
II, Nosrob Investments, Quota Fund and Montgomery Small Capital Partners II
are under the control of Montgomery Asset Management, L.P. See "PRINCIPAL
SHAREHOLDERS."
(5) Thomas Kearns has served as a director of the Company since December, 1995.
See "MANAGEMENT."
(6) Paul Rizzo and Domenick Treschitta are consultants to the Company and have
been nominated to become directors of the Company if elected by the
Company's stockholders at the Company's annual meeting to be held in July,
1996.
(7) Eric Steiner is a co-founder of the Company, has served as a director of
the Company since its inception and is a principal stockholder. See
"MANAGEMENT" and "PRINCIPAL SHAREHOLDERS."
(8) Reflects the adjusted number of shares into which the rights to acquire
shares would be converted. These rights, when granted, provided for a
dilution projection provision which had been triggered by the Company's
various financial transactions.
(9) Includes principals of Royce Investment Group; see note 2 above.
21
<PAGE>
PLAN OF DISTRIBUTION
The Shares are being offered by the Selling Stockholders from time to time on
the NASDAQ (Small-Cap-SM-) system, in privately negotiated transacations or on
other markets. Any Shares sold in brokerage transactions will involve
customary broker's commissions. No underwriter will participate in any sales
on behalf of the Selling Stockholders.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
SALES, MARKET DEVELOPMENT AND MAJOR CUSTOMERS
Since the formation of the Company's predecessor in December 1988, the
Company has been engaged in developing products and market positions for the
control of infectious diseases. It has recently expanded its disposable
supplies business to include equipment lines. During 1992, concurrent with the
publication of OSHA's Bloodborne Pathogen Rule which increased awareness of
regulatory control of contaminated medical instruments, the Company successfully
negotiated medical waste mail-back product sales to Caremark and Quantum Health
Resources, which are primarily engaged in the service of home care patients.
Revenues attributable to Caremark and Quantum for the year ended December 31,
1994 were $508,000 and $100,000 respectively. Caremark would be characterized
as a major customer constituting 13% of the Company's total sales in 1994. In
January, 1995, Coram Inc. purchased a division of Caremark, resulting in sales
to both Coram Inc. and Caremark Therapeutic, Inc. For the year ended December
31, 1995, sales to Caremark, Coram and Quantum were $398,000, $165,000 and
$134,000, respectively. A customer group list was purchased by OnGard from
ProMed Sharps in December 1992. During the year ended December 31, 1995, sales
to ProMed customers were approximately $240,000. In February 1993, the Company
and Sherwood entered into a five-year Supply, Distribution and Licensing
Agreement ("Sherwood Agreement") which gives OnGard's medical waste mail-back
products access to Sherwood's extensive distribution system. The exclusive
arrangement has since terminated in the third quarter of 1995. For the year
ended December 31, 1994, the Company's revenues attributable to the Sherwood
Agreement were approximately $356,000. While no longer a major customer,
Sherwood represented $99,000 of the Company's sales for the year ended
December 31, 1995. The Company also continues to expand its direct selling
capabilities.
With the acquisition of MDPI in 1993 and OST in late 1994, the Company
emphasized a direct sales approach. It expanded its sales staff with experienced
personnel in both the packaging and equipment lines to expand its market
position. Boston Scientific, a sterile packaging customer, has been a major
customer representing 16% of the Company's total sales in 1994. OST had one
customer, Omni Construction, which accounted for 12% of the Company's revenues
in 1994. On November 3, 1995 the Company announced it had signed a letter of
intent with Oliver Products of Grand Rapids, Michigan for the sale of its
medical device packaging business. This transaction closed on December 7, 1995.
The sale included production equipment and inventory with proceeds from the sale
aggregating $620,500. The gain on the sale was approximately $233,000. The
Company retained all related accounts receivable. Accordingly, Boston
Scientific will no longer be a major customer. Revenues from Boston Scientific
approximated $512,000 in 1995. However, net profitability from this and other
packaging line accounts was nominal after accounting for direct selling expenses
and allocation of general and administrative expense. Accordingly, the Company
believes the loss of this customer will have no impact on the results of
operations and capital resources
PRODUCT LINE EXPANSION
During 1990, substantially all of the Company's revenues came from the sale
of the Recapper and related products. The Recapper is a device which allows
clinicians to separate used needles from re-usable syringes without directly
touching the needle. During 1991 and 1992, the Company expanded its product
line into the medical waste mail-back business. During 1993, the Company
experienced significant revenue growth due to the addition of its medical
sterile packaging products. Growth in this market is attributable largely to
the Company's acquisition of the assets of MDPI described elsewhere herein.
Medical sterile packaging products were manufactured to customer specifications
and are sold to a variety of medical device manufacturers. In June 1993, the
Company relocated its operations to a larger facility that includes a "white
room" for the manufacturing of sterile medical packaging. The Company made a
significant investment in this new facility and equipment. Revenues
attributable to sterile medical packaging business for the year ended
December 31, 1993, 1994, and 1995 were $1,715,000, $1,813,000 and $1,905,000
respectively.
23
<PAGE>
However, in connection with the relocation and expansion of manufacturing in
Denver during 1993, additional shipping costs were incurred for late fees and
gross margins were weakened as the Company incurred start-up costs associated
with the production process.
From 1992 through 1994, the Company made progress in the development of the
AutoPak-TM- line of sterile pouches. The Company received approval on its
510(k) notices with the FDA in December 1994 and has completed clinical trials.
Commercialization is commencing now with direct selling to hospitals. The
Company believes that the acquisition of OST will significantly add to its
ability to market comprehensive sterilization supplies and infection control
products. The Company has completed its development of a hospital medical waste
processing system, WasteClave and a tabletop sterilizer, HiVac, for use in
operating rooms, laboratories and other clinical environments. Sales efforts
for these products recently commenced.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from OnGard's Statements of Operations expressed as percentages of revenues:
<TABLE>
<CAPTION>
Year Ended Three Months
December 31 Ended March 31
----------- --------------
1995 1994 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues................................ 100.0 % 100.0 % 100.0 % 100.0 %
Costs of Sales.......................... 106.3 88.4 121.9 107.4
------- ------- ------- ------
Operating Margin.(deficit).............. (6.3) 11.6 (21.9) (7.4)
------- ------- ------- ------
Operating Expenses......................
General and Administrative.............. 87.3 62.1 120.8 48.3
Write down of note receivable........... -- 71.0 -- --
Sales and Marketing..................... 29.5 14.5 58.5 19.4
Depreciation and Amortization........... 6.2 3.8 10.2 6.0
Research and Development................ 7.4 5.7 9.4 10.2
------- ------- ------- ------
Total................................... 130.4 198.9 83.9
------- ------- ------- ------
Loss from Operations.................... (136.7) (145.5) (220.8) (91.3)
Interest and Other Expense.............. (11.5) (6.1) (27.3) (6.5)
Interest and Other Income............... 5.6 1.7 5.9 .5
Forgiveness of Debt..................... 2.1 -- -- --
------- ------- ------- ------
Net Loss................................ (138.3) % (149.9) % (242.2) % (97.3) %
------- ------- ------- ------
------- ------- ------- ------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Revenues for the three months ended March 31, 1996 decreased $564,000 or
44%, to $728,000 from $1,292,000 in the same period in 1995. The decrease is
primarily attributable to the sale of selected assets of the packaging business,
in December 1995, which no longer fit with the Company's long-term strategic
plans. Packaging revenues in the first quarter 1995 were $438,000; there were
only $20,000 of such revenues in the comparable quarter in 1996. The remaining
decrease of $146,000 in sales occurred in the equipment line; sufficient open
orders were in place to meet or exceed prior years sales but start-up issues
with new production equipment impeded such shipments.
Operating margin decreased to a deficit of $160,000 (a deficit of 21.9% of
revenues) for the three months ended March 31, 1996 compared to a decifit of
$96,000 (7.4% of revenues) for the same period in 1995. The decrease in margin
resulted from production start-up costs associated with relocating Autopak
24
<PAGE>
operations to the New York facility, and related internal restructuring costs,
totalling $77,000. Revenues, however, were insufficient to offset fixed factory
overhead resulting in an operating margin deficiency.
General and administrative expenses increased $255,000, or 41%, from
$624,000 to $879,000 for the respective three month periods ended March 31, 1995
and 1996. Of this increase, $135,000 is attributable to non-cash charges for
deferred compensation expense resulting from stock options granted to certain
officers and directors; approximately $60,000 is attributable to payroll, and
approximately $56,000 for travel and relocation expenses.
Sales and marketing expenses increased by 70% to $426,000 in the three
months ended March 31, 1996 versus $251,000 in the comparable period in 1995.
The Company has increased its direct selling efforts, including manpower and
collateral materials, in both its equipment and Autopak product lines.
Research and development expenses decreased $63,000 to $68,000 from
$131,000, a 48% decrease, from the first quarter ended March 31, 1995 to the
comparable quarter in 1996. The decrease relates to the completion of Autopak
development ($31,000), and scaling down the development of the Company's
tabletop sterilizer ($32,000), as it reached commercialization.
Interest expense increased $102,000 to $186,000 for the three months ended
March 31, 1996 from $84,000 in the comparable period in 1995, or 121.4%. This
results from increased indebtedness on the Company's bank line (the note was
increased $1.0 million in April/May 1995) accounting for $27,000 and
amortization of debt issuance costs accounting for $75,000. The notes were due
on April 15, 1996 and were paid in full at that time.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
Revenues for the twelve months ended December 31, 1995 increased 27% to
$4,975,000 from $3,928,000 in the same period in 1994, or $1,047,000. The
increase was attributable to sales from the Company's equipment line, OST, which
was consolidated in the Company's operating results for the entire year in 1995,
but only for the last quarter of 1994.
Operating margin decreased to a deficit of $311,289 (a deficit of 6.3% of
revenues) for the year ended December 31, 1995 compared to $457,636 (11.6% of
revenues) for the same period in 1994. The gross margin deficiency at the
Company's acquired equipment business line, OST, comprised $332,518 of the
deficit. This was the result of (1) a lack of financial resources for nearly 9
months during 1995 in which fixed factory overhead was incurred and charged to
operations without substantive revenue generation and, (2) upon availability of
funds, a significant allocation of production man hours was applied to the
development of two new proprietary products, a tabletop sterilizer called HIVAC,
and a hospital autoclave, called WasteClave. As a result, shipments of revenue
generating products were reduced and insufficient to offset fixed factory
overhead. At the Company's disposable product line the operating margin was a
positive $21,231. This amount decreased due to unfavorable material and labor
usage inefficiencies related to the sterile medical packaging line selected
assets of which were sold in December 1995. The Company believes that revenue
levels should be sufficient in the later half of calendar year 1996 to provide
positive operating margins. Through that date it will fund margin deficiencies
and losses with existing funds from its September 1995 Private Placement, and
with funds from warrant exercises.
General and administrative expenses increased 78% to $4,339,822 (81% of
revenues) for the year ended December 31, 1995 from $2,440,935 (62% of
revenues) for the 1994 period. The increase is entirely attributable to a non-
cash charge for compensation expense related to fully vested, stock option
grants at prices less than market value, totaling $1,700,000. Other than this,
the administrative expenses at OST increased $513,000 due to a full year of
inclusion in 1995 versus one quarter in 1994 after the date of the acquisition;
remaining expenses decreased $426,000.
25
<PAGE>
Sales and marketing expenses increased 159% from $568,488 in 1994 to
$1,468,319 for the year ended December 31, 1995. Of this increase $663,000 was
incurred at OST. This, and the remaining increase of $237,000 relates to the
Company's efforts to sell directly to its existing customers as well as the
development of new customers in conjunction with commercializing its new
products, AutoPak, HiVac and WasteClave (see "Business-Products Under
Development and Commercialization Activities"). The Company believes its sales
and marketing expenses will continue to increase during 1996 while it
establishes its sales personnel complement and marketing for this effort.
Depreciation and amortization increased from $150,930 to $307,813 for the
year ended December 31, 1994 and 1995 respectively or 104%. Approximately
$96,000 is attributable to a full year of amortization of goodwill associated
with the acquisition of OST versus one quarter in 1994, and the purchase of an
updated computer equipment network and software, $60,000.
Research and development increased from $223,652 to $369,858 for the year
ended December 31, 1994 and 1995 respectively, or 65%. New equipment products
being or already developed at OST, accounted for an increase of approximately
$221,000. These products include HiVac and WasteClave described above. R&D
expenses for disposable products, specifically AutoPak, declined $75,000
resulting from the completion of development of initial product sizes.
Interest expense increased as a result of interest and debt issuance cost
amortization related to the Company's term loans. The Company obtained a $1.5
million term loan facilitated by a third party guarantor ($764,000 outstanding
at December 31, 1995). The total was received in two equal parts in May and
November 1994. The loan bears interest at the prime rate plus 2%. The loan
calls for monthly payments based on a 36 month amortization schedule with a
balloon payment due in April 1996. In April and May 1995, the loan was
increased by a total of $1.0 million under similar terms, with the principal
portion of the loan is due concurrently with the balloon payment of the original
loan in April 1996. The Company granted an additional 200,000 warrants to
guarantors of the Company's loan which resulted in debt issuance costs.
On December 24, 1995 the Board of Directors granted 700,000 stock options
(600,000 at $3.50 and 100,000 at $1.00) to certain officers, directors and
consultants of the Company. In the fourth quarter of 1995 the Company recorded
compensation expense of $1,700,000 related to fully vested options for an amount
representing the difference between the exercise price and fair market value of
OnGard common stock on the date of the grant. The Company also recorded
deferred compensation expense of $1,087,500 for options which vest ratably over
two years, which will be charged to operations over that time. The price of
OnGard's common stock at the date of the grant was $7 1/8.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues for the year ended December 31, 1994 increased 36.1% to $3,928,345
from $2,885,433 in the same period in 1993. The merger with Pharmetics on
October 1, 1994, now representing the Company's equipment product line, resulted
in increased sales of $954,272 (91.5% of the increase) which occurred in its
entirety during the fourth quarter 1994. The remaining increase is due to an
increase in sales relating to the sterile packaging line of approximately
$112,000.
Gross margin increased 5.9% to $457,636 (11.6% of revenues) for the year
ended December 31, 1994 compared to $432,292 (15.0% of revenues) for the same
period in 1993. The dollar increase results from higher revenues during the
period. The decrease, as a percentage of revenues represents a decrease in
gross margin for the sterile packaging line. The gross margin for the container
line remained relatively unchanged.
General and administrative expenses for the year ended December 31,1994
increased 17.1% to $2,440,935 (62.1% of revenues) compared to $2,084,381 (72.2%
of revenues) for the same period in 1993. The decrease as a percentage of
revenues is due to increased sales during 1994. The dollar increase of
approximately $356,000, is attributable to the administrative expenses of
Pharmetics which incurred approximately $220,000 during the fourth quarter. The
remaining increase relates to the Denver facility for non-cash charges
associated with compensation expense for stock option grants.
26
<PAGE>
Sales and marketing expenses increased 358.3% to $568,488 (14.5% of
revenues) from $124,051 (4.3% of revenues) for the year ended December 31, 1994
and 1993 respectively. The increase is related to selling expenses of the
Company's equipment product line during the fourth quarter of 1994 and increased
direct selling efforts on disposable product lines.
During 1994, the Company initiated an evaluation of the fair value of its
investment in OST. The aggregation of advances to OST which became part of
OnGard's investment, coupled with the shares of OnGard Common stock issued in
connection with the acquisition, substantially exceeded the Company's
expectation of the fair value of OnGard's investment in OST. Accordingly,
during the third quarter of 1994 OnGard charged off $801,824. During the fourth
quarter, the Company continued the analysis of its investment. Because the
funding needs of Pharmetics had escalated, based not only on current operating
requirements but also for significant payments on past due trade credit, the
Company's aggregate acquisition investment was indeterminate until the fourth
quarter. Further, OST's financial condition, which had deteriorated
considerably in the first three quarters of 1994, had also impacted the market
position of its traditional product line, weakening near-term sales
expectations. This also became evident late in the fourth quarter.
Accordingly, the Company believed an impairment adjustment to the value of its
investment was appropriate. In its determination of the impairment, the Company
forecasted future sales, earnings, and annual working capital requirements, and
discounted the cash flows of its acquired equipment business. The Company
projected approximately 25% revenue growth for the period 1996 through the year
2000. It also projected increased gross margins, over this time horizon, from
OST's traditional levels of 30% to 44%. This increase is the result of a
greater concentration on higher margin custom and proprietary products which are
now the focus of direct selling efforts. In addition, margins may be enhanced
by the allocation of semi-fixed factory overhead expenses to a greater number of
units sold. The projected cash flows were discounted at the rate of
approximately 30%. The Company also believes that the new equipment business
line which OnGard has directed OST to develop, coupled with a more intensive and
updated marketing program will have a beneficial effect during 1995. However,
in conjunction with establishing its investment in OST at the date of
acquisition, the Company wrote off $801,824 and $1,988,561 in the third and
fourth quarters of 1994, respectively. There were no corresponding charges in
1993.
Research and development expenses increased 397.5% to $223,652 (5.7% of
revenues) in 1994 from $44,953 (1.6% of revenues) in 1993. This is due, in
part, to increased expenses as the Company finalized production and material
requirements for AutoPak, the Company's proprietary sterile packaging product.
The Company received 510K approval from the FDA in December, 1994. In addition,
the Company began expanding the equipment product line of OST and has been
engaged in the development process of two new products, a tabletop sterilizer,
called Hi-Vac, and a hospital autoclave, called Waste Clave. The Company
received orders for Hi-Vac in April, 1995 and began installation of the first
Waste Clave in the first quarter 1995.
Interest expense increased 1746.8% to $215,121 in 1994 compared to $11,648
in 1993. The increase is primarily the result of interest and amortization of
debt issuance costs related to the guaranteed $1.5 million bank loan. The
Company also incurred interest charges and debt discount totaling $22,500
related to the issuance of convertible debentures.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at March 31, 1996 increased to $4,627,000
from $1,974,000 at December 31, 1995. Cash and cash equivalents were $5,803,000
at March 31, 1996 versus $3,693,000 at December 31, 1995. Accounts receivable
increased $17,000 to $673,000 at March 31, 1996 from $656,000 at December 31,
1995. Inventory increased $ 325,000 to $1,807,000 at March 31, 1996 from
$1,482,000 at December 31, 1995.
The Company had an accumulated deficit of $19,753,000 at March 31, 1996 and
expects losses to continue at least through much of 1996. Cash requirements to
fund operating losses have been accomplished primarily through equity and debt
placements. Operating losses have accelerated since 1994 as a result of funding
the Company's acquired subsidiary, OST, both prior to and after the acquisition,
as well as
27
<PAGE>
expenditures to complete development of its new products Autopak, HiVac, and
WasteClave. The Company invested $1,883,824 in OST prior to its acquisition,
and issued 359,602 shares to acquire 100% of the outstanding shares of
Pharmetics. Subsequent to the date of its acquisition of OST and through
December 31, 1995, a fourteen month period, the Company has applied an
additional $2,890,100 which has been used substantially to fund OST's
operating requirements. The operating requirements included the repayment of
past due trade credit, operating losses and, importantly, the development of
two new sterilization products: HiVac, a tabletop steam sterilizer and
WasteClave, a highly efficient hospital autoclave. The Company's new
products, which are proprietary, should generate better gross margins than
the existing products and should improve operating results. The Company
commenced selling these products in late 1995 but as it establishes a sales
force and marketing programs during early 1996 such expenditures will
increase causing continued losses until revenue growth is sufficient to
offset losses. This is anticipated in the latter part of 1996. These losses
and their financing have been the most significant aspect of the Company's
cash flow.
Successful completion of the Company's initial public offering in 1992
provided approximately $4.0 million to expand marketing efforts for the
Company's initial product lines and continue product enhancement and expansion.
However, as working capital at December 31, 1994 amounted to a deficit of
$1,032,000, it became necessary for the Company to obtain additional funds. In
order to align its capital structure and working capital deficiency, on
September 29, 1995, the Company completed a private placement (the "September
1995 Private Placement") of the sale of 2,204,021 shares of the Company's common
stock at a price of $3.50 per share aggregating gross proceeds of $7,714,028 and
net proceeds of $7,634,028. The September 1995 Private Placement requires that
the Company register such Common Shares issued in this placement six months
after the closing date, by March 29, 1996. Pursuant to the September 1995
Private Placement, the Company also sold 100 shares of its Series B Redeemable
Preferred Limited Voting Stock (the "Series B preferred stock"). Provided that
the holders of the Series B preferred stock own in the aggregate at least 5% of
the Company's Common Stock, the holders of the Series B preferred stock can
nominate and elect one member to the Company's Board of Directors.
The Company had also obtained additional funding prior to the September
1995 Private Placement to finance operating losses. During July 1994, the
Company completed a Private Placement and an offshore offering of 300,000 units
consisting of two shares of common stock and one warrant at $7 per unit. In
addition, the Company obtained debt financing facilitated by a third-party
Guarantor. A total of $1.5 million was completed in two equal parts; the later
half was contingent upon the Pharmetics merger which was consummated effective
October 1, 1994. The Note is secured by the Company's inventory, equipment,
accounts receivable and intangible assets. In consideration for the $1.5
million guarantee, the Company issued to the Guarantor or its assigns a five-
year warrant ("Guarantor's Warrant") to purchase 400,000 shares of Company
Common Stock at an exercise price of $4.00 per share.
The Note payable to the bank ($622,000 outstanding at March 31, 1996)
called for monthly payments at an interest rate of prime plus 2% based upon a
36-month payment schedule and a balloon payment at the end of one and one-half
years (April 1996). The Company repaid the loan through existing cash on the due
date and is currently seeking other lending sources to provide a working capital
facility.
During 1994, the Company also initiated a private offering of Convertible
Debentures ("Debentures") each unit of which consists of $100,000 in 6%
Convertible Debentures and 25,000 redeemable class B common stock warrants to
acquire an equivalent number of common shares at $6.00 per share. The
Debentures were convertible into shares of the Company's common stock at the
option of the holder or into shares of the Company's Series A Convertible
Preferred Stock ("Series A Preferred Stock") at the option of the Company, when
such Series A Preferred Stock were approved by the Company's Shareholders.
Debenture conversion was to be based on a conversion ratio of 25,000 shares for
each $100,000 Debenture converted, or $4.00 per share. In January 1995, the
Company's shareholders approved, by a majority vote, the authorization of
preferred stock. As a result, the total $1.5 million raised from the offering
through February 1995 became equity and the Company issued 375,000 Series A
preferred shares and 375,000 Class B common stock warrants.
28
<PAGE>
In addition, during February 1995 the Company sold shares, through the
exercise of Class A warrants from existing warrant holders, totaling $320,000 in
gross proceeds. The Company provided an incentive to Class A warrant holders
by reducing the exercise price to $4.50 for a period of 30 days. In April and
May, 1995, the guarantor of the Company's bank line (described above) and
another investor in OnGard facilitated $1,000,000 of additional bank borrowings.
The two new $500,000 notes bear interest at the rate of 11% per annum and mature
on April 15, 1996. The three notes were paid in full at maturity. An
additional 200,000 warrants were provided to the guarantors in exchange for
their guarantees. Such warrants were issued under the same terms as the 400,000
warrants described above.
In addition, the Company also obtained funds through the exercise of
outstanding Common Stock Purchase Warrants. These warrants were to expire on
August 15, 1995, but were initially extended until December 31, 1995 and
thereafter until March 29, 1996 and April 30, 1996. Through the exercise of
Common Stock Purchase Warrants, the Company generated $4.6 million in gross
proceeds through March 31, and through the expiration date of the Common Stock
Purchase Warrants, April 30, 1996, had received, or had stock subscriptions
receivable, totalling $6.0 million in gross proceeds. Although the Company has
been successful to date in obtaining sources of financing sufficient to meet
current trade obligations and other expenses and to enable it to pursue its
business plans generally, there is no assurance it will be successful in this
regard in the future. Furthermore, there can be no assurance that the Company
will be successful in securing other funds or, that if successful, such funds
will be adequate to fund the Company's operations until it is able to generate
cash from operations sufficient to sustain its ongoing operations without
additional external sources of capital.
29
<PAGE>
BUSINESS
INFECTION CONTROL MARKET
The Company's infection control activities are divided into three primary
components. The first component includes medical waste services and products.
The Company's medical waste product line allows for comprehensive product and
service offerings within non-hospital, clinical markets. See "--Medical Waste
Services."
The second component previously consisted of sterile medical packaging,
which is designed and manufactured for medical device manufacturers.
Sterilization medical packaging is used to contain new, unused medical devices
during the sterilization process and maintain sterility during transport and
presentation. These products were primarily sold under private label. Sterile
medical packaging is constructed on specially designed machines that are capable
of handling multiple webs and completing sealing operations through the
application of heat and adhesives. The Company acquired substantially all of
the assets of MDPI, a Pennsylvania corporation engaged in the design, production
and distribution of sterile medical packaging. A number of customers of MDPI
became customers of the Company. Customers include Boston Scientific, U.S.
Surgical, Symbiosis and Baxter HealthCare. The Company announced on November 3,
1995 it had signed a letter of intent to sell its medical packaging line to
Oliver Products of Grand Rapids, Michigan. A definitive agreement was
completed on December 7, 1995. The Company intends to focus its efforts on
sterilization supplies and equipment, described below.
The third component of the infection control market consists of
sterilization supplies and equipment. Sterilization involves the complete
elimination or destruction of all forms of microbial life, including high
numbers of bacterial spores. Sterilization is required for those instruments or
devices that penetrate skin or contact normally sterile areas of the body.
Through its acquisition of Pharmetics, now OST, the Company manufacturers and
markets a complete line of institutional and pharmaceutical grade sterilizers,
washers and dryers. Sterilization supplies may include containers, wraps and
pouches and indicators and monitors which indicate that the sterilization
process has been completed. Sterilization supplies are primarily utilized by
hospital and clinical facilities during the reprocessing of reusable
instrumentation. Sterilization equipment may be used by hospitals in the
sterilization process for reusable instrumentation or for the sterilization of
materials prior to the disposal of medical waste, and by pharmaceutical
companies. The Company has developed three proprietary products AutoPak, HiVac,
and WasteClave, which it has begun to commercialize. These products and the
markets they serve are central to the Company's marketing efforts. See
"Business--Products Under Development and Commercialization Activities".
MEDICAL WASTE SERVICES
Non-hospital, small quantity generators produce significantly less medical
waste than large quantity hospital-based generators but pay a higher cost per
pound of waste. Several states have recently increased efforts to regulate home
bound and consumer generated medical waste. The Company introduced a consumer
version of its mail-back product during the fourth quarter of 1993. See "--
SMALL QUANTITY GENERATORS."
Currently, nearly all states regulate the disposal of medical waste. Some
states regulate the disposal of medical waste generated in the home environment,
and some local governments are responding to pressure to remove this waste from
municipal disposal systems. The Company's integrated medical waste handling
systems are designed to fit the specific needs of small quantity generators.
The handling of medical waste in health care facilities is primarily
regulated by the Occupational Health and Safety Administration ("OSHA"),
although other federal, state and local regulation may apply. The Company's
primary market for medical waste disposal services consists of physicians,
dentists and other non-hospital health care facilities that generate relatively
small quantities of regulated medical waste.
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The Company utilizes the U.S. Postal Service to allow its customers to ship
contained medical waste from any location to the Company's contracted
incineration facilities. The Company believes that the U.S. Postal Service is
an effective means of providing nationwide transportation for the Company's
medical waste systems. The Company's medical waste disposal solutions
incorporate proprietary packaging designs that meet or exceed stringent Postal
Service regulations regarding the transport of medical waste. The Company's
medical mail-back products are authorized for transport by the Postal Service
under U.S. Postal Code number 39 CFR, Part III, and all OnGard mail-back medical
waste kits indicate OnGard's Postal Approval Code numbers, U.S.P.S.-002 A-F.
See " --MAIL-BACK SYSTEM." The Company has provided training and support to
employees at the Nashville Post Office, which is the primary destination for the
Company's mail-back system. In addition, the Company has worked with airline
personnel who handle OnGard's products at selected baggage facilities.
On February 23, 1993, the Company and Sherwood, a subsidiary of American
Home Products Corporation, entered into a five year supply, distribution and
licensing agreement (the "Sherwood Agreement"). Sales of the Company's products
to medical distributors were accomplished through the Sherwood contract.
However, the Company and Sherwood were continuously revising the existing
agreement in instances where the parties agree that a direct selling approach by
the Company was appropriate. Ultimately, the exclusive relationship was
terminated during the third quarter of 1995. Loss of the Sherwood contract will
require the Company to modestly increase its expenditures in sales and to make
direct arrangements with the distribution channels. This process began in the
third quarter 1995.
MARKETS
The Company's initial product was the OnGard Recapper, a patented device
offering a mechanical alternative to unprotected handling of contaminated
needles. Prior to the Company's entering into the Sherwood Agreement,
purchasers of the Recapper and mail-back products included large dental product
distributors, such as Sullivan Dental Products, Inc. and Patterson Dental Co.,
as well as large catalog distributors such as Henry Schein and Darby Dental
Supply. The Company will approach some of these distributors again.
Sherwood sales efforts began in March 1993. The first shipment of the
Company's products to Sherwood pursuant to the Sherwood Agreement occurred in
April 1993. For the years ended December 31, 1994 and 1995, the Company's
revenues attributable to the Sherwood Agreement were approximately $356,000 and
$99,000, respectively. None were recorded during the first quarter ended
March 31, 1996.
In January 1993, the Company acquired the customer list of PRO-MED SHARPS
("PRO-MED"), formerly a seller of medical waste mail-back kits within the dental
and physician office markets. PRO-MED discontinued sale of its mail-back
medical waste products. For a one time payment of $20,000, the Company acquired
the exclusive use of the PRO-MED mailing list and the support of PRO-MED
personnel in converting PRO-MED's customers to the Company's product lines.
Many PRO-MED customers are now being served by the Company on a direct basis and
through automatic reorder systems. For the years ended December 31, 1994 and
1995, sales to PRO-MED and other direct customers were $197,000 and $240,000,
respectively and approximately $50,000 for the first quarter ended March 31,
1996. The Company also continues to serve the home health care market. The
Company has a private label relationship with Quantum Health Resources, a
national home infusion company that specializes in hemophilia care. The Company
also has an agreement to provide disposable containers and mail-back services to
Caremark Inc., a leading provider of home care services throughout the United
States. In January, 1995 Coram, Inc. purchased a division of Caremark, Inc.,
resulting in sales to Coram, Inc. and Caremark Therapeutic, Inc. During the
year ended December 31, 1995 and for the first quarter ended March 31, 1996,
approximate sales attributable to Caremark, Coram and Quantum totaled $398,000,
$165,000, and $134,000, and $109,000, $75,000, $26,000, respectively. As a
result of the purchase by Coram, Inc. of the Caremark division, Caremark
Therapeutic, Inc., neither Coram nor Caremark individually reached sales levels
which would constitute a major customer, i.e., exceeding 10% of the Company's
1995 sales.
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In addition to the markets described above, there are a significant number
of insulin dependent diabetics in the United States who use and dispose of
contaminated needles and syringes. In 1992, Florida began to regulate disposal
of diabetic-used syringes. The Company believes that this market can best be
addressed through sales efforts directed at the retail pharmacy level to
coincide with insulin and syringe sales.
SMALL QUANTITY GENERATORS
The Company's waste disposal system is especially suited for small quantity
medical waste generators, many of whom are subject to some form of regulation
with respect to their waste disposal practices. Small quantity medical waste
generators are generally considered to be those medical facilities that produce
less than 25 pounds per month of regulated medical waste.
INCINERATION CONTRACT
The Company has a long-term contract for incineration services with
National Medical Waste, Inc. The facility involved is operated by BioMedical
Waste, a national operator of medical waste incinerators and medical hauling
systems. BioMedical Waste is headquartered in Boston, Massachusetts and
operates a medical waste incinerator in Nashville, Tennessee that is utilized
for destruction of medical waste generated by OnGard customers. In 1992, the
Company entered into a five-year contract with National Medical Waste, Inc., a
subsidiary of BioMedical Waste, for incineration services which required the
Company to pay a one time fee of $50,000 for prepaid incineration.
National Medical Waste had incurred recurring operating losses and
experienced a working capital deficiency that raised substantial doubts about
its ability to continue as a going concern. If the Company was unable to
continue shipping medical waste to its present incineration, the Company would
have to contract for comparable services on substantially equivalent terms with
another party.
National Medical Waste merged into BioMedical Waste, which subsequently
filed for protection pursuant to Chapter 11 of the U.S. Bankruptcy Code.
BioMedical Waste provides pick-up service at the U.S. Postal Service destination
points, audits the waste and inputs and maintains the records required by the
Company. This arrangement is designed to assure the Company that transported
medical waste is destroyed in compliance with applicable environmental and other
regulations.
The Company has recently negotiated a new waste disposal contract with a
division of Waste Management, Inc. in Chandler, Arizona which provides all of
these services. New orders for mail-back products will dispose their waste at
this facility. The costs under this agreement are substantially lower than the
National Medical Waste contract. However, as the Company has mail-back
products, previously sold, with mailing labels addressed to National Medical
Waste, it will continue to utilize that facility until outstanding products have
been delivered for disposal.
MAIL-BACK SYSTEM
The Company's mail-back products comprise a fully prepaid system that
allows the user to collect and dispose economically of medical waste in
compliance with applicable regulations. For one price, the customer receives
disposable containers, packaging, tracking services, transportation and
incineration. An integral, four-part tracking form allows tracking from
generator to incinerator. The entire package is burned without being opened by
the incinerator personnel.
The system uses the Company's proprietary redundant packaging concept,
which incorporates two corrugated fiberboard packages with an intervening
plastic liner to enclose the waste container, containing liquid-activated
absorbent material. The system is self-sealing; it does not require any special
equipment, skill or tape. The packaging meets or exceeds current postal
regulation for integrity, strength and durability. This packaging must pass
Department of Transportation tests mandated by the U.S. Postal Service,
including a thirty-foot frozen drop, a five-foot drop of a thirteen pound spike
and a three pounds per square inch pressurized leak-proof test. OnGard mail-
back kits are available in special chemo-waste designated containers
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as well as for sharps regulated medical waste. The Company has filed a patent
application, which is pending, with respect to the mail-back system.
STERILIZATION MEDICAL PACKAGING
The following information is provided as an historic perspective.
Effective November 3, 1995 the Company announced it had signed a letter of
intent with Oliver Products of Grand Rapids, Michigan for the sale of its
medical device packaging line. This transaction closed on December 7, 1995.
Effective January 1, 1993, the Company, through a wholly owned subsidiary,
OnGard Systems Packaging, Inc. ("OSP"), acquired substantially all of the assets
of MDPI, a Pennsylvania corporation engaged in the design, production and
distribution of sterile medical packaging. The acquisition was made pursuant to
an asset purchase agreement among OSP, MDPI and Donald Marotta, President and
sole shareholder of MDPI. The closing date of the acquisition was March 1, 1993
and the effective date was January 1, 1993. The total purchase price of
approximately $675,000 included the issuance of 50,000 shares of Common Stock
valued for purposes of the Agreement at $4.75 per share. The remaining $437,500
of the purchase price included the assumption of $205,000 of liabilities of
MDPI. The assets acquired included, among other things, accounts receivable,
inventory, patterns and dies, machinery and plant equipment, furniture and
fixtures, cash and goodwill. MDPI used these assets in its business of
designing, producing and distributing sterile medical packaging for the medical
device industries.
In addition, the Company entered into a three-year employment agreement
with Mr. Marotta at an annual salary of $100,000, which was subsequently
renegotiated into a consulting agreement at a daily rate of $385, subject to
certain terms and conditions. Mr. Marotta agreed to a two-year noncompete
agreement for an additional $100,000, all of which has been paid. The noncompete
agreement is in effect for two years after the termination of the employment
agreement. In connection with the sale of assets to Oliver, the noncompete
agreement was canceled.
The Company entered into a contract dated March 1, 1993 with SkyRun, Inc.
("SkyRun"), an affiliate of MDPI, for the construction by SkyRun of equipment
for the manufacture of medical packaging pouches. This new equipment is
suitable for the manufacture of the AutoPak' product line discussed below as
well as other applications within the sterilization packaging field. See "--
Products Under Development." The Company has excluded this equipment from its
sale to Oliver Products described above. The manufacturing contract is a
"cost-plus" contract under which OnGard's ultimate payment obligation was
$233,000. Although in September 1993 the Company accepted delivery of this
machinery and is currently using it in its manufacturing operations, the Company
is continuing to make improvements to the machinery.
During the summer of 1993, the Company completed relocation of the former
MDPI from Doylestown, Pennsylvania to Denver, Colorado. The packaging business
formerly carried on by MDPI was operational in the Denver facility.
PRODUCTS UNDER DEVELOPMENT AND COMMERCIALIZATION ACTIVITIES
The Company has continued to develop sterilization supply and equipment
product lines. The Company's ability to introduce sterilization supply product
lines will be subject to the receipt of regulatory clearance from the FDA. See
"--Regulations--THE FOOD AND DRUG ADMINISTRATION." There is no assurance as to
when or if the FDA will give the Company regulatory clearance for all of the
sterilization pouch products. In December 1994, the Company received clearance
on AutoPak' , the central product of its sterilization supply line. The
Company plans to offer a comprehensive product line which will include its
AutoPak' product line, a variety of self-seal and heat-seal sterilization
packages and an integrated sterilization indicator and monitor product line.
The Company has entered into an exclusive marketing agreement with Baxter V.
Mueller, a
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division of Baxter Healthcare Corporation of Deerfield, Illinois. Baxter is
a worldwide leader in the manufacture and marketing of health care products
in 100 countries. Its V. Mueller division markets surgical instruments and
surgical use products to healthcare companies and hospitals. The agreement
also calls for other sterile packaging products developed by OnGard to be
marketed exclusively by Baxter and for the two companies to address market
opportunities in reprocessing of surgical instruments. The territory covers
the United States and Canada. The Company will also sell equipment used in
the sterilization process for either reprocessing reusable instruments or
sterilization of medical waste prior to its disposal.
The Company will elect to sell some of its sterilization equipment directly
into the hospital market. WasteClave, the Company's product for the
sterilization of hospital medical waste has been developed and shipped to three
customers. Another proprietary product, a tabletop sterilizer called HIVAC, has
been sold in limited quantities into the European markets.
The market for sterilization supplies and equipment is primarily hospital
based. There can be no assurance that the Company can compete effectively
outside of its traditional market. OnGard has also developed, and continues to
develop, product lines within the indicator, biological sterilization monitoring
and sterilization equipment markets. These product lines, which include both
proprietary and non-proprietary products, are expected to be introduced in 1996.
The AutoPak System is a proprietary disposable, heavy duty large
plastic/non-woven fabric pouch and a proprietary loading system for
sterilization of large instrument trays and soft goods. The product is intended
to compete in the markets served by central supply room wrap and reusable
instrument tray containers. AutoPak's advantages include visual access, reduced
storage space, decreased loading time and waste reduction. The loading system
consists of a tray holder which will facilitate enclosure of the instrument tray
within the AutoPak Pouch. The Company has filed for patent protection on the
construction of the package and on the materials contained therein, but there is
no assurance that such protection will be granted.
To facilitate manufacture of AutoPak, new and proprietary materials were
required and developed through a relationship between OnGard and American
National Can Company ("American National Can"). In June 1993, the Company and
American National Can entered into two letter agreements (the "Letter
Agreements") which outlined the principal points of agreement between the
parties. Although in the Letter Agreements the parties contemplate entering
into a development agreement, there are no plans currently to do so. The
parties have used the points of agreement in the Letter Agreements as the basis
of their relationship. The Company has an exclusive right to purchase these
proprietary materials from American National Can and American National Can has
an exclusive right to supply these materials for the AutoPak' product line. In
addition, American National Can has agreed to provide research and development
advice for further OnGard product development.
With respect to all of the products discussed above, there can be no
assurance that regulatory clearances will be obtained (other than AutoPak, for
which clearance has been received) or that any of them will be commercially
successful. If AutoPak is not commercially viable, or if regulatory approvals
for it were not obtained, marketing of many of the Company's other products may
be adversely affected.
ACQUISITION OF PHARMETICS
Effective October 1, 1994, the Company acquired Pharmetics through OnGard
Pharmetics, Inc. (now OST), a wholly owned subsidiary of the Company. The
merger agreement provided for the issuance of one share of the Company's
Common Stock for every twelve (12) shares of Pharmetics common stock and 200
shares of the Company's Common Stock for each share of Pharmetics preferred
stock. Thus, based upon a closing price of OnGard of $8.125 and Pharmetics
of $.50 on September 16, 1994, 3,103,225 outstanding shares of Pharmetics
common stock with an aggregate value of $1,551,613 were exchanged for 258,602
shares of OnGard Common Stock with an aggregate value of $2,101,141 and 400
outstanding shares of Pharmetics preferred stock with an aggregate value of
$400,000 were exchanged for 85,000 shares of OnGard Common Stock (which
amount included an aggregate of 5,000 shares of Common Stock of OnGard paid
to preferred stockholders of Pharmetics in lieu of accrued and unpaid
dividends) with an aggregate value of
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$690,625. In addition, Royce Investment Group was granted 16,000 shares of
OnGard Common Stock with an aggregate value of $130,000. Theodore Shlisky,
former President of Pharmetics, entered into an employment agreement with the
Company in which he became an officer.
OST, a Delaware corporation, is engaged in the business of designing,
manufacturing and remanufacturing sterilization equipment, washers, dryers and
associated instrumentation. OST's customers include pharmaceutical and medical
device manufacturers, hospitals, clinics, physicians, diagnostic and research
laboratories, and universities. OST offers service for its equipment, as well
as for its competitors' equipment, in the form of preventive maintenance
contracts and per diem arrangements.
Pharmaceutical and medical device manufacturers use OST's sterilization
equipment in their manufacturing process to reduce or eliminate the possibility
that the products they produce will cause disease or complicate treatment.
Hospitals, clinics, physicians, laboratories and universities use OST's
sterilizers to render their instruments and apparatus biologically sterile so
that their use by humans and animals will not transmit or induce illness.
Hospitals can also use OST's sterilizers to sterilize medical waste before
discarding.
The predecessor of OST, Pharmetics, was organized in 1980 and initially
operated as a manufacturers' representative for major brands of sterilization
equipment. In 1982, Pharmetics commenced manufacturing sterilization equipment
of its own design. During the latter part of 1987 and early part of 1988,
Pharmetics expanded its product line and commenced the design and manufacture of
washers and dryers. OST is marketing its washers and dryers to the same
industries to which it sells its sterilizers. The washers cleanse with high
temperature water pressure, agitation and detergents and are used by customers
in washing items prior to sterilization or with items that require cleansing
without sterilization. The dryers are used in conjunction with the washers.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for further information
concerning OnGard Pharmetics.
MANUFACTURING AND ENGINEERING
OnGard currently operates a manufacturing and assembly facility in
Hauppauge, New York. The New York facility houses machinery required for the
production of AutoPak and other pouches and for OST's medical equipment
products. OnGard also has a machine shop which is utilized to maintain and
construct equipment as required. Materials and supplies for these products are
available from several sources. On November 3, 1995 the Company announced it
would close its Denver facility and consolidate facilities at its Hauppauge, New
York operation on or about December 31, 1995. (See "Facilities"). In
connection with the closing of the Denver facility, the Company incurred certain
shipping and relocation costs, which were not material.
OnGard designed, developed and owns the molds and tooling used for blow
molding and injection molding the sharps containers sold as part of its mail-
back line, and the tools used to manufacture the corrugated cardboard components
of the waste disposal system. OnGard contracts with third parties for the
manufacture of the molded plastic containers, corrugated fiberboard cartons and
other components and thus is dependent on them for the manufacture of these
products and components. OnGard assembles its mail-back products and ships
finished, complete kits to customers.
OnGard purchases raw materials for its AutoPak product line from a variety
of sources. Principal suppliers include American National Can. A two month
inventory of raw materials is generally kept on hand. As certain proprietary
films are available only from ANC, the loss of supply from such sources could
disrupt manufacturing operations.
OnGard's proprietary packaging products are being developed and designed
primarily by Mark Weiss, President; and Clay Cannady, Director, Sterility
Assurance Products.
OST fabricates pressure vessels and washer and dryer housings in-house.
Other components and supplies are generally available from a variety of sources.
Components are assembled at the OST facility located at 40 Commerce Drive,
Hauppauge, New York 11788.
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OST requires progress payments on all non-standard equipment. In the event
of an order cancellation, progress payments are applied against the work in
process. OST offers a one year warranty on all equipment. In the event that
OST cannot repair a defective unit, it will replace it during the warranty
period. Order cancellations and product returns have been immaterial.
REGULATION
OSHA
OSHA regulates work places in general, including medical care facilities.
The OSHA blood-borne pathogen regulations encourage the development of certain
safe workplace practices for the handling of used sharps. The rules encourage
both engineering and procedural solutions consistent with the use of the
Company's products. No assurance can be given that OSHA will not develop new
regulations and new interpretations of existing regulations to the Company's
detriment. The Company's manufacturing and assembly operations are subject to
OSHA inspection
POST OFFICE
The U.S. Postal Service has been transporting medical waste on a regulated
basis since 1989. In 1992 the Post Office adopted rules for the mailing of
regulated materials that mandate rigorous testing, certification and bonding
requirements for packaging used to transport medical waste. The Company's
products are designed for shipment via first class/priority mail as required by
Post Office regulations. The Company's packaging meets or exceeds all
requirements published in the Domestic Mail Manual. In five states, there is a
further requirement for the use of registered mail, return receipt requested,
service. The Company's kits sold in those states include the additional
documentation and postage necessary to comply.
STATE AND LOCAL REGULATION
Most states have regulations that determine appropriate methodologies for
the handling and disposal of medical waste. Several states, including New York,
California and New Jersey, require specific approval of medical waste disposal
programs including mail-back medical waste products. The Company has obtained
approvals from these states. In Minnesota, a change in the overall
environmental regulatory framework resulted in mail-back medical waste being
excluded in new regulations put into effect during the summer of 1993.
Minnesota took the position that use of the Company's system by practitioners
was inconsistent with applicable state regulations. The Company made its
distributors aware of this development. The Director of Pollution Control in
Minnesota recently informed the Company that he intended to address the
situation through the proposal of new regulations that, if adopted, would
provide exemptions relating to the disposal of medical waste through the U.S.
Postal Service. The Company cannot predict when or if these new regulations
will be adopted. However, the Director of Pollution Control has orally informed
the Company that no enforcement action will be taken in this regard pending the
adoption of the new rules. Regardless of these oral representations, there is
no assurance that the State of Minnesota will not take such enforcement action.
Environmental regulations in Maine are also inconsistent with mail-back medical
waste programs. The Company has informed its distributors about Maine's
position. The Company does not actively pursue mail-back medical waste programs
in states that do not encourage or prohibit its use. Maine and Minnesota
represent a small percentage of the Company's current market and a
correspondingly small percentage of the potential market for the Company's
medical waste kits.
Although the Company attempts to monitor regulatory developments in all
states in order to maintain regulatory compliance, because of the large number
of regulators it is possible the Company might not be immediately aware of
changes in relevant regulations. Regulations may change frequently, and the
Company's
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activities may be curtailed or limited to the extent that certain states
restrict the use of medical mail-back systems.
THE FOOD AND DRUG ADMINISTRATION
The Company's existing and planned products are or may be subject to
regulation by the FDA pursuant to the provisions of the Federal Food, Drug, and
Cosmetic Act ("FDC Act"). Under the FDC Act, several, if not all, of the
Company's infection control products, sterilization medical packaging and
sterilization supplies are subject to regulation as medical devices.
Medical devices are classified into either Class I, II or III. Class I and
II devices are not expressly approved by the FDA. However, pursuant to
section 510(k) of the FDC Act, the manufacturer or distributor of a Class I or
II device that is initially introduced commercially on or after May 28, 1976
must notify the FDA of its intent commercially to introduce the device through
the submission of a premarket notification (a "510(k) notice"). Before
commercial distribution can commence, the FDA must review the 510(k) notice and
clear the device for commercial distribution. The FDA normally has 90 days to
review the 510(k) notice and grant or deny clearance to market on the basis that
it is substantially equivalent to a device marketed before May 28, 1976.
Alternatively, the FDA may postpone a final decision and require the submission
of additional information, which may include clinical data. If additional
information is required, review and clearance of a 510(k) notice may be
significantly delayed. In order to clear a Class I or II device for marketing,
the FDA must determine, from the information contained in the 510(k) notice,
that the device is "substantially equivalent" to one or more Class I or II
devices that are legally marketed in the United States.
If a device is not considered "substantially equivalent," it is regulated
as a Class III medical device. In general, a Class III medical device must be
expressly approved by the FDA for commercial distribution pursuant to the
submission of a Premarket Approval Application ("PMA"). A PMA must contain,
among other information, substantial information about the manufacture of the
device and data from adequate and well controlled clinical trials that
demonstrate that the device is both safe and effective. The PMA approval
process is substantially more complex and lengthy than the 510(k) premarket
notification process. Once a PMA is submitted, it may take 16-24 months, or
longer, for the FDA review and approval, if such approval is granted at all.
A medical device, whether cleared for marketing under the 510(k) pathway or
pursuant to a PMA approval, is subject to ongoing regulatory oversight by the
FDA to ensure compliance with regulatory requirements, including, but not
limited to, product labeling requirements and limitations, including those
related to promotion and marketing efforts, Current Good Manufacturing Practice
requirements, record keeping and medical device (adverse reaction) reporting.
FDA regulatory oversight also applies to the Company's sterile medical
packaging products, which are used by other companies in packaging their own
medical devices. Generally, FDA acceptance of the suitability of such packaging
products is made in the context of regulatory submissions of other companies
concerning the device to be packaged. Thus, the Company requires no separate
FDA clearance or approval of these packaging products. Within this framework,
the principal regulatory responsibilities of the Company for its sterile medical
packaging products are to ensure that the packaging products are manufactured in
conformity with Current Good Manufacturing Practice requirements. Although the
Company believes that all of its manufacturing activities are in conformity with
Current Good Manufacturing Practice requirements, there can be no guarantee of
compliance.
Historically, the FDA has not exercised device regulatory authority over
some types of infection control products, such as sharps containers or mailer
packages, including those used in the Company's mail-back system, and has
allowed companies to begin commercial introduction (on or after May 28, 1976) of
these types of products without a 510(k) clearance. On February 3, 1994, the
FDA issued a written policy statement which allowed manufacturers of sharps
containers a "discretionary period" of 180 days (until August 2, 1994) to
continue marketing their products already in distribution (introduced on or
after May 28, 1976) without the benefit of 510(k) clearance provided that
required 501(k) notices are submitted to FDA prior to the conclusion
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of the discretionary period. Manufacturers of sharps containers also must
comply with FDA device listing and establishment registration requirements.
The FDA has indicated that there is no change in its regulatory posture
toward the mailer packages used in the mail-back system and that it does not
intend to regulate this product as a medical device. There can, however, be
no assurance that the FDA will maintain its current regulatory posture toward
the mailing package.
OST submitted all but one of the 510(k) notices and expects to submit the
remaining one in the near future. In June 1994, the Company received
notification that all of its 510(k) submittals for sharps containers had been
approved and cleared for marketing. The Company has an additional submittal for
one of its sharps containers which the FDA had advised it to withhold until the
others had cleared, which it is now preparing for submission.
ENVIRONMENTAL REGULATION
The Environmental Protection Agency (the "EPA") has the authority to
regulate medical waste under the Resource Conservation Recovery Act. Although
the EPA has not to date issued any formal rules covering medical wastes, it has
issued a guide for infectious waste management.
The Hazardous Materials Transportation Act ("HMTA") governs the packaging
and transportation of hazardous materials in commerce. The HMTA prescribes
certain packaging requirements for enumerated regulated medical waste and
infectious substances. Regulations promulgated by the Department of
Transportation pursuant to the HMTA describe the requirements to be observed in
preparing the materials for shipment, including shipment by highway. The
regulations also cover inspection, testing and retesting of the transportation
of hazardous materials.
The Congress and the EPA may adopt new, or modify existing, laws,
regulations and policies regarding the regulation of medical waste. The Company
cannot predict what effect, if any, future regulation may have on its
operations.
PATENTS AND TRADEMARKS
The OnGard product line includes patented and other proprietary products.
The OnGard Recapper was awarded U.S. Patent No. 4,986,816. The Company was also
awarded a patent on the OnGard Medical Waste System (U.S. Patent No. 5,097,950).
Patent applications relating to the mail-back product line, the AutoPak-TM-
system and other products have also been filed, but the Company cannot predict
when or if these patents will be awarded. Although the Company believes its
patents are valuable and provide a competitive advantage, there is no assurance
that any patents held or secured by the Company will provide any protection or
commercial or competitive benefit to the Company. In addition, the Company may
incur substantial legal expenses attempting to enforce its patents. There is
also no assurance that the Company's products will not infringe upon patents
held by others.
The Company owns the registered trademark "On-Gard" in its stylized form.
In addition, the Patent and Trademark Office has approved the Company's
applications (which are in the final stages of pendency) with respect to "OnGard
Systems" in stylized and plain letter form and with respect to AutoPak-TM-. The
Company believes that it has established valuable trademark rights in OnGard,
OnGard Systems and AutoPak-TM-. The Company retains all rights to its
trademarks under the terms of the Sherwood Agreement. The Company's unified
approach to product name, logo and identity is reflected in its promotional
literature, packaging and labeling and the Company intends to continue to
promote this identity in all its product offerings and strategic alliances.
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EMPLOYEES
As of December 31, 1995, the Company had approximately 75 employees. None
of the Company's employees are subject to a collective bargaining agreement.
The Company believes that its relations with its employees are good.
COMPETITION
The Company operates and markets its mail-back systems in an increasingly
competitive environment. Competitors include local and national hauling
services and some local or regional mail-back services. At the current time,
the Company is aware of five companies which have approval from the U.S. Postal
Service to offer mail-back services. None of these companies offer the
selection of sizes and capacities currently provided by OnGard.
The Company's primary competitor in the mail-back medical waste handling
business is a joint venture between Becton Dickinson, a manufacturer of
hypodermic needles, and Browning-Ferris Industries, a national waste hauling
company. Sherwood and Becton Dickinson are competitors within the needle and
syringe sales market and each has the capability to sell needles, syringes and
mail-back systems. In addition, both Sherwood and Becton Dickinson have
extensive distribution capacities within the target markets. The Company
believes that its pricing for mail-back systems is competitive.
The sterile packaging industry is extremely competitive. The Company
competes with a variety of large and small manufacturers who have similar
capabilities. The sterilization supplies market is also competitive and is
dominated by several large companies with complete product lines.
The market for sterilization equipment is also highly competitive and many
competitors of OST have greater financial resources. These companies include
American Sterilizer (AMSCO), Steris and Sanipak, which may sell either
institutional or tabletop sterilizers, or hospital autoclaves.
BACKLOG
As of March 31, 1996, the Company had a backlog of $2,650 in the medical
waste and medical packaging areas and OST had a backlog of approximately
$173,000 in the sterilization equipment area. For these purposes, "backlog"
refers to orders received for the purchase of products, which were due by the
above date but had not yet been delivered. These do not reflect total open
orders, for which OnGard Sterilization Technologies had in excess of $1 million
at March 31, 1996.
INSURANCE
The Company maintains liability insurance with coverage limits of
$1 million in the aggregate. The Company also carries other customary business
insurance. The Company has posted a $50,000 bond with the U.S. Postal Service
under its new regulations. The Company does not maintain key man life insurance
on any of its employees.
FACILITIES
On November 3, 1995 the Company announced its plans to consolidate
operations at its facility in Hauppauge, New York. The consolidation was
completed by December 31, 1995. The Company has closed its Denver facility.
Effective April 1, 1996, the Company had an agreement with a new lessee and the
landlord in which the Company has assigned all its rights and interest in 34,000
of the 50,000 square feet which it previously occupied. Under the terms of the
agreement the Company will receive amounts ranging from $5,200 to $6,700 per
month through May 31, 1998 in consideration for the assignment of its existing
lease.
39
<PAGE>
Effective April 1, 1996, the Company was released from any monthly lease
payments or responsibilities associated with this lease.
The Company's corporate and administrative offices, as well as production
for AutoPak, are now located at 40 Commerce Drive in Hauppauge, New York.
Approximately 35,000 square feet is used for manufacturing and the balance of
7,000 square feet is used for offices. A new lease commenced February 1, 1995.
For the three successive annual periods, the annual rent is $116,025 per annum;
in the fourth and fifth year, the annual rent is $162,078 and $172,788,
respectively. In addition, the landlord advanced $350,000 to remodel the
facility in early 1996. This amount will be repaid by the Company in two
repayment schedules: the first of which for $50,000 will be repaid beginning
February 1, 1996 and ending January 1, 1997 for $4,359 per month and the second,
for $300,000, will be repaid over 36 months, beginning February 1, 1996 for
$9,600 per month. Prior amounts due the landlord, which were unpaid under
Pharmetics lease arrangements, totaling $170,248, were repaid with 22,700 shares
of unregistered OnGard Common Stock. The Company has agreed to include such
shares in its next registration statement. If such registration statement has
not occurred by December 15, 1995, the Company will grant the right to the
landlord to purchase an additional 10,000 shares of OnGard Common Stock at an
exercise price of $7.50. The grant must be exercised by December 15, 1997.
LEGAL PROCEEDINGS
The Company does not have any pending legal proceedings other than ordinary
routine litigation incidental to its business. As a seller of medical infection
control and waste handling systems, the Company could face product liability
claims or other claims potentially based on accidental infections, loss of waste
disposal packages in the mail, or other unforeseen circumstances. The Company
maintains product liability insurance in an aggregate amount of $1 million.
There can be no assurance that such coverage will be adequate to cover future
product liability claims or that it will continue to be available at reasonable
prices.
OST, by its merger with Pharmetics, is party to a number of lawsuits filed
primarily by trade creditors, and it owed withholding and other payroll related
taxes amounting to approximately $230,000, including interest and penalties.
The Company has been successful in negotiating settlements to these claims to
date and the Company believes that these claims will not have a materially
adverse effect on OST's financial condition or results of operations. In
addition, although there have been no legal proceedings in this regard, in the
second quarter of 1994 the Company initiated, and has completed, discussions
with federal and New York state tax authorities to pay prior federal
(approximately $110,000), unemployment (approximately $21,000) and New York
state (approximately $102,000) taxes, payment for which are due over specified
time periods, and which the Company is paying for on a monthly basis.
On April 19, 1996, a patent infringement lawsuit was filed in the United
States District Court, Central District of California, entitled KENNETH R.
WILKES and KENPACK INCORPORATED vs. ONGARD SYSTEMS, INC. AND ONGARD PHARMETICS,
INC. As of this date OnGard and OST have responded to this lawsuit.
40
<PAGE>
PRO FORMA FINANCIAL INFORMATION
PHARMETICS' TRANSACTION AND PRO FORMA BASIS OF PRESENTATION
On October 1, 1994 the Company and Pharmetics, Inc. completed a merger in
which Pharmetics was merged into a wholly-owned subsidiary of OnGard Systems,
OST. The acquisition was transacted through the exchange of stock in which
OnGard provided 359,602 shares of its commons stock valued at $2.6 million to
the shareholders of Pharmetics.
The following unaudited pro forma consolidated, condensed financial
statements present the results of operations of OnGard and Pharmetics for the
year ended December 31, 1994. The presentation sets forth the results of
operations of OnGard as if the acquisition of Pharmetics was consummated as of
January 1, 1994. See "Business -- Acquisition of Pharmetics."
The following unaudited pro forma consolidated, condensed financial data
should be read in conjunction with the accompanying footnotes thereto and the
historical financial statements of OnGard and Pharmetics presented elsewhere in
this prospectus.
The following unaudited pro forma consolidated, condensed financial
information is based on estimates and assumptions that are outlined in the
footnotes to unaudited pro forma consolidated, condensed financial statements.
The actual results reported in the future will vary from such unaudited pro
forma consolidated, condensed financial information.
41
<PAGE>
ONGARD SYSTEMS, INC. AND SUBSIDIARIES AND PHARMETICS INCORPORATED
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Proforma Adjustments
--------------------
Historical Historical Pro Forma
OGSI Pharmetics Debit Credit Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $3,928,345 $ 987,293 $ $ $4,915,638
Cost of Sales 3,470,709 1,969,586 5,440,295
----------------------------------------------------------------
457,636 (982,293) (524,657)
-----------------------------------------------------------------
COST & EXPENSES:
General & Administrative 2,440,935 733,229 3,174,184
Write-Down of Excess Cost Over
Net Tangible Assets Acquired 1,988,561 1,988,561
Provision for losses on
advances to Pharmetics 801,824 801,824
Selling 568,488 380,984 949,472
Depression & Amortization 150,930 (5,871) 127,820(a) 272,879
Research & Development 223,652 32,917 256,569
----------------------------------------------------------------
TOTAL EXPENSES 6,174,390 1,141,259 127,820 0 7,443,469
----------------------------------------------------------------
Income (loss) From Operations (5,716,754) (2,123,552) (127,820) 0 (7,968,126)
-----------------------------------------------------------------
Interest Expense (239,761) (110,191) (349,952)
Interest & Other Income 66,507 1,030,962 1,097,469
-----------------------------------------------------------------
Total Other Income/Expense (173,254) 920,771 0 0 747,517
-----------------------------------------------------------------
Loss Before Income Taxes (5,890,008) (1,202,781) (127,820) 0 (7,220,609)
Income taxes 0 0 0 0 0
-----------------------------------------------------------------
Net Loss $(5,890,008) $(1,202,781) $(127,820) $0 $(7,220,609)
-----------------------------------------------------------------
-----------------------------------------------------------------
Net Loss Per Share ($2.60)
------------
------------
Weighted Average Number of
Shares Outstanding 2,776,460
</TABLE>
42
<PAGE>
ONGARD SYSTEMS, INC. AND SUBSIDIARIES AND OST
NOTES TO UNAUDITED PROFORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ProForma Adjustments and Assumptions
The acquisition of OST was accounted for as a purchase. The purchase
price, after giving effect to liabilities assumed, was allocated to the tangible
assets of Pharmetics based upon their values and the remaining excess of the
purchase price over the fair value of net tangible assets acquired is being
amortized on a straight-line basis over 20 years. During the third quarter of
1994 and thereafter, OnGard initiated an evaluation of the excess purchase price
shown as "Cost in Excess Net Assets of Business Acquired" on its Balance Sheet.
The Company, as a result, wrote off amounts as described below.
The accompanying unaudited proforma consolidated condensed financial
statements give effect to the following proforma adjustments and assumptions:
(a) To record the amortization of good will (straight-line over 20 years)
as if the acquisition of Pharmetics was effective at the beginning of
the respective period.
43
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES
OnGard's executive officers, directors and significant employees are as
follows:
Name Age Title
Mark E. Weiss 43 President, Treasurer, Director
and Chief Executive Officer
Philip B. Kart 45 Vice President and Chief
Financial Officer
Eric L. Steiner, M.D. 43 Director
Thomas F. Kearns, Jr. 57 Director
Clay C. Cannady 34 Director of Sterility
Assurance Products
Lawrence H. Cabeceiras 40 Vice President, Marketing
Kent Cherrey 40 Vice President, Sales
Mark E. Weiss is a co-founder of OnGard and has served as a director,
President and Treasurer since OnGard's inception. Prior to OnGard's inception,
from September 1987 to June 1989, Mr. Weiss was President and Chief Executive
Officer of HealthCare United Management Corporation, a health insurance
management organization, and President of HealthCare United, a
federally-qualified health maintenance organization. HealthCare United was
operating under the supervision of the Colorado Division of Insurance when Mr.
Weiss joined the organization as part of a work-out team. As President of
HealthCare United, Mr. Weiss worked with the Colorado Division of Insurance to
place HealthCare United in an orderly receivership, ensuring that beneficiary
coverage was maintained. Prior to that, Mr. Weiss was an independent
consultant. Mr. Weiss has a bachelor's degree in mathematics, with a minor in
chemistry, from the University of Colorado.
Eric L. Steiner, M.D., is a co-founder of OnGard and has served as a
director since OnGard's inception. He is not an employee of OnGard. Since
1981, Dr. Steiner has been a board-certified anesthesiologist, specializing in
cardiovascular anesthesia, and is past Chairman of the Department of
Anesthesiology at Mercy Medical Center in Denver. Dr. Steiner is a 1978
graduate of Hahnemann Medical College and a 1974 graduate of the University of
Pittsburgh.
Thomas F. Kearns has been appointed to the Board, effective December 24,
1995, to fill the vacancy created by the resignation of Derace L. Schaeffer,
M.D., which resignation was effective as of the same date. Mr. Kearns was
appointed in accordance with the right of the Series B Preferred stockholders
(see "Description of Capital Stock-Preferred Stock") to nominate and elect a
director. It is expected that Mr. Kearns will stand for election by the Series
B Preferred stockholders at the Company's next annual meeting of stockholders.
Mr. Kearns is a retired partner of the investment banking firm of Bear, Stearn &
Co., Inc. He also serves as a director of Biomet, Inc., a manufacturer of
orthopedic devices, and Pharma Kinetics Laboratories, Inc., a contract research
organization, and as a trustee of the University of North Carolina.
Philip B. Kart joined the Company in March 1994 as Vice President and Chief
Financial Officer. Prior to joining the Company, from 1989 to 1994, Mr. Kart
was a principal in Big Stone Partners, a financial advisory
44
<PAGE>
firm which assisted growing and troubled businesses in operations restructuring
and financial management. Prior to that, Mr. Kart held financial officer or
management positions with Lasertrak Corporation, a venture capital backed
aviation equipment company, Agrigenetics Corporation, a $100 million (sales)
biotechnology company and Union Carbide Corporation. He was also with the
public accounting firm of Price Waterhouse. Mr. Kart has a bachelor's degree
from Wagner College, an M.B.A. from City University of New York and is a C.P.A.
Clay C. Cannady, Director of Sterile Assurance Products has been with
OnGard Systems since May 1993. From May 1988 to April 1993, he held various
positions in the Sales and Marketing Group of American National Can. Mr.
Cannady has a bachelor of arts degree from the University of Missouri and a
graduate degree from the University of North Carolina School of Business.
Lawrence H. Cabeceiras joined the Company in January 1995 as Vice
President, Sales and Marketing. Prior to joining the Company, he had been with
AMSCO (American Sterilizer Company) from 1980 through 1994, most recently as
Corporate Director of Marketing and Product Commercialization. He had
previously been with Union Carbide, Linde Medical Gas Division from 1978 to
1980. Mr. Cabeceiras has a B.A. and M.B.A. from Tulane University
Kent Cherrey joined the Company in November 1995 as Vice President of
Sales. For the twelve years preceding this, Mr. Cherrey held a variety of
positions in sales and sales management, leading to the position of Vice
President of Strategic Accounts for Ballard Medical Products, Inc. in Utah.
Ballard's product lines focused on disposal products sold to hospitals and
related health care companies. Prior to that he was with Respiratory Care, Inc.
from 1983 to 1985. Mr. Cherrey has a B.A. from University of Wisconsin.
In connection with an initial public offering OnGard completed in September
1992, Royce has the right pursuant to an underwriting agreement to designate a
member or a non-voting advisor to OnGard's Board of Directors until August 1997.
Royce has not yet exercised its right nor expressed its intent with respect to
designating such a person.
In connection with its investment in the September 1995 Private Placement,
Montgomery Asset Management has the right to designate one member of the
Company's Board of Directors. See "Description of Capital Stock - Preferred
Stock". Montgomery has indicated it will exercise its right to designate a
member of the Board but formal notification and approval has not yet occurred.
The following persons, each of whom was an officer or director of the
Company, or beneficial owner of more than 10% of the Company's Common Stock, at
any time during 1994, failed to file on a timely basis reports required by
Section 16(a) of the Exchange Act through December 31, 1995; Lawrence H.
Cabeceiras and Kent W. Cherrey, one late report in 1995; Eric L Steiner, two
late reports in 1995.
EXECUTIVE COMPENSATION
The following table sets forth all annual and long-term compensation
paid by the Company to those officers whose total annual salary and bonus
exceeded $100,000, for services rendered during the calendar years indicated
below.
45
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term
Compensation
--------------------------------- -------------
Name and Principal Year Salary Bonus Other Annual Stock Options
Position Compensation
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weiss, Mark 1995 $150,941 $50,000 - 350,000(2)
President
- ---------------------------------------------------------------------------------------
Weiss, Mark 1994 $130,000 $25,000 $(4) 135,000(6)
President
- ---------------------------------------------------------------------------------------
Weiss, Mark 1993 $126,000 $35,000(5) $0(4) -0-
President
- ---------------------------------------------------------------------------------------
Cabecerias, Larry 1995 $110,909 - - 60,000(3)
Vice President Marketing
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Exercisable at $3.50 per share and expire December 24, 2002.
(2) 15,000 options vested and exercisable on January 30, 1995 and 45,000 vested
equally in four annual installments exercisable at $6.50 per share. All
expire January 30, 2002.
(3) Less than $50,000 or 10% of the total of annual salary and bonus.
(4) Granted in May 1994 for 1993 performance.
(5) Exercisable at $5.00 per share and expire in December 2001.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------------
Percent of All
Options Granted
to Employees in
Number of Shares Fiscal Year Exercise Expiration Date
Underlying Price
Options
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weiss, Mark 350,000 44.5% $3.50 December 24, 2002
---------------------------------------------------------------------------------------
Cabecerias, Larry 60,000 7.6% $6.50 January 30, 2002
---------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the number of shares of the Company's Common
Stock covered by outstanding stock options held by each of the named executives
at December 31, 1995, and the value at December 31, 1995, as determined by the
spread between the option price and the price of the Company stock as reported
by NASDAQ National Market (Small-Cap-SM-). Options granted to the named
executives during the fiscal year are shown in the table immediately above and
are reflected in the following table. Mr. Weiss elected not to exercise any of
his outstanding stock options during the fiscal year.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
-----------------------------------------------------------------------------
Number of Unexercisable Options at Value of Unexercised In-the-Money Options
Fiscal Year-End at Fiscal Year-End
-----------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weiss, Mark 372,500 175,000 $1,100,625 $656,250
-----------------------------------------------------------------------------------------------
Cabecerias, Larry 15,000 45,000 $11,250 $33,750
-----------------------------------------------------------------------------------------------
</TABLE>
COMPENSATION OF DIRECTORS
In December 1995, the Board of Directors granted 50,000 and 25,000 non-
qualified stock options, respectively to Mr. Thomas Kearns and Dr. Eric
Steiner, respectively, pursuant to the Company's 1995 Stock Option Plan. The
stock options are exercisable at $3.50 per share and expire on December 24,
2002. These options are vested 50% immediately, with the remainder vested
ratably over two years.
46
<PAGE>
In December 1994, the Board of Directors granted 100,000 and 50,000 non-
qualified stock options, respectively, to Drs. Schaffer and Steiner for their
services as directors of the Company pursuant to the Company's 1992 Stock Option
Plan. The stock options are exercisable at $5.00 per share and expire on
December 22, 2001. The stock options granted to Dr. Schaffer vest ratably over
a four year period; the stock options granted to Dr. Steiner vested immediately.
EMPLOYMENT AGREEMENTS
Mr. Weiss has an employment agreement with OnGard effective through
December 31, 1995. The Board of Directors has agreed to extend the employment
agreement through three additional years. The agreement is terminable by OnGard
for cause, as defined therein, without further obligation. If OnGard terminates
Mr. Weiss without cause, he will be entitled to a one-time payment equal to five
times his annual base salary at the amount in effect at the date of the
termination. Upon any termination, Mr. Weiss is subject to two-year covenants
not to compete. Effective January 1, 1996 Mr. Weiss' annual base salary was
increased to $200,000.
Effective September 29, 1994, OST entered into an employment agreement with
Theodore Shlisky in connection with the Pharmetics Merger. The employment
agreement provides that Mr. Shlisky shall serve as executive vice president of
OST for the three year term of the agreement and in such capacity he will be
responsible for all phases of OST's manufacturing and distribution in connection
with its sterilization equipment business. Mr. Shlisky is entitled to an annual
base salary of $105,000, plus a cash bonus equal to 25% of his base salary for
the 12 months ending September 30, 1995 provided OST's sales in the ordinary
course of business exceed $4 million by the end of such period; similar bonuses
are to be negotiated during the second and third 12 month periods. The
employment agreement automatically terminates upon the earlier of (i) the
expiration of three years, subject to extension by OST for up to six months;
(ii) the death of Mr. Shlisky; (iii) OST's relocation to a facility over 50
miles from the present facility, if Mr. Shlisky elects not to relocate to the
new facility; or (iv) the inability of Mr. Shlisky to perform his duties by
reason of illness, disability or other incapacity if such inability continues
for more than three successive months or five months in the aggregate during any
period of 12 consecutive months; and OST may terminate the agreement for cause
as defined therein. It may be extended for a period of 6 months at the option
of OST and the parties agree to discuss Mr. Shlisky's continued involvement in
the Company prior to the end of the three year term. The employment agreement
also contains a non-competition clause effective for two years following
termination of the agreement. Mr. Shlisky has resigned from the Company
effective December 18, 1995. Mr. Shlisky claims that the Company did not
fulfill certain of its obligations under his employment agreement. The Company
denies this allegation and is currently evaluating with its counsel the
potential effect of Mr. Shlisky's departure on the Company, as well as the
Company's legal remedies arising out of Mr. Shlisky's termination of his
employment agreement. The Company intends to vigorously pursue all its
available remedies relating to this matter.
There are no arrangements pursuant to which any director of OnGard receives
cash compensation; however directors are provided stock options as described
above.
On December 22, 1994, pursuant to the Company's 1992 Stock Option Plan, the
Board of Directors voted to grant the following stock options to the following
people: Mark E. Weiss, options for 135,000 shares of Common Stock at $5.00 per
share, vesting immediately; Eric L. Steiner, M.D., options for 50,000 shares of
Common Stock at an exercise price of $5.00 per share, vesting immediately;
Derace L. Schaffer, M.D., options for 100,000 shares of Common Stock at an
exercise price of $5.00 per share, vesting ratably over a four year period
beginning December 22, 1994; Philip B. Kart, options for 10,000 shares of Common
Stock at $6.00 per share, vesting effective March 21, 1994, and options for
50,000 shares of Common Stock at $6.50 per share, vesting ratably over a four
year period beginning March 21, 1994; Clay C. Cannady, options for 15,000 shares
of Common Stock at $5-1/8 per share, vesting effective May 10, 1993, and options
for 45,000 shares of Common Stock at $6.50 per share, vesting ratably over a
four year period beginning May 10, 1993. All options expire seven years after
the vesting date of the first options to vest under the particular grant. See
47
<PAGE>
"Management Discussion and Analysis of Financial Condition and Results of
Operations--Year Ended December 31, 1994 Compared to Year Ended December 31,
1993."
On December 24, 1995, under similar grants, the Board of Directors voted to
grant stock options to the following people at $3.50 per common share, vested
50% immediately and the remainder vested ratably over two years: Mark E. Weiss,
350,000 options; Eric L. Steiner, M.D. 25,000 options; Thomas F. Kearns, Jr.,
50,000 options; Philip B. Kart, 25,000 options; Joseph Riccardo, a consultant to
the company, 100,000 options; Paul J. Rizzo, a consultant to the company, 50,000
options. In addition, Domenick Treschitta, a consultant to the company, was
granted 100,000 options, all vested immediately, but at $1.00 per common share.
48
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of OnGard Common Stock as of March 31, 1996, by (i) each
person who is known by OnGard to own beneficially 5% or more of OnGard Common
Stock; (ii) each director and officer individually; and (iii) all directors
and officers as a group. Except as otherwise indicated, each person has sole
voting and investment power over the shares of OnGard Common Stock listed as
beneficially owned by him.
<TABLE>
<CAPTION>
Name of individual Shares Beneficially
or number in group owned Percentage of Shares Outstanding(1)
- ------------------ ------------------- -----------------------------------
<S> <C> <C>
Mark E. Weiss 914,837(2)(3) 14.5% (2)(3)
2323 Delgany Street
Denver, Colorado 80216
Eric L. Steiner, M.D. 452,248(3)(5) 7.2% (3)(5)
2323 Delgany Street
Denver, Colorado 80216
Montgomery Asset Management, L.P. 1,148,000(6)(7) 18.2% (6)(7)
600 Montgomery Street
San Francisco, CA 94111
Mellon Bank Corporation 550,000(9) 8.8% (9)
One Mellon Bank Center
Pittsburgh, PA 15258
The Dreyfus Corporation and 550,000(9) 8.8% (9)
200 Park Avenue
New York, NY
Quota Fund 360,000(6) 5.7% (6)
600 Montgomery Street
San Francisco, CA 94111
Hausmann Funding 456,000(6) 7.2% (6)
600 Montgomery Street
San Francisco, CA 94111
Lawrence H. Cabeceiras 26,250(4) .4% (4)
2323 Delgany Street
Denver, Colorado 80216
Clay C. Cannady 42,500(4) .7% (4)
2323 Delgany Street
Denver, Colorado 80216
Philip B. Kart 47,500(4) .4% (4)
2323 Delgany Street
Denver, Colorado 80216
Thomas F. Kearns 75,000(4)(6) 1.2% (4)(6)
40 Commerce Drive
Hauppauge, NY 11788
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C>
Paul Rizzo 45,000(6)(10) .7% (6)(10)
40 Commerce Drive
Hauppauge, NY 11788
Domenick Treschitta 139,000(6)(8)(10) 2.2% (6)(8)(10)
40 Commerece Drive
Hauppauge, NY 11788
All directors and officers 1,742,335(4) 27.6% (4)
as a group (9 persons)
</TABLE>
(1) Includees exercise of 757,000 OnGard Common Stock purchase warrants
which converted to 957,600 common shares in March 1996. See "Certain
Transactions."
(2) Includes 226,313 shares owned of record by LEC Irrevocable Trust, a
trust of which Mr. Weiss and his family are beneficiaries. Under the terms
of the LEC Irrevocable Trust, Dr. Steiner has the power to vote and direct
the disposition of these shares and may be considered the beneficial owner
thereof. Also includes 113,667 shares owned of record by Blue River
Irrevocable Trust (see Footnote 5) and assumes exercise of options to buy
372,500 shares granted to Mr. Weiss which are currently exercisable, 62,500
of which expire in May 2003 and 135,000 of which expire in December, 2002.
See "Management--Executive Compensation."
(3) The beneficial ownership of 339,980 shares (held by the LEC Trust and
Blue River Trust) may be attributable to both Mr. Weiss and Dr. Steiner and
is included in each of the totals of shares beneficially owned by them.
See Footnotes 2 and 5.
(4) Assumes exercise of currently exercisable options to buy shares of
OnGard Common Stock granted as follows: (i) Mr. Weiss, 372,500 shares;
(ii) Dr. Steiner, 62,500 shares; (iii) Mr. Cannady, 42,500 shares;
(iv) Mr. Kart, 47,500 shares; and (v) Mr. Cabeceiras, 26,250 shares and
Mr. Kearns, 25,000 shares. See "Management--Executive Compensation,"
-- " Compensation of Directors," and "Employment Agreements."
(5) Includes 113,667 shares owned of record by Blue River Irrevocable
Trust. Mr. Weiss serves as trustee of this trust for the benefit of Dr.
Steiner and his family. Under the terms of the trust, Mr. Weiss has the
power to vote and direct the disposition of these shares and may be
considered the beneficial owner thereof. Also includes 226,313 shares
owned of record by LEC Irrevocable Trust (see Footnote 2) of which
Dr. Steiner is trustee and 10,000 shares owned of record by C.A.C.
401(k) Profit Sharing Plan for the benefit of Dr. Eric L. Steiner,
10,268 shares acquired in payment of indebtedness owed to Dr. Steiner,
and 14,500 shares acquired in the September 1995 Private Placement.
Also assumes exercise of options to buy 50,000 shares granted to
Dr. Steiner which are currently exercisable and which expire in
December, 2001, and 12,500 which are exercisable and which expire
December 2002.
(6) This beneficial owner purchased the Company's common shares during the
September 1995 Private Placement.
(7) Includes shares held by Quota Fund and Hausmann Funding, for which
Montgomery Asset Management maintains voting and dispositive power.
(8) Includes 10,000 shares purchased by Barbara Treschitta, Mr. Treschitta's
wife, in the September, 1995 Private Placement.
(9) Mellon Bank aquired shares in the public market for the Dreyfus Corporation
and mutual funds for which Dreyfus Corporation acts as investment manager.
Mellon Bank maintains voting and depositive power over these shares.
(10) Assumes the excercise of currently excercisable options granted under
consulting agreements as follows; (i) Mr. Rizzo, 25,000 shares (ii)
Mr. Treschitta, 100,000 shares.
50
<PAGE>
CERTAIN TRANSACTIONS
In September 1992, OnGard completed an initial public offering of its
common stock whereby 920,000 Units, consisting of one share of Common Stock
and one Warrant, were sold at $5.00 per Unit resulting in net proceeds to
OnGard of approximately $3,718,000. Each Warrant entitles the holder to
purchase one share of Common Stock at an adjusted exercise price of $5.34 per
share and was exercisable through August 11, 1995, until the Company extended
the expiration date through April 30, 1996. An anti-dilution provision
contained in these warrants expired on August 11, 1995. See "Description of
Securities--Redeemable Common Stock Purchase Warrants." The Warrants are
subject to redemption by OnGard, subject to certain conditions, upon 30 days
written notice. As of April 10, 1996, 759059 Warrants had been exercised and
converted into 960,210 shares.
Pursuant to the terms of the underwriting agreement relating to the
initial public offering, OnGard has entered into a five-year agreement
providing for the payment of a fee to Royce in the event Royce is responsible
for a merger or acquisition transaction to which OnGard is a party. OnGard
will pay Royce an amount equal to the following percentages of the
consideration paid by or to OnGard; 5% of the first $1,000,000 or portion
thereof; 4% of the second $1,000,000 or portion thereof; and 3% of the
excess. The fee payable to Royce will be in the same form of consideration
as that paid by OnGard or to OnGard, as the case may be. In connection with
the Merger, Royce is receiving a fee of approximately 16,000 shares of OnGard
Common Stock.
Effective October 1, 1994, Pharmetics was merged into the Company's
wholly-owned subsidiary, OGPI, now OST. See ""Business -- Acquisition of
Pharmetics."
On June 28, 1995, the Company issued 10,268 shares of Common Stock to
Dr. Eric L. Steiner, a director of the Company, in repayment of a loan from
Dr. Steiner to the Company. For purposes of the repayment, the shares were
valued at $4.375 per share.
In September, 1995, the Company completed a private placement of
2,204,021 shares of the Company's Common Stock at a price of $3.50 per share
and receive an aggregate of $7,714,075 in gross proceeds. Pursuant to such
private placement, a group of investors under the control of Montgomery Asset
Management, L.P. acquired 1,148,000 shares of 21.4 percent of the shares
outstanding of the Company. At the same time, the same group of investors
purchased 100 shares of the Company's Series B Redeemable Preferred Limited
Voting Stock for an aggregate of $10. The Series B Preferred Stockholders,
provided they own in the aggregate at least five percent of the Company's
Common Stock, can nominate and elect one member to the Company's Board of
Directors. The Series B Preferred Stock is not entitled to any dividends
unless so declared by the Company's Board of Directors. If ant any time the
holders of the Series B Preferred Stock in the aggregate own less than five
percent of the Company's common Stock, the Company may, upon ten days'
notice, redeem the Series B Preferred Stock at a price of $.10 per share.
There is no liquidation preference for the Series B shares unless the Board
elects to redeem these shares prior to liquidation.
Also in connection with the private placement discussed above, Dr. Eric
L. Steiner, a director of the Company, purchased 14,500 shares of the
Company's Common Stock, Thomas F. Kearns, Jr., a director of the Company,
purchased 50,000 shares of the Company's Common Stock and Domenick
Treschitta, a nominee to the Board of Directors and his wife, Barbara
Treschitta, purchased an aggregate of 39,000 shares of the Company's Common
Stock.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of OnGard consists of 10,000,000 shares of
OnGard Common Stock $.001 par value per share and 3,000,000 shares of OnGard
Preferred Stock $.001 par value purchase. At the date of this memorandum,
OnGard has outstanding 6,312,834 shares of OnGard Common Stock, and 378,292
of OnGard Preferred Stock
PREFERRED STOCK
Holders of the 378,292 shares of OnGard Series A Preferred Stock are
entitled to one vote for each Common Stock into which it is then convertible,
on all matters to be voted on by the stockholders. Each share of Series A
Preferred Stock is convertible into one share of common stock. The Series A
Preferred stockholders will vote with the Common stockholders as a single
class. An affirmative vote of the majority of Series A Preferred Stock will
be necessary to alter the rights and preferences of the shares of Series A
Preferred Stock. Holders of the Series A Preferred Stock may convert their
shares into Common Stock at any time at their option. Dividends will be paid
only upon declaration by the Board of Directors, otherwise none are due or
payable on the Series A Preferred Stock. Holders will not be entitled to any
preemptive subscription or redemption rights. The Series A Preferred Stock
will have a preference in liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, equal to $4.00 per share plus any
accrued and unpaid dividends if declared by the Company's Board of Directors.
If the assets available for distribution are insufficient to pay the holders
of Series A Preferred Stock and the holders of all preferred stock that is
pari passu with the Series A Preferred Stock the full amount to which they
are entitled, then such holders shall share ratably in any distribution of
the assets of the Company in proportion to the amounts that would have been
payable with respect to their shares if all amounts payable with respect to
such shares were paid in full. Acquirors of preferred shares were also
granted Class B warrants described below.
Pursuant to the September 1995 Private Placement, the Company also sold
100 shares of its non-interest bearing Series B Redeemable Preferred Limited
Voting Stock Provided that the holders of the Series B preferred stock own
in the aggregate at least 5% of the Company's Common Stock, the holders of
the Series B preferred stock can nominate and elect one member to the
Company's Board of Directors. The Series B preferred stock is not entitled
to any dividends unless so declared by the Company's Board of Directors. If
at any time holders of the Series B preferred stock own less than five
percent of the Company's Common Stock, the Company may, upon ten days'
written notice, redeem the Series B preferred stock at a price of $.10 per
share. There is no liquidation preference for the Series B shares unless the
Board elects to redeem these shares prior to liquidation.
COMMON STOCK
Holders of OnGard Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by the stockholders. Holders of
OnGard Common Stock are entitled to receive dividends when and as declared by
the Board of Directors out of funds legally available therefor. See,
however, "Market for OnGard Common Stock and Dividend Policy." Upon
liquidation or dissolution of OnGard, holders of OnGard Common Stock are
entitled to share ratably in the remaining assets of OnGard which may be
available for distribution after payment of OnGard's creditors. Holders of
OnGard Common Stock have no preemptive, subscription or redemption rights.
OnGard Common Stock has no cumulative voting rights; provided, however, that
the holders of the Company's Common Stock purchased on August 30, 1995 as
part of the September 1995 Private Placement have preemptive rights to
purchase their proportionate share of new securities that the Company may
issue. All outstanding shares of OnGard Common Stock are fully paid and
nonassessable.
52
<PAGE>
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
OnGard issued Warrants to purchase 920,000 shares of OnGard Common Stock
at $6.75 per share as part of its initial public offering in 1992. The total
of 920,000 shares has been adjusted to 1,163,956 shares pursuant to an
anti-dilution provision. Each Warrant entitles the holder to purchase one
share of OnGard Common Stock at an adjusted exercise price of $5.34 per share
until 5:00 p m. Mountain Time, on April 30, 1996. The Warrants do not confer
upon the Warrant holder any voting or other rights of a stockholder of
OnGard. Upon notice to the Warrant holders, OnGard has the right to reduce
the exercise price or extend the expiration date of the Warrants. The
Company extended the expiration date of the warrants from August 11, 1995
originally to December, 31,1995 and then to March 29, 1996 and April 30, 1996.
The outstanding Warrants had an anti-dilution provision which was
triggered by the Company's Dilutive Transactions completed since the issuance
of these warrants and through the original expiration date of August 11,
1995. See "RISK FACTORS - Outstanding Warrants." Effective August 11, 1995,
the anti-dilution provision expired, although the Company extended the
exercise period to April 30, 1996.
The Warrants had been issued pursuant to a warrant agreement (the
"Warrant Agreement") between OnGard and Continental Stock Transfer & Trust
Company, New York, New York, as Warrant Agent, and are evidenced by Warrant
Certificates in registered form. The Warrants provide for adjustment of the
exercise price and for a change in the number of shares issuable upon
exercise to protect holders against dilution in the event of a stock
dividend, stock split, combination or reclassification of the OnGard Common
Stock or upon issuance of shares of OnGard Common Stock at prices lower than
the greater of the Warrant exercise price then in effect or the then market
price.
The exercise price of the Warrants was subject to adjustment as follows:
If OnGard issues any OnGard Common Stock, or any securities exercisable
for or convertible into Common Stock, for a consideration per share less than
the higher of either (a) the exercise price in effect immediately prior to
the issuance of such OnGard Common Stock or securities, or (b) the then
current market price per share of the OnGard Common Stock, then, the exercise
price in effect immediately prior to each such issuance shall (except as
otherwise provided in this clause) be adjusted by multiplying such exercise
price by a fraction, the numerator of which shall be the number of shares of
OnGard Common Stock outstanding (as defined in the Warrant Agreement) prior
to such issuance plus the number of shares of OnGard Common Stock which the
aggregate offering price of the total number of shares of OnGard Common Stock
to be issued (or deemed issued) would purchase at the higher of (a) the
exercise price then in effect or (b) the then current market price per share
the OnGard Common Stock, and of which the denominator shall be the number of
shares of OnGard Common Stock then outstanding (as defined in the Warrant
Agreement) plus the number of shares of OnGard Common Stock to be issued (or
deemed issued).
The Warrants do not confer upon the Warrant holder any voting or other
rights of a stockholder of OnGard. Upon notice to the Warrant holders,
OnGard has the right to reduce the exercise price and exercise its right
extend the expiration date of the Warrants until March 29, 1996. See
"CERTAIN TRANSACTIONS."
Through April 30, 1996, the Company received $6.0 million (gross
proceeds) from the exercise of approximately 890,000 Warrants converting to
1,128,000 shares.
UNDERWRITER'S UNIT PURCHASE WARRANTS
OnGard sold to the Underwriter of its initial public offering, for a
price of $10 in the aggregate, 80,000 warrants (the "Underwriter's
Warrants"). The total number of Underwriter's Warrants has been adjusted to
approximately 120,391 pursuant to an anti-dilution provision. Each
Underwriter's Warrant entitles the holder to purchase one unit, at an
adjusted price of $4.65 per unit, through August 11, 1997. The units
underlying the Underwriter's Warrants are substantially identical to the
units sold to the public, except that the Warrants
53
<PAGE>
contained in such units are not callable at any time and the Underwriter's
Warrants may be exercised by delivering cash and/or securities of OnGard
equal in value of the exercise price, based upon the market value of the
securities being delivered to OnGard. OnGard has also granted certain
redemption rights to the Underwriter with respect to the Underwriter's
Warrants and the units issuable thereunder. The Warrants contained in such
units are exercisable at $6.26 per share. The Underwriter's Warrants contain
an anti-dilution provision that was triggered in connection with the Dilutive
Transactions in which the Company has engaged. See "RISK
FACTORS--Underwriter's Warrants and Exercise Thereof." These adjustments do
not reflect shares OnGard anticipates issuing to Royce in connection with the
Merger. See "VOTING AND MANAGEMENT INFORMATION--Management and Principal
Shareholders of OnGard--Certain Transactions."
The Placement Agent has also been granted warrants to purchase a total
of 30,000 Units (each Unit consisting of two shares of common stock and one
purchase warrant) at $7 per unit in connection with the Company's private
placement completed in July, 1994. The 30,000 warrants underlying the
Underwriter's private placement warrants are identical in terms to the Class
A Warrants discussed above except that they are not subject to redemption.
The 60,000 shares underlying these units, were initially granted at a price
of $3.50 and the 30,000 warrants at a price of $6.00 per warrant. The
Company believes that, based upon the anti-dilution provision that has been
triggered by the Dilutive Transactions since the issuance of these units, the
shares have been adjusted to 69,652 and the exercise price to $3.01. The
warrants have been adjusted to 34,826 and the price to $5.17.
GUARANTORS' WARRANTS
In consideration for a $1.5 million guarantee of debt financing
facilitated by a third party Guarantor, from a commercial lender, Norwest
Bank, Colorado ("Bank") the Company issued the Guarantor or its assigns a
five year warrant to purchase 400,000 shares of the Company's common stock at
an exercise price of $4 per share until 5:00 p.m. New York Time on October
24, 1999. The Warrant does not confer upon the holder any voting or other
rights of a stockholder of OnGard. In the event the Company files a new
registration statement under the Securities Act of 1933 with the Securities
and Exchange Commission covering securities of the Company, the holder of the
Warrant will have the right to have the shares issuable upon exercise of the
Warrant included in such registration to permit the public sale of the
Warrant Shares. The Warrant contains an anti-dilution provision to provide
for adjustment of the exercise price and for a change in the number of shares
issuable upon exercise to protect the holder against dilution in the event of
a stock dividend, stock split, combination or reclassification of the OnGard
Common Stock. The Company believes the adjusted exercise price of the
warrants is $3.41 and number of shares is 468,700. In addition, the
guarantor, in conjunction with another investor in the Company, guaranteed an
additional $1.0 million of additional borrowings for which an additional
200,000 warrants were granted at an exercise price of $4.00 per share. These
warrants are identical in terms to those previously provided but expire on
May 31, 2000. The Company believes the adjusted exercise price of these
warrants is $3.57 and the number of shares is 224,080.
CLASS A WARRANTS
The Private Placement of the Company's Common Stock completed in July,
1994 contained warrants (the "Class A Warrants") to purchase one share of the
Company's Common Stock for $6. The Class A Warrants are exercisable until
5:00 p.m., Mountain Time, three years from the final closing date of the
Private Placement. The Class A Warrants contain an anti-dilution provision
which is triggered by (i) a sale of any shares of the Company's Common Stock
for a consideration per share less than the then current fair market value
per share of Common Stock or the purchase price pursuant to the Class A
Warrants on the date of sale, (ii) the issuance of any shares of Common Stock
as a stock dividend to the holders of Common Stock, and (iii) a subdivision
or combination of the outstanding shares of Common Stock into a greater or
lesser number of shares. The Warrant agreement specifically provided that
anti-dilution provisions was not triggered by the Pharmetics' Merger or the
Guarantor's Warrants. The Class A Warrants are redeemable by the Company in
the event the closing price of the Company's Common Stock is at least $10 per
share per day for twenty consecutive trading days immediately preceding the
date of the notice of redemption. The Holders of the Class A Warrants and
securities issuable upon exercise thereof are granted both demand and
"piggyback" registration rights under certain conditions. Three hundred
thousand (300,000) Class A Warrants were issued,
54
<PAGE>
71,429 were exercised during the first quarter 1995. The Company believes
that based on its securities transactions since the date of the issuance of
Class A warrants, the price per share has been adjusted to $5.20 and shares
issuable revised to 268,341.
CLASS B WARRANTS
The Class B Redeemable Common Stock Warrants sold in connection with
preferred shares described above are exercisable for a period of three years
from the closing date of the offering, until 5:00 p.m. Mountain Time on such
date. Each of 375,000 Warrant entitles the holder thereof to purchase one
share of Common Stock at a price of $6.00 per share. The Warrants are
redeemable by the Company in the event the closing price of the Company's
Common Stock is at least $10 per share per day for twenty consecutive trading
days immediately preceding the date of the notice of redemption. The
Warrants will be protected against dilution upon the occurrence of certain
events including sales of Common Stock for less than fair market value, stock
dividends, split-ups, reclassifications, mergers and asset sales. The
Company believes that based on its securities transactions since the date of
the issuance of the Class B warrants, the price per share has been adjusted
to $5.23, for 287,471 shares and $5.31 for 141,060 shares and the shares
issuable revised to 428,531.
CERTAIN STATUTORY PROVISIONS
The Company is subject to section 203 of the Delaware General
Corporation Law, which imposes restrictions on business combinations (as
defined therein) with interested persons (being any person who acquired 15%
or more of the Company's outstanding voting stock). In general, the Company
is prohibited from engaging in business combinations with an interested
person for a period of three years from the date a person becomes an
interested person, subject to certain exceptions. By restricting the ability
of the Company to engage in business combinations with an interested person,
the application of section 203 of the Company may provide a restriction on
hostile or unwanted takeovers even if such proposals are at a premium to
current market prices of the common stock and are favored by the majority of
stockholders.
LIABILITY LIMITATIONS ON DIRECTORS AND OFFICERS
As permitted by the provisions of the Delaware General Corporation Law,
the Company's Certificate of Incorporation eliminates in certain
circumstances the monetary liability of directors of the Company of certain
breaches of their fiduciary duties as directors. However, these provisions
do not eliminate the liability of a director (i) for a breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions by a director not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) for liability arising under
section 174 of the Delaware General Corporation Law (relating to the
declaration of dividends and purchase or redemption of shares in violation of
the Delaware General Corporation Law); or (iv) for any transaction from which
the director derived an improper personal benefit. In addition, these
provisions do not limit the rights of the Company or its stockholders, in
appropriate circumstances, to seek equitable remedies such as injunctive or
other forms of non-monetary relief. Such remedies may not be effective in
all cases.
Pursuant to the Company's By-Laws, and consistent with section 145 of
the Delaware Business Corporation Law, directors and officers of the Company
are entitled to mandatory indemnification from the Company against certain
liabilities and expenses (i) to the extent such officers or directors are
successful in the defense of a proceeding and (ii) in proceedings in which
the director or officer is not successful in the defense thereof, unless (in
the latter case only) it is determined that the director or officer breached
or failed to perform his duties to the Company and such breach or failure
constituted: (a) a willful failure to deal fairly with the Company or its
shareholders in connection with a matter in which the director or officer had
a material conflict of interest; (b) a violation of the criminal law unless
the director of officer had reasonable cause to believe his or her conduct
was lawful or had no reasonable cause to believe his or her conduct was
unlawful; (c) a transaction from which the director or officer derived an
improper personal profit; or (d) willful misconduct.
55
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officer and controlling persons of the
Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
TRANSFER AND WARRANT AGENT
The Company's transfer agent is Continental Stock Transfer and Trust
Co., New York, New York. Continental Stock Transfer and Trust Co. will also
serve as Warrant Agent in connection with the exercise of the Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
At April 30, 1996, OnGard had 6,488,721 shares of OnGard Common Stock
outstanding and 378,392 preferred shares outstanding which are convertible to
common stock. Of these shares, the 920,000 shares sold in the initial public
offering, 212,947 exchanged in the Pharmetics acquisition, 1,129,940
converted from exercise of Common stock purchase warrants, 300,000 shares
issued under Regulation S and approximately 195,000 other shares may be
freely traded without restriction under the Securities Act of 1993 (the
"Act"). An additional 125,000 preferred shares were also issued under
Regulation S and are traded without restriction. The Company is registering
2,639,023 common shares by this Prospectus making them available for public
sale. The remaining 1,091,811 shares of OnGard Common Stock (the "restricted
shares") have been issued and sold by OnGard in private transactions in
reliance upon various exemptions under the Act. Such shares will be eligible
for public sale if registered under the Act or sold in accordance with Rule
144 thereunder.
In general, under Rule 144, beginning 90 days after August 11, 1992, the
date of the initial public offering, a person (or persons whose shares are
aggregated) who has beneficially owned his shares for at least two years,
including persons who may be deemed "affiliates" (as defined in the
Securities Act of 1933, as amended) of OnGard, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (a)
1% of the then outstanding shares of OnGard Common Stock (approximately
63,000 shares) or (b) the average weekly trading volume in the
over-the-counter market during the four calendar weeks preceding the date on
which notice of such sale is filed with the Securities and Exchange
Commission. In addition, sales under Rule 144 are subject to the certain
other restrictions regarding the manner of sale, required notice and
availability of public information concerning OnGard. A person (or persons
whose shares are aggregated) who is not deemed an "affiliate" of OnGard and
who has beneficially owned his shares for at least three years would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations and certain other restrictions.
The holders of 1,150,000 shares of registered shares agreed not to sell
any of their shares of OnGard Common Stock to the public for a period of 24
months after August 11, 1992 without the prior written consent of the
Underwriter. Based upon available information, OnGard believes that,
following the expiration of such 24 month period, a substantial portion of
such shares became eligible for public sale pursuant to Rule 144 as described
above. The holders of such shares have agreed that, for three years
following such 24 months period, all sales of such shares shall be effected
through or with the Underwriter, in the following manner. Each such holder
shall offer the Underwriter the exclusive opportunity to purchase or sell
such shares on terms at least as favorable as such holder can obtain
elsewhere. If the Underwriter fails to accept such proposal within three
business days, the Underwriter shall have no rights with respect to the
proposed transaction. If the proposal is thereafter modified in any material
respect, the Underwriter will have an additional right of refusal on the
terms described above.
In connection with its acquisition of assets of MDPI in March 1993,
OnGard privately issued 50,000 shares of common stock. These shares
constitute "restricted securities" for purposes of the Act. The purchaser of
these securities agreed that, in addition to applicable securities law
restrictions, it would not transfer the shares for a period of twelve months
from the date of purchase.
56
<PAGE>
In connection with its acquisition of OST in October, 1994, OnGard
issued 130,655 shares to the former majority holder of OST stock. The
purchaser agreed it would not transfer the shares for a period of twelve
months from the date of purchase.
57
<PAGE>
EXPERTS
The consolidated financial statements of OnGard Systems, Inc. as of
December 31, 1995 and for each of the two years in the period then ended
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report.
58
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ONGARD SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants........................... F-1
Consolidated Balance Sheet as of December 31, 1995................. F-2
Consolidated Statements of Operations for the years ended
December 31,1995 and 1994......................................... F-3
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1995 and 1994.................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1994........................................ F-5
Notes to Consolidated Financial Statements......................... F-6
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 1996 AND 1995
Consolidated Balance Sheets as of March 31, 1996 and
December 31, 1995 (Unaudited)..................................... F-22
Consolidated Statements of Operations for the three months ended
March 31, 1996 and 1995 (Unaudited)............................... F-24
Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 (Unaudited)............................... F-25
Notes to Consolidated Financial Statements......................... F-27
</TABLE>
59
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OnGard Systems, Inc.:
We have audited the accompanying consolidated balance sheet of OnGard
Systems, Inc. (a Delaware corporation) and subsidiary as of December 31,
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of OnGard Systems, Inc. and
subsidiary as of December 31, 1995, and the results of their operations and
their cash flows for each of the two years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
March 29, 1996
F-1
<PAGE>
ONGARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,693,303
Restricted cash 97,363
Trade accounts receivable, net of allowance of $119,000 656,274
Inventory, net 1,481,847
Prepaid expenses and other current assets 77,881
-----------
Total current assets 6,006,668
-----------
PROPERTY AND EQUIPMENT, net 1,152,573
-----------
EQUIPMENT UNDER OPERATING LEASE, net 134,440
-----------
OTHER ASSETS:
Excess cost over net tangible assets acquired, net 2,396,608
Intangible and other assets, net 238,258
Deposits 51,151
Debt guarantee fee, net 140,740
-----------
Total other assets 2,826,757
-----------
$10,120,438
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank $ 1,764,270
Trade accounts payable 839,187
Accrued liabilities 1,251,050
Capital leases payable 88,362
Customer deposits 89,994
-----------
Total current liabilities 4,032,863
NONCURRENT TRADE ACCOUNTS PAYABLE 50,735
-----------
Total liabilities 4,083,598
-----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred stock, $.001 par value,
3,000,000 shares authorized; 378,292 issued and
outstanding; aggregate liquidation preference of
$1,513,168 1,228,167
Series B Redeemable Preferred stock, no par value;
100 shares issued and outstanding 10
Common stock, $.001 par value, 10,000,000 shares authorized;
5,355,281 shares issued and outstanding 5,355
Additional paid-in capital 23,983,803
Deferred compensation (1,189,500)
Accumulated deficit (17,990,995)
-----------
Total stockholders' equity 6,036,840
-----------
$10,120,438
-----------
-----------
The accompanying notes are an integral part of this balance sheet.
F-2
<PAGE>
ONGARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
----------- -----------
REVENUES $4,975,069 $ 3,928,345
COST OF SALES 5,286,358 3,470,709
---------- -----------
Operating margin (deficit) (311,289) 457,636
---------- -----------
COSTS AND EXPENSES:
General and administrative 4,339,822 2,440,935
Sales and marketing 1,468,319 568,488
Depreciation and amortization 307,813 150,930
Research and development 369,859 223,652
Writedown of excess cost over net tangible assets
acquired (Notes 1 and 12) - 1,988,561
Provision for losses on advances to Pharmetics
(Notes 1 and 12) - 801,824
---------- -----------
Total costs and expenses 6,485,813 6,174,390
---------- -----------
LOSS FROM OPERATIONS (6,797,102) (5,716,754)
INTEREST EXPENSE (549,332) (239,761)
INTEREST AND OTHER INCOME, net 358,434 66,507
---------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (6,988,000) (5,890,008)
PROVISION FOR INCOME TAXES - -
----------- -----------
NET LOSS $(6,988,000) $(5,890,008)
----------- -----------
----------- -----------
NET LOSS PER SHARE $ (1.76) $ (2.32)
---------- -----------
---------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 3,961,700 2,534,900
---------- -----------
---------- -----------
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
ONGARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Common Stock
-------------------- -------------- --------------------
Shares Amount Shares Amount Shares Amount
-------------------- -------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 - $ - - $ - 2,070,000 $2,070
- -
Issuance of 600,000 common shares in
connection with equity private
placement, net of issuance costs and
underwriter's commissions of $427,823 - - - - 600,000 600
Issuance of 400,000 warrants in
connection with guarantee of the
Company's note payable to bank - - - - - -
Issuance of 359,602 common shares in
connection with merger with Pharmetics - - - - 359,602 360
Issuance of 250,000 warrants in
connection with convertible debenture
private placement - - - - - -
Deferred compensation related to stock
options granted - - - - - -
Compensation related to stock options
granted - - - - - -
Net loss - - - - - -
------- ---------- --- --- --------- ------
BALANCE, December 31, 1994 - - - - 3,029,602 3,030
Conversion of convertible debentures to
Class A preferred stock, net of debt
discount 250,000 765,000 - - - -
Issuance of 3,292 Class A preferred shares
for accrued interest on convertible
debentures 3,292 13,167 - - - -
Sale of 125,000 Class A preferred shares,
net of underwriters' commissions of $50,000 125,000 450,000 - - - -
Issuance of 100 shares of Class B redeemable
preferred limited voting stock - - 100 10 - -
Conversion of 71,429 Class A warrants to
common stock, net of underwriters
commissions of $25,000 - - - - 71,429 71
Conversion of related party notes payable
and interest to common stock - - - - 12,373 12
Issuance of 200,000 warrants in connection
with guarantee of the Company's notes
payable to bank - - - - - -
Issuance of 2,204,021 common shares in
connection with equity private placement,
net of issuance costs of $80,000 - - - - 2,204,021 2,204
Deferred compensation related to stock
options granted - - - - - -
Compensation related to stock options granted - - - - - -
Amortization of deferred compensation - - - - - -
Conversion of vendor payables to common stock - - - - 35,200 35
Exercise of common stock warrants - - - - 2,656 3
Net loss - - - - - -
------- ---------- --- --- --------- ------
BALANCE, December 31, 1995 378,292 $1,228,167 100 $10 5,355,281 $5,355
------- ---------- --- --- --------- ------
------- ---------- --- --- --------- ------
<CAPTION>
Additional Total
Paid-In Deferred Accumulated Stockholders'
Capital Compensation Deficit Equity
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993 $ 7,389,481 $ - $ (5,112,987) $2,278,564
Issuance of 600,000 common shares in
connection with equity private
placement, net of issuance costs and
underwriter's commissions of $427,823 1,671,577 - - 1,672,177
Issuance of 400,000 warrants in
connection with guarantee of the
Company's note payable to bank 400,000 - - 400,000
Issuance of 359,602 common shares in
connection with merger with Pharmetics 2,595,515 - - 2,595,875
Issuance of 250,000 warrants in
connection with convertible debenture
private placement 250,000 - - 250,000
Deferred compensation related to stock
options granted 150,000 (150,000) - -
Compensation related to stock options
granted 309,375 - - 309,375
Net loss - - (5,890,008) (5,890,008)
----------- ----------- ------------ ----------
BALANCE, December 31, 1994 12,765,948 (150,000) (11,002,995) 1,615,983
Conversion of convertible debentures to
Class A preferred stock, net of debt
discount - - - 765,000
Issuance of 3,292 Class A preferred shares
for accrued interest on convertible
debentures - - - 13,167
Sale of 125,000 Class A preferred shares,
net of underwriters' commissions of $50,000 - - - 450,000
Issuance of 100 shares of Class B redeemable
preferred limited voting stock - - - 10
Conversion of 71,429 Class A warrants to
common stock, net of underwriters
commissions of $25,000 296,359 - - 296,430
Conversion of related party notes payable
and interest to common stock 59,910 - - 59,922
Issuance of 200,000 warrants in connection
with guarantee of the Company's notes
payable to bank 200,000 - - 200,000
Issuance of 2,204,021 common shares in
connection with equity private placement,
net of issuance costs of $80,000 7,631,844 - - 7,634,048
Deferred compensation related to stock
options granted 1,087,500 (1,087,500) - -
Compensation related to stock options granted 1,700,000 - - 1,700,000
Amortization of deferred compensation - 48,000 - 48,000
Conversion of vendor payables to common stock 228,062 - - 228,097
Exercise of common stock warrants 14,180 - - 14,183
Net loss - - (6,988,000) (6,988,000)
------------------------------------------- ----------
BALANCE, December 31, 1995 $23,983,803 $(1,189,500) $(17,990,995) $6,036,840
------------------------------------------- ----------
------------------------------------------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ONGARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,988,000) $(5,890,008)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization and noncash interest 835,715 575,373
Compensation expense related to stock options granted 1,748,000 309,375
Gain on sale of packaging assets (233,500) -
Provision for doubtful accounts 52,000 1,285
Provision for losses on advances to Pharmetics - 801,824
Writedown of excess cost over net tangible assets acquired - 1,988,561
Write-off of equipment - 50,856
Write-off of selected intangible packaging line assets 110,000 -
Changes in assets and liabilities:
Increase in restricted cash (47,363) -
Decrease (increase) in trade accounts receivable 625,846 (445,047)
(Increase) decrease in inventory (404,363) 36,991
(Increase) decrease in prepaid expenses and other (71,556) 33,332
(Decrease) increase in trade accounts payable and accrued liabilities (1,045,803) 313,186
Increase (decrease) in deposit liability 59,535 (3,287)
----------- -----------
Net cash used in operating activities (5,359,489) (2,227,559)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (298,076) (294,676)
Proceeds from sale of packaging assets 620,500 -
Decrease (increase) in other assets 68,134 (30,802)
Increase in notes and advances receivable from Pharmetics prior to merger - (1,612,091)
Redemption of certificate of deposit - 190,000
Payment of Pharmetics merger expenses - (232,561)
----------- -----------
Net cash provided by (used in) investing activities 390,558 (1,980,130)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 450,010 -
Proceeds from issuance of common stock 7,944,641 1,795,376
Proceeds from convertible debentures - 1,000,000
Payment of notes payable to related parties (55,500) (51,000)
Proceeds from notes payable to bank 1,000,000 1,500,000
Payment of note payable to bank (666,109) (69,632)
Payment of capital leases payable (79,523) (22,859)
----------- -----------
Net cash provided by financing activities 8,593,519 4,151,885
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,624,588 (55,804)
CASH AND CASH EQUIVALENTS, beginning of the year 68,715 124,519
----------- -----------
CASH AND CASH EQUIVALENTS, end of the year $ 3,693,303 $ 68,715
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 131,274 $ 34,150
----------- -----------
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Acquisition of Pharmetics (Note 1) - -
Conversion of convertible debentures to Preferred stock 765,000 -
Conversion of related party notes payable and interest to common stock 59,922 -
Conversion of vendor payables to common stock 228,097 -
Acquisition of equipment through capital leases 145,517 -
Fair value of warrants issued to guarantor for bank debt (Notes 9 and 10) 200,000 400,000
Reclassification of inventory to equipment under operating lease 134,440 -
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ONGARD SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. ORGANIZATION AND BUSINESS:
OnGard Systems, Inc. ("OnGard" or the "Company") manufactures and markets both
equipment and disposable sterility assurance products for the control of
infectious diseases. These products serve a broad spectrum of healthcare
providers in a variety of markets. The Company sells products for the safe,
efficient and economic handling, storage, transportation and disposal of
infectious medical waste, and is also engaged in the production and distribution
of sterile packaging. Through its 1994 acquisition of Pharmetics, Inc.
("Pharmetics"), now known as OnGard Sterilization Technologies, Inc. ("OST"), a
wholly owned subsidiary of the Company, described below, the Company
manufactures sterilizers, washers and dryers used for the control of infection
in hospital, pharmaceutical, laboratory and research facilities.
During 1993, the Company and Med-Device Packaging, Inc. ("MDPI") entered into an
Asset Purchase Agreement (the "Purchase Agreement"), effective January 1, 1993,
whereby the Company purchased substantially all of MDPI's assets and assumed
certain MDPI liabilities, as defined in the Purchase Agreement, for a purchase
price of $673,524. Effective December 7, 1995, the Company sold selected MPDI
assets to another company in order to focus on its proprietary product line,
Autopak-TM-. Sales proceeds for the packaging equipment and inventory
aggregated $620,500. The gain on the sale of these assets was $233,500. In
connection with the disposal, the Company wrote-off related goodwill and a non-
compete agreement aggregating $68,000 during 1995. The Company also retained
related accounts receivable.
The Company and Pharmetics completed an Agreement and Plan of Merger (the
"Merger Agreement") effective October 1, 1994. The Company issued 359,602 of
its common shares in exchange for all of the outstanding common and preferred
stock of Pharmetics. The acquisition was accounted for as a purchase.
The purchase price related to the Pharmetics merger is as follows:
Issuance of common stock $2,595,875
Merger expenses 232,561
Advances to Pharmetics 1,082,434
----------
Purchase price $3,910,870
----------
----------
F-6
<PAGE>
The purchase price was allocated as follows:
1994
-----------
Cash $ -
Trade accounts receivable 590,998
Inventory 900,840
Property and equipment 114,530
Other assets 81,164
Excess cost over net tangible assets acquired 4,544,942
-----------
Total assets 6,232,474
Assumption of liabilities (2,321,604)
-----------
$ 3,910,870
-----------
-----------
The Company has consolidated the results of this acquisition since the effective
date of the merger. See Note 12, where the Company's decision to write down the
excess of cost over net tangible assets acquired related to this transaction is
described in further detail.
The following unaudited pro forma consolidated results of operations of the
Company for the year ended December 31, 1994 assumes that the acquisition of
Pharmetics had occurred on January 1, 1994. The pro forma results presented
below are not necessarily indicative of the actual results of operations had
Pharmetics been acquired as of the earlier date, nor are they necessarily
indicative of future results of operations.
1994
--------------
(unaudited)
Revenues $ 4,915,638
Net loss $ (7,566,433)
Net loss per share $ (2.98)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in 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.
F-7
<PAGE>
CASH EQUIVALENTS
The Company considers all highly liquid cash investments with an original
maturity of three months or less to be cash equivalents.
RESTRICTED CASH
The Company has a standby letter of credit for $50,000 for the transportation of
medical waste by the U.S. Postal Service. The letter of credit had no balance
outstanding at December 31, 1995, and is backed by the restriction of a $50,000
certificate of deposit, which is classified as restricted cash in the
accompanying consolidated balance sheet. Also included in restricted cash is
approximately $47,000 in escrow related to the sale of MPDI assets described in
Note 1.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Work in process and finished goods inventory includes direct manufacturing costs
and an allocation of overhead.
Inventory, net consists of the following at December 31, 1995:
Raw materials $ 905,886
Work-in-process 477,901
Finished goods 98,060
-----------
$ 1,481,847
-----------
-----------
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation and
amortization. Depreciation and amortization is provided on a straight-line
basis over the following estimated useful lives:
Machinery and equipment 3 - 7 years
Furniture and fixtures 5 - 7 years
Leasehold improvements remaining term of
lease or estimated
useful life, whichever
is less
Expenditures for maintenance and repairs which do not materially prolong the
normal useful life of an asset are charged to operations as incurred. Additions
and improvements which substantially extend the useful lives of the properties
are capitalized. The cost and related accumulated depreciation and amortization
of property and equipment are removed from the accounts upon retirement or other
disposition, and any resulting gain or loss is reflected in earnings.
EXCESS COST OVER NET TANGIBLE ASSETS ACQUIRED
Excess cost over net tangible assets acquired is being amortized over 20 years.
The balance at December 31, 1995 of $2,396,608 is net of $159,774 of accumulated
amortization. The Company recorded a writedown of excess cost over net tangible
assets acquired as of December 31, 1994 which is described in Note 12. The
Company evaluated the impairment of its excess cost over net tangible assets
acquired based on a fair value methodology using discounted projected future net
cash flows.
F-8
<PAGE>
INTANGIBLE AND OTHER ASSETS
The costs of the Company's patents and trademark are being amortized on a
straight-line basis over 17 years from the date the patents and trademark were
obtained.
DEBT GUARANTEE FEE
Debt guarantee fee reflects the fair value of warrants issued to the guarantors
of the Company's $2.5 million bank loans in exchange for the guarantee (Note 9).
The costs are being amortized over the life of the loan as interest expense.
The Company obtained an investment banking opinion on the fair value assigned to
these warrants.
REVENUE RECOGNITION
The Company generally recognizes revenue from product sales upon shipment to the
customer. If a product shipment is delayed at the customer's request, the
Company recognizes revenue upon completion and acceptance by the customer.
WARRANTY RESERVE
The Company provides a warranty on its equipment sales. Estimated warranty
costs are accrued at the time the equipment is sold. The Company has a warranty
reserve of approximately $91,000 as of December 31, 1995, which is included in
accrued liabilities in the accompanying consolidated balance sheet.
ACCRUED LIABILITIES
Accrued incineration and postage expenses represent the expected costs
associated with the ultimate disposal of the Company's mail-back products.
Mail-back products are disposable containers used to collect medical waste by
customers who then mail the filled containers through the U.S. Postal Service
(Note 8) to an incinerator. An accrual is made for each mail-back product sold
and, as the containers are received by the incinerator, charges for incineration
and postage are billed to and paid by the Company.
Accrued liabilities consists of the following at December 31, 1995:
Legal $ 125,343
Incineration and postage 370,089
Commissions 154,144
Payroll and related taxes 123,253
Other 478,221
----------
$1,251,050
----------
----------
F-9
<PAGE>
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
laws, of temporary differences between the financial reporting and tax bases of
assets and liabilities. In addition, SFAS 109 requires recognition of deferred
tax assets for the expected future tax effects of tax loss carryforwards and tax
credit carryforwards. Net deferred tax assets are then reduced, if deemed
necessary, by a valuation allowance for the amount of any tax benefits which,
more likely than not based on current circumstances, are not expected to be
realized (Note 7).
RESEARCH AND DEVELOPMENT
Research and development costs incurred by the Company associated with the
development of preproduction prototypes are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company calculates the fair value of financial instruments and includes this
additional information in the notes to financial statements when the fair value
is different than the book value of those financial instruments. When the fair
value approximates book value, no additional disclosure is made. The Company
uses quoted market prices whenever available to calculate these fair values.
When quoted market prices are not available, the Company uses standard pricing
models for various types of financial instruments which take into account the
present value of estimated future cash flows. At December 31, 1995, the
carrying value of all financial instruments approximated fair value.
MAJOR CUSTOMERS
The Company had one customer which accounted for 10% of total revenues during
1995, and three customers that accounted for 16%, 13%, and 12%, respectively, of
the Company's revenues during 1994. During 1995, one of the Company's major
customers divested a division to another entity resulting in the Company selling
to both companies. However, due to the divestiture, neither customer was
characterized as a major customer in 1995, although the sales were retained by
the Company. In addition, through its sale of selected medical packaging assets
in December 1995 (Note 1), the Company no longer sells these products to
customers, which included its only major customer in 1995. Net profitability
from this and other packaging line accounts was nominal. Accordingly,
management believes the loss of this account will not have a material impact on
the results of operations.
In 1993, the Company and Sherwood Medical Company ("Sherwood"), a company
engaged in the distribution of medical products, and a subsidiary of American
Home Products Corporation, entered into a five-year supply, distribution,
disposal and license agreement (the "Distribution Agreement"). The Company
appointed Sherwood as exclusive distributor in the mail-back field. However,
the Company and Sherwood were continuously revising the existing agreement in
instances where the parties agreed that a direct selling approach by the Company
was appropriate. Ultimately, the exclusive relationship was terminated during
the third quarter of 1995. Loss of the Sherwood contract has required the
Company to modestly increase its expenditures in sales promotion and to make
direct arrangements with the distribution channels. Sherwood accounted for 2%
of the Company's sales during 1995.
F-1O
<PAGE>
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common shares
outstanding during each year. Due to the Company's net loss in 1995 and 1994,
common share equivalents of the Company are not included in the net loss per
share calculation, as the inclusion of such common share equivalents would be
antidilutive.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
During March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This
statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. This statement is effective
for financial statements for fiscal years beginning after December 15, 1995,
although earlier application is encouraged. The Company believes that the
adoption of this statement will not have a material impact on its financial
statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement establishes a fair
value based method of accounting for an employee stock option or similar equity
instrument but allows companies to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees". Companies
electing to continue to use the accounting under APB Opinion No. 25 must,
however, make pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting defined in SFAS No. 123 had been
applied. These disclosure requirements are effective for years beginning after
December 15, 1995. Management intends to continue accounting for its stock-
based compensation plans under the accounting prescribed by APB Opinion No. 25.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31, 1995:
Furniture and fixtures $ 62,256
Leasehold improvements 415,142
Machinery and equipment 1,418,999
-----------
1,896,397
Less- Accumulated depreciation and amortization (743,824)
-----------
$ 1,152,573
-----------
-----------
F-11
<PAGE>
4. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consists of the following as of December 31, 1995:
Patents and trademark $245,132
Non-compete agreement 36,662
Other 20,000
--------
301,794
Less- Accumulated amortization (63,536)
--------
$238,258
--------
--------
5. NOTES PAYABLE TO RELATED PARTIES:
At December 31, 1994, the Company had a note payable outstanding to an employee
of the Company for $48,000, which was paid in 1995. In 1989, the Company issued
a $30,000 unsecured note to one of the founding stockholders of the Company as
consideration for funding start-up losses. The note provided for interest
payable at prime plus 1%, and matured June 28, 1993. This note, including
accrued interest, was settled in 1995 with the issuance of 10,268 shares of the
Company's common stock. Through its acquisition of Pharmetics, the Company also
had a $30,000 unsecured note payable to one of its employees which had been
classified as a current liability at December 31, 1994. The note has been
repaid in part with 2,105 shares of the Company's common stock and $7,500 in
cash; $7,500 remains outstanding at December 31, 1995.
6. LEASES:
The Company leases its Denver and New York office and warehouse facilities, and
has other minor noncancelable operating leases including office and factory
equipment which range from three to five years. The Denver office and warehouse
lease expires in May 1998, and the Company has the option to renew the lease for
an additional six years. In connection with the consolidation of its Denver and
New York facilities, the Company has a final draft of an agreement in which it
has assigned the lease for its Denver facility effective April 1, 1996. Through
this assignment, the Company will be granted complete release from its
obligations under the lease and will also receive premium payments from the
assignee in excess of its monthly rental payments through May 1998. The New
York facility lease expires in January 2000. Total rental expense for 1995 and
1994 was $258,651 and $141,288, respectively. Future minimum lease payments are
as follows, which include payments in the event the agreement described above to
assign the Denver lease is not completed:
1996 $404,778
1997 364,544
1998 287,446
1999 167,840
2000 171,173
Thereafter $ 14,333
The Company must also pay its proportionate share of all operating costs of the
leased buildings as defined in the lease agreements.
The Company also leases certain fixed assets that are capitalized as of
December 31, 1995. Future obligations on these leases are $88,362, plus accrued
interest of $6,032.
F-12
<PAGE>
7. INCOME TAXES:
Net deferred tax assets and liabilities consist of the following at December 31,
1995:
Current:
Accounts receivable $ 45,291
Inventory 102,661
Other 37,048
-----------
185,000
-----------
Noncurrent:
Fixed assets (48,715)
Stock compensation 646,000
Net operating loss carryforwards 6,167,156
-----------
6,764,441
-----------
Total net deferred tax asset 6,949,441
Valuation allowance (6,949,441)
-----------
Net deferred tax asset $ -
-----------
-----------
The Company's effective income tax rate was different than the statutory federal
income tax rate as follows:
1995 1994
----------- -----------
Federal income tax (benefit) at statutory rates $(2,338,000) $(1,848,000)
State income tax (benefit), net of federal effect (227,000) (215,000)
SFAS 109 valuation allowance on operating losses 2,565,000 2,063,000
----------- -----------
$ - $ -
----------- -----------
----------- -----------
The Company has no state or federal income taxes currently payable at
December 31, 1995.
The differences between the fiscal 1995 losses reported for financial reporting
and income tax purposes relate primarily to differences in the timing of certain
reported items including depreciation and amortization expense and provision for
losses.
At December 31, 1995, the Company has net operating loss ("NOL") carryforwards
of approximately $16,229,000 currently available for federal income tax purposes
which expire through 2010. The Company's initial public offering ("IPO") and
certain other ownership changes have limited the Company's ability to utilize
its NOL carryforwards existing at the dates of the respective ownership changes.
The Pharmetics preacquisition NOL of approximately $3,990,000, which is included
in the above amount, will be significantly limited due to the change in control
resulting from the acquisition by OnGard.
The Company has determined that its net deferred tax asset as of December 31,
1995 does not satisfy the realization criteria set forth in SFAS 109.
Recognition of these benefits requires future taxable income, the attainment of
which is uncertain. Accordingly, a valuation allowance has been recorded to
offset the entire net deferred tax asset.
F-13
<PAGE>
8. CONTINGENCIES:
MAIL-BACK MEDICAL WASTE SERVICE
The Company provides a mail-back medical waste service to small quantity
generators of medical waste. The Company uses the U.S. Postal Service for its
mailings of medical waste. As such, the Company is subject to the U.S. Postal
Service's existing and evolving regulations pertaining to the transportation of
medical waste. Transportation, handling and storage of medical waste may also
be subject to rules and regulations promulgated by various agencies such as the
Occupational Safety and Health Administration, the Department of Transportation
and various state and local municipalities. Changes in regulations could have a
significant impact on the Company's ability to market and transport its medical
waste products and waste disposal services.
LEGAL PROCEEDINGS
Although the Company does not have any pending legal proceedings other than
ordinary, routine litigation incidental to its business, as a seller of medical
infection control and waste handling systems, the Company could face product
liability claims or other claims potentially based on accidental infections,
loss of waste disposal packages in the mail or other unforeseen circumstances.
The Company maintains product liability insurance in an aggregate amount of
$1,000,000, an amount it believes to be adequate. However, there can be no
assurance that such coverage will be adequate to cover future product liability
claims, if any, or that such product liability insurance coverage will continue
to be available at reasonable prices.
9. NOTES PAYABLE TO BANK:
In 1994, the Company obtained a $1.5 million bank loan facilitated by a third-
party guarantor. The total $1.5 million was received in two equal parts; the
first half was a revolving credit facility and the second was contingent upon
completion of the Pharmetics merger, which was consummated effective October 1,
1994 (Notes 1 and 12). Upon issuance of the second $750,000, the total
revolving credit facility converted to a $1.5 million term loan, dated November
1994, which bears interest at the prime rate plus 2% (10.5% at December 31,
1995). The loan calls for monthly payments based on a 36-month amortization
schedule and matures on April 15, 1996. As of December 31, 1995, there was
$764,270 outstanding under this term loan. During 1995, the guarantor of the
original loan and another investor in the Company facilitated an additional
$1,000,000 in bank borrowings due concurrently with the original loan. These
loans bear interest at 11% at December 31, 1995.
10. STOCKHOLDERS' EQUITY:
PRIVATE EQUITY TRANSACTIONS
During August and September 1995, the Company received net proceeds of
approximately $7.6 million from the private placement of 2,204,021 shares of its
common stock at a price of $3.50 per share. The Company also issued 100 shares
of its Series B preferred stock to the largest investor in the private placement
at an aggregate cost of $10.00. The Series B preferred shares carry no dividend
or voting rights but convey the right to elect one member of the Company's Board
of Directors so long as at least 5% of the Company's common stock is owned by
the investor. The Series B holders exercised this right effective December
1995. The stock purchase agreement also provides this investor a preemptive
right to purchase its pro rata share of ownership in the Company subsequent to
this private placement, allowing for up to $7.0 million in gross proceeds from
this placement.
F-14
<PAGE>
In January 1995, the Company's shareholders approved, by a majority vote, the
authorization of up to 3,000,000 Series A preferred shares. Series A preferred
shares have a par value of $.001 per share, carry no dividend rights unless
declared by the Company's Board of Directors in their sole discretion, and have
a preference in liquidation of $4.00 per share plus any accrued dividends, if
such dividends have been declared. Each preferred share is convertible into one
share of the Company's common stock at the option of the holder. The Series A
preferred shareholders are entitled to vote with the common shareholders as a
single class. Each preferred share conveys votes equal to the number of common
shares into which it is convertible. Upon authorization of the preferred stock
issuance by the Company's shareholders, the Company converted, at its option,
$1,000,000 of convertible debentures, which were outstanding at December 31,
1994, into 250,000 shares of convertible Series A preferred stock. Class B
Preferred Stock Warrants to acquire 250,000 shares of the Company's common stock
at $6.00 per share, which were issued in connection with the convertible
debentures, remain outstanding after the conversion.
During February 1995, the Company sold an additional $500,000 of preferred stock
units. Each unit consists of one share of Series A preferred stock at a price
of $4.00 per share and one warrant to acquire the Company's common stock at an
exercise price of $6.00 per share. A total of 125,000 Series A preferred shares
were sold, accompanied by 125,000 Class B Preferred Stock Warrants.
PUBLIC OFFERING AND COMMON STOCK PURCHASE WARRANTS
In August 1992, the Company completed an IPO of its common stock whereby 920,000
units, consisting of one share of common stock and one purchase warrant (the
"Common Stock Purchase Warrant"), were sold at $5.00 per unit, resulting in net
proceeds to the Company of approximately $3,718,000. During 1995, 2,100 of
these Common Stock Purchase Warrants were exercised (2,656 shares were issued
pursuant to antidilution provisions of these warrants). Each Common Stock
Purchase Warrant entitled the holder to purchase one share of common stock at an
exercise price of $6.75 per share. The Common Stock Purchase Warrants were
subject to redemption by the Company in the event its closing stock price
equaled or exceeded $10.00 per share on the NASDAQ exchange for 20 consecutive
days and upon 30 days written notice. The redemption provision expired in
August 1995. The Common Stock Purchase Warrants contain an antidilution
provision which affects both the exercise price of the warrant and the number of
shares underlying the warrants, and which has been triggered by various equity
and debt financing transactions which have occurred since that date. During
1995, the Company extended the expiration date, but no other provisions, to
December 31, 1995, and then to March 29, 1996. Through March 29, 1996, the
Company received approximately $4.6 million in proceeds from the exercise of
these warrants (Note 13). On March 29, 1996, the Company extended the
expiration date of the remaining warrants through April 30, 1996.
EQUITY PRIVATE PLACEMENT AND CLASS A WARRANTS
In July 1994, the Company completed a private placement of 300,000 equity units,
each unit consisting of two shares of the Company's common stock and one warrant
which was sold at $7.00 per unit. Each warrant (the "Class A Warrants")
entitles a holder to purchase one share of the Company's common stock for $6.00.
The Class A Warrants also contain an antidilution provision which affects the
number of shares and the price of each warrant. The warrant agreement
specifically provides that the antidilution provisions were not triggered by
either the Pharmetics merger (Notes 1 and 12) or the Guarantor's Warrants (Note
9 and below). The Class A Warrants are subject to redemption on the same terms
as the Common Stock Purchase Warrants described above. In February 1995, 71,429
warrants were converted to common stock; the Company had provided one-time
pricing of $4.50 per share to incent this exercise.
F-15
<PAGE>
GUARANTOR'S WARRANTS
In connection with the guarantee of the Company's $1.5 million bank loan (Note
9), the Company granted a total of 400,000 warrants (the "Guarantor's Warrants")
to purchase its common stock at a price of $4.00 per share to a guarantor. The
Guarantor's Warrants were granted in phases: 250,000 warrants were granted upon
the guarantee of the first $750,000 loan amount and, thereafter, an additional
150,000 warrants were granted upon issuance of the aggregate $1.5 million note.
The warrant agreement with the guarantor contains antidilution provisions which
specifically exclude the Pharmetics merger (Notes 1 and 12) and the equity
private placement described above. During 1995, in connection with the
guarantee of an additional $1.0 million in bank loans, the Company granted a
total of 200,000 additional warrants to the original guarantor and another
investor in the Company under similar terms as the original warrants.
UNDERWRITER'S WARRANTS
Underwriter's warrants to purchase a total of 80,000 units at an exercise price
of $7.00 per unit, each unit consisting of one share of common stock and one
purchase warrant with an exercise price of $9.45, were issued to the underwriter
("Underwriter") as part of the Company's IPO. The Underwriter's warrants
contain an antidilution provision that has been triggered by various equity and
debt financing transactions which have occurred since that date. The warrants
underlying the Underwriter's warrants have also been adjusted based on similar
antidilution provisions.
The Underwriter has also been granted warrants to purchase a total of 30,000
units (each unit consisting of two shares of common stock and one purchase
warrant) at $7.00 per unit in connection with the Company's equity private
placement. The 30,000 warrants underlying the Underwriter's equity private
placement warrants are identical in terms to the Class A Warrants discussed
above except that they are not subject to redemption.
CLASS B PREFERRED STOCK WARRANTS (SEE "PRIVATE EQUITY TRANSACTIONS" ABOVE)
In November 1994, the Company issued 250,000 Class B Preferred Stock Warrants in
connection with the sale of $1.0 million in convertible debentures. The Class B
Preferred Stock Warrants are identical in terms to the Class A Warrants
described above, and are subject to redemption by the Company under the same
terms and conditions as the Common Stock Purchase Warrants described above. As
part of a single transaction in February 1995, the Company converted the
debentures to preferred stock and sold an additional $500,000 of preferred stock
with identical warrants; 125,000 Class B Preferred Stock Warrants were issued.
F-16
<PAGE>
A summary of the warrant terms, the Company's calculation of dilution adjusted
prices and shares at December 31, 1995, and potential maximum gross proceeds to
the Company are as follows:
<TABLE>
<CAPTION>
Common Class B
Stock Preferred
Purchase Class A Guarantor's Underwriter's Stock
Warrants Warrants Warrants Warrants Warrants Total
-------- --------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Original number of shares (a) 917,900 228,571 600,000 250,000 375,000 2,371,471
Original price $6.75 $6.00 $4.00 $3.50-$9.45 $6.00
Dilution adjusted shares 1,161,300 268,341 692,780 345,260 428,531 2,896,182
Dilution adjusted price $5.34 $5.20 $3.41-3.57 $3.01-$6.25 $5.23-5.31
Maximum potential
gross proceeds ($ millions) (b) $6.2 $1.4 $2.4 $1.6 $2.3 $13.9
Expiration date 4-30-96 4-20-97, 10-24-99 8-11-97, 2-28-98
7-18-97 7-20-97
Redemption provision Yes Yes No No Yes
</TABLE>
(a) 71,429 Class A Warrants and 2,100 Common Stock Purchase Warrants were
exercised during 1995.
(b) There is no assurance that the full amount of these proceeds will be
received by the Company in the future. However, subsequent to year end,
the Company has received approximately $4.6 million in connection with
the exercise of 680,000 Common Stock Purchase Warrants through March 29,
1996.
STOCK OPTION PLAN
Effective May 1, 1992, the Company adopted a stock option plan (the "1992
Plan"). The Board of Directors (the "Board") has reserved 550,000 shares of
common stock for issuance under the 1992 Plan. The 1992 Plan is administered by
the Compensation Committee (the "Committee"). The Board (or the Committee) has
discretion to select optionees, designate the number of shares and the exercise
price of each option and to specify certain other terms. Officers, key
employees, directors and consultants of the Company are eligible to participate.
During 1994, the Company's stock option plan activities resulted in a charge to
operations of $309,375 for compensation expense related to the granting of fully
vested options at a price less than the fair market value of OnGard common stock
on the date of the grant. Under a similar grant, but for options which vest
over four years, the Company recorded deferred compensation expense of $150,000,
which will be expensed ratably over the four-year vesting period. Other than
those options which were vested immediately, granted options vest ratably over a
four-year period, and all options can be exercised through the seventh
anniversary after the first options vest.
In January 1995, the Company's shareholders approved a new plan (the "1994
Plan") for the issuance of up to 600,000 shares of common stock of either or
both nonqualified or incentive stock options. The option grants vest ratably
over four years and may be exercised for a term of 10 years but not before six
months following the date of grant. The option price for incentive stock
options granted shall be at least 100% of the fair market value of the common
stock at the date of grant. Nonqualified options may be issued at less than the
fair market value at the discretion of the Committee. The 1994 Plan generally
supersedes the 1992 Plan.
F-17
<PAGE>
In December 1995, the Board of Directors granted 700,000 stock options (600,000
at $3.50 and 100,000 at $1.00) to certain officers, directors and consultants of
the Company. In the fourth quarter of 1995, the Company recorded compensation
expense of $1,700,000 related to fully vested options for an amount representing
the difference between the exercise price and fair market value of OnGard common
stock on the date of the grant. The Company also recorded deferred compensation
expense of $1,087,500 for options which vest ratably over two years, and related
compensation will be charged to operations over that time.
The following table reflects activity under the plans for the two-year period
ended December 31, 1995:
Options Shares Granted Option Share Price
- -------------------------------- -------------- ------------------
Outstanding at December 31, 1993 62,500 $5.00
Granted 465,000 $5.00 - $6.50
Exercised - -
-------------- ------------------
Outstanding at December 31, 1994 527,500 $5.00 - $6.50
Granted 908,750 $1.00 - $8.00
Terminated (90,500) -
Exercised - -
------------- ------------------
Outstanding at December 31, 1995 1,345,750 $1.00 - $8.00
-------------- ------------------
-------------- ------------------
Exercisable at December 31, 1995 732,500 $1.00 - $8.00
-------------- ------------------
-------------- ------------------
11. TRANSACTIONS WITH MANAGEMENT:
In May 1992, the Company entered into employment agreement with its President,
which expired on December 31, 1995. In December 1995, the Board of Directors
voted to extend this agreement for three years. The President's employment
agreement provides that if he is terminated without cause, he will receive a
one-time payment equal to five times the amount of his base salary in effect at
that time. In September 1994, the Company entered into an employment agreement
with its Executive Vice President at OST for a three-year term. Upon his
resignation, the agreement terminated. The agreements specify minimum base
salary amounts, certain fringe benefits and incentive compensation, including
annual bonuses contingent on achievement of specific objectives established by
the Board of Directors.
12. MERGER WITH PHARMETICS, INC. AND IMPAIRMENT OF INVESTMENT:
As described in Note 1, the Company completed its merger with Pharmetics on
October 1, 1994. During the period preceding the Company's acquisition of
Pharmetics (now OST), the Company extended secured loans to Pharmetics totaling
$1,884,258 in order to fund Pharmetics' operating requirements. Since the date
of the acquisition, the Company has continued to fund the cash operating
requirements of OST, net of cash receipts from collection of receivables.
F-18
<PAGE>
During the third quarter of 1994, the Company evaluated the fair value of its
potential investment in Pharmetics. The aggregation of advances to Pharmetics
coupled with the shares of OnGard stock to be issued in connection with the
acquisition began to exceed the Company's expectation of the fair value of
Pharmetics. Accordingly, during the third quarter, the Company charged to
operations $801,824 of advances provided to Pharmetics during the third quarter.
During the fourth quarter, the Company continued the analysis of its investment.
Because the funding needs of Pharmetics had escalated, based not only on the
then-current operating requirements but also for significant payments on past
due trade credit, the Company's determination of the carrying value of its
investment was indeterminable until the fourth quarter of 1994. Further,
Pharmetics' financial condition, which had deteriorated considerably in the
first three quarters of 1994, and which became more evident during the fourth
quarter, had also impacted the market position of its traditional product line,
weakening near-term sales expectations. Accordingly, the Company recorded an
impairment adjustment to the value of its investment as of December 31, 1994.
In its determination of the impairment, the Company forecasted future sales,
working capital requirements and discounted future cash flows. The Company
projected approximately 25% revenue growth for the period 1996 through 2000. It
also projected increased gross margins, over this time horizon, from Pharmetics'
traditional levels. The projected income growth is the result of a greater
concentration on higher margin products and proprietary products, which are the
focus of direct selling efforts. In addition, margins are projected to improve
by the allocation of semi-fixed factory overhead expenses to a greater number of
units sold. The projected cash flows were discounted at a rate of approximately
30%.
Based on its determination of the impairment, the Company wrote off $1,988,561
of excess cost over net tangible assets acquired as of December 31, 1994 related
to the excess cost over net tangible Pharmetics assets acquired. In conjunction
with its quarterly review of the carrying value of its purchased intangible
assets associated with this acquisition, the Company evaluated whether further
changes occurred in 1995 which negatively impacted the long-term prospects of
recovering its investment. The Company revised its calculations through
December 31, 1995 employing the same methodology and discount factors, applying
them to the projected cash flows. Based on a comparison of the unamortized
goodwill at December 31, 1995 with the value of discounted cash flows, the
Company believes no future impairment adjustment is necessary at this time.
13. LIQUIDITY AND CAPITAL RESOURCES - SUBSEQUENT EVENTS:
The Company has an accumulated deficit of $17,990,995 at December 31, 1995 and
expects losses to continue for the foreseeable future. Additional expenditures
for equipment and marketing will also be required in order to commercialize
OnGard's proprietary sterilization supply product line and tabletop sterilizer.
The Company needs additional capital in to order support its operations until
its generates sufficient cash flow from operations.
In August and September 1995, the Company completed a private placement (the
"September 1995 Private Placement") of the sale of 2,204,021 shares of the
Company's common stock at a price of $3.50 per share aggregating gross proceeds
of approximately $7.7 million and net proceeds of approximately $7.6 million.
The September 1995 Private Placement required that the Company register such
common shares issued in this placement six months after the closing date, by
March 29, 1996. In addition, during February 1995, the Company sold shares,
through the exercise of Class A warrants from existing warrant holders, totaling
$320,000 in gross proceeds and $296,430 in net proceeds. The Company provided
an incentive to Class A warrant holders by reducing the exercise price to $4.50
for a period of 30 days. In April and May 1995, the guarantor of the Company's
bank debt (Note 9) and another investor in OnGard, facilitated $1,000,000 of
additional bank borrowings. The two new $500,000 notes bear interest at the
rate of 11% per annum and mature on April 15, 1996. In February
F-19
<PAGE>
1995, the Company sold $500,000 of convertible Series A preferred stock units at
$4.00 per preferred unit, which included one share of preferred stock and one
warrant to acquire common stock at $6.00 per common share.
The Company also has 1,161,300 Common Stock Purchase Warrants outstanding that,
if exercised by warrant holders, could provide a maximum of $6.2 million of
estimated net proceeds to the Company by or before their expiration date, April
30, 1996 (Note 10). Through March 29, 1996, the Company had received cash
proceeds from such warrants of approximately $4.6 million. Furthermore,
additional exercise activity is in process for an additional potential amount of
approximately $500,000. The Company projects these funds and its existing cash
position to be sufficient to fund its operations through December 31, 1996.
Although the Company has been successful to date in obtaining sources of
financing sufficient to meet current trade obligations and other expenses and to
enable it to pursue its business plans generally, there is no assurance it will
be successful in this regard in the future. Furthermore, there can be no
assurance that the Company will be successful in receiving additional proceeds
from the exercise of the Common Stock Purchase Warrants, or other warrants
outstanding, or that if successful, such funds will be adequate to fund the
Company's operations until it is able to generate cash from operations
sufficient to fund its operations to sustain its ongoing operations without
additional external sources of capital.
On March 6, 1996, the Company announced it had completed an agreement with
Baxter V. Mueller ("Baxter"), a division of the Baxter Healthcare Corporation of
Deerfield Illinois, for the exclusive marketing and distribution of a series of
sterilization packaging products developed by OnGard. Baxter Healthcare
Corporation is the principal domestic operating subsidiary of Baxter
International, Inc. Through its subsidiaries, Baxter is a leader in the
manufacture and marketing of healthcare products, systems and services
worldwide offering products to healthcare providers in 100 countries. The
Baxter V. Mueller group markets a complete line of high-quality specialized
surgical instruments and surgical-use products to healthcare companies and
hospitals.
The initial sterilization product covered by the scope of this agreement is
OnGard's Autopak-TM-. The agreement also calls for other sterile packaging
products developed by OnGard to be marketed exclusively by Baxter and for the
two companies to jointly address market opportunities in rapid reprocessing and
management of surgical instruments. The territory covered by the exclusive
agreement encompasses the United States and Canada. The agreement is a buy-sell
distribution arrangement whereby Baxter will purchase directly from OnGard for
resale to the market.
F-20
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31
1996 1995
---- ----
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,803,382 $ 3,693,303
Restricted Cash 99,133 97,363
Trade accounts receivable, net of
allowance of $119,000 at December 31,
1995 and $114,000 at March 31, 1996 673,042 656,274
Inventory 1,806,886 1,481,847
Prepaid expenses and other 255,866 77,881
----------- -----------
Total current assets 8,638,309 6,006,668
PROPERTY AND EQUIPMENT, net 1,977,740 1,152,573
EQUIPMENT UNDER OPERATING LEASES, net 248,000 134,440
OTHER ASSETS:
Excess cost over net tangible assets acquired, net 2,364,653 2,396,608
Intangible and other assets, net 249,938 238,258
Deposits 111,897 51,151
Debt guarantee fee, net 16,551 140,740
----------- -----------
Total other assets 2,743,039 2,826,757
----------- -----------
TOTAL ASSETS $13,607,088 $10,120,438
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statement
F-21
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
March 31 December 31
1996 1995
---- ----
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
----------- -----------
CURRENT LIABILITIES:
Current portion of notes payable to bank $ 1,622,322 $ 1,764,270
Trade accounts payable 696,382 839,187
Accrued liabilities 1,468,304 1,251,050
Capital leases payable 145,244 88,362
Customer deposits 78,757 89,994
----------- -----------
Total current liabilities 4,011,009 4,032,863
----------- -----------
LONG TERM LIABILITIES:
Capital leases payable, net of current portion 333,568 -
Noncurrent trade accounts payable 293,386 50,735
----------- -----------
Total long term liabilities 626,954 50,735
----------- -----------
Total liabilities $ 4,637,963 $ 4,083,598
----------- -----------
----------- -----------
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred stock; $.001 par
value, 3,000,000 shares authorized, 378,292
issued and outstanding at December 31, 1995 and
March 31, 1996; aggregate liquidation preference
of $1,513,168 $ 1,228,167 $ 1,228,167
Series B Redeemable Preferred Stock, no per value;
100 shares issued and outstanding 10 10
Common stock; $.001 par value,
10,000,000 shares authorized, 5,355,281
shares issued and outstanding at December 31,
1995 and 6,314,733 shares issued and
outstanding at March 31, 1996 6,315 5,355
Additional paid-in capital, common stock 28,531,648 23,983,803
Deferred compensation (1,044,188) (1,189,500)
Accumulated deficit (19,752,827) (17,990,995)
----------- -----------
Total stockholders' equity $ 8,969,125 $ 6,036,840
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,607,088 $10,120,438
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31
-------------------
1996 1995
---- ----
(Unaudited) (Unaudited)
REVENUES $ 727,750 $ 1,292,218
COST OF SALES 887,289 1,388,173
Operating margin (deficit) (159,539) (95,955)
COSTS AND EXPENSES:
General and administrative 879,480 623,518
Sales and Marketing 425,756 251,078
Depreciation and amortization 73,946 77,963
Research and development 68,396 131,142
----------- -----------
Total expenses 1,447,578 1,083,701
----------- -----------
LOSS FROM OPERATIONS (1,607,117) (1,179,656)
INTEREST INCOME 41,628 574
OTHER INCOME 1,292 5,635
INTEREST EXPENSE (186,448) (83,639)
OTHER EXPENSES (12,735) (80)
----------- -----------
NET LOSS $(1,761,439) $(1,257,166)
----------- -----------
----------- -----------
NET LOSS PER SHARE $ (.32) $ (.41)
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 5,515,190 3,065,318
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
March 31
---------------------
1996 1995
---- ----
(Unaudited) (Unaudited)
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $(1,761,439) $(1,257,166)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization and
non-cash interest 260,268 190,130
Compensation expense related to stock
options 145,312 9,375
Allowance for doubtful accounts (5,118) -
Changes in assets and liabilities:
Increase in restricted cash (1,770) -
(Increase) decrease in accounts receivable (11,649) 568,041
(Increase) in inventory (441,624) (337,272)
(Increase) decrease in prepaid expenses (177,985) (34,560)
(Increase) decrease in deposits (60,746) -
Increase (decrease) in customer deposits (11,237) 42,641
(Decrease) increase in accounts payable
and accrued liabilities (32,882) (71,818)
Net cash flows used in operating activities (2,098,870) (890,629)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (139,265) (18,142)
Increase in patent, patents pending and trademark (17,568) (3,971)
----------- -----------
Net cash flows used in investing activities $ (156,833) $ (22,113)
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
March 31
----------------------
1996 1995
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable to bank $ (141,948) $ (106,884)
Payment of lease obligations (41,072) (15,900)
Net proceeds from issuance of common
stock 4,548,802 296,431
Net proceeds from issuance of preferred stock - 450,000
Net cash flows from financing activities 4,365,782 623,647
NET INCREASE (DECREASE) IN CASH 2,110,079 (289,095)
CASH and cash equivalents, beginning of year 3,693,303 68,714
----------- -----------
CASH and cash equivalents, end of the period $ 5,803,382 $ (220,381)
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 30,583 $ 40,884
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:
Stock subscription receivable $ 513,719 -
Conversion of convertible debentures to
preferred stock - $ 769,997
Conversion of vendor payables to common stock - $ 170,248
Leasehold improvements financed by others $ 350,000 -
Acquisition of equipment through capital leases $ 431,112 $ 82,000
Reclassification of finished goods inventory to
equipment, currently under lease $ 116,584 -
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
ONGARD SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information in this Form 10-QSB includes the results of the Company and
its wholly owned subsidiary, OnGard Sterilization Technology ("OST"), for
the periods ended March 31, 1996 and 1995. The data is unaudited, but
includes all adjustments including the elimination of intercompany accounts
and transactions which are, in the opinion of management, necessary for a
fair presentation of the interim periods presented. The accounting policies
utilized in the preparation of financial information are the same as set
forth in the Company's annual financial statements and should be read in
conjunction with the Company's Form 10-KSB. Certain prior period balances
have been reclassified to conform to the current period classification.
Results of operations for the three months ended March 31, 1996 may not
necessarily be indicative of the full year results.
On October 1, 1994 the Company completed a merger with Pharmetics, Inc.
(Pharmetics), now known as OST. The transaction was effected through the
exchange of the Company's common stock for all of the outstanding common and
preferred stock of OST. The aggregate purchase price, including the value of
shares exchanged, merger expenses plus advances made to fund OST's operations
prior to the acquisition, which ultimately became part of OnGard's
investment, was $3,910,870. The Company has consolidated the results of this
acquisition since the effective date.
In December, 1995, the Company sold selected assets of its packaging line
to Oliver Products including its customer accounts; proceeds from the sale
aggregated $620,500. As a result of this sale, through the three months
ended March 31, 1996, no material operating data is reflected in the
financial statements from the packaging assets, while such data is included
for the comparable quarter ended March 31, 1995.
2. EQUITY TRANSACTIONS
During August and September, 1995 the Company obtained $7.7 million from
the private placement of 2,204,021 shares of its common stock at a price of
$3.50 per share. The Company also issued 100 shares of its Series B
preferred stock to the largest investor in the private placement, at a cost
of $10.00. The Series B preferred shares carry no dividend or voting rights
but provides for the right to elect one member of the Company's board of
directors so long as at least 5% of the Company's common stock is owned by
the investor. The investor exercised this right in December, 1995.
During March, 1995 holders of the Company's Common Stock Purchase
Warrants, which were then due to expire on March 29, 1996, exercised 755,694
warrants converting into 957,952 shares of the Company's common stock
providing $5.1 million (gross proceeds) from their exercise. The Company
then extended the expiration date (but no other terms of these Common Stock
Purchase Warrants) until April 30, 1996. An additional, 134,541 warrants,
converting to 170,193 shares were exercised generating an additional $.9
million (gross proceeds), for an aggregate total of $6.0 million in gross
proceeds. The warrants expired on April 30, 1996 (Note 7).
The impact of outstanding warrants has not been included in earnings per
share as such inclusion would be antidilutive.
3. INVENTORY
Inventory consists of the following as of March 31, 1996:
Raw materials $1,044,958
Work in process 692,608
Finished goods 69,320
----------
$1,806,886
----------
----------
The December 31, 1995 inventory balance consisted of the following:
Raw materials $ 905,886
Work in process 477,901
Finished goods 98,060
----------
$1,481,847
----------
----------
F-26
<PAGE>
4. PROPERTY AND EQUIPMENT AND INTANGIBLE AND OTHER ASSETS
Property and equipment, at cost, consist of the following as of
March 31, 1996:
Furniture and fixtures $ 74,131
Leasehold improvements 840,451
Machinery and equipment 1,902,192
----------
2,816,774
Less accumulated depreciation
and amortization (839,034)
----------
$1,977,740
----------
----------
Intangible and other assets, at cost, consist of the following as of
March 31, 1996:
Patents and trademarks $ 262,700
Other intangible assets 56,662
----------
319,362
Less accumulated amortization (69,424)
----------
$ 249,938
----------
----------
5. DEBT GUARANTEE FEE
Debt guarantee fees reflect the estimated fair value of 600,000 warrants
issued to the guarantor of the Company's $2.5 million bank indebtedness in
exchange for the guaranty. The amount is being amortized over the term of
the note, as a non-cash charge against earnings and is included in
interest expense (Note 6). The Company obtained an investment banking
opinion for the fair value assigned to the first 400,000 warrants granted,
and applied the same value for the subsequent 200,000 warrants which were
granted under the same terms and conditions. The guarantee fee was fully
amortized upon the repayment of the debt in April, 1996 (Note 6).
6. DEBT
In October 1994, the Company entered into a $1.5 million term loan with a
bank which was facilitated by a third party guarantor. The loan bears
interest at the prime rate plus 2% (11% at March 31, 1996) and provides for a
36 month amortization schedule with a balloon payment at the end of one and a
half years from inception. In April and May 1995, the guarantor of the $1.5
million note and another guarantor ("the guarantors"), facilitated an
additional $1.0 million in indebtedness with the same bank. Two notes of
$500,000 each were executed with the principal amount due in April 1996;
interest was payable monthly. In exchange for their guarantees, the Company
granted the guarantors options to acquire a total of 200,000 shares at an
exercise price of $4.00 per share(Note 5). These two notes bear interest at
11 %. At March 31, 1996 the aggregate indebtedness on these notes was
$1,622,000. The three notes were paid in full in April, 1996, in accordance
with the maturity payment terms described above.
F-27
<PAGE>
7. WARRANTS
The Company has issued warrants in connection with the securities
transactions which have financed its operations since its initial public
offering, other than the September 1995 private placement described in Note 2.
Warrant prices and expiration periods vary but key terms, shown below, are
included in each transaction. A summary of the key warrant terms, Company
calculation of dilution adjusted prices and shares at March 31, 1996 and
potential maximum gross proceeds to the Company are as follows:
<TABLE>
<CAPTION>
Class B
Common Purchase Class A Guarantor's Underwriter's Debenture
Stock Warrants Warrants Warrants Warrants Warrants Total
------ -------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Number of shares (a) 160,940 228,571 600,000 250,000 375,000 1,614,511
Original price $6.75 $6.00 $4.00 $3.50-$9.45 $6.00 -
Dilution adjusted shares 203,589 268,341 692,780 345,260 428,531 1,938,501
Dilution adjusted price $5.34 $5.20 $3.41-$3.57 $3.01-$6.25 $5.23-$5.31 -
Maximum potential gross
proceeds ($ millions) (b) $1.1 $1.4 $2.4 $1.6 $2.3 $8.8
Expiration date (c) 04-30-96 4-20-97, 7-18-97 10-24-99, 5-31-00 08-11-97, 07-20-97 2-28-98
Redemption provision Yes Yes No No Yes
</TABLE>
_____________
(a) Through March 31, 1996, 757,794 Common Stock Purchase Warrants and
71,429 Class A Warrants were exercised.
(b) There is no assurance that the full amount, if any, of these proceeds
will be received by the Company in the future. However, prior to their
expiration on April 30, 1996, an additional 134,541 Common Stock Purchase
Warrants were exercised generating $.9 million (Note 9).
(c) On March 31, 1995, the Company extended until April 30, 1996, the
expiration date of its Common Stock Purchase Warrants, which were
previously set to expire on December 31, 1995 and prior to that on
August 15, 1995. Other than the extended expiration period, no other
terms, including anti-dilution provisions, were extended.
8. DISTRIBUTION AGREEMENT
On March 6, 1996, the Company announced it had completed an agreement with
Baxter V. Mueller ("Baxter"), a division of the Baxter Healthcare Corporation
of Deerfield Illinois, for the exclusive marketing and distribution of a
series of sterilization packaging products developed by OnGard. Baxter
Healthcare Corporation is the principal domestic operating subsidiary of
Baxter International, Inc. Through its subsidiaries, Baxter is a leader in
the manufacture and marketing of healthcare products, systems and services
worldwide offering products to healthcare providers in 100 countries. The
Baxter V. Mueller group markets a complete line of high-quality specialized
surgical instruments and surgical-use products to healthcare companies and
hospitals.
The initial sterilization product covered by the scope of this agreement
is OnGard's Autopak. The agreement also calls for other sterile packaging
products developed by OnGard to be marketed exclusively by Baxter and for the
two companies to jointly address market opportunities in rapid reprocessing
and management of surgical instruments. The territory covered by the
exclusive agreement encompasses the United States and Canada. The agreement
is a buy-sell distribution arrangement whereby Baxter will purchase directly
from OnGard for resale to the market.
F-28
<PAGE>
II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Consistent with section 145 of the Delaware General Corporation Law
("Delaware Law"), Article VII of the Company's By-Laws provides that the
Company shall indemnify any person in connection with legal proceedings
threatened or brought against him by reason of his present or past status as
an officer or director of the Company, provided that the person acted in good
faith and in a manner he reasonably believes to be in or not opposed to the
best interests of the Company, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
Company shall also indemnify any such person in connection with any action by
or in the right of the Company provided the person acted in good faith an in
a manner he reasonably believed to be in or not opposed to the best interests
of the Company except that no indemnification may be made if such person is
adjudged to be liable to the Company unless the court in which such action
was brought determines, upon application, that despite such adjudication, the
person is fairly and reasonably entitled to such indemnification as the court
deems proper. In addition, to the extent that any officer or director is
successful in the defense of any such legal proceeding, the Company is
required to indemnify him against expenses, including attorneys' fees, that
are actually and reasonably incurred by him in connection therewith. The
By-Laws also contain a nonexclusivity clause which provides in substance that
the indemnification rights under the By-Laws shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled under
any agreement with the Company, any By-Law, any vote of stockholders or
disinterested directors of the Company or otherwise.
Consistent with section 102(b) of the Delaware Law, Article VIII of the
Company's Certificate of Incorporation provides that a director of the
Company shall not be liable to the Company or its stockholders for damages
for breach of fiduciary duties as director, subject to certain limitations.
Article VIII does not eliminate or limit the liability of a director for (a)
any breach of the director's duty of loyalty to the Company or its
stockholders; (b) any acts of omissions not in good faith or which involved
intentional misconduct or a knowing violation of law; (c) any conduct that is
the subject of section 174 of the Delaware Law; or d) any transaction from
which the director derived an improper personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
None of the expenses of issuances and distribution are being paid by the
Selling Stockholders.
The expenses of issuance and distribution which are to be paid by the
Company are estimated as follows:
Item Amounts
---- ---------
Blue Sky Expenses $ 6,250.00
Legal Fees and Expenses 15,625.00
Accounting Fees and Expenses 9,375.00
Fees and Expenses of Transfer Agent 3,125.00
Printing and Engraving Expenses 9,375.00
Miscellaneous 6,250.00
----------
Total $50,000.00
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company issued securities which were
not registered under the Securities Act of 1933 (the "Act"), as described
below.
On April 20, 1994, the Company issued a total of 150,000 units, each
unit consisting of two shares of the Company's Common Stock and one warrant
to purchase one share of the Company's Common Stock at an exercise price of
$6.00 per share, to two offshore investors at an issue price of $7.00 per
unit. The sales and issuances of securities in these transactions were
deemed by the Company to be exempt from registration under the Act by virtue
of Regulation S under the Act. The sales occurred outside of the United
States in an offshore transaction and each purchaser signed a representation
that he was not a U.S. person within the meaning of Rule 902(o) under the Act
and that until the expiration of six months from the date the securities were
issued any offer or sale of the securities (including the warrants and common
stock issuable upon exercise thereof) shall not be made by him in the United
States or to a U.S. person or for the account of a U.S. person. The
purchasers further acknowledged with respect to the warrants: (a) that the
common stock to be issued upon exercise of the warrants has not been
registered under the Act; (b) the warrants sold offshore in the offering may
not be exercised by or on behalf of any U.S. person unless registered under
the Act or an exemption from such registration is available; (c) any person
attempting to exercise a warrant sold offshore in the offering will be
required to provide (i) written certification that he is not a U.S. person
and that the warrant is not being exercised on behalf of a U.S. person, or
(ii) a written opinion of counsel, satisfactory to the Company, to the effect
that the warrant and the common stock to be delivered upon exercise thereof
have been registered under the Act or are exempt from registration
thereunder; and (d) the warrants will bear a legend reflecting the foregoing
restrictions. All securities issued to these persons contained legends
restricting their transfer pursuant to the foregoing restrictions. Royce
Investment Group, Inc., the placement agent, received: (i) a placement fee
equal to 10% of the proceeds from these sales; (ii) a non-accountable expense
allowance equal to 3% of the proceeds from these sales and (iii) a unit
purchase option to purchase, at $7.00 per unit, 10% of the units sold in this
offering.
On July 18, 1994 the Company issued a total of 150,00 units, each unit
consisting of two shares of the Company's common stock and one warrant to
purchase one share of the Company's common stock at an exercise price of
$6.00 per share, to a group of 15 accredited investors, as that term is
defined in Rule 501 of Regulation D promulgated under the Act at an issue
price of $7.00 per unit. The sales and issuances of securities in these
transactions were deemed by the Company to be exempt from registration under
the Act by virtue of Regulation D under the Act. The recipients represented
and acknowledged that they are "accredited investors" within the meaning of
Rule 501 under the Act; in the normal course of their business, they invest
in or purchase securities similar to the units, and they have such knowledge
and experience in financial and business matters that they are capable of
evaluating the merits and risks of purchasing the units. They further
represented that they had access to such financial and other information
concerning the Company and the units as they deemed necessary in connection
with their decision to purchase the units, including an opportunity to ask
questions of, and request information from, the Company and that there were
purchasing the units for their own account, and not with a view to, or offer
or sale in connection with, any distribution thereof. All securities issued
to these persons contained legends restricting their transfer without
compliance with applicable securities laws. Royce Investment Group, Inc.,
the placement agent, received: (i) a placement fee equal to 10% of the
proceeds from these sales; (ii) a non-accountable expense allowance equal to
3% of the proceeds from these sales and (iii) a unit purchase option to
purchase, at $7.00 per unit, 10% of the units sold in this offering.
On November 4, 1994 and February 16, 1995 the Company issued a total of
15 units to two accredited investors at a price of $100,000 per unit. The
initial 10 units issued on November 4, 1994 consisted of $100,000 of 6%
Convertible Debentures due February 28, 1998 and 25,000 Redeemable Common
Stock Purchase Warrants to acquire an equivalent number of shares of Common
Stock at $6.00 per share. Pursuant to shareholder authorization received on
January 24, 1995 and the terms of the Debentures, the Debentures comprising a
part of such 10 units were converted into Series A Convertible
II-2
<PAGE>
Preferred Stock at the rate of one share of Series A Convertible Preferred
Stock for each $4.00 in principal amount of the Debentures. Interest on the
Debentures from the date of issuance to the date of conversion was paid by
the issuance of an additional 3,292 shares of Series A Convertible Preferred
Stock. Each of the additional five units issued on February 16, 1995
consisted of 25,000 shares of Series A. Convertible Preferred Stock and
25,000 Redeemable Common Stock Purchase Warrants to acquire an equivalent
number of shares of Common Stock at $6.00 per share. The sale and issuance
of securities in these transactions were deemed by the Company to be exempt
from registration under the Act by virtue of Regulation D under the Act. The
recipients represented their intention to acquire the securities for
investment only and not with a view to distribution thereof, that they were
not formed for the specific purpose of acquiring the securities and that they
had total assets in excess of $5,000,000. Legends setting forth the
restrictions on transfer without compliance with applicable securities laws
were placed on each certificate representing the shares issued in these
transactions.
On December 15, 1994 the Company issued 22,700 shares of Common Stock to
EEC Corp. The issuance of these securities was pursuant to an agreement
between the Company and the recipient with respect to the payment of lease
payments in arrears. For purposes of the transaction the issue price was
agreed to be $7.50 per share. The issuance was deemed by the Company to be
exempt from registration under the Act by virtue of section 4(2) thereof.
The recipient represented to the Company that he was an accredited investor.
A legend setting forth the restrictions on transfer without compliance with
applicable securities laws was placed on each certificate representing the
shares issued in this transaction.
On February 15, 1995 the Company issued 2,105 shares of Common Stock to
Louis Wertman. The shares were issued pursuant to an agreement between the
Company and the recipient in partial payment of a loan from the recipient to
Pharmetics Incorporated, which loan remained unpaid at the time the Company
acquired Pharmetics Incorporated. For purposes of the transaction the issue
price was agreed to be $7.125 per share. The Company deemed the issuance to
be exempt from registration under the Act by virtue of section 4(2) thereof
as a transaction not involving any public offering. The recipient
represented his intention to acquire the shares for his own account for long
term investment and not with a view to the distribution thereof and that he
has such knowledge and experience in financial and business matters to be
capable of evaluating the merits and risks of the investment. The
certificate representing the shares issued to the recipient contained a
legend restricting transfer of the shares without compliance with applicable
securities laws. The recipient acknowledged receipt of adequate information
regarding the Company prior to entering in the agreement pursuant to which
the shares were issued.
On February 15, 1995 the Company issued 71,429 shares of Common Stock to
an offshore investor, Planate Business, S.A. at an issue price of $4.50 per
share. The shares were issued pursuant to the exercise by a recipient of
Class A Common Stock Purchase Warrants received as part of the units issued
on April 20, 1994, as described above. The Company had reduced the exercise
price of the warrants from $6.00 to $4.50 for a period of 30 days to induce
warrant holders to exercise their warrants. The Company deemed the issuance
to be exempt from registration under the Act by virtue of Regulation S
promulgated thereunder. The recipient provided written certification that it
is not a U.S. person and that the warrants were not being exercised on behalf
of a U.S. person.
On June 28, 1995 the Company issued 10,268 shares of Common Stock to Dr.
Eric L. Steiner, a director of the Company, in repayment of a loan from Dr.
Steiner to the Company. For purposes of the repayment the shares were valued
at $4.375 per share. The Company deemed the issuance to be exempt from
registration under the Act by virtue of section 4(2) thereof as a transaction
not involving any public offering. The recipient represented his intention
to acquire the shares for his own account for long term investment and not
with a view to the distribution thereof and that he has such knowledge and
experience in financial and business matters, and knowledge and access to
information regarding the Company, to be capable of evaluating the merits and
risks of the investment. The certificate representing the shares issued to
the recipient contained a legend restricting transfer of the shares without
compliance with applicable securities laws.
II-3
<PAGE>
On August 30, 1995 the Company issued a total of 1,148,000 shares of
Common Stock to a group of six accredited investors at an issue price of
$3.50 per share. The sales and issuances of securities in these transactions
were deemed by the Company to be exempt from registration under the Act by
virtue of Regulation D under the Act. The recipients represented and
warranted that: (i) they were acquiring the shares for investment for their
own account and not with a view to, or for resale in connection with, a
distribution or other disposition thereof; (ii) they have been given the
opportunity to obtain any information or documents relating to, and to ask
questions and receive answers about, the Company and the business and
prospects of the Company which they deemed necessary to evaluate the merits
and risks related to their investment in the securities and to verify the
information received; (iii) their financial condition is such that they can
afford to bear the economic risk of holding the securities for an indefinite
period of time and have adequate means for providing for their current needs
and contingencies; (iv) they can afford to suffer a complete loss of their
investment; (v) their knowledge and experience in financial and business
matters are such that they are capable of evaluating the merits and risks of
their acquisition of the securities; and (vi) they are accredited investors
as that term is defined in Rule 501 of Regulation D.
On August 30, 1995, in connection with the sales and issuances described
in the preceding paragraph, the Company issued a total of 100 shares of
Series B Redeemable Preferred Limited Voting Stock to the same six accredited
investors at an issue price of $.10 per share. These sales and issuances
were also deemed by the Company to be exempt from registration under the Act
by virtue of Regulation D. The recipients made the same representations and
warranties with respect to their acquisition of the Series B Redeemable
Preferred Limited Voting Stock as they made with respect to their acquisition
of Common Stock, as set forth in the preceding paragraph.
Between September 8, 1995 and September 29, 1995 the Company sold an
aggregate of 1,056,020 shares of Common Stock at an issue price of $3.50 to a
group of 41 persons; of such 41 persons, 37 were accredited investors and 4
were qualified, non-accredited investors and included a director of the
Company, two relatives of officers of the Company and an employee. The
Company deemed the sales to be exempt from registration under the Act
pursuant to Rule 506 of Regulation D promulgated under the Act. Each
recipient made representations to the Company consistent with their status as
an accredited investor or qualified purchaser and were provided with
disclosures consistent with Rule 502(b)(2) of Regulation D. The Company
placed a legend restricting transfer without compliance with applicable
securities laws on each certificate representing the shares issued to these
recipients.
No underwriting discounts or commissions were paid to any party in
connection with any of the foregoing transactions except for the sales
occurring on April 20, 1994 and July 18, 1994 as set forth above.
II-4
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Certificate of Incorporation, as amended (i)
3.2 Bylaws of OnGard, as amended (i)
4.1 Certificate of Incorporation, as amended (i)
4.2 Bylaws of OnGard, as amended (i)
4.3 Specimen Common Stock Certificate(i)
5 Form of Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.
10.1 Employment Agreement of Mark E. Weiss (i)
10.2 Consulting Agreement of Donald M. Marotta (v)
10.3 Letter of Intent to Acquire all of the Issued and Outstanding
Common Stock and Preferred Stock of Pharmetics, Incorporated (ii)
10.4 Agreement Between OnGard and American Can (iii); omitted in
connection with a request for confidential treatment pursuant to
Rule 406 of Regulation C
10.5 Merger Agreement Among OnGard, OGPI, Pharmetics and Shlisky (iv)
10.5.1 Amendment to Merger Agreement (iv)
10.5.2 Amendment No. 2 to Merger Agreement (vi)
10.5.3 Amendment No. 3 to Merger Agreement (vi)
10.6 Employment Agreement of Theodore M. Shlisky (iv)
10.7 Guaranty of Guarantor and OnGard Note to Bank (vi)
10.7.1 Guaranty of Guarantors and OnGard Note to Bank (viii)
10.8 Joint Marketing and Distribution Agreement between OnGard and
Devon Industries, Inc. (vii)
10.9 Mailback Agreement between OnGard and Option Care, Inc. (vii)
10.10 Agreement between OGPI and ECC Corp. (vii)
10.10.1 Agreement between OnGard, OGPI and ECC Corp. (vii)
10.10.2 Agreement between OnGard, OGPI and ECC Corp. (vii)
10.11 Waste Disposal Contract with Waste Management, Inc. (viii)
10.12 Stock Purchase Agreement and Registration Rights Agreement
between OnGard and purchasers in the September 1995 Private
Placement (ix)
10.13 Agreement between OnGard and Baxter Healthcare (Certain portions
omitted in connection with a request for confidential treatment
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended) (xi)
22 List of Subsidiaries of OnGard (ii)
24.1 Consent of Arthur Andersen LLP
24.2 Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
P.C. See Exhibit 5
24.3 Consent of Deloitte & Touche LLP
24.4 Consent of Thomas F. Kearns (x)
25 Powers of Attorney (i)
99 Deferred Payment Arrangements for payment of Unemployment
Insurance by Pharmetics Incorporated (vii)
</TABLE>
_____________________
(i) Previously filed with Registration Statement No. 33-48372, and
incorporated herein by reference.
(ii) Previously filed with Post-Effective Amendment No. 1 to Registration
Statement No. 33-48372, and incorporated herein by reference.
(iii) Filed with Post-Effective Amendment No. 2 to Registration Statement
No. 33-48372, and incorporated herein by reference.
(iv) Previously filed with Registration Statement No. 33-75282, and
incorporated herein by reference.
II-5
<PAGE>
(v) Previously filed with OnGard's Form 10-KSB for the fiscal year ended
December 31, 1993, and incorporated herein by reference.
(vi) Previously filed with Amendment No. 1 to Registration Statement No.
33-75282, and incorporated herein by reference.
(vii) Filed with Post Effective Amendment No. 4 to Registration Statement
No. 33-48372, and incorporated herein by reference.
(viii) Filed with Post Effective Amendment No. 6 to Registration Statement
No. 33-48372, and incorporated herein by reference.
(ix) Filed with Post Effective Amendment No. 7 to Registration Statement No.
33-48372, and incorporated herein by reference.
(x) Filed with Post Effective Amendment No. 8 to Registration Statement No. 8
(xi) Previously filed with OnGard's Form 10-KSB/A for the fiscal year ended
December 31, 1995, and incorporated herein by reference.
ITEM 28. UNDERTAKINGS
The undersigned small business issuer undertakes as follows:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities Exchange Commission, such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer
of expenses incurred or paid by a director, officer or controlling person of
the small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(c) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(d) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
small business issuer certifies that it has reasonable grounds to believe it
meets all of the requirements for filing on Form SB-2 and authorized this
amendment to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Hauppauge, State of
New York on June 26, 1996.
ONGARD SYSTEMS, INC.
By: /s/ Mark E. Weiss
-------------------------------
Mark E. Weiss, President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mark E. Weiss President and Director (Principal June 26, 1996
- --------------------------- Executive)
Mark E. Weiss
/s/ Philip B. Kart Vice President (Principal Financial June 26, 1996
- --------------------------- Officer and Accounting Officer)
Philip B. Kart
/s/ Eric L. Steiner* Director
- --------------------------- -------------
Eric L. Steiner*
- --------------------------- Director -------------
Thomas F. Kearns
/s/ Mark E. Weiss June 26, 1996
- -------------------------------------
*By: Mark E. Weiss, Attorney-in-Fact
</TABLE>
II-7
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 29, 1996, and to all references to our Firm included in or made a
part of this registration statement.
ARTHUR ANDERSEN LLP
Melville, New York
June 21, 1996
<PAGE>
June 27, 1996
[LETTERHEAD]
OnGard Systems, Inc.
40 Commerce Drive
Hauppauge, New York 11788
Gentlemen:
We have acted as counsel for OnGard Systems, Inc. (the "Company") in
connection with the registration, under the Securities Act of 1933, as amended
(the "Act"), by the Company of 4,637,227 shares of common stock issued and
issuable, upon the exercise of certain warrants to purchase common stock, (the
"Shares") by the Company to certain stockholders of the Company (the "Selling
Stockholders"). The Shares were registered by the Company pursuant to a
Registration Statement (the "Registration Statement") which became effective
with the Securities and Exchange Commission (the "Commission") on or about
June 27, 1996 and may be offered by the Selling Stockholders to the public.
The Shares were, or with respect to a portion of the Shares issuable upon
exercise of warrants issued to the Selling Stockholders may be, issued by the
Company to the Selling Stockholders in various private transactions, as
described in the Registration Statement, in which transactions the Selling
Stockholders were given registration rights.
In rendering this opinion, we have examined and relied upon originals
or copies, certified or otherwise identified to our satisfaction, of various
documents including, but not limited to, the following:
1. The Registration Statement, including the exhibits attached
thereto.
2. The Prospectus, dated June 27, 1996 in the form filed with the
Commission (the "Prospectus").
3. The Certificate of Incorporation of the Company, as amended.
4. The By-Laws of the Company, as amended.
5. Minutes of the meetings of the Board of Directors and Stockholders
of the Company.
6. Consent resolutions of the Board of Directors of the Company.
<PAGE>
7. A specimen certificate for the common stock of the Company.
8. The certificate of officers of the Company as to certain factual
matters.
9. The various agreements pursuant to which the Shares were and may
be issued to the Selling Stockholders.
10. Such other instruments and documents as we have deemed necessary
or advisable for the purpose of rendering this opinion.
As to various questions of fact material to our opinion, we have
relied upon certificates of officers of the Company and of state officials. In
rendering this opinion we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all documents submitted to us as copies or drafts of
documents to be executed. We believe that reliance upon such certificates is
reasonable. We have made no other inquiry or investigation as to factual
matters.
Based on the foregoing, and upon such additional investigation as we
have deemed necessary, it is our opinion that:
The portion of the Shares that have been issued have been duly
authorized and, upon issuance, delivery and payment therefor, were validly
issued, fully paid and nonassessable. The Company has duly authorized, reserved
and set aside the portion of the Shares issuable upon exercise of the warrants
issued to the Selling Stockholders, and such Shares, when issued and paid for
upon exercise of such warrants in accordance with the provisions thereof, will
be duly and validly authorized and issued, fully-paid and non-assessable.
With certain exceptions, we are qualified to practice law only in the
State of Colorado and we do not purport to be experts on, or to express any
opinion herein concerning, any law other than the State of Colorado, the
corporate law of the State of Delaware and the federal law of the United States.
This opinion has been delivered to
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you solely for your own use and may not be used for any other purpose or
communicated to a third party without our prior written consent. We hereby
consent to the use of this opinion in the Registration Statement.
Yours very truly,
REINHART, BOERNER, VAN DEUREN,
NORRIS & RIESELBACH, P.C.
BY
Arnold R. Kaplan