Index to Financial Statements
GELTECH, Inc.
CONTENTS
PAGE
----
Report of Independent Certified Public Accountants......................... F-2
Balance Sheet.............................................................. F-3
Statement of Operations.................................................... F-5
Statement of Stockholders' Equity.......................................... F-6
Statement of Cash Flows.................................................... F-7
Notes to Financial Statements.............................................. F-8
F-1
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
GELTECH, Inc.
We have audited the accompanying balance sheet of GELTECH, Inc. as of December
31, 1999 and the related statement of operations, stockholders' equity and cash
flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides 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 GELTECH, Inc. at December 31,
1999 and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
April 26, 2000
F-2
<PAGE>
GELTECH, Inc.
Balance Sheet
December 31, 1999
ASSETS
Current assets:
Cash and cash equivalents $ 390,981
Accounts receivable (less allowance for doubtful
accounts of $40,712) 715,318
Accounts receivable under U.S. government contracts 90,268
Inventories:
Raw materials 135,975
Work-in-process 933,483
Finished goods 462,362
-----------
1,531,820
Less inventory reserve (295,000)
-----------
1,236,820
Prepaid expenses 51,958
-----------
Total current assets 2,485,345
Property and equipment:
Machinery and equipment 1,956,770
Office furniture and computer equipment 225,647
Leasehold improvements 286,150
Leased assets 507,058
-----------
2,975,625
Less accumulated depreciation and amortization (1,408,821)
-----------
1,566,804
Intangible assets, net 79,937
Deferred licensing fee, net 417,507
Goodwill, net 335,193
-----------
Total assets $ 4,884,786
===========
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 650,210
Accrued expenses 197,357
Current portion of long-term debt and capital
lease obligations 210,218
Current portion of long-term debt to stockholders 36,646
-----------
Total current liabilities 1,094,431
Long-term debt and capital lease obligations 1,559,218
Long-term debt to stockholders 25,042
Stockholders' equity:
Common stock, $.01 par value; 18,000,000 shares
authorized; 7,395,032 shares issued and outstanding 73,950
Series A, 10% cumulative convertible preferred stock,
$.01 par value; 431,343 shares authorized, issued
and outstanding 4,314
Series B, 10% cumulative convertible preferred stock,
$.01 par value; 929,901 shares authorized, issued
and outstanding 9,299
Series C, 10% cumulative convertible preferred stock,
$.01 par value; 1,368,658 shares authorized; 1,316,501
shares issued and outstanding 13,165
Series D, 10% cumulative convertible preferred stock;
$.01 par value; 4,600,000 shares authorized; 4,481,100
shares issued and outstanding 44,811
Paid-in surplus 9,885,059
Accumulated deficit (7,824,503)
-----------
Total stockholders' equity 2,206,095
-----------
Total liabilities and stockholders' equity $ 4,884,786
===========
See accompanying notes.
F-4
<PAGE>
GELTECH, Inc.
Statement of Operations
Year ended December 31, 1999
Net revenues $ 6,746,396
Cost of sales 4,653,964
-----------
Gross profit 2,092,432
Selling, general and administrative expense 2,586,753
-----------
Loss from operations (494,321)
Other expenses:
Interest expense (161,158)
Other, net (57,912)
-----------
(219,070)
-----------
Loss before income taxes (713,391)
Income taxes (684,000)
-----------
Net loss $(1,397,391)
===========
Loss per common share:
Basic and diluted $ (0.19)
===========
See accompanying notes.
F-5
<PAGE>
GELTECH, Inc.
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
COMMON PREFERRED PREFERRED PREFERRED PREFERRED PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK STOCK SURPLUS DEFICIT TOTAL
------- ------ ------ ------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $68,297 $4,314 $9,299 $13,165 $44,811 $9,532,434 $(6,427,112) $ 3,245,208
Exercise of stock options,
306,175 shares 3,061 -- -- -- -- 2,475 -- 5,536
Exercise of stock warrants,
24,211 shares 242 -- -- -- -- -- -- 242
Issuance of common stock in
connection with acquisition
of Sierra Precision Optics,
Inc., 135,000 shares 1,350 -- -- -- -- 201,150 -- 202,500
Issuance of common stock in
exchange for note payable,
100,000 shares 1,000 -- -- -- -- 149,000 -- 150,000
Net loss -- -- -- -- -- -- (1,397,391) (1,397,391)
------- ------ ------ ------- ------- ---------- ----------- -----------
Balance at December 31, 1999 $73,950 $4,314 $9,299 $13,165 $44,811 $9,885,059 $(7,824,503) $ 2,206,095
======= ====== ====== ======= ======= ========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
GELTECH, Inc.
Statement of Cash Flows
Year ended December 31, 1999
OPERATING ACTIVITIES
Net loss $(1,397,391)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 575,151
Provision for doubtful accounts (15,192)
Provision for deferred income taxes 684,000
Inventory reserve 264,579
Change in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable 144,031
Inventories (836,655)
Prepaid expenses 66,581
Accounts payable 239,425
Accrued expenses 36,552
-----------
Net cash used in operating activities (238,919)
INVESTING ACTIVITIES
Purchases of property and equipment (134,681)
Acquisition of Sierra Precision Optics, Inc., net of cash acquired (111,431)
-----------
Net cash used in investing activities (246,112)
FINANCING ACTIVITIES
Proceeds from debt financing 600,000
Payments on debt financing (395,157)
Proceeds from issuance of common stock 5,778
-----------
Net cash provided by financing activities 210,621
-----------
Net decrease in cash and cash equivalents (274,410)
Cash and cash equivalents at beginning of year 665,391
-----------
Cash and cash equivalents at end of year $ 390,981
===========
See accompanying notes.
F-7
<PAGE>
GELTECH, Inc.
Notes to Financial Statements
December 31, 1999
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GELTECH, Inc. (the Company), is a manufacturer of advanced optical components
primarily for the telecommunications industry. Secondary markets include
medical, data storage and other industries utilizing semiconductor lasers.
Leading product lines include precision molded optics, molded glass gratings,
lens arrays, laser flow tubes, prisms and sol-gel derived products including
silica porous substrates and powders.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the assets of five to seven years, and
the term of the lease agreement for leasehold improvements. The machinery and
equipment under capital lease is being depreciated over the five-year term of
the lease and is included in depreciation expense. Depreciation expense was
$507,424 in 1999.
INTANGIBLE ASSETS
The Company has intangible assets representing all costs incurred to acquire
"the exclusive right to use certain technology" developed by the University of
Florida in Gainesville and protected by numerous patents. These costs are being
amortized on a straight-line basis over a period of 17 years, which corresponds
to the expected life of the related patents. Amortization expense was $23,147 in
1999, and accumulated amortization expense totaled $313,570 at December 31,
1999.
GOODWILL
The Company has goodwill, which represents the excess cost of the acquired
business over the fair value of net assets acquired. These costs are being
amortized on a straight-line basis over a period of 20 years. Amortization
expense for 1999 and accumulated amortization at December 31, 1999 was $17,642.
F-8
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED LICENSING FEE
Deferred licensing fee represents the cost of a perpetual license for acquired
technology. These costs are being amortized based on actual product sales for
the year as a percentage of total expected sales over the life of the patented
technology. Amortization expense was $26,938 for 1999, and accumulated
amortization expense totaled $82,494 at December 31, 1999.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to market value or discounted cash flow value is required. Fair
value is determined as the present value of estimated expected future cash flows
using a discount rate commensurate with the risks involved.
REVENUE RECOGNITION
Revenues from production contracts are recorded when the product is completed
and shipped. Revenues arising from cost reimbursement research contracts with
U.S. government agencies are recognized within the limitations of the contract.
The actual costs of performing the research are expensed as incurred.
CONCENTRATIONS OF CREDIT RISK
Cash and cash equivalents are deposited in high credit, quality financial
institutions. At times, cash balances may be in excess of FDIC insurance limits.
Concentrations of credit risk for accounts receivable are considered by the
Company to be minimal as the Company sells its products to customers located
throughout the world. The Company generally requires no collateral or security
from its customers and has not incurred any significant credit related losses.
ADVERTISING COSTS
It is the Company's policy to expense advertising costs as incurred. Costs
incurred during 1999 amounted to $25,258. These amounts are included in selling,
general and administrative expense in the accompanying financial statements.
F-9
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and totaled $779,822
during 1999. These amounts are included in selling, general and administrative
expense in the accompanying financial statements.
STOCK-BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board Opinion (APB) No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES.
LOSS PER SHARE
Basic loss per share is computed by dividing net loss available to common
stockholders by the weighted average common shares outstanding for the period.
Diluted loss per share is computed giving effect to all potentially dilutive
common shares. Potentially dilutive common shares may consist of incremental
shares issuable upon the exercise of stock options, adjusted for the assumed
repurchase of the Company's common stock, at the average market price, from the
exercise proceeds and also may include incremental shares issuable in connection
with convertible securities. In periods in which a net loss has been incurred,
all potentially dilutive common shares are considered antidilutive and thus are
excluded from the calculation.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, the Company recognizes deferred income taxes for
the tax consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year-end,
based on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount that is more likely than not to be realized.
F-10
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. (SFAS) 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133. SFAS 137 amends SFAS 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, to defer its effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS 133 establishes
accounting and reporting standards for derivative instruments including stand
alone instruments, such as forward currency exchange contracts and interest rate
swaps or embedded derivatives and requires that these instruments be
marked-to-market on an ongoing basis. These market value adjustments are to be
included either in the statement of operations or stockholders' equity,
depending on the nature of the transaction. The Company is required to adopt
SFAS 133 in the first quarter of its fiscal year 2001. Management does not
expect the adoption of SFAS 133 will have a material effect on the Company's
financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued SAB No. 101.
REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which provides guidance on the
recognition, presentation, and disclosures of revenue in financial statements
filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Management does not expect the adoption of SAB No. 101
will have a material adverse effect on the Company's financial position or
results of operations.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION, AN INTERPRETATION OF APB OPINION NO. 25. Among other issues, that
interpretation clarifies the definition of employees for purposes of applying
APB No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain
F-11
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
conclusions in the interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. To the extent that this interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effect of applying
this interpretation is recognized on a prospective basis from July 1, 2000. The
Company is currently reviewing stock grants to determine the impact, if any,
that may arise from implementation of this interpretation, although management
does not expect the impact, if any, to be material to its financial statements.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following at December 31, 1999:
Checking and money market account deposits $173,422
U.S. government agency note 217,559
--------
$390,981
========
The repurchase account deposits and U.S. government agency note are considered
cash equivalents as they are readily convertible to cash and have original
maturities of less than 90 days. Repurchase account deposits are invested daily
by financial institutions in commercial paper and in U.S. treasury and U.S.
government agency notes. The fair value of the repurchase account deposits and
U.S. government agency note approximates cost.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
A summary of long-term debt and capital lease obligations as of December 31,
1999 follows:
Note payable to Corning Incorporated, principal plus interest
at the prime rate plus .5%, currently due. Secured by all
property purchased from the issuer of the note with no
carrying value at December 31, 1999. See Note 8. $ 77,613
Note payable to NationsBank, payable in monthly principal
installments of $13,007 plus interest at the prime rate
plus 1.25% to December 2004. Secured by all accounts
receivable, inventory, and intangible assets. 624,320
F-12
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Capital lease obligation to Colonial Pacific Leasing, payable
in monthly installments at 11.1% to January 2001. Secured
by software systems purchased under capital lease with a
carrying value of $66,017 at December 31, 1999. Purchase
option of $1 at lease termination. 55,983
Capital lease obligation to Newcourt Financial, payable in
monthly installments at 12.0% to April 2002. Secured by
equipment purchased under capital lease with a carrying
value of $63,479 at December 31, 1999. Purchase option of
$1 at lease termination. 38,617
Capital lease obligation to Newcourt Financial, payable in
monthly installments at 11.7% to September 2002. Secured
by equipment purchased under capital lease with a carrying
value of $106,093 at December 31, 1999. Purchase option of
$1 at lease termination. 99,240
Capital lease obligation to Newcourt Financial, payable in
monthly installments at 15.4% to December 2002. Secured by
equipment purchased under capital lease with a carrying
value of $8,400 at December 31, 1999. Purchase option of
$1 at lease termination. 7,233
Capital lease obligation to Newcourt Financial, payable in
monthly installments at 11.7% to October 2002. Secured by
equipment purchased under capital lease with a carrying
value of $64,000 at December 31, 1999. Purchase option of
$1 at lease termination. 67,776
Capital lease obligation to Intech Financial, payable in
monthly installments at 12.3% to March 2003. Secured by
equipment purchased under capital lease with a carrying
value of $48,000 at December 31, 1999. Purchase option of
$1 at lease termination. 48,943
Note payable to Placer Sierra Bank, payable in monthly
principal and interest payments of $3,672 at 10.25% with
full principal balance due in July 2003. Secured by all
accounts receivable, inventory, and fixed assets acquired
from Sierra Precision Optics, Inc. with a carrying value
of $963,676 at December 31, 1999. 249,711
Promissory note, payable interest only at 9.5% for five years
with full principal balance due in July 2004. 500,000
----------
1,769,436
Less current portion (210,218)
----------
$1,559,218
==========
F-13
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
The prime rate was 8.75% at December 31, 1999.
During 1999, borrowings under the note payable to NationsBank were increased
through conversion of $300,000 outstanding on the Company's line of credit to
the note payable.
Required payments by fiscal year for long-term debt and capital lease
obligations for years after 1999 were as follows:
CAPITAL
LEASE
YEAR ENDING DECEMBER 31 LONG-TERM DEBT OBLIGATIONS
----------------------- -------------- -----------
2000 $ 96,913 $ 141,587
2001 177,530 133,112
2002 179,835 80,831
2003 341,286 9,015
2004 656,080 --
---------- ---------
1,451,644 364,545
Less amount representing interest -- (46,753)
---------- ---------
$1,451,644 $ 317,792
========== =========
4. LINE OF CREDIT
The Company has a line of credit with a bank for $500,000, limited to 75% of
certain accounts receivable and 50% of certain inventory balances, which expires
June 2000. Interest is payable monthly at the prime rate plus 1.5%. At December
31, 1999, $500,000 was available on the line. The line of credit is
collateralized by accounts receivable, intangible assets, and inventory. The
Company is required to maintain various financial covenants.
5. INCOME TAXES
The components of the income tax provision at December 31, 1999 are as follows:
Current $ --
Deferred 684,000
--------
$684,000
========
F-14
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
The components of the net deferred income tax assets and liabilities at December
31, 1999 are as follows:
Tax operating loss carryforwards $ 2,366,000
Inventories 205,000
Depreciation and amortization (39,000)
Alternative minimum tax credit carryforward 45,000
Vacation accrual 9,000
Allowance for doubtful accounts 16,000
Inventory reserve 112,000
-----------
2,714,000
Valuation allowance (2,714,000)
-----------
$ --
===========
At December 31, 1999, all net deferred tax assets have been fully offset by a
valuation allowance. The valuation allowance increased approximately $950,000
during 1999.
The Company generated a net operating loss of approximately $129,000 during
1999. At December 31, 1999, the Company has net operating loss carryforwards of
approximately $6.2 million which expire at various dates between 2005 and 2019.
The following is a reconciliation of the statutory United States income tax rate
to the effective income tax rate for the year ended December 31, 1999:
Tax benefit computed at statutory federal rate (34.00)%
State tax benefit (3.90)
Change in valuation allowance 133.25
Nondeductible expense 0.53
------
Income tax expense 95.88%
======
F-15
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Series A nonvoting convertible preferred stock (Series A), provides for
cumulative dividends at an annual rate of $.232 per share, is convertible at
$2.32 per share into the Company's common stock on a one for one basis, and has
preference in dividends and liquidation over the common stockholders. At
December 31, 1999, cumulative dividends on the Series A totaled $1,131,217,
which are not accrued in the accompanying financial statements.
The Series B nonvoting convertible preferred stock (Series B) provides for
cumulative dividends at an annual rate of 10% of the original Series B purchase
price, is convertible on a per share basis into the number of shares of the
Company's common stock that results from dividing $2.74 by the conversion price
per share, and has preference in dividends and liquidation over the Series A and
common stockholders. The conversion price per share is $2.74. At December 31,
1999, cumulative dividends on the Series B totaled $2,590,522, which are not
accrued in the accompanying financial statements.
The Series C nonvoting convertible preferred stock (Series C) provides for
cumulative dividends at an annual rate of 10% of the original Series C purchase
price, is convertible on a per share basis into the number of shares of the
Company's common stock that results from dividing $.42448 by the conversion
price per share, and has preference in dividends and liquidation over the Series
A, Series B and common stockholders. The conversion price per share is $.42537.
At December 31, 1999, cumulative dividends on the Series C totaled $364,044,
which are not accrued in the accompanying financial statements.
The Series D nonvoting convertible preferred stock (Series D) provides for
cumulative dividends at an annual rate of 10% of the original Series D purchase
price, is convertible on a per share basis into the number of shares of the
Company's common stock that results from dividing $1.00 by the conversion price
per share, and has preference in dividends and liquidation over the Series A,
Series B, Series C and common stockholders. The conversion price per share is
$1.00. At December 31, 1999, cumulative dividends on the Series D totaled
$2,251,599, which are not accrued in the accompanying financial statements.
F-16
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
The Company had an incentive stock option (ISO) plan for its employees which
expired December 31, 1995. The number of shares reserved for grants of options
under this plan was 3,165,256. In 1996, the Company adopted a new incentive
stock option plan for its employees which expires in the year 2006. The number
of shares reserved for grants of options under this plan was 1,380,000. The
following table summarizes common stock options activity granted pursuant to the
ISO plans and other options activity for the year ended December 31, 1999.
WEIGHTED
EXERCISE AVERAGE
PRICE EXERCISE
SHARES RANGE PRICE
------ ----- -----
Outstanding at January 1, 1999 1,824,260 $ .01-$1.00 $ .64
Granted 107,500 $1.00-$1.50 $1.10
Exercised 303,675 $ .01 $ .01
Exercised 2,500 $1.00 $1.00
Canceled 874,253 $1.00 $1.00
Canceled 12,500 $ .01 $ .01
--------- ----------- -----
Outstanding at December 31, 1999 738,832 $ .01-$1.50 $ .54
========= =========== =====
Exercisable at December 31, 1999 353,832 $ .01 $ .01
211,000 $1.00 $1.00
--------- ----------- -----
564,832 $ .01-$1.00 $ .38
========= =========== =====
The above options expire at various dates through September 2005. The weighted
average remaining contractual life of options with exercise prices of $1.00 to
$1.50 and $0.01 at December 31, 1999 is 2.3 years and 6.7 years, respectively.
Pro-forma information regarding net income and earnings per share is required by
FASB Statement 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair values for these options were
estimated at the date of grant using the minimum value method with the following
weighted-average assumptions; risk-free interest rate of 6%; dividend yields of
0%; and a weighted-average expected life of the options of five years.
F-17
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
For purpose of pro-forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting periods. The Company's pro-forma
net loss and loss per share for the year ended December 31, 1999 are shown
below:
Net loss:
As reported $(1,397,391)
Pro-forma loss (1,440,136)
Basic and diluted loss per share:
As reported $ (0.19)
Pro-forma loss (0.20)
The pro-forma results reflect only options granted since 1994. Therefore, the
full impact of SFAS 123 is not reflected in the pro-forma results because
compensation cost is reflected over the vesting periods and compensation cost
for options granted prior to January 1, 1995 is not considered. The
weighted-average fair value of options granted during the year ended December
31, 1999 was $0.35.
STOCK WARRANTS
During 1999, stock warrants for 138,889 shares of common stock at an exercise
price of $1.80, expiring in June 2004, were granted and 24,211 stock warrants
were exercised at an exercise price of $.01. At December 31, 1999, the number of
stock warrants outstanding was 138,889. The stock warrants granted were in
conjunction with the $500,000 promissory note to a lendor (see Note 3).
The weighted average grant date fair value of warrants issued during the year
ended December 31, 1999 was $0.20.
F-18
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
Numerator:
Net loss (numerator for basic and
diluted loss per share) $(1,397,391)
===========
Denominator:
Denominator for basic loss per share --
weighted average shares 7,258,130
Effect of dilutive securities:
Options --
Warrants --
-----------
Dilutive potential shares --
Denominator for diluted loss per share --
adjusted weighted average shares 7,258,130
===========
Basic and diluted loss per share $ (0.19)
===========
The employee stock options and warrants are not included in the computation of
loss per share because to do so would be anti-dilutive.
7. RELATED PARTY TRANSACTIONS
In connection with the purchase of Sierra Precision Optics, Inc. (Sierra), the
Company issued a promissory note to a stockholder for $81,600, due January 2001
(see Note 12). Principal and interest payments are due monthly at 8%. At
December 31, 1999, the balance was $17,243.
The Company also assumed a note payable for $211,000 to a stockholder in
connection with the Sierra acquisition. In January 1999, $150,000 of the balance
was converted to 100,000 shares of common stock. At December 31, 1999, the
balance was $44,445 and is payable in monthly principal installments at 12%
through December 2001.
F-19
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is obligated as part of a license agreement to pay royalties to the
University of Florida equal to 2% of net sales of certain licensed products plus
a percentage of any royalty income received from sub-licensees. A minimum net
royalty of $25,000 per year is due to the University of Florida. This royalty
due may be reduced by up to 25% to cover expenses to defend and maintain the
patent. Royalty expenses related to this agreement were $18,750 in 1999.
In 1997, the Company re-negotiated the terms of its license agreement with
Corning Incorporated, in which the Company was obligated to pay Corning a
royalty for each licensed product sold subsequent to January 1, 1998 of 4% of
the net sales price per unit sold until November 2001 and 3.5% of the net sales
price per unit sold after November 2001 and until August 2006. Under the terms
of the new agreement, Corning Incorporated agreed to grant the Company a
fully-paid perpetual license for the acquired technology in exchange for a
lump-sum payment of $500,000, which was paid in 1998. The cost of the license is
being amortized over 9 years, which is the estimated remaining life of the
patented technology. During 1999, $26,938 in royalty expense was recognized and
is included in selling, general and administrative expense in the accompanying
financial statements.
The Company leases facilities under long-term noncancelable operating leases.
Future minimum payments as of December 31, 1999 applicable to noncancelable
operating leases with initial terms of one year or more are as follows:
2000 $ 338,692
2001 353,252
2002 370,366
2003 94,089
----------
Total $1,156,399
==========
Rent expense for all operating leases was $401,432 in 1999.
The Company is currently in negotiations with Corning Incorporated related to
their licensing agreement and has not repaid the $77,613 balance on the note
payable to Corning Incorporated that was originally due in July 1999. The
Company continues to accrue interest on the note and any unpaid amounts are
included in the current portion of long-term debt and accrued expenses at
December 31, 1999.
F-20
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Company is involved in certain other disputes and litigation arising in the
ordinary course of its business. In the opinion of management, all matters are
adequately covered by insurance, or if not covered are without merit or are of
such kind, or involve such amounts as would not have a material adverse effect
on the Company's financial position, results of operations or cash flows if
disposed of unfavorably.
9. EMPLOYEE BENEFIT PLAN
The Company provides retirement benefits to employees through a salary reduction
401(k) savings plan. Employees are eligible to participate in the plan after six
months and 1,000 hours of service, and are permitted to contribute up to the
amount allowable by law to the plan. Employee contributions up to 6% in 1999 of
eligible wages were matched by the Company at a discretionary percentage. The
Company's contributions to the 401(k) savings plan for the year ended December
31, 1999 were approximately $15,700. Employees are vested in the matching
contributions over a five year period.
10. SIGNIFICANT CUSTOMERS
Sales to the United States government and to a significant customer were 7% and
18% of the Company's total revenues, respectively, during 1999.
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest totaled $161,158 during 1999.
Assets acquired and liabilities assumed in 1999, through issuance of promissory
note and common stock related to Sierra Precision Optics, Inc. was valued at
$284,100.
During 1999, $150,000 of a note payable was converted to 100,000 shares of
common stock.
During 1999, $300,000 due on the line of credit was converted to a note payable.
F-21
<PAGE>
GELTECH, Inc.
Notes to Financial Statements (continued)
12. ASSET PURCHASE
On January 4, 1999, the Company entered into an agreement to purchase the assets
and assume certain liabilities of Sierra Precision Optics, Inc. for cash, stock
and a note payable totaling approximately $304,100. Per this agreement, the
Company acquired operating assets of approximately $895,000 and assumed
liabilities of approximately $872,000 in exchange for $20,000 cash, a $81,600
promissory note to a stockholder and 135,000 shares of common stock valued at
approximately $202,500. Consulting and legal expenses incurred in connection
with the transaction were approximately $71,000. The Company recorded goodwill
in connection with this transaction in the amount of $352,835, which is being
amortized over 20 years. The results of Sierra's operations are included in the
Company's statement of operations since the acquisition date.
13. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
On January 24, 2000, a lawsuit was filed against the Company by a former
employee who alleged breach of his employment agreement. This suit was settled
by the Company on August 4, 2000 through a cash payment to the former employee
in the amount of $120,000.
On September 20, 2000, the stockholders of the Company sold 100% of their stock
to LightPath Technologies, Inc. making GELTECH, Inc. a wholly-owned subsidiary.
F-22
