U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the
Fiscal Year Ended December 31, 1996 Commission File No. 0-20432
ONGARD SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
Delaware 84-1149380
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
40 Commerce Drive, Hauppauge, NY 11788
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number, including area code: (516) 231-8989
Securities Registered under Section 12(b) of the Act: None
Title of Each Class Name of Exchange on Which Registered
N/A N/A
Securities Registered under Section 12(g) of the Act:
Units consisting of one share of Common Stock and one Warrant
(Title of Class)
Common Stock, $.001 par value
(Title of Class)
Common Stock Purchase Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $3,688,000.
The aggregate market value of the voting stock of the issuer held by
non-affiliates, computed by reference to the price at which stock was sold, or
the average bid and asked prices of such stock, as of April 10, 1997, was
$14,054,000.
6,613,722 shares of Common Stock were outstanding as of December 31, 1996.
Transitional Small Business Disclosure Format
Yes [ ] No [X]
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Item 1. Description of Business
Infection Control Market
OnGard Systems, Inc., a Delaware Corporation (the "Company" or "OnGard"),
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 were relocated to 40 Commerce Drive, Hauppauge, NY 11788 in
January, 1996 from 2323 Delgany Street, Denver, Colorado, 80216. Its telephone
number is (516)231-8989. 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 and has since raised other funds for corporate development purposes.
The Company currently manufactures and markets an integrated line of both
sterilization equipment and disposable sterility assurance products which serve
the infection control market. These products are offered to a broad spectrum of
healthcare providers ranging from hospital, pharmaceutical and laboratory
companies to individual practitioners. The Company's infection control
activities are divided into two components.
The first 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, in October 1994, (in a stock
transaction valued at $2.6 million), the Company manufactures and markets a
complete line of institutional and pharmaceutical grade sterilizers, washers and
dryers. See "Sterilization Equipment and Acquisition of Pharmetics."
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. 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. The Company's proprietary AutoPak(TM)
product line provides hospitals with a disposable packaging product for
sterilizing reusable surgical instruments. See "Commercialization of New
Products."
The second component, and the Company's initial product line, offered small
quantity medical waste generators (primarily non-hospital environments) with a
disposal system for the elimination of medical waste. The products included a
proprietary mailback system which the user sends directly to disposal sites for
the destruction of syringes and other "sharps" which carry infection. See "Small
Quantity Medical Waste Services." The Company is currently evaluating a plan of
disposition of selected assets of this business to focus on its sterilization
equipment and supplies business.
The Company previously manufactured medical packaging, which was designed
and manufactured for medical device manufacturers. Sterile medical packaging is
used to contain new, unused medical devices during transport and presentation.
These products were primarily sold under private label. 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 it had sold selected medical packaging assets to Oliver Products of
Grand Rapids, Michigan 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 related
accounts receivable.
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Sterilization Equipment and Acquisition of Pharmetics
Effective October 1, 1994, the Company acquired Pharmetics through OnGard
Pharmetics, Inc., a wholly owned subsidiary of the Company ("OGPI or OnGard
Pharmetics"). The merger agreement provided for the issuance of one share of the
Company's Common Stock for every twelve shares of Pharmetics common stock and
200 shares of the Company's Common Stock for each share of Pharmetics preferred
stock. Thus, on October 1, 1994, 3,103,225 outstanding shares of Pharmetics
common stock were exchanged for 258,602 shares of OnGard Common Stock and 400
outstanding shares of Pharmetics preferred stock 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). In addition, Royce Investment Group was
granted 16,000 shares of OnGard Common Stock as a merger fee.
OST 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
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
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' sterilizers to sterilize medical waste before
discarding.
OST also markets 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 OST.
In January 1996, the Company relocated from Denver, Colorado, and combined
its two facilities to the space Pharmetics formerly occupied. In connection with
the relocation, the Company renovated its manufacturing and office space and
expanded its manufacturing equipment infrastructure.
Commercialization of New Products
The Company has focused its efforts on the development of 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 its sterilization pouch products. In December 1994, the
Company received clearance on AutoPak(TM) , the central product of its
sterilization supply line. AutoPak(TM) was introduced into hospitals for
commercial use through an exclusive marketing agreement with Baxter Healthcare
Corporation. Baxter Healthcare Corporation of Deerfield, Illinois is a worldwide
leader in the manufacture and marketing of healthcare products in 100 countries.
Its V. Mueller division, which sells AutoPak(TM), markets surgical instruments
and surgical use products to healthcare companies and hospitals. The territory
covered by the exclusive agreement is the United States and Canada. The Company
received its first orders from Baxter in September 1996. During the fourth
quarter of 1996, the AutoPak(TM) product line was integrated into Allegiance
Corporation, the $4.5 billion healthcare spin-off from Baxter Healthcare
Corporation. The Company plans to offer a comprehensive product line which will
include its AutoPak(TM) product line, a variety of self-seal and heat-seal
sterilization packages and an integrated sterilization indicator and monitor
product line.
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The market for sterilization supplies is primarily hospital based. There can be
no assurance that the Company can compete effectively outside of its traditional
market.
The Company has also developed small, competitively priced sterilizers for
use in hospital, laboratory and other markets. A tabletop sterilizer, called
HiVac(TM), has completed development. Sales during 1996 exceeded $200,000 for a
specific, non-hospital user in Europe. This same purchaser has provided OnGard
with an initial purchase order for 1997 which aggregates $284,000. The Company
anticipates additional orders during 1997.
The AutoPak(TM) 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(TM)`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(TM) Pouch. The Company has filed for and been
granted patent protection on the construction of the package and on the
materials contained therein.
To facilitate manufacture of AutoPak(TM), 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. 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(TM) 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(TM),
for which clearance has been received), that any of such products will be
commercially successful.
Small Quantity Medical Waste Services
Small Quantity Generators
The Company's Mailback waste disposal system is especially suited for small
quantity non-hospital 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 50 pounds per month of regulated medical
waste.
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 healthcare facilities is primarily
regulated by the Occupational Health and Safety Administration ("OSHA"),
although other federal, state and local regulations 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 (however the Company itself does not dispose of medical
waste). 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 Mailback products are
authorized for transport by the Postal Service under U.S. Postal Code number 39
CFR, Part III, and all OnGard Mailback medical waste kits indicate OnGard's
Postal Approval Code numbers, U.S.P.S.-002 A-F. See "Mailback System." The
Company has provided training and support to employees at the Nashville Post
Office, which is the primary destination for the Company's Mailback 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 an exclusive five year supply,
distribution and licensing agreement (the "Sherwood Agreement"). This agreement
made possible the marketing by Sherwood of its Monoject product line along with
the Company's medical waste disposal system. Pursuant to the Sherwood Agreement,
Sherwood, one of the country's largest manufacturers of disposable medical
devices, including syringes, needles and other items collectively known as
"sharps," distributed the Company's complete line of medical waste Mailback
disposal kits. See "Mailback System." The Company also sold these products
directly to some customers through its internal sales group. 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 relationshhip was terminated during
the third quarter of 1995. Thereafter, the Company sold directly to its
customers.
Mailback System
The Company's Mailback 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 Mailback
kits are available in special chemo-waste designated containers as well as for
sharps regulated medical waste. The Company received three patents with respect
to the Mailback system.
Markets
The Company's initial product was the OnGard Recapper, a patented device
offering a mechanical alternative to unprotected handling of contaminated
needles. Purchasers of the Recapper and Mailback products include large dental
product distributors, such as Sullivan Dental Products,
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Inc. and Patterson Dental Co., as well as large catalog distributors such as
Henry Schein and Darby Dental Supply.
In January 1993, the Company acquired the customer list of PRO-MED SHARPS
("PRO-MED"), formerly a seller of medical waste Mailback kits within the dental
and physician office markets. PRO-MED discontinued sale of its Mailback 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 on a direct basis and through automatic reorder
systems by the Company. For the year ended December 31, 1996, sales to PRO-MED
customers were approximately $159,000. 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 Mailback 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, 1996, approximate
sales attributable to Caremark, Coram and Quantam totaled $312,000, $150,000,
and $45,000 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 constitue a major customer, i.e.,
exceeding 10% of the Company's 1995 or 1996 sales. The Company believes that the
increasing concentration of homecare service providers offers opportunities for
continued growth of these products. In addition, waste haulers serving markets
including small quantity generators also provide opportunities.
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 raise substantial doubts about its
ability to continue as a going concern. National Medical Waste merged into
BioMedical Waste, which subsequently filed for protection pursuant to Chapter 11
of the U.S. Bankruptcy Code. The Company has 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 Mailback 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
Mailback 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. That entity has operated since its
filing for bankruptcy and continues to provide incineration services to its
customers. The Company's new orders will be addressed to the Chandler facility
for disposal.
Both waste disposal companies provide pick-up service at the U.S. Postal
Service destination points audit the waste and inputs and maintain 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.
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Sterilization Medical Packaging
The following information is provided as a historic perspective. On
December 7, 1995, the Company completed the sale of its medical device packaging
line to Oliver Products of Grand Rapids, Michigan. The Company operating results
include the packaging line through that date.
In January 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. Effective December 7, 1995, the Company sold selected assets of MDPI to
focus on its sterilization equipment and supplies business.
Manufacturing and Engineering
OnGard currently operates a manufacturing and assembly facility in
Hauppauge, New York. The New York facility also houses machinery required for
production of AutoPak(TM) and other pouches. OnGard also has a machine shop
which is utilized to maintain equipment as required. Materials and supplies for
these products are available from several sources.
OnGard designed, developed and owns the molds and tooling used for blow
molding and injection molding the sharps containers sold as part of its Mailback
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, and for the assembly of its Mailback products, and
ships finished, complete kits to customers.
OnGard purchases raw materials for its AutoPak(TM) 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 products and product line expansions 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 manufactured and assembled at 40 Commerce Drive, Hauppauge, New
York 11788.
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.
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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 mailback medical waste products. The Company has obtained
approvals from these states. In Minnesota, a change in the overall environmental
regulatory framework resulted in Mailback 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 Mailback medical waste programs. The Company has informed
its distributors about Maine's position. The Company does not actively pursue
Mailback 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 activities may be curtailed or limited to the extent that certain
states restrict the use of medical Mailback systems.
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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 Mailback 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
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provided that required 501(k) notices are submitted to FDA prior to the
conclusion 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 Mailback 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.
OGSI 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. The Company has
also received clearances relating to its AutoPak(TM) products.
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 patents on the OnGard Medical Waste System (U.S. Patent No. 5,097,950,
350,604 and 5,427,238). The Company was also awarded two patents on AutoPak(TM)
(U.S. Patent No. 5,459,978 and 5,590,777). 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 "OnGard" 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.
10
<PAGE>
Employees
As of December 31, 1996, 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 Mailback systems in an increasingly
competitive environment. Competitors include local and national hauling services
and some local or regional Mailback services. At the current time, the Company
is aware of five companies which have approval from the U.S. Postal Service to
offer Mailback services. None of these companies offer the selection of sizes
and capacities currently provided by OnGard.
The Company's primary competitor in the Mailback 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
Mailback systems. In addition, both Sherwood and Becton Dickinson have extensive
distribution capacities within the target markets. The Company believes that its
pricing for Mailback systems is competitive.
The sterile packaging industry is extremely competitive. The Company
competes with a variety of large manufacturers, including Kimberly Clark, 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 highly competitive and many
competitors of OST have greater financial resources. These companies include
Steris/American Sterilizer (AMSCO) and Gettinger, which may sell either
pharmeceutical sterilizers or hospital autoclaves.
Backlog
As of December 31, 1996, the Company had open orders which aggregated $2.6
million. Of these, approximately $530,000 were backlog orders, which were due by
December 31 but had not yet been delivered.
Insurance
The Company maintains liability and umbrella insurance with coverage limits
of $7 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.
11
<PAGE>
Item 2. Description of Property
Facilities
In early 1996, the Company consolidated operations at its facility in
Happauge, New York. The Company closed its Denver facility by assigning its
lease obligations for the duration of the term. The Company receives a premium
payment monthly from the assignee through the duration, May 31, 1998.
The Company's corporate and administrative offices, as well as production
for AutoPak(TM), 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 has advanced $350,000 to remodel the
facility. This amount is being repaid by the Company, in the amount of $9,600
per month for 36 months and $4,359 for 12 months, which both began in February
1996. Prior amounts due the landlord, which were unpaid under Pharmetics lease
arrangements, totaling $170,248, were repaid in 1995 with 22,700 shares of
unregistered OnGard Common Stock, which the Company subsequently registered.
Item 3. Legal Proceedings.
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 plus
umbrella coverage for an additional $5 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, was 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 and has
completed the payment terms of substantially all of these and the Company
believes that the few remaining 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 Pharmetics 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. Through
December 31, 1996, the Company had completed payments to federal and
unemployment tax authorities.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
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<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is quoted in the NASDAQ (Small-Cap(SM)) system
and it trading symbol is OGSI. As of December 31,1996, there were approximately
138 record holders and approximately 1357 beneficial holders of Common Stock.
There were 6,613,722 shares outstanding as of December 31, 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, In. ("NASAD") 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, and its warrants expired April
30, 1996.
<TABLE>
<CAPTION>
Year: Quarter Common Stock Year: Quarter Common Stock
- -------------- ------------ -------------- ------------
High Bid Low Bid High Bid Low Bid
-------- ------- -------- -------
1992: 1995:
<S> <C> <C> <C> <C> <C>
Third Quarter 4-1/2 4-1/2 First Quarter 8-1/4 6-1/2
Fourth Quarter 4-1/2 4-1/2 Second Quarter 7 4-1/2
1993: Third Quarter 9-1/2 4
First Quarter 4-7/8 4-1/2 Fourth Quarter 8-3/4 6-5/8
Second Quarter 5-1/3 4-7/8 1996:
Third Quarter 6-3/4 5-1/8 First Quarter 9-1/4 6-5/8
Fourth Quarter 8-3/8 6-5/8 Second Quarter 7-1/4 4-1/2
1994: Third Quarter 5-1/4 2-5/8
First Quarter 7-3/4 6-3/4 Fourth Quarter 3-3/8 1-7/8
Second Quarter 8-1/4 4-1/8
Third Quarter 9 6
Fourth Quarter 9 6-1/2
<CAPTION>
Warrants Units
-------- -----
Year: Quarter High Bid Low Bid High Bid Low Bid
- -------------- -------- ------- -----------------
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
</TABLE>
13
<PAGE>
1996:
First Quarter 4-7/8 1-7/8
Second Quarter 1-1/4 1
* Through October 25, 1993.
** Through April 30, 1996.
The closing bid price of OnGard Common Stock in the NASDAQ (Small-Cap(SM))
system on April 10, 1997 was $2.125.
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 continued development and expansion of
its business.
14
<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. Its inital product line was a waste disposal
system for small quantity waste generators. It subsequently expanded to sterile
packaging and sterilization equipment. 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.
Caremark was 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 Inc. resulting in sales to Coram Inc as well as Caremark. Revenues
attributable to Caremark, Coram and Quantum for the year ended December 31, 1996
were $312,000, $150,000 and $45,000 respectively. However, due to the divestment
of a division of Caremark in 1995, neither Caremark, nor Coram met the
qualifications of a significant customer in 1995 or 1996. A customer group list
was purchased by OnGard from ProMed Sharps in December 1992. During the year
ended December 31, 1996, sales to ProMed and customers were approximately
$159,000. In February 1993, the Company and Sherwood entered into a five-year
Supply, Distribution and Licensing Agreement ("Sherwood Agreement") which gave
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, 1995, the Company's revenues
attributable to the Sherwood Agreement were approximately $99,000, but had no
sales to Sherwood thereafter.
With the acquisition of MDPI in 1993 and OST in late 1994 and
commercialization of AutoPak(TM), the Company has emphasized more direct sales.
It had expanded its sales staff with personnel in both the packaging and
equipment lines to expand its market position. Boston Scientific, a sterile
packaging customer, had been a major customer representing 10% of the Company's
total sales in 1995. However, 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 selected assets of its medical device packaging line. 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 was no longer 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 had no net impact on
the results of operations and capital resources. OST had no customer, which
accounted for 10% more of the Company's revenues in 1995 or 1996.
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 sold to a
variety of medical device manufacturers. In June 1993, the Company
15
<PAGE>
relocated MDPI operations to a larger facility that included a "white room" for
the manufacturing of sterile medical packaging. Revenues attributable to sterile
medical packaging product line for the year ended December 31, 1995 were
$1,905,000. This business provided the technical skills and equipment to develop
the Company's proprietary sterility assurance product, AutoPak(TM). Once
developed, the Company elected to pursue this market and divest selected assets
of MDPI, described above.
During 1996, the Company completed an exclusive marketing agreement with
Baxter Healthcare Corporation in an arrangement where Baxter buys AutoPak(TM)
from OnGard for resale and distribution of AutoPak(TM) into the hospital market.
Initial orders were received from Baxter in September 1996. In the fourth
quarter of 1996, the AutoPak(TM) agreement was integrated into Allegiance, the
$4.5 billion healthcare spin-off from Baxter. AutoPak(TM) sales for the year
ended December 31, 1996 to Baxter and other customers were $257,000 and occurred
primarily in the last half of 1996.
In October 1994, the Company acquired Pharmetics, now OST, which expanded
its activities into sterilization equipment. OST generated $2,522,000 in
revenues for the year ending December 31, 1996.
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 Year Ended Year Ended
December 31, December 31, December 31,
------------ ------------ ------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Costs of Sales 88.4 106.3 131.9
------ ------ ------
Operating Margin 11.6 (6.3) (31.9)
------ ------ ------
Operating Expenses:
General and Administrative 62.1 52.6 56.2
Write down of note receivable 71.0 -- --
Marketing 14.5 29.5 46.7
Depreciation and Amortization 3.8 6.2 10.6
Deferred Compensation 21.1 34.7 18.7
Research and Development 5.7 7.4 4.8
------ ------ ------
Total (157.1) 130.4% 137.0
------ ------ ------
Loss from Operations (145.5) (136.7) (168.9)
Interest Expense (5.6) (11.1) (8.6)
Interest and Other Income 1.7 5.6 8.4
Forgiveness of Debt -- 2.1 --
Other Expenses (0.5) (0.4) (1.4)
------ ------ ------
Net Loss (149.9)% (138.3)% (170.5)%
====== ====== ======
</TABLE>
Year ended December 31, 1996 compared to year ended December 31, 1995.
Revenues for the twelve months ended December 31, 1996 decreased by
$1,287,000 or 26% from the comparable period in 1995, from $4,975,000 to
$3,688,000. However, after excluding sales
16
<PAGE>
related to MDPI of $1,905,000, which was divested in December 1995, revenues
increased by approximately $618,000 or 20%. This increase is attributable
primarily to sales of AutoPak(TM) of $257,000 and increased sales of the
equipment lines of $461,000 offset partially by reductions in sales of the
Company's Mailback business.
Operating margin decreased $864,000 to a deficit of $1,175,000 (a deficit
of 31.9% of revenues) versus a deficit of $311,000 (a deficit of 6.3% of
revenues). The decrease is comprised of (1) a net decrease in sales of
$1,287,000 resulting from the sale of MDPI and its related product margin
contribution of approximately $441,000, (2) start-up production costs incurred
in connection with relocating AutoPak(TM) operations to New York, including
production equipment, material modifications, internal personnel and facility
restructuring costs of $147,000 and (3) the remainder in increased factory
overheads intended to improve the performance and quality of production,
including engineering, purchasing and quality control. In the aggregate,
revenues were insufficient to offset factory overheads resulting in an operating
margin deficiency.
General and administrative expenses decreased by $541,000 to $2,071,000 in
1996 versus $2,612,000 in 1995, a decrease of 21%. The decrease relates to
tighter expense controls including reductions in legal fees of approximately
$170,000, and numerous administrative expenses associated with the consolidation
of the Denver and New York locations into the New York facility, primarily
including rent offset by rental premiums received from the occupant of the
Denver facility, salaries, travel, telephone and other expenses.
Sales and marketing expenses increased 17%, or $255,000, from $1,468,000 in
1995 to $1,723,000 in 1996. The increase relates primarily to direct selling
costs in connection with the commercialization of AutoPak(TM), its technicial
support personnel, related travel and collateral materials of $684,000 offset,
in part, by the elimination of sales expenses associated with the divested MDPI
business, of $391,000.
Research and development decreased from $370,000 for the twelve months
ended December 31, 1995 to $176,000 for the comparable period in 1996. This
decrease of 52%, or $194,000, reflects the completion of development costs
associated with both AutoPak(TM) and the tabletop sterilizer and
commercialization of both.
Depreciation and amortization increased $84,000 or 28%, from $308,000 to
$392,000 for the years December 3, 1995 and 1996 respectively. The increase is
predominately attributable to expanding the Company's manufacturing capabilities
in the equipment business.
Deferred compensation decreased from $1,728,000 in 1995 to $691,000 in
1996. The decrease relates to recording non-cash charges for fully vested
options granted in 1996 to certain directors, officers or consultants of the
Company, at prices below market price.
Interest expense decreased by $230,000, or 42%, from $549,000 in 1995
versus $319,000 in 1996. The decrease relates primarily to reduced interest on
the Company's bank line, of $345,000, which was paid at maturity on April 15,
1996, but was outstanding, in part or whole, throughout 1995. This decrease was
offset by increased interest on capital lease financing of manufacturing
equipment and leasehold improvements.
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.
17
<PAGE>
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 7% to $2,611,697 (53% of
revenues) for the year ended December 31, 1995 from $2,440,935 (62% of revenues)
for the 1994 period. 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; other expenses decreased $426,000.
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-Product 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.
Deferred compensation increased to $1,728,000 in 1995 from $309,375 in
1994. The increase in non-cash charges is attributable to fully vested stock
option grants to certain directors, officers and consultants at prices less than
market value.
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.
18
<PAGE>
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 will
record 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 will also
record 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.
Liquidity and Capital Resources
Certain information set forth herein contains forward-looking statements,
as such term is defined in Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Such statements are subject to
certain risks and uncertainties discussed herein, which could cause actual
results to differ materially from those in the forward-looking statements.
The Company's working capital at December 31, 1996, decreased modestly to
$1,956,000 from $2,085,000 at December 31, 1995. Cash and cash equivalents were
$885,500 at December 31, 1996 versus $3,693,000 at December 31, 1995. Accounts
receivable increased $10,000 to $785,000 at December 30, 1996, from $775,000 at
December 31, 1995. Inventory increased to $2,102,380 at December 30, 1996 from
$1,482,000 at December 31, 1995.
The Company had an accumulated deficit of $24,278,000 at December 31, 1996
and expects losses to continue at least through 1997. 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.
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, 1996,
a twenty-six month period, the Company has applied an additional $7,126,000
which has been used substantially to fund OST's operating requirements. The
operating requirements included the repayment of past due trade credit,
operating losses, improvements to the existing product line and the development
of two new sterilization products: HiVac, a compact steam sterilizer and
WasteClave, a highly efficient hospital autoclave. The Company's new products,
which are proprietary, and product enhancements should generate better gross
margins and should improve operating results. The Company commenced selling
these products in late 1995 but as it established its sales force and marketing
programs during 1996 such expenditures caused continued losses. These losses and
their financing have been the most significant aspect of the Company's cash
flow.
The Company has begun calendar year 1997 with open orders at OST of $2.6
million, and expects significant additional orders during 1997 which will also
be filled during 1997. Based upon this, the Company believes its losses will
decline substantially during 1997.
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.
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 was 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
19
<PAGE>
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 ($764,000 outstanding at December 30, 1995 and
none outstanding at December 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 note at maturity.
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.
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 matured and
were paid in full on April 15, 1996.
In 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 $7,714,028 and net proceeds of $7,634,028. The September 1995 Private
Placement required that the Company register such Common Shares issued in this
placement, which it did during 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 also obtained funds from the exercise of outstanding Common
Stock purchase warrants. These warrants were to expire on August 11, 1995, but
were extended until April 30, 1996. The net proceeds to the Company through
warrant exercise were $5.7 million by the expiration date. The Company will need
additional funds for working capital as its orders for its new product lines
increase and to fund operating losses. In April 1997, the Company obtained a
commitment for a credit line with a bank, secured by the Company's tangible and
intangible assets and facilitated guarantors ( the "Guarantors"), who are either
investors or option holders of the Company. The credit line of $1.0 million
matures 12 months from inception, in April 1998, and bears interest at the LIBOR
rate plus 2%. In exchange for their guarantee, the Company granted 375,000
warrants to purchase the Company's common stock price per share at the closing
date or $2.00 per share, whichever is lower. At maturity, the Company will seek
alternatives to repay the debt with new equity, determine if the line can be
extended or refinanced with new debt. In addition, the Company has received $1.5
million from the sale of convertible Debentures (the "Debentures"). The
Debentures are convertible into common stock of the Company in $50,000
denominations at any time after a 45-day restriction period at a price equal to
the then fair market value of the common stock less 22 1/2% or, the price at the
funding date, whichever is lower. The
20
<PAGE>
Debentures bear interest at the rate of 6% per annum until conversion; such
interest is payable quarterly in cash or common stock of the Company, at the
Company's option. The Debentures mature five years from issuance at which time
any remaining amounts convert to common stock. The Company will grant warrants
to the placement agent equal to 10% of the funds raised at the exercise price
described above and pay placement fees of approximately 10% of the funds raised.
The Company projects that these funds plus its existing cash position will be
sufficient to fund operations through December 31, 1997. The placement agent has
committed to financing an additional $3.5 million until February 28, 1998, under
the same terms discussed above; the additional financing is solely at the
Company's option. However, in the event such commitment is unfulfilled by the
Company, an additional 2% of such unfulfilled commitment will be paid in
warrants to the placement agent on the terms described above. The Company will
record the value of warrants to the quarantors, and the discount from market
price provided to the Debenture holders, as a non-cash charge included as
interest expense.
Although the Company 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 it will be successful in this regard in the future. Furthermore, there
can be no assurance that 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.
Item 7. Financial Statements
INDEX Page
----- ----
Report of Independent Public Accountants F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flow F-5
Notes to Consolidated Financial Statements F-6
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OnGard Systems, Inc.:
We have audited the accompanying consolidated balance sheets of OnGard Systems,
Inc. (a Delaware corporation) and subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the 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, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Melville, New York
April 11, 1997
<PAGE>
<TABLE>
<CAPTION>
ONGARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 885,552 $ 3,693,303
Restricted cash 50,000 97,363
Trade accounts receivable, net of allowance of $40,000 and $119,186,
respectively 744,856 656,274
Inventory, net 2,102,380 1,481,847
Prepaid expenses and other current assets 203,712 77,881
------------ ------------
Total current assets 3,986,500 6,006,668
------------ ------------
PROPERTY AND EQUIPMENT, net 1,836,056 1,152,573
------------ ------------
EQUIPMENT UNDER OPERATING LEASE, net 237,594 134,440
------------ ------------
OTHER ASSETS:
Excess cost over net tangible assets acquired, net 2,268,788 2,396,608
Intangible and other assets, net 303,359 238,258
Deposits 95,241 51,151
Debt guarantee fee, net -- 140,740
------------ ------------
Total other assets 2,667,388 2,826,757
------------ ------------
$ 8,727,538 $ 10,120,438
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to bank $ -- $ 1,764,270
Trade accounts payable 541,604 839,187
Accrued liabilities 1,242,257 1,251,050
Capital lease obligations 186,741 88,362
Customer deposits 221,359 89,994
Current portion of notes payable 98,847 --
------------ ------------
Total current liabilities 2,290,808 4,032,863
CAPITAL LEASE OBLIGATIONS 198,051 --
NOTES PAYABLE 109,520 50,735
------------ ------------
Total liabilities 2,598,379 4,083,598
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred stock, $.001 par value, 3,000,000 shares
authorized; 253,292 and 378,292 issued and outstanding as of December 31,
1996 and 1995, respectively; aggregated liquidation preference of $1,013,168
and $1,513,168, respectively 778,167 1,228,167
Series B Redeemable Preferred stock, no par value; 100 shares issued and
outstanding as of December 31, 1996 and 1995 10 10
Common stock, $.001 par value, 25,000,000 and 10,000,000 shares authorized
as of December 31, 1996 and 1995, respectively; 6,613,722 and 5,355,281
shares issued and outstanding, respectively 6,614 5,355
Additional paid-in capital 30,212,161 23,983,803
Deferred compensation (589,500) (1,189,500)
Accumulated deficit (24,278,293) (17,990,995)
------------ ------------
Total stockholders' equity 6,129,159 6,036,840
------------ ------------
$ 8,727,538 $ 10,120,438
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
<TABLE>
<CAPTION>
ONGARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
<S> <C> <C>
REVENUES $ 3,688,186 $ 4,975,069
COST OF SALES 4,716,411 5,286,358
START UP PRODUCTION COSTS 147,052 --
----------- -----------
Operating margin (deficit) (1,175,277) (311,289)
----------- -----------
COSTS AND EXPENSES:
General and administrative 2,071,203 2,611,697
Sales and marketing 1,722,800 1,468,319
Depreciation and amortization 392,254 307,813
Deferred compensation 691,500 1,728,125
Research and development 175,780 369,859
----------- -----------
Total costs and expenses 5,053,537 6,485,813
----------- -----------
LOSS FROM OPERATIONS (6,228,814) (6,797,102)
INTEREST EXPENSE (319,027) (549,332)
OTHER EXPENSE (49,893) (23,365)
INTEREST AND OTHER INCOME, net 310,436 381,799
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (6,287,298) (6,988,000)
PROVISION FOR INCOME TAXES -- --
----------- -----------
NET LOSS $(6,287,298) $(6,988,000)
=========== ===========
NET LOSS PER SHARE (.99) (1.76)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 6,365,250 3,961,700
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ONGARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Convertible Series A Series B Redeemable
Preferred Stock Preferred Stock
---------------------- ---------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 -- $ -- -- $ --
Conversion of convertible debentures to Class A
preferred stock, net of debt discount 250,000 765,000 -- --
Issuance of 3,292 Series A preferred shares for
accrued interest on convertible debentures 3,292 13,167 -- --
Sale of 125,000 Series A preferred shares, net of
underwriters' commissions of $50,000 125,000 450,000 -- --
Issuance of 100 shares of Series B redeemable
preferred limited voting stock -- -- 100 10
Conversion of 71,429 Series A warrants to common
stock, net of underwriters commissions of $25,000 -- -- -- --
Conversion of related party notes payable and
interest to common stock -- -- -- --
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
Deferred compensation related to stock options -- -- -- --
granted
Compensation related to stock options granted -- -- -- --
Amortization of deferred compensation -- -- -- --
Conversion of vendor payables to common stock -- -- -- --
Exercise of common stock warrants -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, December 31, 1995 378,292 1,228,167 100 10
Issuance of 1,129,941 common shares in connection
with conversion of common stock purchase warrants,
net of commissions and other expenses of $371,000 -- -- -- --
Exercise of employee stock options -- -- -- --
Conversion of Series A preferred stock to common (125,000) (450,000) -- --
stock
Amortization of deferred compensation -- -- -- --
Deferred compensation related to issuance of stock
options to non-employee -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, December 31, 1996 253,292 $ 778,167 100 $ 10
============ ============ ============ ============
<CAPTION>
Common Stock Additional
----------------------- Paid-In Deferred
Shares Amount Capital Compensation
------------ ------------ ------------ ------------
<C> <C> <C> <C>
BALANCE, December 31, 1994 3,029,602 $ 3,030 $ 12,765,948 $ (150,000)
Conversion of convertible debentures to Class A
preferred stock, net of debt discount -- -- -- --
Issuance of 3,292 Series A preferred shares for
accrued interest on convertible debentures -- -- -- --
Sale of 125,000 Series A preferred shares, net of
underwriters' commissions of $50,000 -- -- -- --
Issuance of 100 shares of Series B redeemable
preferred limited voting stock -- -- -- --
Conversion of 71,429 Series A warrants to common
stock, net of underwriters commissions of $25,000 71,429 71 296,359 --
Conversion of related party notes payable and
interest to common stock 12,373 12 59,910 --
Issuance of 200,000 warrants in connection with
guarantee of the Company's notes payable to bank -- -- 200,000 --
Issuance of 2,204,021 common shares in connection
with equity private placement, net of issuance 2,204,021 2,204 7,631,844 --
costs of $80,000
Deferred compensation related to stock options -- -- 1,087,500 (1,087,500)
granted
Compensation related to stock options granted -- -- 1,700,000 --
Amortization of deferred compensation -- -- -- 48,000
Conversion of vendor payables to common stock 35,200 35 228,062 --
Exercise of common stock warrants 2,656 3 14,180 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, December 31, 1995 5,355,281 5,355 23,983,803 (1,189,500)
Issuance of 1,129,941 common shares in connection
with conversion of common stock purchase warrants,
net of commissions and other expenses of $371,000 1,129,941 1,130 5,664,237 --
Exercise of employee stock options 3,500 4 22,746 --
Conversion of Series A preferred stock to common 125,000 125 449,875 --
stock
Amortization of deferred compensation -- -- -- 691,500
Deferred compensation related to issuance of stock
options to non-employee -- -- 91,500 (91,500)
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, December 31, 1996 6,613,722 $ 6,614 $ 30,212,161 $ (589,500)
============ ============ ============ ============
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
------------ -------------
<S> <C> <C>
BALANCE, December 31, 1994 $(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 Series A preferred shares for
accrued interest on convertible debentures -- 13,167
Sale of 125,000 Series A preferred shares, net of
underwriters' commissions of $50,000 -- 450,000
Issuance of 100 shares of Series B redeemable
preferred limited voting stock -- 10
Conversion of 71,429 Series A warrants to common
stock, net of underwriters commissions of $25,000 -- 296,430
Conversion of related party notes payable and
interest to common stock -- 59,922
Issuance of 200,000 warrants in connection with
guarantee of the Company's notes payable to bank -- 200,000
Issuance of 2,204,021 common shares in connection
with equity private placement, net of issuance -- 7,634,048
costs of $80,000
Deferred compensation related to stock options -- --
granted
Compensation related to stock options granted -- 1,700,000
Amortization of deferred compensation -- 48,000
Conversion of vendor payables to common stock -- 228,097
Exercise of common stock warrants -- 14,183
Net loss (6,988,000) (6,988,000)
------------ ------------
BALANCE, December 31, 1995 (17,990,995) 6,036,840
Issuance of 1,129,941 common shares in connection
with conversion of common stock purchase warrants,
net of commissions and other expenses of $371,000 -- 5,665,367
Exercise of employee stock options -- 22,750
Conversion of Series A preferred stock to common -- --
stock
Amortization of deferred compensation -- 691,500
Deferred compensation related to issuance of stock
options to non-employee -- --
Net loss (6,287,298) (6,287,298)
------------ ------------
BALANCE, December 31, 1996 $(24,278,293) $ 6,129,159
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ONGARD SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,287,298) $(6,988,000)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization and non-cash interest 814,911 835,715
Compensation expense related to stock options granted 691,500 1,748,000
Gain on sale of packaging assets -- (233,500)
Provision for doubtful accounts (79,186) 52,000
Write-off of selected intangible packaging line assets -- 110,000
Changes in assets and liabilities:
Decrease (increase) in restricted cash 47,363 (47,363)
Decrease (increase) in trade accounts receivable (9,396) 625,846
Increase in inventory (737,113) (404,363)
Increase in prepaid expenses and other current assets (125,831) (71,556)
Decrease in trade accounts payable and accrued liabilities (298,859) (1,045,803)
Increase in customer deposits 131,365 59,535
----------- -----------
Net cash used in operating activities (5,852,544) (5,359,489)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (312,965) (298,076)
Proceeds from sale of packaging assets -- 620,500
Decrease (increase) in other assets (137,111) 68,134
----------- -----------
Net cash provided by (used in) investing activities (450,076) 390,558
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock -- 450,010
Proceeds from issuance of common stock 22,750 7,944,641
Proceeds from conversion of warrants to common stock, net 5,665,367 --
Payment of notes payable to related parties (7,500) (55,500)
Proceeds from notes payable to bank -- 1,000,000
Payment of note payable to bank (1,764,270) (666,109)
Payment of capital leases payable (229,108) (79,523)
Payment of leasehold improvements financed by owner and other (192,370) --
----------- -----------
Net cash provided by financing activities 3,494,869 8,593,519
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,807,751) 3,624,588
CASH AND CASH EQUIVALENTS, beginning of year 3,693,303 68,715
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 885,552 $ 3,693,303
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 170,019 $ 131,274
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Conversion of convertible debentures to preferred stock -- 765,000
Conversion of related party notes payable and accrued interest to common stock -- 59,922
Conversion of vendor payables to common stock -- 228,097
Conversion of preferred stock to common stock 450,000 --
Leasehold improvements financed by owner 350,000 --
Acquisition of equipment through capital leases 525,128 145,517
Fair value of warrants issued to guarantor for bank debt (Notes 8 and 9) -- 200,000
Reclassification of inventory to equipment under operating lease 116,580 134,440
</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, 1996 AND 1995
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. Through its 1994 acquisition of Pharmetics,
Inc. ("Pharmetics"), now known as OnGard Sterilization Technologies, Inc.
("OST"), a wholly-owned subsidiary of the Company, the Company manufactures
sterilizers, washers and dryers used for the control of infection in hospital,
pharmaceutical, laboratory and research facilities. The Company also 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.
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. Effective December 7, 1995, the Company sold selected
MDPI assets to another company in order to focus on its proprietary
sterilization packaging line, Autopak(TM), and sterilization equipment business.
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.
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.
Cash Equivalents
The Company considers all highly liquid cash investments with an original
maturity of three months or less to be cash equivalents.
F-6
<PAGE>
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, 1996 and 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 sheets as of December 31, 1996 and 1995. As of
December 31, 1995, an additional $47,000 was held in escrow related to the sale
of MDPI assets (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 include direct manufacturing costs
and an allocation of overhead.
Inventory, net consists of the following:
December 31,
1996 1995
---------- ----------
Raw materials $1,356,476 $ 905,886
Work-in-process 629,280 477,901
Finished goods 116,624 98,060
---------- ----------
$2,102,380 $1,481,847
========== ==========
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and
amortization. Depreciation and amortization are 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 balances at December 31, 1996 and 1995 of $2,268,788 and $2,396,608 are net
of $287,594 and $159,774 of accumulated amortization, respectively.
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.
F-7
<PAGE>
Debt Guarantee Fee
Debt guarantee fee reflected the fair value of warrants issued to the guarantors
of the Company's $2.5 million bank loans in exchange for the guarantee (Note 8).
The costs were 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, which was fully amortized at December 31, 1996.
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, 1996 and 1995, the
carrying value of all financial instruments approximated fair value.
Impairment of Long-Lived Assets
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 was adopted
by the Company effective January 1, 1996. No impairment loss was recognized as a
result of the adoption of this statement.
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 $100,000 and $91,000 as of December 31, 1996 and 1995,
respectively, which is included in accrued liabilities in the accompanying
consolidated balance sheets.
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 11) 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 consist of the following:
December 31,
1996 1995
---------- ----------
Legal $ 85,966 $ 125,343
Incineration and postage 420,000 370,089
Commissions 123,662 154,144
Accrued vacation, payroll and related taxes 155,165 123,253
Other 457,464 478,221
---------- ----------
$1,242,257 $1,251,050
========== ==========
F-8
<PAGE>
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.
Major Customers
The Company had no single customer which would be characterized as a major
customer during 1996. The Company had one customer which accounted for 10% of
total revenue during 1995. As a result of the sale of medical device packaging
assets the Company no longer sells to this customer. During 1995, one of the
Company's 1994 major customers divested a division to another entity resulting
in the Company selling to both entities. Due to the divestiture neither of these
was a major customer, although the Company retained the sales to both.
Research and Development
Research and development costs incurred by the Company associated with the
development of preproduction prototypes are expensed as incurred.
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).
Stock-Based Compensation
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 using 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 (Note 9). These disclosure requirements are effective for years
beginning after December 15, 1995. The Company has elected to continue
accounting for its stock-based compensation awards to employees and directors
under the accounting prescribed by APB Opinion No. 25 and to provide the
disclosures required by SFAS No. 123. As required, the Company has adopted SFAS
No. 123 to account for stock-based compensations awards to outside consultants.
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 losses in 1996 and 1995,
common stock equivalents of the Company are not included in the net loss per
share calculation, as the inclusion of such common stock equivalents would be
antidilutive.
F-9
<PAGE>
Recently Issued Accounting Standards
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". This statement establishes standards for computing and
presenting earnings per share ("EPS"), replacing the presentation of currently
required primary EPS with a presentation of Basic EPS. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for all prior
periods presented. The Company does not expect the impact of the adoption of
this statement to be material to previously reported EPS amounts.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31,
1996 1995
----------- -----------
Furniture and fixtures $ 86,080 $ 62,256
Leasehold improvements 784,140 415,142
Machinery and equipment 2,079,400 1,418,999
----------- -----------
2,949,620 1,896,397
Less-Accumulated depreciation and amortization (1,113,564) (743,824)
----------- -----------
$ 1,836,056 $ 1,152,573
=========== ===========
Equipment under capital leases, included in property and equipment was
approximately $520,000 and $87,000 as of December 31, 1996 and 1995,
respectively.
4. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consist of the following:
December 31,
1996 1995
--------- ---------
Patents and trademark $ 338,150 $ 245,132
Non-compete agreement -- 36,662
Other 20,000 20,000
--------- ---------
358,150 301,794
Less-Accumulated amortization (54,791) (63,536)
--------- ---------
$ 303,359 $ 238,258
========= =========
F-10
<PAGE>
5. NOTES PAYABLE TO RELATED PARTIES:
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 was repaid during 1995 and 1996
in part with 2,105 shares of the Company's common stock and the remainder with
$15,000 in cash.
6. LEASES:
The Company leases its New York office and warehouse facilities and a sales
office in Denver, and has other minor noncancelable operating leases including
office and factory equipment which range from three to five years. In connection
with the consolidation of its Denver and New York facilities, in January 1996,
the Company assigned the lease for its former Denver facility effective April 1,
1996. Through this assignment, the Company was granted complete release from its
obligations under the lease and also receives additional 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 1996 and 1995
was $252,121 and $258,651, respectively. Future minimum operating lease payments
are as follows, which excludes payments relating to the assigned lease in
Denver:
1997 $223,000
1998 251,000
1999 261,000
2000 23,000
Thereafter --
The Company also leases certain fixed assets that are capitalized as of December
31, 1996. Future obligations on these leases are approximately $385,000, plus
accrued interest of $85,000.
7. INCOME TAXES:
Net deferred tax assets and liabilities consist of the following:
December 31,
1996 1995
----------- -----------
Current:
Accounts receivable $ 15,200 $ 45,291
Inventory 45,875 102,661
Other -- 37,048
----------- -----------
61,075 185,000
----------- -----------
Noncurrent:
Fixed assets (50,000) (48,715)
Stock compensation 891,385 646,000
Net operating loss carryforwards 8,166,693 6,167,156
----------- -----------
9,008,078 6,764,441
----------- -----------
Total net deferred tax asset 9,069,153 6,949,441
Valuation allowance (9,069,153) (6,949,441)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
F-11
<PAGE>
The Company's effective income tax rate was different than the statutory federal
income tax rate as follows:
1996 1995
----------- -----------
Federal income tax (benefit) at statutory rates $(1,999,537) $(2,338,000)
State income tax (benefit), net of Federal effect (194,138) (227,000)
Valuation allowance on net operating loss carryforwards 2,193,675 2,565,000
----------- -----------
$ -- $ --
=========== ===========
The Company has no state or federal income taxes currently payable at December
31, 1996 or 1995.
The differences between the fiscal 1996 and 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, 1996 and 1995, respectively, the Company has net operating loss
("NOL") carryforwards of approximately $21,491,000 and $16,229,000 currently
available for federal income tax purposes which expire through 2011. 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 assets as of December 31,
1996 and 1995 do 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.
8. NOTES PAYABLE:
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 (Note 1). 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%. 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 matured on April 15, 1996 and were paid off in their entirety.
During 1996, the Company entered into two new borrowing agreements with the
landlord of the Company's New York facility in order to finance certain
leasehold improvements. Under the terms of those agreements, the Company
borrowed $50,000 and $300,000 at an annual interest rate of 10%. The loans are
being repaid in monthly installments through January 1997 and January 1999,
respectively. As of December 31, 1996, $208,000 was outstanding under these
agreements.
F-12
<PAGE>
9. 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 redeemable preferred stock to the largest investor in the
private placement at an aggregate cost of $10 per share. 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 holder 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.
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 contained 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, March 29, 1996 and then to April 30, 1996. Approximately 1,130,000 options
were exercised prior to the final revised expiration date at an adjusted price
of $5.34 providing gross proceeds of $6,000,000 and net proceeds of $5,665,000.
F-13
<PAGE>
Equity Private Placement and Series 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 "Series A Warrants")
entitles a holder to purchase one share of the Company's common stock for $6.00.
The Series 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 (Note 1) or the Guarantor's Warrants (Note 8 and
below). The Series 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, which resulted in
approximately $296,430 in net proceeds.
Guarantor's Warrants
In connection with the guarantee of the Company's $1.5 million bank loan (Note
8), 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 (Note 1) 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.
Series B Preferred Stock Warrants (see "Private Equity Transactions" above)
In November 1994, the Company issued 250,000 Series B Preferred Stock Warrants
in connection with the sale of $1.0 million in convertible debentures. The
Series B Preferred Stock Warrants are identical in terms to the Series 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 Series B Preferred Stock Warrants were also
issued.
F-14
<PAGE>
A summary of the warrant terms, the Company's calculation of dilution adjusted
prices and shares at December 31, 1996, and potential maximum gross proceeds to
the Company are as follows:
<TABLE>
<CAPTION>
Series B
Preferred
Series A Guarantor's Underwriter's Stock
Warrants Warrants Warrants Warrants Total
-------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Original number of shares (a) 228,571 600,000 250,000 375,000 1,453,571
Original price $6.00 $4.00 $3.50 - $9.45 $6.00
Dilution adjusted shares 268,341 692,780 345,260 428,501 1,734,882
Dilution adjusted price $5.20 $3.41 - $3.57 $3.01 - $6.25 $5.28 - $5.31
Maximum potential gross proceeds
($ millions) (b) $1.4 $2.4 $1.6 $2.3 $7.7
Expiration date 4-30-97, 10-24-99 8-11-97, 2-28-98
7-18-97 7-20-97
Redemption provision Yes No No Yes
</TABLE>
(a) 71,429 Series A Warrants exercised during 1995.
(b) There is no assurance that the full amount of these proceeds will be
received by the Company in the future.
Stock Option Plan
In January 1995, the Company's shareholders approved a stock plan (the "1994
Plan"), which superseded the pre-existing stock option plan (the "1992 Plan").
The 1994 Plan provides for the issuance of up to 1,500,000 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. At December
31, 1996, 1,107,688 stock options granted to employees and directors were
exercisable. The Company accounts for awards granted to employees and directors
under APB Opinion No. 25, under which compensation cost has been recognized for
stock options granted at an exercise price less than the market value of the
options on the grant date. Had compensation cost for all stock option grants in
1996 and 1995 been determined consistent with SFAS No. 123, the Company's net
loss and loss per share would have been increased to the following pro forma
amounts:
1996 1995
---- ----
Net loss: As Reported (6,287,298) (6,988,000)
Pro Forma (6,800,163) (7,746,636)
Primary EPS: As Reported (.99) (1.76)
Pro Forma (1.07) (1.96)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
F-15
<PAGE>
The following table reflects activity under the plan for the two-year period
ended December 31, 1996:
<TABLE>
<CAPTION>
1996 1995
------ -----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,346,250 $ 4.49 527,500 $ 5.45
Granted 441,000 4.47 908,750 4.15
Exercised (3,500) 7.50 -- --
Forfeited (237,750) 6.64 (75,000) 6.76
Canceled (30,250) 5.43 (15,000) 6.27
--------- ---------
Outstanding at end of year 1,515,750 4.12 1,346,250 4.49
========= =========
Exercisable at end of year 1,107,688 4.01 747,500 4.01
========= =========
</TABLE>
The fair value of the stock options granted is estimated on the date of grant
using the Black-Scholes option pricing model with an assumed expected life of 7
years, risk free interest rates of 6.36% in 1996 and 6.01% in 1995, volatility
of 56% in 1996 and 49% in 1995 and dividend yield of 0% in both years. The
weighted average fair values of options granted in 1995 at prices below market
value and at market value are $5.46 and $4.60, respectively. The weighted
average fair values of options granted in 1996 at prices at market value and
above market value were $4.19 and $1.83, respectively.
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 and directors 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.
During 1996 under the 1994 Plan, the Company granted 50,000 options to an
outside consultant. All transactions with individuals other than those
considered employees, as set forth within the scope of APB Opinion No. 25, must
be accounted for under the provisions of SFAS No. 123. Under SFAS No. 123, the
fair value of the options granted to the consultant at the date of grant was
$91,500. These options were granted for a term of up to seven years at an
exercise price equal to the market value at the date of grant. At December 31,
1996, 25,000 of the options outstanding with respect to the consultant were
exercisable. Compensation expense recognized during fiscal 1996 related to these
options was $45,750.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at Remaining Exercise at Exercise
Range of Exercise Prices 12/31/96 Contractual Life Price 12/31/96 Price
------------------------ -------- ---------------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$ 1.00 to $ 1.50 100,000 5.98 $1.00 100,000 $1.00
3.42 to 5.13 1,188,000 6.43 3.86 887,500 3.99
5.14 to 7.72 227,750 6.21 6.81 120,188 6.70
---------- ---------
1.00 to 7.72 1,515,750 6.37 4.12 1,107,688 4.01
========= =========
</TABLE>
F-16
<PAGE>
10. TRANSACTIONS WITH MANAGEMENT:
In May 1992, the Company entered into an 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. The Company also has employment agreements with its Vice
Presidents of Sales and Technology. All of these agreements specify minimum base
salary amount, certain fringe benefits and incentive compensation, including
annual bonuses contingent on achievement of specific objectives established by
the Board of Directors.
11. 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
The Company does not have any pending legal proceedings other than ordinary,
routine litigation incidental to its business. However, 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 and umbrella coverage packages in the mail or other
unforeseen circumstances. The Company maintains product liability and umbrella
insurance in an aggregate amount of $7,000,000, 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.
12. LIQUIDITY AND CAPITAL RESOURCES - SUBSEQUENT EVENTS:
The Company has an accumulated deficit of $24 million at December 31, 1996 and
expects losses to continue for the foreseeable future. Additional expenditures
for equipment and marketing will also be required in order to expand the market
position of OnGard's sterilization supply and equipment product lines. The
Company needs additional capital in order to support its operations until it
generates sufficient cash flow from operations.
In April 1997, the Company obtained a $1.0 million bank loan facilitated by
third-party guarantors, who are either investors in or option holders of the
Company (the "Guarantors"). The loan matures twelve months from inception for
the then outstanding principal balance. Outstanding principal bears interest at
LIBOR plus 2%. The Company has provided its assets as collateral for the
funding, but is permitted to sell certain assets without a commensurate
reduction of the aggregate $1.0 million line. In connection with the guarantee,
the Company has granted the Guarantors a total of 375,000 warrants to purchase
its common stock at a price of $2.00 or the common stock price at the funding
date, whichever is lower. The Company will amortize debt guarantee fees over the
life of the loan, as interest expense, for the fair value of the warrants
issued.
F-17
<PAGE>
Also in April 1997, the Company received $1.5 million from the sale of
convertible debentures (the "Debentures"). The Debentures are convertible into
common stock of the Company in $50,000 denominations at any time after a 45-day
restriction period at a price equal to the then fair market value of the common
stock less 22-1/2%, or the common stock price at the funding date, whichever is
lower. The Debentures bear interest at the rate of 6% per annum until
conversion; such interest is payable quarterly in cash or common stock of the
Company at the Company's option.
The Debentures mature five years from issuance, at which time any remaining
amounts convert to common stock. The Company will grant warrants to the
placement agent equal to 10% of the funds raised at the exercise price described
above and pay placement fees of approximately 10% of the funds raised. The
placement agent has committed to financing an additional $3.5 million until
February 28, 1998, under the same terms discussed above but the additional
financing is solely at the Company's option. However, in the event such
commitment is unfulfilled by the Company, an additional 2% of such unfulfilled
commitment will be paid in warrants on the terms described above. The Company
will record the value of warrants to the guarantors, and the guaranteed discount
from market price provided to the Debenture holders, as non-cash interest
expense.
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, and although the Company's
management believes that the Company has, through its available cash and lines
of credit, sufficient resources through at least December 31, 1997, 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 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 without
additional external sources of capital.
F-18
<PAGE>
PART III
Item 9. Executive Officers, Directors and Significant Employees
OnGard's executive officers, directors and significant employees are as
follows:
Name Age Title
- ---- --- -----
Mark E. Weiss 44 President, Treasurer, Director
and Chief Executive Officer
Philip B. Kart 46 Vice President and Chief
Financial Officer
Eric L. Steiner, M.D. 43 Director
Thomas F. Kearns Jr. 58 Director
Domenick P. Treschitta 55 Director
Paul Rizzo 69 Director
Clay C. Cannady 35 Director of Sterility
Assurance Products
Lawrence H. Cabeceiras 40 Vice President, Marketing
James Terracciano 40 Vice President, Technology
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.
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 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.
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
22
<PAGE>
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.
Anthony Esposito was appointed to the Board, effective March 1997, by the
existing Directors pursuant to the Company's by-laws, to serve until the vote at
the next annual shareholders meeting. Mr. Esposito has broad experience with
manufacturing operations; he has been president of ECC Corporation, which
manufactures industrial equipment, since 1976 as well as manages real estate
interests.
Thomas F. Kearns, Jr. 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 to
nominate and elect a director. Mr. Kearns was approved by the Company's
shareholders at the Company's last annual sharholders' meeting during 1996. Mr.
Kearns is a retired partner of the investment banking firm of Bear, Stearns &
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. Mr. Kearns
resigned his directorship on March 6,1997.
Domenick P. Treschitta was nominated to fill the second vacancy created by
the increase in the number of directors. He became a consultant to the Company
in March, 1995 advising the Company in the area of commercialization for
AutoPak(TM) and corporate finance and subsequently a director. Prior to becoming
a consultant to the Company, he was Executive Vice President of Ballard Medical
Products, Inc. Mr. Treschitta has a B.A. degree in Science from the University
of Connecticut. Mr. Treschitta resigned his directorship on March 2, 1997.
Paul J. Rizzo has been a partner in Franklin Street Partners, a member of
the National Association of Securities Dealers, since 1994 and serves as a
director of Johnson & Johnson, McGraw Hill, Ryder Systems and Morgan Stanley
Group. Prior to becoming a director of the Company, he was Vice Chairman of IBM
Corporation from 1993 to 1994. From 1987 to 1992 he served as Dean of the
University of North Carolina Graduate School of Business. From 1958 to 1987 he
was Vice Chairman of IBM Corporation. Mr. Rizzo has a Bachelor of Science degree
in Business from the University of North Carolina. Mr. Rizzo resigned from the
Board on March 6, 1997.
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 an M.B.A. from Tulane University
James Terracciano joined the Company in May 1996 as Vice President of
Technology and General Manager. Prior to joining the Company, he had been with
Lumex, Inc., a leading healthcare manufacturer from 1985 to 1996, as Director of
Technical Affairs. He had previously been with Grumman Aerospace and Fairchild
Republic from 1976 to 1985. Mr. Terracciano has a B.T. in Mechanical Engineering
from SUNY Farmingdale.
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 nominate and elect one member of
the Company's Board of Directors. See "Description of Capital Stock - Preferred
Stock". Effective December 24, 1995, Dr.
23
<PAGE>
Derace L. Schaeffer resigned from the Board. Montgomery's designee, Thomas F.
Kearns, Jr., was appointed to fill the vacancy on the Board. Mr. Kearns resigned
effective March 6, 1997.
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 1995, failed to file on a timely basis reports required by
Section 16(a) of the Exchange Act during 1995 or prior fiscal years: Lawrence H.
Cabercieras, Kent W. Cherrey and Eric L. Steiner.
Item 10. 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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------
Annual Compensation Long-Term
Compensation
--------------------------------------------------------
Name and Principal Year Salary Bonus Other Stock
Position Annual Options
Compensation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weiss, Mark 1996 $200,000 $75,000 (3) 175,000(1)
President
- ----------------------------------------------------------------------------------------
Weiss, Mark 1995 $150,941 $50,000 (3) 350,000(1)
President
- ----------------------------------------------------------------------------------------
Weiss, Mark 1994 $130,000 $25,000 (3) 135,000(4)
President
- ----------------------------------------------------------------------------------------
Weiss, Mark 1993 $126,000 $35,000 (3) 62,500(4)
President
- ----------------------------------------------------------------------------------------
Cabeceiras, Larry 1996 $120,000 -0- (3) -0-
Vice President
Marketing
- ----------------------------------------------------------------------------------------
Cabeceiras, Larry 1995 $110,909 -0- -0- 60,000(2)
Vice President
Marketing
- ----------------------------------------------------------------------------------------
Kart, Phil 1996 $119,000 -0- -0- 12,500(1)
Vice President
- ----------------------------------------------------------------------------------------
Kart, Phil 1995 $94,000 $26,000 -0- 25,000(1)
Vice President
- ----------------------------------------------------------------------------------------
</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) Exercisable at $5.00 per share and expire in December 2000-2001.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ----------------------------------------------------------------------------------------
Percent of All
Options Granted
Number of to Employees in
Shares Fiscal Year Exercise Expiration Date
Underlying Price
Options
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weiss, Mark 175,000 41.1% $3.50 September 2003
- ----------------------------------------------------------------------------------------
Kart, Phil 12,500 3.0% $3.50 September 2003
- ----------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
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, 1996, and the value at December 31, 1996, 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.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
- ----------------------------------------------------------------------------------------
Number of Unexercisable Options Value of Unexercised In-the-Money
at Fiscal Year-End Options at Fiscal Year-End
-------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexcercisable
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weiss, Mark 547,500 175,000 -0- -0-
- ----------------------------------------------------------------------------------------
Cabeceiras, 30,000 30,000 -0- -0-
Larry
- ----------------------------------------------------------------------------------------
Kart, Phil 66,250 31,250 -0- -0-
- ----------------------------------------------------------------------------------------
</TABLE>
Compensation of Directors
In September 1996, the Board of Directors granted 12,500 non-qualified
stock options to Dr. Eric Steiner, and 25,000 each to Mr. Thomas Kearns and Mr.
Paul Rizzo, pursuant to the Company's 1995 Stock Option Plan. The options are
exercisable at $3.50 per share and expire in September 2003. The options are
fully vested.
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.
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 provided that Mr. Shlisky shall serve as executive vice president of
OST for the three year term of the agreement and in such capacity he was to be
responsible for all phases of OST's manufacturing and distribution in connection
with its sterilization equipment business. Mr. Shlisky 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.
25
<PAGE>
The Company intends to vigorously defend all its available
remedies relating to this matter. Mr. Shlisky has not pursued 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
"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 was granted 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 and subsequently, a member of the Board of Directors, was granted
100,000 options, all vested immediately, but at $1.00 per common share.
In September 1996, the Board of Directors voted to approve options to the
following individuals at the then current market price of $3.50: Mark E. Weiss,
175,000 options; Eric Steiner, M.D., 12,500 options; Thomas F. Kearns, Jr.,
25,000 options; Paul Rizzo, 25,000 options; Joseph Riccardo, 50,000 options,
Philip B. Kart, 12,500 options.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of OnGard Common Stock as of December 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.
26
<PAGE>
<TABLE>
<CAPTION>
Name of individual
or number in group Shares Beneficially
Outstanding(1)(6) owned Percentage of Shares Outstanding(1)
- ----------------- -------------------- -----------------------------------
<S> <C> <C>
Mark E. Weiss 777,667(2)(3) 11.7%(2)(3)
40 Commerce Drive
Hauppauge, NY 11788
Eric L. Steiner, M.D. 217,185(3)(5) 3.3%(3)(5)
40 Commerce Drive
Hauppauge, NY 11788
Montgomery Asset Management, L.P 1,148,000(6)(7) 17.4%(6)(7)
600 Montgomery Street
San Francisco, CA 94111
Mellon Bank Corporation 541,100(9) 8.2%(9)
One Mellon Bank Center
Pittsburgh, PA 15258
Dreyfus Corporation 541,100(9) 8.2%(9)
and Dreyfus Growth Capital
New York, NY
Quota Fund 360,000(6) 5.4%(6)
600 Montgomery Street
San Francisco, CA 94111
Hausmann Funding 456,000(6) 6.9%(6)
600 Montgomery Street
San Francisco, CA 94111
Lawrence H. Cabeceiras 26,250(4) .4%(4)
40 Commerce Drive
Hauppauge, NY 11788
Clay C. Cannady 53,750(4) .8%(4)
40 Commerce Drive
Hauppauge, NY 11788
Phil Kart 53,750(4) .8%(4)
40 Commerce Drive
Hauppauge, NY 11788
Thomas F. Kearns 87,500(4)(6) 1.3%(4)(6)
40 Commerce Drive
Hauppauge, NY 11788
Paul Rizzo 57,500(6)(10) .9%(6)(10)
40 Commerce Drive
Hauppauge, NY 11788
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
Domenick Treschitta 139,000(6)(8)(10) 2.1%(6)(8)(10)
40 Commerce Drive
Hauppauge, NY 11788
All directors and officers 1,416,352(4) 21.4%(4)
as a group (9 persons)
</TABLE>
(1) Includes outstanding OnGard Common Stock. Excludes preferred shares,
options and warrants, which can be converted or exercised into Common
Stock. See "Certain Transactions."
(2) Includes 113,667 shares owned of record by Blue River Irrevocable Trust
(see Footnote 5) and assumes exercise of options to buy 460,000 shares
granted to Mr. Weiss which are currently exercisable, 62,500 of which
expire in May 2003 and the remainder of which expire in December, 2002. See
"Management--Executive Compensation."
(3) The beneficial ownership of 113,667 shares (held by 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, 460,000 shares; (ii) Dr.
Steiner, 68,750 shares; (iii) Mr. Cannady, 53,750 shares; (iv) Mr. Kart,
53,750 shares; (v) Mr. Cabeceiras, 26,250 shares and Mr. Kearns, 37,500
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. Includes 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 18,750 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 has acquired shares in the public market as beneficial owner
for the Dryfus Corporation and the Dryfus Growth Capital for which it has
voting and depositive power.
28
<PAGE>
Item 12. Certain Relationships and Related Transactions.
CERTAIN TRANSACTIONS
In June 1989, LEP Holdings, Inc., a company that desired to invest in
OnGard, loaned Mr. Weiss and Dr. Steiner a total of $125,000 which was in turn
loaned to OnGard. The notes evidencing those loans provided for interest payable
at 1% above prime with a maturity on June 28, 1993. The notes were unsecured and
subordinate to the other debts and obligations of OnGard. The notes were pledged
by Mr. Weiss and Dr. Steiner to LEP as security for their notes payable to LEP
in the amount of $125,000. These notes, from OnGard to Dr. Steiner and Mr.
Weiss, and from them to LEP, were repaid as part of the agreement with LEP
described below.
During June 1989, LEP acquired 429,000 shares of OnGard's common stock for
$100,000. In connection with this transaction, LEP agreed to provide an
irrevocable letter of credit of up to $3 million to secure bank financing for
OnGard's start-up operations. OnGard ultimately borrowed a total of $2,972,985,
including accrued interest, under a bank promissory note agreement due December
15, 1991. The bank notified OnGard that it was calling the loan due and payable
on December 17, 1991 and it proceeded against the LEP letter of credit for
repayment of the loan. The payment of the bank promissory note through the LEP
letter of credit constituted an additional capital contribution to OnGard by
LEP.
On May 12, 1992, OnGard and LEP entered into an agreement whereby OnGard
repurchased one-half of the shares of OnGard's common stock owned by LEP for
approximately $140,000 and purchased a $25,000 principal amount promissory note
of a third party for $10,000. Effective with the execution of this agreement,
LEP provided a general release to OnGard for any and all claims against OnGard
and its principal stockholders for all transactions which transpired through the
date of the release. In addition, Mr. Weiss and Dr. Steiner repaid loans from
LEP totaling $125,000 plus accrued interest of $25,000. The Agreement provided
that LEP would be represented on OnGard's Board of Directors for a period of
three years. LEP did not nominate a representative to OnGard's Board of
Directors for 1993. Each of the foregoing transactions with LEP were on terms
more favorable than with an entity which would not desire to invest in OnGard.
However, OnGard does not believe that LEP has been, or is presently, an
affiliate of OnGard. In December 1994, LEP sold all of its OnGard Common Stock
to various individuals and entities in accordance with Rule 144(k) under the
Securities Act of 1933, as amended. See "Risk Factors--Potential Future Sales
Pursuant to Rule 144." The Company was not a party to this transaction.
In connection with OnGard's May 1992 restructuring, discussed in the
preceding paragraph, Mr. Weiss purchased 68,295 shares of Common Stock for
$47,806, Mr. Bauer purchased 42,165 shares of Common Stock for $29,515 and Dr.
Steiner contributed 154,457 of his beneficially-owned shares of Common Stock to
OnGard. Mr. Weiss and Mr. Bauer received bonuses of $47,806 and $29,515,
respectively, on May 7, 1992, and OnGard paid an additional bonus of $52,000 in
December of 1992 to cover the taxes on these bonuses. These purchases and
contributions were accomplished to reflect these shareholders' interests and
investments in OnGard as of that date.
As of May 7, 1992, OnGard effected a 1.7875-for-1 Common Stock split,
effected as a stock dividend of .7875 share of Common Stock for each share by
holders of record on May 7, 1992.
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. The Warrants are subject to redemption by
OnGard, subject to certain conditions, upon 30 days
29
<PAGE>
written notice. At the expiration date, warrants had been issued, resulting in
net proceeds to the Company of $5,700,000.
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 received
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 of 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 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.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this Report:
EXHIBIT INDEX
Exhibit
Number Description
3.1 Certificate of Incorporation, as amended (i)
3.2 Bylaws of OnGard, as amended (i)
4.1 Certificate of Incorporation, as amended (i)
30
<PAGE>
4.2 ByLaws of OnGard, as amended (i)
4.3 Form of Warrant Agreement (i)
4.4 Specimen Warrant Agreement (i)
4.5 Form of Underwriter's Warrant Agreement (i)
4.6 Specimen Common Stock Certificate (i)
10.1 1992 Stock Option Plan (i)
10.2 Employment Agreement of Mark E. Weiss (i)
10.3 Employment Agreement of Thomas J. Bauer (i)
10.4 Agreement between OnGard and National Medical Waste (i)
10.5 Employment Agreement of Donald M. Marotta (ii)
10.5.1 Consulting Agreement of Donald M. Marotta (vi)
10.6 Letter of Intent to Acquire all of the Issued and
Outstanding Common Stock and Preferred Stock of Pharmetics,
Incorporated (iii)
10.7 Agreement Between OnGard and American Can (iv); omitted in
connection with a request for confidential treatment
pursuant to Rule 406 of Regulation C
10.8 Merger Agreement Among OnGard, OGPI, Pharmetics and
Shlisky(v)
10.8.1 Amendment to Merger Agreement (v)
10.8.2 Amendment No. 2 to Merger Agreement (vii)
10.8.3 Amendment No. 3 to Merger Agreement (vii)
10.9 Employment Agreement of Theodore M. Shlisky (v)
10.10 Agreement Between OnGard and LEP Holdings, Inc. (vii)
10.11 Guaranty of Guarantor and OnGard Note to Bank (vii)
10.12 Joint Marketing and Distribution Agreement between OnGard
and Devon Industries, Inc. (viii)
10.13 Mailback Agreement between OnGard and Option Care, Inc.
(viii)
10.14 Agreement between OGPI and ECC Corp. (viii)
10.14.1 Agreement between OnGard, OGPI and ECC Corp. (vii)
10.14.2 Agreement between OnGard, OGPI and ECC Corp. (viii)
10.15 Agreement between OnGard and Baxter HealthCare (Omitted in
connection with a request for confidential treatment
pursuant to rule 406 of Regulation C)
22 List of Subsidiaries of OnGard (iii)
25 Powers of Attorney (I)
99 Deferred Payment Arrangements for Payment of Unemployment
Insurance by Pharmetics Incorporated (viii)
- ----------
(i) Previously filed with Registration Statement No. 33-48372, and
incorporated herein by reference
(ii) Previously filed with OnGard's Form 10-KSB for fiscal year ended December
31, 1992, and incorporated herein by reference.
(iii) Previously filed with Post-Effective Amendment No. 1 to Registration
Statement No. 33-48372, and incorporated herein by reference.
(iv) Filed with Post-Effective Amendment No. 2 to Registration Statement No.
33-48372, and Incorporated herein by reference.
(v) Previously filed with Registration Statement No. 33-75282, and
incorporated herein by reference.
31
<PAGE>
(vi) Previously filed with OnGard's Form 10-KSB for the fiscal year ended
December 31, 1993, and incorporated herein by reference.
(vii) Previously filed with Amendment No. 1 to Registration Statement No.
33-75282, and incorporated herein by reference.
(viii) Filed with Post-Effective Amendment No. 4 to Registration Statement No.
33-48372, and incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: April 14, 1997 ONGARD SYSTEMS, INC.
BY:/s/Mark E. Weiss
---------------------------------
Mark E. Weiss, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Name Title Date
/s/Mark E. Weiss President and Director April 14, 1997
- ---------------------- (Principal Executive Officer)
Mark E. Weiss
*
/s/Eric L. Steiner Director April 14, 1997
- ----------------------
Eric L. Steiner
/s/Anthony Esposito Director April 14, 1997
- ----------------------
Anthony Esposito
/s/Philip B. Kart Principal Financial Officer April 14, 1997
- ----------------------
Philip B. Kart
* Pursuant to power of attorney
32
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 885,552
<SECURITIES> 0
<RECEIVABLES> 784,856
<ALLOWANCES> 40,000
<INVENTORY> 2,102,380
<CURRENT-ASSETS> 3,986,500
<PP&E> 2,949,620
<DEPRECIATION> 1,113,564
<TOTAL-ASSETS> 8,727,538
<CURRENT-LIABILITIES> 2,290,808
<BONDS> 0
0
778,177
<COMMON> 6,614
<OTHER-SE> 29,622,661
<TOTAL-LIABILITY-AND-EQUITY> 8,727,538
<SALES> 3,688,186
<TOTAL-REVENUES> 3,688,186
<CGS> 4,323,463
<TOTAL-COSTS> 5,053,537
<OTHER-EXPENSES> 49,893
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 319,027
<INCOME-PRETAX> (6,287,298)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,287,298)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,287,298)
<EPS-PRIMARY> (.99)
<EPS-DILUTED> (.99)
</TABLE>
