As filed with the Securities and Exchange Commission on June 13, 1996
Registration No. 33-80009
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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HEMAGEN DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2869857
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
CARL FRANZBLAU, CHIEF EXECUTIVE OFFICER
Hemagen Diagnostics, Inc.
34-40 Bear Hill Road
Waltham, Massachusetts 02154
(617) 890-3766
(Address of registrant's principal executive offices and agent for service)
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Copies to:
PAUL D. BROUDE, ESQUIRE
ANDREW D. MYERS, ESQUIRE
O'Connor, Broude & Aronson
950 Winter Street, Suite 2300
Waltham, Massachusetts 02154
(617) 890-6600
Approximate date of commencement of proposed sale to the public: Upon
sale by the certain Selling Stockholders after conversion of certain
promissory notes and common stock purchase warrants into common stock.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box: [X]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
PROSPECTUS
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Hemagen Diagnostics, Inc.
2,388,035 Shares of Common Stock
This Prospectus relates to 2,388,035 shares (the "Shares") of Common
Stock, $.01 par value per share (the "Common Stock"), of Hemagen
Diagnostics, Inc., a Delaware corporation (the "Company"). Of the Shares,
1,550,000 were issued upon conversion of 13% Subordinated Convertible
Promissory Notes (the "Notes") sold by the Company in connection with a
private placement completed in September 1995 and 838,035 have been or may
be issued upon exercise of common stock purchase warrants (the "Warrants").
The holders of the Notes and Warrants are sometimes referred to herein as
the "Selling Securityholders." The Company will receive no part of the
proceeds of any sale of Shares by the Selling Securityholders. See "Plan of
Distribution" and "Description of Securities."
The Company's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation System Small-Cap Market ("NASDAQ")
and the Boston Stock Exchange (the "BSE") under the symbols "HMGN" and
"HGN," respectively. The Shares to be offered for sale pursuant to this
Prospectus may be offered for sale on NASDAQ, the BSE, or in privately
negotiated transactions. On June 3, 1996, the closing bid and ask prices of
the Company's Common Stock on NASDAQ were $2.75 and $3.00 per share,
respectively.
The Company will assume all of the costs and fees relating to the
registration of the Shares, except for any discounts, concessions or
commissions payable to underwriters, dealers or agents incident to the
offering and sale of the Shares, and any fees and disbursements of counsel
to the Selling Securityholders.
An investment in the Common Stock involves a high degree of risk. See
"Risk Factors" contained elsewhere in this Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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The date of this Prospectus is June __, 1996.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copies
thereof may be obtained, at prescribed rates, at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
The Company has filed a Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended (the "Act"), covering the shares of
Common Stock included in this Prospectus. This Prospectus does not contain
all the information set forth in or annexed to exhibits to the Registration
Statement filed by the Company with the Commission and reference is made to
such Registration Statement and the exhibits thereto for the complete text
thereof. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement,
including the exhibits filed as part thereof, copies of which may be
obtained at prescribed rates upon request to the Commission in Washington,
D.C. Any statements contained herein concerning the provisions of any
documents are not necessarily complete, and, in each instance, such
statements are qualified in their entirety by reference to such document
filed as an exhibit to the Registration Statement or otherwise filed with
the Commission.
IN CONNECTION WITH THIS OFFERING, CERTAIN SELLING SHAREHOLDERS MAY
ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE OVER
THE COUNTER MARKET ON NASDAQ IN ACCORDANCE WITH RULE 10b-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "PLAN OF DISTRIBUTION."
The Company will furnish its stockholders with annual reports
containing audited financial statements and such interim reports as it deems
appropriate.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and all Financial
Statements, including the Notes thereto, appearing elsewhere in this
Prospectus.
The Company
Hemagen Diagnostics, Inc. (the "Company") develops, manufactures and
markets proprietary medical diagnostic test kits, or "assays," used to aid
in the diagnosis of autoimmune and infectious diseases and in general health
assessment. Autoimmune diseases are diseases in which the immune system
mistakenly identifies the body's cells and tissues as foreign and attempts
to destroy them. Rheumatoid arthritis is an example of an autoimmune
disease. The Company generally focuses on markets which it believes offer
significant growth potential and limited competition.
Until July 1995, the Company's products were based primarily on two
diagnostic technologies, hemagglutination and enzyme-linked immunosorbence
("ELISA" or "EIA"). In July 1995, the Company completed the acquisition of
a line of similar but complementary test kits using a third technology,
immunofluorescence, from Schiapparelli BioSystems, Inc. (the "VIRGO(R)
Acquisition"). These acquired assays are sold under the registered
trademark VIRGO(R).
On March 1, 1996, the Company acquired Reagents Applications, Inc.
("RAI") from Kone Holdings, Inc. RAI manufactures and markets a complete
line of clinical chemistry reagents and diagnostic products for in vitro
diagnostic use in hospitals, clinics and laboratories. These products are
sold under the RAICHEM(TM) label directly and through a network of over 30
distributors in the United States and international markets. RAI also
produces private label reagents for domestic and international customers.
Most RAI reagents can be used in both automated and manual analyzers. RAI's
leading product lines include blood chemistry assays used to aid the
monitoring and measurement of health profiles, such as cholesterol, blood
urea nitrogen (BUN), triglycerides, glucose and uric acid.
The Company offers over 90 test kits that have been cleared by the
United States Food and Drug Administration (the "FDA") for sale in the
United States. Several additional test kits are sold in foreign markets.
The Company markets and sells its brand name products worldwide, directly
and through national and international distributors and manufacturers'
representatives. The Company markets its products in South America through
its majority-owned subsidiary, Hemagen Diagnosticos Comercio, Importacao e
Exportacao, Ltd., a Brazilian limited liability company ("HDC"). In
addition, the Company sells certain of its products on a private-label basis
to multinational distributors of medical diagnostics.
The Company owns a proprietary technique for preserving red blood
cells, a key component of the Company's hemagglutination assays. This
technology enables the Company to manufacture products which have a shelf
life of up to 24 months (compared to a typical shelf life of 30 to 60 days
for traditional hemagglutination processes), provide quick and accurate
results, require no special laboratory equipment to perform and are more
reliable than previously available hemagglutination assays. The extended
shelf life and improvements in the consistency of these assays substantially
eliminate limitations previously encountered in the use of hemagglutination
assays. In the fiscal years ended September 30, 1995 and 1994,
approximately 45% and 35%, respectively, of the Company's sales were derived
from sales of hemagglutination assays.
The Company's executive offices are located at 34-40 Bear Hill Road,
Waltham, Massachusetts 02154. Its telephone number is (617) 890-3766. Its
manufacturing facilities are at the Waltham location, Sao Paulo, Brazil, at
9033 Red Branch Road, Columbia, Maryland and at 8225 Mercury Court, San
Diego, California. Unless the context otherwise requires, the term the
"Company" includes the Company, its wholly owned subsidiary, RAI, and HDC.
The Offering
<TABLE>
<S> <C>
Common Stock offered by
the Selling Stockholders(1)...... 2,388,035 shares
Common Stock to be outstanding
after the offering(1)(2)......... 8,268,390
NASDAQ and BSE symbol............. HMGN and HGN, respectively
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<F1> As of June 3, 1996, all of the Notes had been converted into 1,550,000
shares of Common Stock and 188,535 shares of Common Stock had been
issued upon exercise of the Warrants.
<F2> Includes the issuance of the Shares offered hereby and 2,695,255 shares
of Common Stock issued in connection with the private placement
completed by the Company in March 1996. Excludes shares of Common
Stock issuable upon exercise of options to purchase up to 500,000
shares of Common Stock under the Company's 1992 Stock Option Plan (the
"Plan"), of which options to purchase 229,225 shares of Common Stock
were outstanding as of June 3, 1996 at exercise prices ranging from
$1.75 to $5.50 per share. Also excludes 2,695,255 shares of Common
Stock issuable upon exercise of warrants issued in connection with a
March 1996 private placement and 539,052 shares of Common Stock
issuable upon exercise of a placement agent warrant also issued in
connection therewith. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources," "Management - 1992 Stock Option Plan," "Plan of
Distribution," and "Description of Securities."
</TABLE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended Years Ended
March 31, September 30,
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1996 1995 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Statement of Operations Data(1):
Total revenue $3,687 $1,278 $3,955 $ 2,361 $ 1,809
Operating loss (395) (728) (846) (1,131) (628)
Net loss (694) (723) (985) (1,108) (1,251)
Net loss per share (.18) (.23) (.31) (.35) (.46)
Weighted average shares outstanding 3,840 3,152 3,158 3,150 2,717
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996(1)
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<S> <C>
Balance Sheet Data:
Working capital................................... $ 5,588
Total assets...................................... 12,800
Current liabilities............................... 2,124
Long term debt, less current portion ............. 2,016
Stockholders' equity.............................. 8,661
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<F1> In March 1996, the Company completed the acquisition of RAI. In July
1995, the Company completed the VIRGO(R) Acquisition. Financial
information and pro forma financial information of RAI, VIRGO(R) and the
Company are included elsewhere in this prospectus. As of March 31,
1996, certain Notes had been converted into 881,250 Shares and Notes
with a principal balance of $668,750 remained outstanding. See "Risk
Factors - Recent Acquisitions;" "Risk Factors - Risks of Acquisitions
and Expansion;" "Risk Factors - Management of Growth" and "Business -
Recent Developments."
</TABLE>
RISK FACTORS
The Shares offered hereby involve a high degree of risk. The Shares
should not be purchased by persons who cannot afford the loss of their
entire investment. Purchasers should carefully consider the information
presented below.
Limited Revenues and Recent History of Operating Losses. For the
fiscal years ended September 30, 1995, 1994 and 1993, the Company reported
net losses of approximately $985,000, $1,108,000 and $1,251,000,
respectively. The Company also reported a net loss of approximately
$694,000 for the six month period ended March 31, 1996. The Company has had
limited revenues to date and no assurance can be given that the Company can
operate profitably in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Financial
Statements."
Recent Acquisitions. The Company's management has undertaken a
strategy of expanding the Company's operations through a combination of
internal growth and acquisitions. In July 1995, the Company purchased
certain assets related to a product line of diagnostic assays. The Company
has leased a manufacturing facility in Columbia, Maryland to produce these
assays, which are sold under the registered trademark VIRGO(R). The Company
now markets and sells this product line through its internal sales force and
distributors. In March 1996, the Company purchased the stock of Reagents
Applications, Inc., of San Diego, California, a manufacturer of diagnostic
reagents. The Company continues to produce the reagents, sold under the
tradename RAICHEM(TM), in a leased facility in San Diego. No assurances can
be given that historical sales levels related to the VIRGO and RAICHEM
product lines will continue, or that the Company can manufacture, market and
sell these product lines on a profitable basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Business - Recent Developments."
Risks of Acquisitions and Expansion. The Company's expansion plans
will subject the Company to all of the risks incident to the expansion of a
small business, particularly the possible adverse impact associated with the
integration of new and/or acquired business operations, including but not
limited to the VIRGO and RAICHEM product lines, into the Company's existing
operations. The Company's business strategy includes the pursuit of
acquisitions, which may require additional financing, including the issuance
of additional equity securities which could result in dilution to the
Company's existing stockholders. In the event an acquisition is completed
and the Company incurs indebtedness in connection with such acquisition, the
Company may be subject to risks associated therewith, including the risks of
interest rate fluctuations and insufficiency of cash flow to pay interest
and principal. No assurance can be given that equity or debt financing will
be available or, if available, will be on terms acceptable to the Company.
The Company may incur significant expenditures in connection with a proposed
acquisition that is not completed, which would result in the Company having
to expense these costs in its then current financial statements. In
addition, companies that acquire businesses or technologies frequently
encounter unforeseen expenses, difficulties, complications and delays, which
could have a material adverse effect on the Company's results of operations.
No assurance can be given that the Company's expansion plans will not result
in significant unexpected liabilities or will ever contribute significant
revenues or profits to the Company. In addition, no assurance can be given
that the Company will pursue or realize any business opportunities in the
future or that any such business opportunity, if pursued and realized, will
prove beneficial to the Company. See "Business - Recent Developments."
Management of Growth. The Company's ability to manage continued
growth will require the Company to manage the integration of new products
and facilities into existing operations and to improve operational,
financial and management information systems, as to which no assurance can
be given. If the Company's management is unable to manage growth
effectively, the quality of the Company's products, ability to retain key
personnel and results of operations would be materially and adversely
affected.
Possible Need for Additional Financing. Although the Company believes
that its current cash resources and anticipated cash flows, including
available lease financing, will be sufficient to fund its current working
capital requirements, no assurance can be given that this will be the case.
The Company experienced negative cash flow from operations during the six
months ended March 31, 1996 and during the fiscal years ended September 30,
1995, 1994 and 1993 and no assurance can be given that the Company will not
require additional financing to fund its ongoing operations and plans for
expansion. In the event the Company requires additional financing, no
assurance can be given that the Company will be able to arrange such
financing on favorable terms, if at all. Failure to do so could have a
material adverse effect on the Company's business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Limited Marketing Experience. The Company has undertaken relatively
limited commercial marketing efforts to date. Although management believes
that the Company's efforts to develop commercial arrangements within its
markets have been successful, no assurance can be given that such marketing
efforts will be successful in the future. Such marketing efforts will
require substantial efforts to inform potential customers of the commercial
applications of the Company's products. No assurance can be given that the
Company's commercial products and planned commercial products will realize
additional market acceptance. See "Business - Distribution and Marketing."
Limited Product Line; Technological Change. The Company's
hemagglutination, ELISA, VIRGO(R) and RAICHEM diagnostic kits are presently
the Company's only commercial products. Although the Company is currently
developing other products, no assurance can be given that any proposed
product will be successfully developed, marketed or sold. See "Business -
Products."
The clinical diagnostics field in which the Company operates is
undergoing technological change. No assurance can be given that the
development of new technology by others will not render the Company's
products obsolete or commercially unmarketable.
Limited Commercial Production Experience. Although the Company has
manufactured and packaged commercial quantities of finished diagnostic
products since 1985, no assurance can be given that the Company will be
able to efficiently and successfully produce substantially increased
commercial quantities of its test kits or a broader product line. See
"Business - Manufacturing and Sources of Supply."
Competition. The clinical diagnostics field in which the Company
competes is subject to intense competition. The Company generally focuses
on niche markets which it believes offer significant growth potential and
limited competition. However, the Company competes and will compete in the
future with numerous competitors, many of which have substantially greater
financial, technical and managerial resources than the Company. No
assurance can be given that the Company will be able to compete successfully
with its present or future competitors. See "Business - Competition."
Dependence on Key Personnel. The success of the Company is dependent
on the efforts and abilities of its Chief Executive Officer and President,
Dr. Carl Franzblau, and of its Vice President for Research and Development,
Dr. Ricardo de Oliveira. If the Company were to lose the services of either
Dr. Franzblau or Dr. de Oliveira before a qualified replacement could be
obtained, its business could be materially and adversely affected. The
Company has entered into employment agreements with Dr. Franzblau and Dr. de
Oliveira. In addition, the Company has purchased key-person life insurance
on the life of Dr. Franzblau, in the amount of $1,000,000 and on the life of
Dr. de Oliveira, in the amount of $1,000,000. See "Management - Directors
and Executive Officers."
Dependence on Major Customers. Olympus America ("Olympus") accounted
for approximately 6% and 21% of the Company's revenues for the six months
ended March 31, 1996 and for the fiscal year ended September 30, 1995,
respectively. Carter-Wallace accounted for approximately 28% of the
Company's revenues for the six months ended March 31, 1996. The decrease in
the percentage of the Company's sales to Olympus were primarily due to
increased sales of the Company and varying levels of orders made by Olympus.
Although the Company expects that its relationships with these customers
will continue, if any of these customers were to cease doing business with
the Company it would have a material adverse effect on the Company's
business. The Company is currently negotiating to renew its supply
agreement with Olympus, which expired in February 1996. No assurance can be
given that such agreement will be renewed. See "Business - Distribution and
Marketing."
Risk of Loss of Proprietary Rights. The Company protects its
proprietary technology primarily as trade secrets rather than by relying on
patents, either because patent protection is not possible or, in
management's opinion, would be less effective than maintaining secrecy. In
addition, the Company relies upon confidentiality agreements with its
employees. To the extent that it relies on confidentiality agreements and
trade secret protection, there can be no assurance that the Company's
efforts to maintain secrecy will be successful or that third parties will
not be able to develop the technology independently. In addition, the
Company licenses technology relating to two patents owned by a third party.
The Company may in the future apply for patent protection for certain of its
technology when management believes such protection would be beneficial to
the Company. The protection afforded by patents owned or licensed by the
Company depends upon a variety of factors which may severely limit the value
of the patent protection, particularly in foreign countries, and no
assurance can be given that patents, if granted, will provide meaningful
protection for the Company's technology. In addition, no assurance can be
given that the Company's products will not infringe any patents of others.
Litigation could result in substantial cost to the Company and diversion of
effort by the Company's management and technical personnel. See "Business -
Patents and Proprietary Rights."
Regulation by Governmental Agencies. The Company's manufacturing and
marketing of diagnostic test kits are subject to government regulation in
the United States and any other countries in which the Company's products
are sought to be marketed. The process of obtaining regulatory approvals
involves lengthy and detailed laboratory and clinical testing, and other
costly and time-consuming procedures. This regulatory process may delay
marketing of new products for lengthy periods and impose costly procedures,
thereby furnishing an advantage to competitors with greater resources. No
assurance can be given that regulatory clearances will be granted on a
timely basis in the future, if at all. The extent of governmental
regulation which may arise from future legislative or administrative action
cannot be predicted. See "Business - Government Regulation."
Dependence on Supplier. One of the antigens used in two of the
Company's ELISA and two of its hemagglutination test kits is available from
only one supplier. Management believes that, if necessary, the Company
could manufacture sufficient quantities of the antigen itself. However, if
the supply of this antigen were to cease, the Company could experience
delays in producing these products, which could have an adverse impact on
the Company. In addition, no assurance can be given that the Company can
produce sufficient quantities of the antigen, if at all. See "Business -
Manufacturing and Sources of Supply."
Product Liability Risks. The Company may incur product liability due
to product failure or improper use of products by the user. Inaccurate
detection may result in the failure to administer necessary therapeutic
drugs or administration of unnecessary and potentially toxic drugs. Even
with proper use of a product, there may be specific instances in which the
results obtained from the Company's test kits could lead a physician to
incorrectly predict the appropriate therapy for a particular patient. The
Company maintains product liability insurance that it believes to be
adequate for its present operations. There is no assurance that the amount
of the Company's insurance is sufficient to fully insure against claims
which may be made against the Company. In addition, there can be no
assurance that the Company will be able to renew its product liability
insurance or find a substitute insurance carrier on favorable terms, or at
all. See "Business - Product Liability."
Risks Associated with Foreign Sales. During the fiscal year ended
September 30, 1995 and 1994 the Company derived approximately 41% and 32% of
its revenue, respectively, from sales to its dealers and end users located
in foreign countries. The Company presently intends to increase its sales
efforts in South America, Japan and Western Europe in the future. Since
most of the Company's international sales are denominated in U.S. dollars,
the Company's products may be less competitive in countries with currencies
declining in value against the dollar. To the extent the Company decreases
prices to reflect a change in exchange rates, the profitability of the
Company's business in those markets could be materially adversely affected.
In the past, there have been significant fluctuations in the exchange rates
between the dollar and the currencies in those countries. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
"Business - South American Activities" and "Business - Distribution and
Marketing."
In addition, foreign countries may impose limitations in the amount of
currency that may be withdrawn from such countries. Such limitations, if
imposed, could materially adversely affect the Company's financial condition
and results of operations.
No Dividends. The Company has not paid dividends on its Common Stock
since its inception and does not intend to pay any dividends to its
stockholders in the foreseeable future. The Company currently intends to
reinvest earnings, if any, in the development and expansion of its business.
See "Dividends."
Sales Pursuant to Rule 144. Approximately 1,800,000 shares of the
Common Stock currently outstanding have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and are
"restricted securities" under Rule 144 of the Securities Act. Ordinarily,
under Rule 144, a person holding restricted securities for a period of two
years may, every three months, sell in ordinary brokerage transactions or in
transactions directly with a market maker an amount equal to the greater of
one percent of the Company's then outstanding Common Stock or the average
weekly trading volume during the four calendar weeks prior to such sale.
Rule 144 also permits sales by a person who is not an affiliate of the
Company and who has satisfied a three-year holding period without any
quantity limitation. Future sales under Rule 144 may have a depressive
effect on the market price of the Common Stock should a public market
develop for such stock. See "Description of Securities."
Future Sales of Common Stock. Up to 500,000 shares of Common Stock
may be issued to employees, officers, directors and consultants pursuant to
the exercise of options under the Company's 1992 Stock Option Plan, of which
options to purchase 229,225 shares have been granted as of June 3, 1996 at a
weighted average exercise price of approximately $2.50. The existence of
the stock options and Warrants and the issuance and resale of the Shares and
of shares of Common Stock upon exercise of stock options could have a
material adverse effect on the market price of the Company's Common Stock.
See "Plan of Distribution" and "Description of Securities."
Possible Anti-Takeover Effects of Certain Charter Provisions. The
Company's Certificate of Incorporation authorizes the Board of Directors to
issue up to 1,000,000 shares of preferred stock, $.01 par value per share
(the "Preferred Stock"). No shares of Preferred Stock are currently
outstanding, and the Company has no present plans for the issuance thereof.
The Preferred Stock may be issued in one or more series, the terms of which
may be determined at the time of issuance by the Board of Directors, without
further action by stockholders, and may include voting rights (including the
right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion and redemption rights and sinking fund
provisions. However, the issuance of any such shares of Preferred Stock
could adversely affect the rights of holders of Common Stock and, therefore,
could reduce the value of the Common Stock. In addition, the ability of the
Board of Directors to issue Preferred Stock could discourage, delay or
prevent a takeover of the Company. See "Description of Securities."
In addition, the Company, as a Delaware corporation, is subject to the
General Corporation Law of the State of Delaware, including Section 203, an
anti-takeover law enacted in 1988. In general, the law restricts the
ability of a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder. As a result of the application of Section 203 and certain
provisions in the Company's Certificate of Incorporation and Bylaws,
potential acquirors of the Company may find it more difficult or be
discouraged from attempting to effect an acquisition transaction with the
Company, thereby possibly depriving holders of the Company's securities of
certain opportunities to sell or otherwise dispose of such securities at
above-market prices pursuant to such transactions.
In addition, the Company's Bylaws provide for the Company's Board of
Directors to be divided into three classes. Directors consulting
approximately one-third of the Board of Directors are elected each year for
a period of three years at the Company's annual meeting of stockholders and
serve until their successors are duly elected by the stockholders. A
classified Board of Directors could discourage, delay or prevent a takeover
or change of control of the Company.
USE OF PROCEEDS
Of the Shares, 1,550,000 had been issued as of June 3, 1996 upon
conversion of the Notes at the conversion price of $1.00 per share. Of the
Shares issuable upon exercise of the Warrants, 188,535 Shares had been
issued as of June 3, 1996. As of June 3, 1996, Warrants to purchase 649,500
Shares remained unexercised at a weighted average exercise price of
approximately $2.40, or an aggregate exercise price of approximately
$1,559,000. Exercise of the Warrants, if any, will be made at the
discretion of the holders thereof. To the extent the Warrants are
exercised, the Company intends to use the proceeds therefrom for working
capital and general corporate purposes. The Company will receive no part of
the proceeds of any secondary sales by the Selling Securityholders involving
the Shares. See "Plan of Distribution" and "Description of Securities."
The Company has agreed to assume all of the costs and fees relating to
the registration of the shares of Common Stock covered by this Prospectus,
except for any discounts, concessions or commissions payable to underwriters
or dealers, agent brokerage fees incident to the offering of the Shares and
any fees and disbursements of counsel to the Selling Securityholders. The
Company estimates the expenses associated with this offering will be
approximately $75,000.
DIVIDEND POLICY
The Company has never paid a cash dividend on its Common Stock and
does not anticipate paying any cash dividends in the foreseeable future.
The Company presently intends to retain future earnings to fund the
development and growth of its business. See "Risk Factors - No Dividends"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the NASDAQ Over-The-Counter
Market ("NASDAQ") and the Boston Stock Exchange since the Company's initial
public offering, which was completed in February 1993. The following table
sets forth the high and low sale prices for the Common Stock as reported by
NASDAQ for the periods indicated. All high and low sale prices for the
Common Stock have been rounded to the nearest cent.
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<CAPTION>
High Low
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Fiscal 1994
First Quarter $3.25 $1.63
Second Quarter $4.00 $2.13
Third Quarter $2.75 $1.88
Fourth Quarter $2.63 $1.88
Fiscal 1995
First Quarter $3.50 $1.88
Second Quarter $2.25 $1.13
Third Quarter $2.13 $1.09
Fourth Quarter $4.50 $1.75
Fiscal 1996
First Quarter $3.50 $1.75
Second Quarter $4.13 $2.50
Third Quarter (through June 3, 1996) $4.13 $2.63
</TABLE>
On June 3, 1996, the last sale price for the Common Stock as reported
by NASDAQ was $2.75 per share and there were approximately 244 record
holders of the Common Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Since its inception, the Company has concentrated its efforts on
developing, manufacturing and marketing medical diagnostics test kits used
to aid in the diagnosis of certain diseases. The Company presently offers
approximately 100 different test kits, of which over 90 have received FDA
clearance for sale in the United States.
Results of Operations
The Six Month Period Ended March 31, 1996 Compared to the Six Month
Period Ended March 31, 1995
Revenues increased to approximately $3,687,000 from approximately
$1,278,000 (an increase of 188%), primarily as a result of (i) sales of
products acquired in the Company's July 1, 1995 acquisition of the VIRGO(R)
product line, (ii) sales of products acquired in the Company's March 1, 1996
acquisition of RAI and (iii) contract manufacturing sales to Carter-Wallace.
See "Liquidity and Capital Resources."
Cost of product sales increased to approximately $2,253,000 from
approximately $697,000 (an increase of 223%), and increased as a percentage
of product sales from 55% to 61% due to lower gross margins related to the
Carter-Wallace and VIRGO(R) sales, the effect of purchase accounting on the
RAI acquisition and a write-off of defective inventory during the period.
Research and development expenses increased to approximately $323,000
from approximately $321,000. The Company is currently developing and
completing studies related to FDA 510(k) submissions for several new
products.
Selling, general and administrative expenses increased to
approximately $1,505,000 from approximately $988,000 (an increase of 52%),
primarily due to expenses at RAI, increased expenses at HDC relating to
staffing and operating its manufacturing facility in Sao Paulo, Brazil and
increased payroll expenses.
Net other expense (income) changed to a net expense of approximately
$300,000 from net income of approximately $5,000 due to an increase in
interest expense due to financing activities. These financing activities
include a $2,000,000 private placement completed in September 1995, lease
agreements entered to acquire machinery and equipment and expenses related
to the issuance of warrants during the six months ended March 31, 1996.
Net loss decreased to approximately $694,000 from $723,000, primarily
due to an increase in RAI, VIRGO(R), Carter-Wallace and HDC sales. This was
partially offset by increased selling, general and administrative expenses,
increased other expenses and a decrease in gross margin percentage.
Fiscal Year Ended September 30, 1995 Compared to Fiscal Year Ended
September 30, 1994
Revenues increased to approximately $3,955,000 from approximately
$2,361,000 (an increase of 67%), primarily as a result of (i) increased
sales by the Company's foreign subsidiary, HDC, (ii) sales arising
subsequent to July 1, 1995 in connection with the VIRGO(R) acquisition,
(iii) increased revenue from the rental of automated blood-typing systems,
and (iv) contract manufacturing sales to a new customer, Carter-Wallace.
Cost of product sales increased to approximately $2,173,000 from
approximately $1,185,000 (an increase of 83%), and increased as a percentage
of product sales to 55% from 50% primarily due to increased costs of
depreciation and costs associated with the startup of the manufacturing
contract with Carter-Wallace.
Research and development expenses decreased to approximately $573,000
from approximately $727,000 (a decrease of 21%), primarily due to a decrease
in lab supplies and raw materials used for research conducted in connection
with the Company's new product development activities. The Company is
currently developing and completing studies related to FDA 510(k)
submissions for several new products.
Selling, general and administrative expenses increased to
approximately $2,055,000 from approximately $1,579,000 (an increase of 30%),
primarily due to increased expenses at HDC relating to staffing and
operating its manufacturing facility in Sao Paulo, Brazil and increased bad
debt expense.
Net other expense increased to approximately $139,000 from
approximately $4,000 due to an increase in interest expense and a decrease
in interest income. The increase in interest expense primarily relates to
financing activities which the Company has entered into to acquire machinery
and equipment. Interest income decreased due to a reduction in the average
balance of interest bearing accounts held by the Company and lower rates of
interest.
Net loss decreased to approximately $985,000 from approximately
$1,108,000, primarily due to higher HDC and Carter-Wallace sales, the
addition of VIRGO(R) sales in the fourth quarter and lower research and
development costs. This was partially offset by an increase in selling,
general and administrative expenses and a decrease in gross margin
percentage.
Fiscal Year Ended September 30, 1994 Compared to Fiscal Year Ended
September 30, 1993
Revenues increased to approximately $2,361,000 from approximately
$1,809,000 (an increase of 31%), primarily as a result of increased volume
of United States and European product sales and an increased volume of
product sales by HDC which were partially offset by decreased sales in
Japan.
Cost of product sales increased to approximately $1,185,000 from
approximately $606,000 (an increase of 96%), and increased as a percentage
of product sales to 50% from 33%, primarily due to increased payroll,
depreciation and facility expenses.
Research and development expenses increased to approximately $727,000
from approximately $541,000 (an increase of 34%), primarily due to research
conducted in connection with the Company's new product development
activities and to increased facility, consulting, travel and payroll
expenses, including the hiring of additional research personnel and a
manager of regulatory affairs.
Selling, general and administrative expenses increased to
approximately $1,579,000 from $1,289,000 (an increase of 22%), primarily due
to increased sales and marketing, payroll and employee benefit expenses.
This increase also reflects increased payroll and facility expenses at HDC,
due to staffing and leasing a new manufacturing facility in Sao Paulo,
Brazil which began light manufacturing of products in fiscal 1994.
Net other expense decreased to approximately $4,000 from approximately
$606,000, primarily due to expenses incurred during fiscal 1993 in
connection with a bridge financing of $1,200,000 completed in September,
1992 (the "Bridge Loan"), including the amortization of the fair value
attributed to the warrants issued in connection with the Bridge Loan.
Foreign exchange loss of $46,000 in fiscal 1994 and $52,000 in fiscal 1993
represents the non-cash translation loss incurred related to the
remeasurement of HDC's financial statements into United States dollars.
Net loss decreased to approximately $1,108,000 from $1,251,000,
primarily due to the absence of costs associated with the Bridge Loan, which
more than offset lower gross margins and higher research and development and
selling, general and administrative expenses. Provision for income taxes
includes a benefit of approximately $18,000 relating to the carryback of net
operating losses to offset taxable income of prior years.
Liquidity and Capital Resources
At March 31, 1996, the Company's working capital was approximately
$5,588,000 compared to working capital of approximately $2,518,000 at
September 30, 1995. This increase was principally due to the closing of a
private placement, described below, in which the Company raised
approximately $6,579,000 in net proceeds, partially offset by initial
working capital requirements for RAI and operating losses.
Inventory balances increased to approximately $3,254,000 as of March
31, 1996 from approximately $1,085,000 as of September 30, 1995, primarily
due to purchase of inventory in connection with the RAI Acquisition and to
the receipt of inventory to support increased sales to Carter Wallace and of
the VIRGO(R) product line. Accounts payable and accrued expenses increased
to approximately $1,365,000 from approximately $793,000 primarily due to the
increase in inventory, including approximately $491,000 of inventory
received from Carter Wallace which will be paid for over a two year period.
Notes payable of approximately $380,000 were paid in December 1995 in
connection with the VIRGO(R) Acquisition.
In December 1994, the Company entered into a five-year agreement with
Carter-Wallace, Inc. to manufacture a broad range of diagnostic test kits
for its Wampole Division. From December 1994 through March 31, 1996, the
Company spent approximately $347,000 in facilities improvement, personnel,
equipment, supplies, raw materials and travel costs directly associated with
the transfer of technology from Carter-Wallace to the Company.
In March 1996, the Company acquired 100% of the outstanding stock of
RAI from Kone Holdings, Inc. for $4,900,000 in cash. Of this amount,
approximately $465,000 had been prepaid as a deposit against the final
purchase price. RAI is a manufacturer of diagnostic test kits which focus
in the areas of clinical chemistry and serum proteins. RAI presently has
approximately 60 test kits which have received FDA clearance for sale in the
United States. See "Consolidated Financial Statements of Reagent
Applications, Inc."
In March 1996, the Company completed a private placement raising
approximately $6,579,000 in net proceeds. In connection with the private
placement, the Company sold approximately 2,695,000 Units (the "Units"),
each unit consisting of one share of share of Common Stock and one Warrant
for $2.75 per unit. The Warrants expire in five years, and each Warrant
entitles the holder to purchase one share of Common Stock for $2.75. The
proceeds of the offering were used to purchase RAI, reduce corporate debt
and to provide additional working capital for the Company.
In July 1995, the Company acquired assets relating to a line of
diagnostic test kits from Schiapparelli BioSystems, Inc. for $1 million in
cash and a note for approximately $380,000, which the Company paid on
December 15, 1995. The VIRGO(R) line of test kits, based on
immunofluorescence technology, is used in the detection of infectious and
autoimmune disease and complements the Company's existing product line.
In September 1995, the Company completed a private placement,
resulting in net proceeds of approximately $2,000,000 which was raised
through the issuance of Convertible Subordinated Promissory Notes (the
"Notes"), which bore interest at the rate of 13% per annum. In January
1996, the Company prepaid Notes with a principal balance of $450,000. In
connection therewith, the Company issued a Warrant to purchase 100,000
shares of Common Stock at an exercise price of $1.00 per share. The Company
recorded an expense of approximately $50,000 in connection with the issuance
of this Warrant. In May 1996, the Company forced the conversion of the
remaining outstanding Notes pursuant to their terms at the conversion rate
of $1.00 per share.
At June 1, 1996 the Company had capital lease arrangements with three
companies totalling approximately $1,988,000. The Company used this
financing to acquire blood-typing machines and other equipment. The Company
is required to pay an average of $73,000 per month in the aggregate under
these arrangements during fiscal 1996. The arrangements run through 1998.
Management believes its cash and cash equivalents and short-term
investments, together with anticipated cash flow from operations, are
sufficient to meet the Company's cash needs for its ongoing business.
Impact of Inflation and Foreign Currency Transactions
Domestic inflation during the last three fiscal years has not had a
significant effect on the Company's business activities. Translation and
transaction gains and losses between the Company and its subsidiary in
Brazil are expensed each period. For the six months ended March 31, 1996
and the fiscal year ended September 30, 1995, the Company recorded
transaction losses of $48,000 and $113,000, respectively. In fiscal 1994,
the Company recorded transaction gain of approximately $46,000.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." SFAS 123 allows the Company to
account for its stock-based employee compensation plans based upon either a
fair value method or the intrinsic value method currently followed by the
Company. If the current method is retained, SFAS 123 requires certain
additional disclosures regarding the impact which the fair value method
would have on the results of the Company's operations. The Company expects
to retain its current method of accounting for stock-based compensation
plans, and therefore, the adoption of SFAS 123 will have no impact on the
Company's financial position or results of operations. Adoption of SFAS 123
is required for financial statements of fiscal years beginning after
December 15, 1995. The Company will implement the disclosure requirements
of SFAS 123 as required in fiscal 1997.
BUSINESS
General
The Company develops, manufactures and markets proprietary medical
diagnostic test kits, or "assays," used to aid in the diagnosis of
autoimmune and infectious diseases. Autoimmune diseases are diseases in
which the immune system mistakenly identifies the body's cells and tissues
as foreign and attempts to destroy them. Rheumatoid arthritis is an example
of an autoimmune disease. The Company generally focuses on niche markets
which it believes offer significant growth potential and limited
competition.
Until July 1995, the Company's products were based primarily on two
diagnostic technologies, hemagglutination and ELISA. In July 1995, the
Company completed the acquisition of a line of similar but complementary
test kits using a third technology, immunofluorescence, from Schiapparelli
BioSystems, Inc (the "VIRGO(R) Acquisition"). The assays acquired are sold
under the registered trademark VIRGO(R).
On March 1, 1996, the Company acquired a producer of general clinical
chemistry reagents utilizing colorimetric, turbometric and enzymatic
procedures from Kone Holdings, Inc. (the "RAI Acquisition"). The RAI assays
are sold under the registered trademark RAICHEM(TM).
The Company offers approximately 100 test kits, of which over 90 have
been cleared by the FDA for sale in the United States. The Company sells
test kits that have not yet been cleared by the FDA in foreign markets. The
Company markets and sells its brand name products worldwide, directly and
through national and international distributors and manufacturers'
representatives. The Company markets its products in South America through
its majority-owned subsidiary HDC. In addition, the Company sells certain
of its products on a private-label basis to multinational distributors of
medical diagnostics.
Recent Developments
Reagents Applications, Inc.
On March 1, 1996, the Company acquired all of the capital stock of
Reagents Applications, Inc. ("RAI") for a total purchase price of
approximately $4.9 million in cash. RAI, based in San Diego, California,
manufactures and markets clinical reagents and assays used in hospitals and
private laboratories. The Company sells these products worldwide directly
and through distributors and original equipment manufacturers. RAI had
revenues of approximately $5,807,000 for the year ended December 31, 1995.
No assurance can be given that historical revenue levels of RAI will provide
an accurate reflection of future revenues.
VIRGO(R) Acquisition
On July 1, 1995, the Company completed the VIRGO(R) Acquisition from
Schiapparelli BioSystems, Inc. ("SBI"). In connection with this
acquisition, the Company paid $1,000,000 in cash and issued a promissory
note for approximately $380,000, which was paid on December 15, 1995. The
Company manufactures the VIRGO(R) products at a portion of the facility
previously used by SBI in Columbia, Maryland.
The VIRGO(R) products consist primarily of assays that aid in the
diagnosis of infectious and autoimmune diseases using immunofluorescence
technology. VIRGO(R) test kits are used by over 300 clinical laboratories
in the United States and Europe, including by certain pre-existing customers
of the Company. The Company sells the VIRGO(R) products through some of its
existing distribution channels and to former customers and distributors of
SBI. The VIRGO(R) products generated sales of approximately $1,186,000 and
$2,661,000 for the six months ended June 30, 1995 and the year ended
December 31, 1994, respectively. No assurance can be given that historical
sales levels of VIRGO(R) products will provide an accurate reflection of
future sales levels.
Agreement with Sheffield Medical Technologies, Inc.
In December 1995, the Company entered into an agreement with Sheffield
Medical Technologies, Inc. to develop a test for an antibody believed to be
responsible for nonprogression of the HIV virus into Acquired Immune
Deficiency Syndrome ("AIDS") in HIV-positive individuals. The agreement
calls for the Company to develop a blood test for the antibody which is
believed to be present in virtually all of the HIV-positive individuals who
survive at least ten years following diagnosis of the HIV infection. The
assay, if developed, could be useful in monitoring the effectiveness of a
vaccine that may one day be developed to generate to antibody.
Carter-Wallace Agreement
In December 1994 the Company entered into a five-year agreement (the
"Carter-Wallace Agreement") with Carter-Wallace, Inc. ("Carter-Wallace") to
manufacture approximately 14 diagnostic test kits for the Wampole division
of Carter-Wallace. The test kits, which had previously been manufactured by
Carter-Wallace, are used to aid the diagnosis of common diseases such as
rheumatoid arthritis, mononucleosis, strep throat and rubella, as well as to
detect pregnancy. Carter-Wallace has agreed to purchase its requirements for
these test kits from the Company during the term of the Agreement, subject
to the Company maintaining certain quality standards. The test kits are
sold by Carter-Wallace to clinical laboratories and physicians' office
laboratories both domestically and abroad.
From December 1994 through May 1995, the Company remodeled its
manufacturing facility and developed certain technical capabilities in
preparation for producing test kits under the Carter-Wallace Agreement.
Initial shipments of finished goods under the Carter-Wallace Agreement began
during the Company's third quarter of fiscal 1995 and full scale production
commenced in the Company's second quarter of fiscal 1996. The Carter-
Wallace Agreement contains provisions for two-year extensions and may be
expanded to include additional products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Technology
The presence and concentration of certain antibodies in the blood of
an individual can assist physicians in the diagnosis of certain diseases.
The Company's hemagglutination, ELISA and immunofluorescence immunoassays
are in vitro (outside of a patient's body) diagnostic tests that are used to
measure specific substances, either antigens or antibodies, in blood or
other body fluids. An antigen is a substance that reacts with a particular
antibody in a manner which, in the proper environment, is detectable either
by the naked eye or with the aid of a laboratory technique which amplifies
the reaction so that it is rendered visible. The Company's hemagglutination
and ELISA assays are two examples of such an amplification.
The Company relies upon proprietary technologies in the manufacture of
its kits. These technologies include a lyophilization technique which
substantially extends the shelf life of the Company's hemagglutination
assays, and proprietary methods to prepare antigens for its ELISA assays.
Hemagglutination
Hemagglutination is the agglutination or "clumping" of red blood cells
("RBCs"). Many substances, including certain antibodies, when placed in
contact with RBCs, will cause agglutination.
Under the appropriate conditions, human RBCs may be modified or
sensitized by binding specific foreign antigens to their surface. These
sensitized RBCs will agglutinate when placed in contact with a specific
antibody to the foreign antigen. The presence of certain antibodies in an
individual's serum (blood from which most red blood cells have been removed)
can indicate certain diseases. By sensitizing RBCs with an antigen that
specifically reacts with a particular antibody, the simple visible
observation of the agglutination reaction will indicate the presence of the
disease-produced antibody. The use of RBCs instead of other particles can
allow for simple visual observation of the agglutination reaction in the
proper environment, and reduces the non-specific reactions seen in
artificial systems such as those that utilize latex particles.
To perform the Company's hemagglutination test, a technician combines
the Company's sensitized RBCs with a patient's serum in a small well with a
V-shaped bottom according to a set of directions included with the Company's
test kits. If no agglutination takes place, the RBCs will settle to the
bottom of the well, resulting in a clearly visible red dot which indicates
that the test is negative.
In contrast, if the particular antibody is present in the patient's
blood, the RBCs will agglutinate, which prevents the RBCs from settling to
the bottom of the well. Instead of the small red dot, the substance will
appear diffuse, which indicates a positive reaction.
ELISA
ELISA (or EIA) tests employ small plastic vessels coated with
particular antigens. The test process involves introducing the patient's
serum into the vessel to allow a reaction to occur. If the antibody being
tested for is present, it will bind to the antigens on the bottom surface of
the vessel. After the vessel is rinsed, the specifically bound antibody will
remain while any non-specific antibodies will be washed away. To detect the
quantity of the specific antibody, other compounds are added which will
cause a color change in the vessel, the intensity of which is directly
proportionate to the quantity of the specific antibody bound. If no color is
noted, this indicates that the patient's serum did not contain detectable
quantities of the specific antibody.
Immunofluorescence
The Company's immunofluorescence tests are analyzed using a
fluorescent microscope. Mammalian cells grown on microscope slides are
treated with disease-producing organisms (viral or bacterial). Serum from a
patient is placed in contact with the infected cells. If a patient has
antibodies to the organism causing the disease, the antibodies will bind to
the organism. A chemical is added to the slide which binds to the organism
and the antibody, if present. When the slide is illuminated with light at a
specific wavelength in the microscope, the chemically-treated cells will
appear fluorescent, indicating a positive test result. If the patient did
not have the appropriate antibody, no fluorescence will appear and the test
result will be deemed negative.
Apolipoproteins and Acute Phase Reactants
The Company has developed a new application for its ELISA technology
to detect cardiovascular risk factors (apolipoproteins) and inflammatory
signals (acute phase reactants), the latter of which are present in a
patient's blood prior to the clinical manifestation of infection or
inflammation. If successful, these technologies could lead to earlier
detection and treatment of cardiovascular disease, the imminent rejection of
transplanted organs, or the onset of infections, than is possible with
techniques now commercially available. Such earlier detection could enable
physicians to better plan appropriate treatment of patients with these
conditions. The Company currently markets two test kits to detect
inflammatory signals, one of which has received clearance from the FDA for
clinical use and one of which is current sold for research purposes.
Product sales for these tests were not material in fiscal 1995 or 1994.
Current Products
Hemagglutination Assays
The Company believes that it manufactures and markets the only
commercially available hemagglutination kits which test for antibodies to
antigens present in the nucleus of a cell ("extractable nuclear antigens,"
or "ENAs") which are markers of certain autoimmune diseases. Each of the
Company's hemagglutination assays is based on the Company's proprietary
technique to lyophilize, or "freeze dry," the RBCs which form the central
component of a hemagglutination assay. The Company's proprietary
lyophilization technique for the preservation of RBCs permits the production
of standardized, easy-to-use and accurate hemagglutination tests with an
extended shelf life, all of which are attributes previously unavailable
using hemagglutination assays. The shelf-life of the lyophilized RBCs before
reconstitution may be up to 24 months. A technician reconstitutes the
powdered cells in a water-based solution prior to introducing the patient's
serum.
Each hemagglutination test also requires a specific formula to
sensitize the RBCs prior to lyophilization such that they will react to a
specific antibody. For each of its tests, the Company uses a proprietary
formula to combine antigens and other reagents with RBCs in a manner that
allows for standard, sensitive and specific agglutination reactions. Results
from the Company's test kits are generally available within two hours. The
Company's hemagglutination test kits aid in the diagnosis of the following
diseases:
SLE (lupus) dermatomyositis
mixed connective tissue disease polymyositis
Sjogren's syndrome rheumatoid arthritis
scleroderma (systemic sclerosis) Chagas' disease
cytomegalovirus (cmv)
In Fiscal 1995 and 1994, the Company derived approximately 45% and 35%
of its revenues, respectively, from sales of hemagglutination assays.
ELISA Assays
The Company develops and markets ELISA tests for the detection of
disease markers. As with corresponding hemagglutination tests produced by
the Company, most of the Company's ELISA assays test for elevated levels of
antibodies, which are useful indicators of certain diseases. ELISA tests are
widely used by large laboratories because these tests adapt easily to
automated diagnostic testing equipment. The Company's ELISA test kits aid
in the diagnosis of the following diseases:
SLE (lupus) polymyositis
mixed connective tissue disease dermatomyositis
Sjogren's syndrome connective tissue diseases
scleroderma (systemic sclerosis) dermatomyositis
Chagas' disease
Certain of the Company's ELISA tests are also used to monitor the
acute phase response to infection and inflammation in diseases such as lupus
and rheumatoid arthritis.
The Company derived approximately 32% and 65% of its revenues,
respectively, from sales of ELISA test kits in Fiscal 1995 and 1994,
respectively. Carter-Wallace sales accounted for 7% of Fiscal 1995 revenue
and 0% of fiscal 1994 revenues, while sales of the VIRGO(R) line accounted
for 16% of Fiscal 1995 revenues and 0% in Fiscal 1994.
The Company's ELISA and hemagglutination kits include screen tests in
which up to six different diagnostic indices are monitored at the same time,
which is useful in the rapid initial screening of patients. If the screen
test is positive, individual kits are available to identify which of these
six indices is present.
VIRGO(R) Products
The Company's immunofluorescence ("IFA") products, sold under the
trade name VIRGO(R), consist primarily of diagnostic assays for infectious
diseases. VIRGO(R) test kits are used as primary or confirmatory tests in
many large clinical laboratories in the United States. There are currently
12 kits in the VIRGO(R) product line.
The Company's VIRGO(R) products are used to aid in the diagnosis of
the following:
cytomegaloviras herpes simplex
SLE (lupus) german measles
connective tissue diseases chicken pox
primary bilary cirrhosis infections with Epstein-Barr virus
toxoplasmosis chlamydial infections
syphilis measles
primary RSV infections mumps infections
In the three month period from July 1, 1995, the date the VIRGO(R)
Acquisition was completed, through September 30, 1995, the Company derived
approximately 30% of its revenues from sales of VIRGO(R) products. Sales of
VIRGO(R) products accounted for 25% of the Company's sales for the six month
period ended March 31, 1996.
RAI Products
The Company's general chemistry products, sold under the trade name
RAICHEM(TM), consist of a broad range of assays used on automated and semi-
automated clinical chemistry analysis systems. Many of the RAICHEM assays
are used in profiling general health conditions and as specific indications
of possible disease states.
South American Activities
In 1991, the Company began to market its product line in South America
through HDC. In fiscal 1994, HDC completed the renovation of a new
manufacturing and office facility in Sao Paulo, Brazil, which allows HDC to
manufacture test kits in South America. This facility began to manufacture
products in fiscal 1994.
The Company markets its full product line to the South American
market, including three proprietary assays for Chagas' disease. Chagas'
disease (American Trypanosomiasis) is an insect and blood transfusion
transmitted parasitic infection which eventually attacks the victim's
cardiovascular system. Due to poor sanitation and other factors, insects
have transmitted Chagas' disease widely throughout Central and South
America, with substantial encroachment into Mexico. In response to the need
for efficient and accurate testing for Chagas' disease, the Company has
developed three diagnostic tests: an instrument-free hemagglutination assay,
an ELISA assay, and a hemagglutination assay prepared specifically for use
with certain automated blood-typing instruments.
The sales office in Sao Paulo is presently staffed by three full-time
salespeople administrators who receive and process orders, and two people in
production, shipping and technical support. In addition, Dr. de Oliveira,
the Company's Vice President of Research and Development, spends time in
Brazil attending to business of the Company. In Fiscal 1995 and 1994 the
Company derived product sales through HDC of approximately $973,000 and
$268,000, respectively. See "Business - Facilities," "Management" and
"Certain Transactions."
Distribution and Marketing
In the United States, the Company sells its products directly to
clinical laboratories and blood banks and on a private-label basis through
multinational distributors of medical supplies. Internationally, the
Company sells its products primarily through distributors. The Company
grants exclusive and non-exclusive distributorships, which generally cover
limited geographic areas and specific test kits. The Company's exclusive
distributorship arrangements generally condition exclusivity on the
distributor maintaining minimum purchases from the Company. The Company has
relationships with approximately 35 distributors and its products have been
sold in over 20 countries. The Company also engages four independent sales
representatives, who market the Company's products to blood banks and
clinical laboratories.
Since 1989 the Company has been the exclusive provider of test kits to
detect CMV antibodies for use with the Olympus PK-7100, the world's most
widely used automated blood-typing instrument in blood banks and large
commercial laboratories. Pursuant to the terms of the Company's agreement
with Olympus, the Company provides CMV test kits for sale by Olympus
worldwide to users of the PK-7100. The agreement provides that Olympus must
purchase a minimum number of hemagglutination CMV test kits annually from
the Company through February 1996, subject to the Company meeting certain
requirements. The agreement specifies that during its term, the Company
will not sell its CMV assays to any customers worldwide which use Olympus
instruments or use competing laboratory analysis equipment in blood banks.
Sales of CMV assays to Olympus were approximately $674,000 and $592,000
during Fiscal 1995 and 1994, respectively. The Company is currently
negotiating with Olympus to renew this agreement. Olympus has continued to
purchase CMV assays from the Company during these negotiations. See "Risk
Factors - Dependence on Major Customers."
The Company also manufactures products on a private label basis for
Sigma Diagnostics, Boehringer Mannheim GmbH ("Boehringer"), and Carter-
Wallace pursuant to supply agreements. These agreements do not currently
provide for minimum purchases and therefore the Company cannot predict the
level of revenues it will derive from these agreements, if any.
Olympus accounted for approximately 21% of the Company's revenue for
Fiscal 1995 and approximately 6% of the Company's revenue for the six
months ended March 31, 1996. Carter-Wallace accounted for approximately 28%
of the Company's revenues for the six months ended March 31, 1996. Although
the Company expects that its relationships with these customers will
continue, if any of these customers were to cease doing business with the
Company it could have a material adverse effect on the Company's business.
See "Risk Factors - Dependence on Major Customers."
Products Under Development
The Company is presently developing new products in areas described
below. The Company spent a total of approximately $562,000, $727,000 and
$440,000 on Company-sponsored research and development for the fiscal years
ended September 30, 1995, 1994 and 1993, respectively. The Company spent a
total of approximately $11,000, $0 and $102,000 on customer-sponsored
research and development for the years ended September 30, 1995, 1994 and
1993, respectively. No assurance can be given that any technologies or
products under development by the Company will be successfully developed,
marketed or sold on a profitable basis.
Autoimmune Diseases
The Company intends to continue its development of products to aid in
the diagnosis of autoimmune diseases. Hemagglutination and ELISA kits for
the detection of antibodies associated with chronic autoimmune active
hepatitis, primary biliary cirrhosis and thyroiditis are currently under
development. The Company believes that it will have commercially available
assays for these purposes in fiscal 1997, subject to obtaining appropriate
regulatory clearances. See "Risk Factors - Government Regulation."
Acute Phase Reactants and Apolipoproteins
The Company continues to develop an application for its ELISA
technology which would detect cardiovascular risk factors (apolipoproteins)
and inflammatory signals (acute phase reactants) that are present in a
patient's blood prior to the manifestation of disease. In addition, this
assay could lead to earlier detection of organ transplant rejection or
infection than is possible with techniques now commercially available. This
technology is licensed by the Company from Boston University, which has a
patent for the technology. See "Business - Relationship with Boston
University."
The Company's acute phase reactant technology has a number of
potential applications, including:
* Transplantation
The key to successful organ transplantation is to ensure that the new
organ is not rejected by the recipient's body. This can be aided in part by
administering appropriate drugs prior to the time when the recipient's body
rejects the transplant. It has been reported that during the early phase of
the rejection process, the body will produce increased levels of certain
acute phase reactants. Using the Company's serum amyloid A ("SAA") assay,
physicians may be able to detect the point at which a body is rejecting a
transplanted organ earlier than current techniques allow.
* Cardiovascular Diseases
The Company is developing a test to measure two blood lipoproteins,
which are indicators of risk of cardiovascular disease. High levels of these
two lipoproteins have been cited as more reliable indices of cardiovascular
risk than cholesterol levels. Together with SAA, these technologies could
detect high cardiovascular risk levels in patients with chronic autoimmune
disease.
* Rheumatoid Arthritis
In connection with the Company's development program, the Company has
sold test kits utilizing its acute phase reactant technology to Pfizer for
use in the evaluation of Pfizer's experimental drug Tenidapr for the
treatment of rheumatoid arthritis.
Infectious Diseases
The Company continues to develop additional assays to aid in the
diagnosis of infectious diseases. The Company recently completed the
development of products are known as a "ToRCH panel," and include assays for
toxoplasmosis, rubella, CMV, and herpes. The Company is also developing test
kits for Lyme disease and for Epstein-Barr virus. As with all of the
Company's products under development, these products will have to undergo
FDA review before they can be marketed and sold in the United States. The
Company cannot predict when it will receive FDA clearance for these
products, if at all. See "Risk Factors - Government Regulation" and
"Business - Government Regulation."
Relationship with Boston University
Dr. Carl Franzblau, the Chairman of the Board, Chief Executive Officer
and President of the Company, serves as a Professor and Chairman of the
Department of Biochemistry and as Associate Dean for Graduate Affairs at the
Boston University School of Medicine. Dr. Alan Cohen, a Director of the
Company, serves as a Professor of Medicine and Pharmacology at Boston
University School of Medicine. Lawrence Gilbert, a Director of the Company,
is a former Director of the Patent and Technology Administration at Boston
University. Dr. John I. Sandson, a Director of the Company, is Dean Emeritus
of the Boston University School of Medicine. Charles W. Smith, a Director of
the Company, served as Senior Vice President of Boston University from 1984
through 1989 and as its Treasurer from 1983 through June 1992. The Company
believes that the continuing relationship between Boston University and
these individuals, particularly Dr. Franzblau, is beneficial to the Company,
particularly with respect to providing the Company with access to new
developments in scientific areas related to the Company's business. See
"Management" and "Certain Transactions."
License Agreements
In March 1992, the Company entered into a license agreement (the "B.
U. License Agreement") with Boston University (the "University") pursuant to
which the Company has obtained the exclusive right to use certain of the
University's patented technology to manufacture and market assays for the
detection of acute phase reactants. See "Business - Products under
Development." Pursuant to the B. U. License Agreement, the Company is
obligated to pay an annual royalty of 5% of the first $50,000 of the
Company's net sales of these assays, and 10% of the Company's net sales of
these assays in excess of $50,000 until the Company has paid the University
a license fee of $10,000 and reimbursed it for certain patent expenses.
Thereafter, the Company will pay a 5% royalty on its net sales of these
assays. Sales under the B.U. License Agreement have been immaterial to
date.
In July 1994, the Company entered into a second license agreement with
the University under which the Company obtained the exclusive right to use
additional patented and patent-pending technology of the University to
manufacture and market certain products relating to tumor markers. The
royalties due under the terms of the agreement are the same as the B.U.
License Agreement and will be applied to a license fee of $15,000. No
royalties were paid in the years ended September 30, 1995 or 1994 and no
amounts were accrued for royalties at September 30, 1995 or 1994. The
agreement terminates upon the termination of the patents.
Product Development Agreement
On February 14, 1992 the Company entered into a product development
agreement with the University to develop a urine-based assay to measure
levels of desmosine, which can indicate certain diseases such as cystic
fibrosis and emphysema. This agreement was terminated in 1993. The parties
are currently in discussions concerning the desirability of commercializing
this technology.
Manufacturing and Sources of Supply
The Company manufactures its hemagglutination and ELISA test kits at
its facility in Waltham, Massachusetts, and its VIRGO(R) products based on
immunofluorescence technology at its facility in Columbia, Maryland. The
RAICHEM line is produced at the Company's facility in San Diego, California.
The Company purchases RBCs and some of the antigens and other reagents used
in the kits from outside vendors. Most reagents used in the Company's test
kits are manufactured at the Company's facilities. The Company uses
lyophilization equipment to preserve sensitized RBCs for its
hemagglutination test kits.
All components used in the Company's products are available from
multiple sources, except for an antigen called SSA, which the Company uses
in two of its ELISA and two of its hemagglutination test kits. The Company
believes that the supplier of this antigen produces this antigen for many
customers. Management believes that if necessary, the Company could produce
sufficient quantities of this antigen itself. Therefore, if the supply of
this antigen were to cease, the Company believes it would not have a long-
term material adverse impact on the Company's business taken as a whole. See
"Risk Factors - Dependence on Suppliers."
Government Regulation
The Company's manufacturing and marketing of diagnostic test kits are
subject to government regulation in the United States and any other
countries in which the Company's products are sought to be marketed. The
Company may also seek regulatory approval to market its products and
proposed products in jurisdictions other than the United States. The
process of obtaining regulatory clearance involves lengthy and detailed
laboratory and clinical testing, and other costly and time consuming
procedures. This regulatory process may delay marketing of new products for
lengthy periods and impose costly procedures, thereby furnishing an
advantage to competitors with greater resources. Although over 90 of the
Company's current products have been cleared by the FDA through the 510(k)
review process, described below, there can be no assurance that regulatory
clearance will be granted on a timely basis in the future, if at all. The
extent of government regulation which may arise from future legislative or
administrative action cannot be predicted.
In vitro monitoring products, such as those employing antibodies for
the detection of autoimmune diseases in humans, are generally classified as
medical devices by the FDA. For some in vitro products, the United States
Food, Drug, and Cosmetic Act provides a process known as a "510(k) review"
to enable the manufacturer to demonstrate that the proposed product is
"substantially equivalent" to another product in commercial distribution in
the United States before May 28, 1976 or which has subsequently been
classified as a Class I or Class II medical device. When a 510(k) review is
used, a sponsor is required to submit a Pre-Market Notification to the FDA.
In the absence of a response from the FDA, the Company would not be able to
proceed with sales of its in vitro product for diagnostic use unless and
until it received notification from the FDA. In the event that the FDA
requests additional information for the Pre-market Notification, there could
be multiple cycles of submissions until clearance is obtained. The FDA has
statutory authority to also require clinical studies data to support a Pre-
Market Notification 510(k) application.
In cases where there are no existing FDA approved products
"substantially equivalent" to the new product, an approved pre-market
approval application ("PMA"), which involves a lengthier and more burdensome
process, would be required before the FDA would allow commercial
distribution. No assurance can be given that any in vitro blood test the
Company develops in the future will be found to have an intended use that
would qualify the new test for 510(k) clearance. Accordingly, a PMA may be
required for any new application of the Company's proposed in vitro blood
tests.
The FDA invariably requires clinical data for a PMA and, although the
FDA may grant 510(k) clearance without supporting clinical data, such data
may be required if the FDA determines that technical differences from
existing products suggest the need for additional evidence of safety or
effectiveness of the new product. If clinical studies are necessary, the FDA
may require the Company to obtain an investigational device exemption
("IDE"). An IDE normally restricts the distribution of an investigational
device to a limited number of institutions, and use by a limited number of
investigators, for the purpose of performing studies to be submitted to the
FDA in a 510(k) Pre-Market Notification or a PMA. The amount that can be
charged for use of an investigational device in a clinical study is
generally limited to recovery of costs until a 510(k) notification is
cleared or PMA approval is granted by the FDA. Accordingly, no significant
return can be expected during the study of investigational devices.
Although certain diagnostic products are exempt from IDE requirements,
the exemption applies only to tests which do not require an invasive
sampling procedure that presents significant risk, do not introduce energy
(such as X-rays) into a subject, and are not used as diagnostics without a
confirmatory diagnosis by a medically established diagnostic product or
procedure. The Company's products would not be used as diagnostics without
such a confirmatory diagnosis while an investigational device.
Medical devices may be exported before receiving IDE, 510(k) or PMA
clearance under certain conditions, providing FDA approval of the proposed
exportation is obtained. The receiving country must certify that the device
is not in conflict with the laws of that country and that the foreign
government is aware of the device's import. In addition, the FDA may require
safety data similar to that required for approval of an IDE before approving
the exportation of a new device. In foreign countries, the Company's
distributors are generally responsible for obtaining any required government
consents.
The Company is also required to register with the FDA as a device
manufacturer and list its devices. As such, the Company is subject to
inspection on a routine basis for compliance with the FDA's Good
Manufacturing Practice ("GMP") regulations. These regulations require that
the Company manufacture its products and maintain its documents in a
prescribed manner with respect to manufacturing, testing and control
activities. Failure to comply with applicable GMP or other regulatory
requirements can result in, among other things, sanctions, fines, delays or
suspensions of approvals, injunctions against further distribution, seizures
or recalls of products, operating restrictions and criminal prosecutions. In
addition, the Company is required to comply with various FDA requirements
for labeling. Pursuant to the Medical Device Reporting Act regulations, the
Company is also required to notify the FDA of any deaths or serious injuries
alleged to have been associated with the use of its diagnostic test kits as
well as product malfunctions that would likely cause or contribute to death
or serious injury if the malfunction were to recur. Finally, the FDA
prohibits an approved device from being marketed for unapproved
applications. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors - Government Regulation."
Competition
Competition in the clinical diagnostics industry is intense. There are
many companies, both public and private, engaged in diagnostics-related
research and development, including a number of well-known pharmaceutical
and chemical companies. Competition is based primarily on product
reliability, customer service and price. Some of these companies have
substantially greater capital resources and have marketing and business
organizations of substantially greater size than the Company. Many companies
have been working on immunodiagnostic reagents and products, including some
products believed to be similar to those currently marketed and under
development by the Company, for a longer period of time than has the
Company. The Company believes that its primary competitors in the
diagnostics market include Abbott Laboratories, Sigma Diagnostics, Trace-
America, Inc. NA, Gull Laboratories, Inc., Inova, Sanofi Diagnostics
Pasteur, Inc. (formerly Kallestad Diagnostics, Inc.), Diamedix Corporation
and Clark Laboratories. The Company expects competition within this industry
to intensify. See "Risk Factors - Competition."
Product Liability
The testing, marketing and sale of clinical diagnostics products
entail an inherent risk of allegations of product liability, and there can
be no assurance that product liability claims will not be asserted against
the Company. The Company may incur product liability due to product failure
or improper use of products by the user. Inaccurate detection may result in
the failure to administer necessary therapeutic drugs or administration of
unnecessary and potentially toxic drugs. Even with proper use of a product,
there may be specific instances in which the results obtained from the
Company's test kits could lead a physician to incorrectly predict the
appropriate therapy for a particular patient. The Company maintains product
liability insurance in the amount of up to $5,000,000 per incident and in
the aggregate which, based on the Company's experience and industry
practice, the Company believes to be adequate for its present operations. No
assurance can be given that the amount of the Company's insurance is
sufficient to fully insure against claims which may be made against the
Company. See "Risk Factors - Product Liability Risks."
Patents and Proprietary Rights
The Company protects its technology primarily as trade secrets rather
than by relying on patents, either because patent protection is not possible
or, in management's opinion, would be less effective than maintaining
secrecy. In addition, the Company relies upon confidentiality agreements
with its employees. To the extent that it relies on confidentiality
agreements and trade secret protection, there can be no assurance that the
Company's efforts to maintain secrecy will be successful or that third
parties will not be able to develop the technology independently. The
Company may in the future apply for patent protection for certain of its
technology when management believes such protection would be beneficial to
the Company. The protection afforded by patents depends upon a variety of
factors which may severely limit the value of the patent protection,
particularly in foreign countries, and no assurance can be given that
patents, if granted, will provide meaningful protection for the Company's
technology. See "Risk Factors - Patents and Proprietary Rights."
Royalty Obligations
The Company is required to pay royalties to third parties on sales of
some of its products and proposed products. See "Business - Relationship
with Boston University" and "Certain Transactions."
Employees
As of June 3, 1996, the Company had 98 full-time employees, of which
five are executive officers, 20 are employed in general and administrative
activities, ten are involved in sales and marketing and 63 are involved in
production and research and development.
Facilities
The Company maintains its principal executive offices, laboratory and
production operations in Waltham, Massachusetts in two adjacent buildings;
one a 4,000 sq. ft. facility which houses the Company's research and
development laboratories, and the other a 15,000 sq. ft. facility which
accommodates the laboratory and production operations and the executive
offices of the Company. The Company pays rent in the amount of $36,000 per
annum for the 4,000 square foot facility on a month-to-month basis. The
Company pays rent in the amount of $82,500 per annum for the 15,000 square
foot facility pursuant to the terms of that lease which ends May 30, 1997.
The Company leases 29,000 square feet in a production facility in Columbia,
Maryland where it manufactures the VIRGO(R) product line. Under the
Columbia lease, which has a five-year term through June 30, 2000, the
Company pays $100,000 per annum in rent. The Company also leases 20,100
square feet in San Diego, California, where it manufactures the RAICHEM
products. Under the San Diego lease, which extends through September 30,
1997, the Company pays $225,084 per annum. In addition, the Company leases
a 1,900 square foot warehouse facility near its production site for which it
pays $13,080 per annum on an annual lease which may be renewed each April 1.
The Company believes that its facilities are adequate for its present and
foreseeable needs. See "Use of Proceeds."
The Company's 51%-owned subsidiary, HDC, leases approximately 4,500
square feet in Sao Paulo, Brazil pursuant to a lease which expires on
September 30, 1996. This subsidiary pays rent in an amount of approximately
$4,800 per month for this space. If the Company's South American activities
expand, the Company's subsidiary may lease additional space in Sao Paulo,
Brazil. See "Certain Transactions."
Legal Matters
The Company is not presently involved in any material pending
litigation.
MANAGEMENT
The following table sets forth the ages of and positions and offices
presently held by each Director and executive officer of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Carl Franzblau, Ph.D. 61 Chairman of the Board of Directors, Chief
Executive Officer, President and Secretary
Ricardo M. de Oliveira, M.D. 44 Vice President of Research and Development
and Director
Peter von Stein 61 Vice President and Chief Operating Officer
Myrna Franzblau 58 Treasurer
William Franzblau 34 Chief Financial Officer and General Counsel
Alan S. Cohen, M.D. 69 Director
Lawrence Gilbert 63 Director
John I. Sandson, M.D. 68 Director
Charles W. Smith 64 Director
</TABLE>
Each of the Company's Directors has served in such capacity since the
Company's inception in 1985. The Company's Board of Directors is divided
into three classes. Directors constituting approximately one-third of the
Board of Directors are elected annually for a period of three years at the
Company's Annual Meeting of Stockholders to serve until their successors are
duly elected by the stockholders. The terms of Dr. Franzblau and Dr. de
Oliveira expire in 1997; and the terms of Dr. Sandson and Mr. Smith expire
in 1998; the terms of Dr. Cohen and Mr. Gilbert expire in 1999. A
classified Board of Directors could discourage, delay or prevent a takeover
or change of control of the Company. Vacancies and newly created
directorships resulting from any increase in the number of authorized
Directors may be filled by a majority vote of Directors then in office.
Officers are elected by and serve at the pleasure of the Board of Directors.
The following is a brief summary of the background of each Director
and executive officer of the Company:
Carl Franzblau, Ph.D. has served as Chairman of the Board of
Directors, Chief Executive Officer and President of the Company since its
inception. For more than the past five years, Dr. Franzblau has served as a
Professor and Chairman of the Biochemistry Department and Associate Dean for
Graduate Affairs at the Boston University School of Medicine. Dr. Franzblau
received his Bachelor of Science degree in Chemistry from the University of
Michigan and his Ph.D. in Biochemistry from the Albert Einstein College of
Medicine. Dr. Franzblau devotes a minimum of 30 hours per week to the
business of the Company pursuant to the terms of his employment agreement.
Dr. Franzblau is the husband of Myrna Franzblau, the Company's Treasurer,
and the father of William Franzblau, the Company's Chief Financial Officer
and General Counsel.
Ricardo M. de Oliveira, M.D. has been the Vice President of Research
and Development and a Director of the Company since its inception. From
1980 through 1990, Dr. de Oliveira was a Professor at the University of Sao
Paulo in Brazil. Dr. de Oliveira is also the Director of Clinical Pathology
at the Cancer Hospital of Sao Paulo, Brazil. Dr. de Oliveira received his
M.D. degree from the Faculdade de Ciencias Medicas da Santa Casa de Sao
Paulo in Brazil.
Peter von Stein joined the Company in August 1992 as its Vice
President and Chief Operating Officer after having served as a consultant to
the Company since February 1992. From August 1991 to June 1992, Mr. von
Stein served as Chief Executive Officer of Health Protection Products, a
privately-held distributor of hip-protection devices. From October 1990
through June 1991, Mr. von Stein served as President and Chief Executive
Officer of Adams Scientific, Inc., a privately-held microbiology company.
From 1983 to 1991, Mr. von Stein served as Chief Executive Officer of Access
Medical Systems, Inc., a privately-held manufacturer of medical-diagnostics
products. Access Medical Systems filed a petition in bankruptcy court for
protection from creditors five months after Mr. von Stein's departure and
completed its reorganization in late 1991. Mr. von Stein received his
Bachelor of Arts degree from Brown University.
Myrna Franzblau has been the Company's Treasurer since its inception.
Mrs. Franzblau received her Bachelor of Arts from Brooklyn College and her
Master's degree in Education from Boston University. Mrs. Franzblau is the
wife of Carl Franzblau, the Company's President, and the mother of William
Franzblau, the Company's Chief Financial Officer and General Counsel.
William Franzblau joined the Company in March, 1993 as its General
Counsel and became the Company's Chief Financial Officer in February 1996.
From January 1, 1991 to March, 1993, Mr. Franzblau was an associate at the
law firm of Shapiro, Israel and Weiner. Mr. Franzblau received his Bachelor
of Arts, J.D. and L.L.M. degrees from Boston University. Mr. Franzblau is
the son of Dr. and Mrs. Franzblau.
Alan S. Cohen, M.D. has served as a Director of the Company since its
inception. Dr. Cohen has been employed by the Boston University School of
Medicine as a Professor of Medicine since 1968 and a Professor of
Pharmacology since 1974. Dr. Cohen served as the Director of the Arthritis
Center of Boston University from 1976 to 1994. From 1972 to 1992, Dr. Cohen
served as Chief of Medicine of Boston City Hospital. Dr. Cohen is a past
President of the American College of Rheumatology. Dr. Cohen received his
Bachelor of Arts degree from Harvard College and his M.D. degree from the
Boston University School of Medicine.
Lawrence Gilbert has served as a Director of the Company since its
inception and served as Clerk of the Company from its inception until 1988.
From 1987 until 1995, Mr. Gilbert served as the Director of Patent and
Technology Administration for Boston University. Since 1995, Mr. Gilbert
has served as the Director of Technology Transfer at the California
Institute of Technology. Mr. Gilbert received his Bachelor of Arts degree
from Brandeis University, his Bachelor of Foreign Trade from the American
Institute of Foreign Trade and a J.D. degree from Suffolk University Law
School.
John I. Sandson, M.D. has served as a Director of the Company since
its inception. Since 1988, Dr. Sandson has been Dean Emeritus of the Boston
University School of Medicine. He was Dean of the Boston University School
of Medicine from 1974 to 1988. Dr. Sandson was a Director and the Clerk of
Peer Review Analysis, Inc., from 1990 to 1993, a publicly-held provider of
medical cost-containment services. Dr. Sandson received his Bachelor's
degree from St. Vincent College and received his M.D. from Washington
University School of Medicine.
Charles W. Smith has served as a Director of the Company since its
inception. From 1984 through 1989, Mr. Smith served as a Senior Vice
President of Boston University. From 1983 through June 1992, Mr. Smith also
served as the Treasurer and a member of the Board of Trustees of Boston
University. Mr. Smith was a Director of Seragen, Inc., a publicly-held
biotechnology company, through May 1996 and was a director of Peer Review
Analysis, Inc. from 1990 to 1994. Mr. Smith attended Metropolitan College
in England and is a fellow of the Institute of Chartered Accountants in
England and Wales.
Committees; Compensation of Non-Employee Directors
The Company has established an Executive Committee, an Audit Committee
and a Compensation Committee of the Board of Directors. Members of the
Executive Committee are Dr. Franzblau, Dr. Sandson and Dr. de Oliveira. The
Executive Committee is authorized to take any action that the Board of
Directors is authorized to act upon with the exception of the issuance of
stock, the sale of all or substantially all of the Company's assets and any
other significant corporate transaction.
Members of the Audit Committee are Mr. Smith and Mr. Gilbert. The
Audit Committee is concerned primarily with recommending the selection of
the Company's independent accountants and reviewing the effectiveness of the
Company's accounting policies and practices, financial reporting and
internal controls. The Audit Committee reviews the scope of audit
coverages, the results of audits, the fees charged by the accountants, and
internal control systems.
The Compensation Committee consists of Dr. Franzblau and two
independent outside Directors, Dr. Sandson and Dr. Cohen. The Compensation
Committee was established to set and administer the policies that govern
annual compensation for the Company's executives.
During fiscal 1995 and 1994, members of the Executive Committee, Audit
Committee and Compensation Committee did not meet as separate committees.
Instead, during such time, the Board of Directors, as a whole, addressed the
policies and issues related to the functions of the Executive, Audit and
Compensation Committees. The Board of Directors met four times during
fiscal 1995. All of the Directors attended at least 75% of the meetings of
the Board of Directors. The Company does not have a standing nominating
committee or a committee performing similar functions.
In fiscal 1995 and 1996 the Company issued to each of its four non-
management Directors 3,000 and 5,000 shares of Common Stock, respectively,
as compensation for such Directors' services to the Company. Drs. Franzblau
and de Oliveira receive no compensation for their services as Directors.
Except for Dr. and Mrs. Franzblau and William Franzblau, no Director
or executive officer is related by blood, marriage or adoption to any other
Director or executive officer.
Executive Officers' Compensation
The following table sets forth the compensation paid to the Company's
Chief Executive Officer during the fiscal years ended September 30, 1995,
1994 and 1993, and the other executive officers of the Company who earned a
total annual salary and bonus in excess of $100,000 during the fiscal year
ended September 30, 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
- --------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f)
Securities
Underlying
Name and Other Annual Options
Principal Position Year Salary Bonus Compensation (#)(4)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Carl Franzblau 1995 $103,000 0 $5,073 (1) 0
Chief Executive Officer 1994 $ 97,950 0 $5,073 0
1993 $ 76,000 0 $5,000 0
Ricardo de Oliveira 1995 $103,000 0 $3,496 (2) 0
Vice President 1994 $100,350 0 $3,496 0
Research & Development 1993 $ 88,600 0 $3,000 0
Peter von Stein 1995 $100,000 0 $3,000 (3) 0
Chief Operating 1994 $ 97,500 0 $2,925 0
Officer 1993 $ 93,500 0 $ 0 0
<F1> The Company had provided Dr. Franzblau with the use of a Company-owned
or leased car during the fiscal years ended September 30, 1995, 1994 and
1993, and has recorded an annual expense for Dr. Franzblau's automobile
of approximately $5,073, $5,073 and $5,000 respectively.
<F2> The Company had provided Dr. de Oliveira with the use of a Company-owned
or leased car during the fiscal years ended September 30, 1995, 1994 and
1993, and has recorded an annual expense for Dr. de Oliveira's
automobile of approximately $3,500, $3,500 and $3,000, respectively.
<F3> Mr. von Stein received an average monthly reimbursement of approximately
$1,200 for housing, automobile and travel expenses associated with his
weekly commute to the Boston area from out of state during the fiscal
years presented. At the election of each employee who has been employed
by the Company for more than twelve (12) months, the Company matches
contributions made by that employee into his or her individual
retirement account, up to a maximum of three percent (3%) of the
employee's annual salary. Mr. von Stein participates in the Company's
retirement assistance program and the Company paid $3,000 and $2,925
into Mr. von Stein's individual retirement account for fiscal 1995 and
1994, respectively. Drs. Franzblau and de Oliveira do not participate
in this program.
<F4> No options have been granted to Dr. Franzblau or Dr. de Oliveira in the
fiscal years ended September 30, 1995, 1994 and 1993. On August 17,
1992, 50,000 options were granted to Mr. von Stein at an exercise price
of $5.00 per share to vest annually over a three-year period. The
exercise price of these options were reduced to $1.75 per share in July
1995. As of September 30, 1995, all of Mr. von Stein's options have
vested, none of which have been exercised.
</TABLE>
The following table sets forth the value of Mr. von Stein's
outstanding options held as of September 30, 1995.
Aggregated Option Exercises in Fiscal 1995 and FY-End Option Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities Value of
Underlying Unexercised Unexercised
Options/SARs In-the-Money
At FY-End(#) Options/SARS at FY-End(#)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise(#) Value Realized($) Unexercisable Unexercisable(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Peter von Stein 0 0 50,000/0 $62,500/n.a.
<F1> Options listed carry an exercise price of $1.75 per share. The fair
market value of the Company's Common Stock underlying the options, as of
September 30, 1995, was $3.00 per share (NASDAQ closing price on
September 29, 1995).
</TABLE>
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
The Company has entered into employment and non-competition agreements
with Dr. Franzblau and Dr. de Oliveira, that expire on June 30, 1997, and
with Mr. von Stein, that expired on December 31, 1995. For the year ended
December 31, 1995, Dr. Franzblau and Dr. de Oliveira each received base
annual salaries of $103,000, the use of an automobile owned or leased by the
Company and bonuses as may be determined by the Board of Directors. The
employment agreements of Dr. Franzblau and Dr. de Oliveira provide that they
each devote a minimum of 30 hours and 40 hours per week, respectively, to
the business of the Company. For the year ended December 31, 1995, Mr. von
Stein received a base annual salary of $100,000 and an annual allowance for
his housing, automobile and travel expenses.
Pursuant to Dr. Franzblau's agreement with Boston University, Dr.
Franzblau must disclose certain inventions made by him to the University.
Dr. Franzblau is also responsible for ensuring that his employment with the
Company does not conflict with the patent policy of the University. As Dr.
Franzblau is not primarily responsible for conducting laboratory research
for the Company and the Company's research is generally unrelated to Dr.
Franzblau's research for the University, the Company does not believe that
these provisions will have any material effect on, or restrict the Company's
ownership or use of, future technological advances, if any, developed by the
Company.
1992 Stock Option Plan
The Company may issue up to 500,000 shares of Common Stock under its
1992 Stock Option Plan (the "Plan"). As of June 3, 1996, 229,225 shares of
the 500,000 shares of Common Stock issuable under the Plan were subject to
outstanding options.
The purpose of the Plan is to strengthen the ability of the Company to
attract and retain well-qualified executive and managerial personnel and to
provide additional incentive to the Company's employees and officers to
contribute to the success of the Company, and thereby to enhance stockholder
value. The Plan was originally adopted by the Board of Directors and the
Company's stockholders on May 6, 1992.
Options under the Plan may be either "incentive stock options" within
the meaning of Section 422 of the United States Internal Revenue Code of
1986, as amended (the "Code"), or non-qualified options. Incentive stock
options may be granted only to employees of the Company, while non-qualified
options may be issued to non-employee Directors, employees and consultants
of the Company.
The per share exercise price of the Common Stock subject to incentive
stock options granted pursuant to the Plan may not be less than the fair
market value of the Common Stock on the date the option is granted. Under
the Plan, the aggregate fair market value (determined as of the date the
option is granted) of the Common Stock that first became exercisable by any
employee in any one calendar year pursuant to the exercise of incentive
stock options may not exceed $100,000. No person who owns, directly or
indirectly, at the time of the granting of an incentive stock option to him,
10% or more of the total combined voting power of all classes of stock of
the Company (a "10% Stockholder"), shall be eligible to receive any
incentive stock options under the Plan unless the option price is at least
110% of the fair market value of the Common Stock subject to the option,
determined on the date of the grant. Non-qualified options are not subject
to this limitation. Options granted under the Plan are not transferrable,
except upon death of the optionee.
Options under the Plan must be granted within 10 years from the
effective date thereof. Incentive stock options granted under the Plan
cannot be exercised more than 10 years from the date of grant, except that
incentive stock options issued to a 10% Stockholder are limited to five year
terms. Any unexercised options under the Plan that expire or that terminate
upon an employee's ceasing to be employed with the Company become available
once again for issuance.
SELLING SECURITYHOLDERS
The following table sets forth the name of each Selling
Securityholder; the number of shares of Common Stock owned by each Selling
Securityholder before this offering to the knowledge of the Company; the
number of Shares offered hereby; the number of shares of Common Stock owned
by each Selling Securityholder after completion of this offering to the
knowledge of the Company; and the percentage of the class represented by
those shares of Common Stock owned after completion of this offering. All
of the Notes had been converted into shares of Common Stock of the Company
as of June 3, 1996.
The Selling Securityholders comprise those persons who purchased or
acquired Notes or Warrants of the Company. Certain of the Selling
Securityholders identified below are officers or directors of the Company.
Sales of the Shares would occur at the discretion of the Selling
Stockholders. See "Plan of Distribution."
<TABLE>
<CAPTION>
Shares
Beneficially Shares to be
Owned Prior Sold in Shares Beneficially
to Offering(1)(2) Offering(1) Owned After Offering(2)
------------------------- ------------ -----------------------
Name of Selling Number of Percentage Number of Percentage
Securityholder Shares of Class Shares of Class
- --------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Aberlyn Capital Management 157,000 4.7 157,000 0 0
Pinecrest Management, Inc. 125,000(3) 4.0 90,517 0 0
Rosendale Financial Services Ltd. 110,000 3.4 110,000 0 0
Carl and Myrna Franzblau 639,521 19.8 65,000 574,521 6.9
KCID Industries, Ltd. 62,500(5) 2.0 45,259 0 0
Synergy Growth Concepts, Ltd. 62,500(5) 2.0 45,259 0 0
Charles W. Smith(6) 144,159 4.5 57,500 86,659 1.1
Peter von Stein(7) 107,500 3.3 57,500 50,000 *
Lawrence Gilbert(8) 166,887 5.2 57,500 109,387 1.3
Thomas E. Hales 50,000 1.6 50,000 0 0
Barry M. Manuel, M.D. 50,000 1.6 50,000 0 0
One & Co. 50,000 1.6 50,000 0 0
Brenda Ottensoser 50,000 1.6 50,000 0 0
Gotham Interiors Inc. 50,000 1.6 50,000 0 0
Jesselson Trust f/b/o Grandchildren 37,500 * 37,500 0 0
Alan S. Cohen, M.D. and
Joan P. Cohen, JTWROS(9) 138,705 4.3 32,500 106,205 1.3
Evan Bruce Cohen, M.D. 42,418 1.3 32,500 9,918 *
John I. Sandson, M.D.(10) 84,691 2.6 32,500 52,191 *
Ronald Weiss 32,500 1.0 32,500 0 0
Marshall Naify 30,000 * 30,000 0 0
Welch & Forbes 30,000 * 30,000 0 0
U.S. Technology 30,000 * 30,000 0 0
Robert Naify 30,000 * 30,000 0 0
Samuel Herschkowitz, MD 30,000 * 30,000 0 0
Salah M. Hassanein 30,000 * 30,000 0 0
Raymond Frankel 30,000 * 30,000 0 0
Joseph and Carol Cooper 53,400 1.7 25,000 28,400 *
Ronald G. Brenner 31,500 * 25,000 6,500 *
Richard Edwards 25,000 * 25,000 0 0
Jonathan Rothschild 25,000 * 25,000 0 0
Jerry L. Ruyan 75,000 2.3 25,000 50,000 *
Bernard M. Weiss 25,000 * 25,000 0 0
Brett and Laurie Yarusi(11) 31,000 * 25,000 6,000 *
William Pope 39,500 1.2 25,000 14,500 *
Charles A. Willand(12) 48,520 1.5 25,000 23,520 *
Ronald H. Rust 25,000 * 25,000 0 0
Manhattan Group Funding 25,000 * 25,000 0 0
Lasam Limited 25,000 * 25,000 0 0
New Jersey Group Funding 25,000 * 25,000 0 0
Michael Cantor 25,000 * 25,000 0 0
Technol. Invest. Management 15,000 * 15,000 0 0
Science Participants 15,000 * 15,000 0 0
Modern Technology Corp. 15,000 * 15,000 0 0
Lester Rosenkrantz 14,000 * 14,000 0 0
L. Neil LeRoy 14,500 * 12,500 2,000 *
Maurice and Stacey Gozlan 22,500 * 12,500 10,000 *
John W. Schieffelin 15,000 * 12,500 2,500 *
Stephen Sheller 15,000 * 12,500 2,500 *
Frank A. Duckworth 12,500 * 12,500 0 0
Douglas Fowlie Gill 12,500 * 12,500 0 0
Arbor Interiors Pension Fund 13,500 * 12,500 1,000 *
Edward I. Marquette 18,900 * 12,500 6,400 *
Griffin Pediatric(13) 16,500 * 12,500 4,000 *
Eli Hazan 16,050 * 12,500 3,550 *
Kent M. Hamilton 15,050 * 12,500 2,550 *
Dr. Henry H. Bahr 17,500 * 12,500 5,000 *
Kurt D. Hellweg 22,500 * 12,500 10,000 *
Leslie A. Turchin 12,500 * 12,500 0 0
Robert and Carol Gross 12,500 * 12,500 0 0
Bonnie S. Grossman 12,500 * 12,500 0 0
Steven D'Apuzzo, Jr. 12,500 * 12,500 0 0
Angelo Ciurleo 12,500 * 12,500 0 0
Harvey Glicker Profit Sharing Trust 12,500 * 12,500 0 0
Robert Grossman 12,500 * 12,500 0 0
Richard M.H. Thompson 12,500 * 12,500 0 0
Marc Roberts and Ron Cantor 12,500 * 12,500 0 0
Eugene Silverman 12,500 * 12,500 0 0
Phil Lifschitz 12,500 * 12,500 0 0
David Feinsilver 12,500 * 12,500 0 0
Robert A. Bradford, Jr. 12,500 * 12,500 0 0
William J. Motto 12,500 * 12,500 0 0
Jasminville Corporation N.V. 12,500 * 12,500 0 0
Robert Joseph 12,500 * 12,500 0 0
Infinite Specialties Defind Benefit Plan 12,500 * 12,500 0 0
Kent Karpawich 12,500 * 12,500 0 0
The Winning Partnership 12,500 * 12,500 0 0
John Jeffrey Brausch 12,500 * 12,500 0 0
Evan B. Weiss 12,500 * 12,500 0 0
William Lewis 12,500 * 12,500 0 0
David E. Matarese 12,500 * 12,500 0 0
Brandt Mandia 12,500 * 12,500 0 0
Metro Consulting, Inc. 12,500 * 12,500 0 0
Peter Ungaro 12,500 * 12,500 0 0
Donald C. Adamson 12,500 * 12,500 0 0
Jonathan Shapiro 12,500 * 12,500 0 0
Alyse Bernstein 12,500 * 12,500 0 0
Donna L. Bregg 12,500 * 12,500 0 0
Eric Bashford 12,500 * 12,500 0 0
Jehuda Reinharz 12,500 * 12,500 0 0
Eliot Schwartz 11,250 * 11,250 0 0
First National Bank of Omaha 7,500 * 7,500 0 0
Richard Pizitz 7,500 * 7,500 0 0
Eugene and Kathryn Buonanno 6,250 * 6,250 0 0
Steven S. Goldberg 6,250 * 6,250 0 0
Robert Johnson 6,250 * 6,250 0 0
Bruce and Carolyn Wilson 6,250 * 6,250 0 0
William Franzblau(14) 74,890 2.0 6,250 68,640 *
Joseph and Kathleen Sacco 6,250 * 6,250 0 0
Rachel Weiss 64,390 2.0 6,250 58,140 *
Bradley Resources Company 36,250 1.1 6,250 30,000 *
Ira Liederman 5,000 * 5,000 0 0
Gary Davis 4,000 * 4,000 0 0
Frank Colen 4,000 * 4,000 0 0
Herbert Maxwell 3,750 * 3,750 0 0
Harvey J. Lippman 3,750 * 3,750 0 0
Ronald Kassover, CPA 3,750 * 3,750 0 0
Joseph Gatti 3,000 * 3,000 0 0
-------------------------------------------------------------
TOTAL 3,781,081 66.7% 2,388,035 1,324,081 17.4%
=============================================================
____________
<F*> Less than 1%.
<F1> Includes shares of Common Stock issuable upon conversion of the Notes
and/or exercise of the Warrants. Information with respect to number
of shares held and percent of class prior to offering is as of
January 10, 1996.
<F2> Pursuant to the rules of the Securities and Exchange Commission, shares
of Common Stock which an individual or group has a right to acquire
within 60 days pursuant to the exercise of options or warrants are
deemed to be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of
any other person shown in the table. Number of shares beneficially
owned after offering is based on ownership information available to
the Company on January 10, 1996.
<F3> Includes Warrants that were exercised on a cashless basis into 90,517
shares of Common Stock.
<F4> Includes 317,010 shares owned by Dr. Franzblau and 317,011 shares owned
by Mrs. Franzblau. Also includes (i) 15,000 shares of Common Stock
issuable upon exercise of outstanding Warrants, (ii) 50,000 shares of
Common Stock issued upon conversion of Notes in May 1996 and (iii)
10,000 shares of Common Stock issuable upon exercise of stock options
at an exercise price of $1.75 per share. Excludes a total of 128,780
shares of Common Stock owned by the children of Dr. and Mrs. Franzblau
as to which Dr. and Mrs. Franzblau disclaim any beneficial interest,
including 12,500 shares of Common Stock issuable upon conversion of
Notes. Dr. Franzblau is the Chairman of the Board of Directors, Chief
Executive Officer and President of the Company. Mrs. Franzblau is the
Treasurer of the Company.
<F5> Includes Warrants that were exercised on a cashless basis into 42,259
shares of Common Stock.
<F6> Includes (i)7,500 shares of Common Stock issuable upon exercise of
outstanding Warrants, (ii) 50,000 shares of Common Stock issued upon
conversion of Notes and (iii) 5,000 shares of Common Stock in March
1996 in consideration of Mr.'Smith's services as a Director of the
Company. Excludes a total of 51,300 shares of Common Stock owned by
children of Mr. Smith as to which Mr. Smith disclaims any beneficial
interest.
<F7> Mr. von Stein serves as the Chief Operating Officer of the Company.
Includes 50,000 shares issuable pursuant to currently exercisable
options.
<F8> Includes (i) 50,000 shares of Common Stock issued upon conversion of
Notes and (ii) 5,000 shares of Common Stock issued in March 1996 in
consideration of Mr. Gilbert's services as a Director of the Company.
Excludes a total of 31,572 shares of Common Stock owned by children of
Mr. Gilbert, as to which Mr. Gilbert disclaims any beneficial
interest.
<F9> Includes (i) 7,500 shares of Common Stock issuable upon exercise of
outstanding Warrants, (ii) 25,000 shares of Common Stock issued upon
conversion of the Notes and (iii) 5,000 shares of Common Stock in
March 1996 in consideration of Dr. Cohen's services as a Director of
the Company. Excludes a total of 63,754 shares of Common Stock owned
by sons of Dr. Cohen to which Dr. Cohen disclaims any beneficial
interest, including 25,000 shares of Common Stock issued upon
conversion of Notes and 7,500 shares of Common Stock issuable upon
conversion of Warrants.
<F10> Includes (i)7,500 shares of Common Stock issuable upon exercise of
outstanding Warrants, (ii) 25,000 shares of Common Stock issued upon
conversion of Notes and (iii) 5,000 shares of Common Stock in March
1996 in consideration of Dr. Sandson's services as a Director of the
Company. Excludes a total of 22,708 shares of Common Stock owned by
children of Dr. Sandson as to which Dr. Sandson disclaims any
beneficial interest.
<F11> Includes 6,000 shares held by the children of Mr. and Mrs. Yarusi.
<F12> Mr. Willand serves as a Director of Operations of the Company.
Excludes 20,520 shares owned by his wife. Mr. Willand disclaims any
beneficial interest in these shares.
<F13> Includes 1,000 shares held by The Griffen Pediatric Clinic Profit
Sharing Plan.
<F14> Includes 58,140 shares of Common Stock owned by Mr. Franzblau and
10,500 shares of Common Stock issuable upon exercise of outstanding
stock options held by Mr. Franzblau. Mr. Franzblau is the Chief
Financial Officer and General Counsel of the Company and the son of
Dr. and Mrs. Franzblau.
</TABLE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 11, 1996, certain
information concerning stock ownership of the Company by (i) each person who
is known by the Company to own beneficially 5% or more of the Company's
Common Stock, (ii) each of the Company's Directors, and (iii) all Directors
and officers as a group. Except as otherwise indicated, the stockholders
listed in the table have sole voting and investment powers with respect to
the shares indicated. To the extent the following persons have rights to
acquire any of the Shares, the information presented below is also set forth
under "Selling Securityholders."
<TABLE>
<CAPTION>
Shares
Beneficially Shares to be
Owned Prior Sold in Shares Beneficially
to Offering(1) Offering Owned After Offering(1)
---------------------- ------------ -----------------------
Name and Address Number of Percentage Number of Percentage
of Beneficial Owner(2) Shares of Class Shares of Class
---------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Carl Franzblau, Ph.D., and
Myrna Franzblau(4) 649,021 19.8 65,000 584,021 6.9
Ricardo M. de Oliveira, M.D.(5) 375,698 11.9 0 375,698 4.6
Lawrence Gilbert(6) 166,887 5.2 57,500 109,387 1.3
Alan S. Cohen, M.D.(7) 138,705 4.3 32,500 106,205 1.3
Charles W. Smith(8) 144,159 4.5 57,500 86,659 1.1
John I. Sandson, M.D.(9) 84,691 2.6 32,500 52,191 *
All Directors & Officers as a
Group (9 persons)(10) 1,732,051 48.6 308,750 1,423,301 17.3
- -------------
<F*> Less than 1%
<F1> Pursuant to the rules of the Securities and Exchange Commission, shares
of Common Stock which an individual or group has a right to acquire
within 60 days pursuant to the exercise of options or warrants are
deemed to be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of
any other person shown in the table. Percentage of class before
offering is as of January 10, 1996, but includes shares of Common
Stock with respect to each individual as set forth in the notes
below.
<F2> The addresses for all of the named individuals is c/o Hemagen
Diagnostics, Inc., 34-40 Bear Hill Road, Waltham, Massachusetts
02154.
<F3> Except to the extent stated in the notes below, the percentage
ownership of such individual or group does not include up to 500,000
shares of Common Stock reserved for issuance pursuant to stock options
that have been or may be granted under the Company's 1992 Stock Option
Plan. As of June 3, 1996, options to purchase 229,225 shares are
currently outstanding pursuant to this plan with an average exercise
price of approximately $2.50 per share.
<F4> Includes 317,010 shares owned by Dr. Franzblau and 307,011 shares owned
by Mrs. Franzblau, including 25,000 shares of Common Stock issued to
Dr. and Mrs. Franzblau upon conversion of promissory notes in May
1996. Also includes (i) 15,000 shares of Common Stock
issuable upon exercise of outstanding Warrants, and (ii)
10,000 shares issuable upon exercise of stock options at an exercise
price of $1.75 per share. Excludes a total of 128,780 shares of
Common Stock owned by the children of Dr. and Mrs. Franzblau as to
which Dr. and Mrs. Franzblau disclaim any beneficial interest,
including 12,500 shares of Common Stock issuable upon conversion of
Notes.
<F5> Excludes 40,014 shares owned by each of Dr. de Oliveira's spouse,
brother and sister as to which Dr. de Oliveira disclaims any
beneficial interest.
<F6> Includes (i) 50,000 shares of Common Stock issued upon conversion of
Notes in May 1996, (ii) 5,000 shares of Common Stock issued in March
1996 for Mr. Gilbert's service as a director of the Company, and (iii)
50,000 shares held be Mr. Gilbert's wife. Excludes a total of 31,572
shares of Common Stock owned by children of Mr. Gilbert, as to which
Mr. Gilbert disclaims any beneficial interest.
<F7> Includes (i) 7,500 shares of Common Stock issuable upon exercise of
outstanding Warrants, (ii) 25,000 shares of Common Stock issued in May
1996 upon conversion of the Notes, and (iii) 5,000 shares of Common
Stock issued in March 1996 in consideration of Dr. Cohen's service as
a director of the Company. Excludes a total of 63,754 shares of
Common Stock owned by sons of Dr. Cohen as to which Dr. Cohen
disclaims any beneficial interest, including 25,000 shares of Common
Stock issued upon conversion of Notes and 7,500 shares of Common Stock
issuable upon conversion of Warrants.
<F8> Includes (i) 7,500 shares of Common Stock issuable upon exercise of
outstanding Warrants, (ii) 50,000 shares of Common Stock issued upon
conversion of Notes in May 1996, and (iii) 5,000 shares of Common
Stock issued in March 1996 in consideration of Mr. Smith's service of
a director of the Company. Excludes a total of 51,300 shares of
Common Stock owned by children of Mr. Smith as to which Mr. Smith
disclaims any beneficial interest.
<F9> Includes (i) 7,500 shares of Common Stock issuable upon exercise of
outstanding Warrants, (ii) 25,000 shares of Common Stock issued upon
conversion of Notes in May 1996, and (iii) 5,000 shares of Common
Stock issued in March 1996 in consideration of Dr. Sandson's service
of the director of the Company. Excludes a total of 22,708 shares of
Common Stock owned by children of Dr. Sandson as to which Dr. Sandson
disclaims any beneficial interest.
<F10> Includes the shares referenced in notes (4) through (9) above, plus (i)
57,500 shares issuable pursuant to currently exercisable options and
warrants held by Mr. Peter von Stein, the Company's Chief Operating
Officer (ii) 50,000 shares of Common Stock issued upon conversion of
Notes beneficially held by Mr. von Stein, (iii) 58,140 shares of
Common Stock held by William Franzblau, Esquire, the Company's Chief
Financial Officer and General Counsel, (iv) 6,250 shares of Common
Stock issued upon conversion of Notes held by Mr. Franzblau and (v)
10,500 shares of Common Stock issuable upon exercise of stock options
at a weighted average exercise price of approximately $1.75 per
sharer. Of these shares, 63,750 are being offered for sale pursuant
to this Prospectus.
</TABLE>
CERTAIN TRANSACTIONS
During 1993, the Company acquired a 51% interest in HDC, that had been
100% beneficially owned by Dr. Ricardo M. de Oliveira, the Company's Vice
President of Research and Development and a Director of the Company. The
Company purchased its interest in HDC in exchange for the forgiveness of a
$25,000 advance to HDC that was outstanding as of September 30, 1992. The
Company loaned HDC $185,500, $100,000 and $50,000 in August 1994, November
1993 and August 1993, respectively, to renovate, equip and operate a new
manufacturing facility in Sao Paulo, Brazil. This indebtedness is evidenced
by three five-year promissory notes, each with interest payable quarterly at
the rate of approximately 12% per annum. The Company and HDC have signed an
agreement in principle for the Company to acquire substantially all of the
remaining interest in HDC by issuing stock options to the minority
stockholders of HDC with an exercise price at or above the fair market value
of the Company's Common stock. The Company and HDC's minority stockholders
are currently negotiating the final details of this arrangement.
The Company has entered into two license agreements and one product
development agreement with Boston University. In the fiscal year ended
September 30, 1993, the Company repaid a $50,000 demand note plus accrued
interest to Boston University. Several of the Company's Directors,
including Dr. Franzblau, the Chairman, Chief Executive Officer and President
of the Company, have affiliations with Boston University. See "Business -
Relationship with Boston University."
Pursuant to a prior arrangement, the Company paid to Dr. Antonio
Lazzari, a principal stockholder and former Director of the Company,
royalties of 1.5% on all revenues arising from sales of certain
hemagglutination test kits through June 1993. In the fiscal years ended
September 30, 1992 and 1993, Dr. Lazzari received approximately $12,000 and
$5,000, respectively, pursuant to this arrangement. According to the terms
of the arrangement, this royalty could have increased to 5% if Dr. Lazzari's
ownership interest in the Company fell below 9%. The Company believes that
it is no longer required to make such payments to Dr. Lazzari, and has not
paid Dr. Lazzari royalties since June 1993. Dr. Lazzari has indicated to
the Company that he believes the royalty payments should continue. The
Company has accrued these royalties on the Company's financial statements
through September 30, 1995, and does not believe that payment of these
royalties, if they were to be re-established, would have a material adverse
effect on the Company's results from operations.
In July 1995 the following Directors and officers of the Company
subscribed for Notes in the following amounts:
<TABLE>
<CAPTION>
Individual Amount of Note
---------- --------------
<C> <C>
*Carl Franzblau, Ph.D., and Myrna Franzblau $ 62,500
Peter von Stein 50,000
**Alan S. Cohen, M.D. 50,000
Lawrence Gilbert 50,000
John I. Sandson, M.D. 25,000
Charles W. Smith 50,000
--------
Total $287,500
___________________
<F*> Includes $12,500 invested by Dr. and Mrs. Franzblau's children.
<F**> Includes $25,000 invested by one of Dr. Cohen's sons.
</TABLE>
The Notes subscribed for by the officers and Directors listed above
are convertible into an aggregate of 287,500 shares of Common Stock of the
Company at the conversion price of $1.00 per share. See "Selling
Stockholders."
The Company believes the terms of these agreements are on terms at
least as favorable as those which it could otherwise have obtained.
PLAN OF DISTRIBUTION
The Shares underlie Notes and Warrants sold by the Company to the
Selling Securityholders in connection with private placements. As of June
1, 1996, all of the Notes had been converted into a total of 1,550,000
shares of Common Stock and 188,535 shares of Common Stock had been issued
upon exercise of the Warrants.
Subject to the foregoing, the Shares covered hereby may be offered and
sold from time to time by the Selling Securityholders. The Selling
Securityholders will act independently of the Company in making decisions
with respect to the timing and price of sales of Common Stock covered by
this Prospectus. The Common Stock covered by this Prospectus may be sold by
the Selling Securityholders in one or more transactions on NASDAQ or the BSE
at market prices then prevailing or in privately negotiated transactions.
In effecting sales, broker-dealers engaged by the Selling Securityholders
may arrange for other broker-dealers to participate. Broker-dealers will
receive commissions or discounts from the Selling Securityholders in amounts
to be negotiated immediately prior to the sale.
In offering the Shares, the Selling Securityholders and any broker-
dealers and any other participating broker-dealers who execute sales for the
Selling Securityholders may be deemed to be "underwriters" within the
meaning of the Act in connection with such sales, and any profits realized
by the Selling Securityholders and the compensation of such broker-dealer
may be deemed to be underwriting discounts and commissions. In addition,
any shares covered by this Prospectus which qualify for sale pursuant to
Rule 144 may be sold under Rule 144 rather than pursuant to this Prospectus.
The Company has advised the Selling Securityholders that they are
required to furnish each broker-dealer through which Common Stock included
herein may be offered with copies of this Prospectus, and may not bid for or
purchase any securities of the Company or attempt to induce any person to
purchase any securities except as permitted under the Exchange Act.
Rule 10b-6 under the Exchange Act prohibits, with certain exceptions,
participants in a distribution from bidding for or purchasing, for an
account in which the participant has a beneficial interest, any of the
securities that are the subject of the distribution. Rule 10b-7 governs
bids and purchases made in order to stabilize the price of a security in
connection with a distribution of the security. Certain brokers or Selling
Stockholders may engage in passive market making as permitted under Rule
10b-6A of the Exchange Act. Such passive market making may be discontinued
at any time, which could have the effect of decreasing the trading price of
the Common Stock.
This offering will terminate on the date on which all shares offered
hereby have been sold by the Selling Securityholders.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue up to 30,000,000 shares of Common
Stock, $.01 par value, of which 7,618,890 were issued and outstanding as of
June 11, 1996, including 200,000 of the Shares deemed to be issued by the
Company subject to receipt of cancelled Notes with an aggregate principal
balance of $200,000. The following summary description of the Common Stock
is qualified in its entirety by reference to the Company's Restated
Certificate of Incorporation. As of June 11, 1996, the Company had 245
stockholders of record.
The holders of Common Stock are entitled to one vote for each share
held of record on each matter submitted to a vote of Securityholders. There
is no cumulative voting for the election of Directors. Subject to the prior
rights of any series of Preferred Stock which may from time to time be
outstanding, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor, and, upon the liquidation, dissolution or winding up of
the Company, are entitled to share ratably in all assets remaining after
payment of liabilities and payment of accrued dividends and liquidation
preference on the Preferred Stock, if any. Holders of Common Stock have no
preemptive rights and have no rights to convert their Common Stock into any
other securities. The outstanding Common Stock is, and the Common Stock to
be outstanding upon completion of the Offering will be, validly issued,
fully paid, and nonassessable.
As of June 3, 1996 the officers and Directors of the Company, may be
deemed to own approximately 19.6% of the outstanding shares of Common Stock,
exclusive of shares of Common Stock issuable upon exercise of outstanding
options or the Warrants or upon conversion of the Notes. As a result, the
Company's existing management is in a position through its voting control to
exert substantial influence over the election of all of the members of the
Board of Directors and to effectively control the Company.
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock, $.01 par value (the "Preferred Stock"). The Preferred Stock may be
issued in one or more series, the terms of which may be determined at the
time of issuance by the Board of Directors, without further action by
securityholders, and may include voting rights (including the right to vote
as a series on particular matters), preferences as to dividends and
liquidation, conversion, redemption rights, and sinking fund provisions.
No shares of Preferred Stock will be outstanding as of the closing of
the Offering and the Company has no present plans for the issuance thereof.
The issuance of any such Preferred Stock could reduce the rights, including
voting rights, of the holders of Common Stock, and, therefore, reduce the
value of the Common Stock. In particular, specific rights granted to future
holders of Preferred Stock could be used to restrict the Company's ability
to merge with or sell its assets to a third party, thereby preserving
control of the Company by existing management.
Private Placement Warrants
The following is a brief summary of certain provisions of the Common
stock purchase warrants (the "Private Placement Warrants") issued in
connection with a private placement completed by the Company in March 1996
(the "Private Placement"). This summary does not purport to be complete and
is qualified in all respects by reference to the actual text of the Warrant
Agreement between the Company and Continental Stock Transfer & Trust Company
(the "Transfer and Warrant Agent"). As of June 3, 1996, the Company had
2,695,255 Warrants outstanding. An additional 269,526 Private Placement
Warrants are issuable upon exercise of a warrant issued to the placement
agent in connection with the Private Placement.
Exercise Price and Terms
Each Private Placement Warrant entitles the registered holder thereof
to purchase one share of Common Stock at an exercise price of $2.75, subject
to adjustment in accordance with the anti-dilution and other provisions
referred to below.
The holder of any Private Placement Warrant may exercise such Private
Placement Warrant by surrendering the certificate representing the Private
Placement Warrant to the Company's Transfer and Warrant Agent, with the
subscription on the reverse side of such certificate properly completed and
executed, together with payment of the exercise price. The Private
Placement Warrants may be exercised at any time in whole or in part at the
applicable exercise price until expiration of the Private Placement Warrants
on February 28, 2001. No fractional shares will be issued upon the exercise
of the Private Placement Warrants.
Adjustments
The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Private Placement Warrants are subject
to adjustment upon the occurrence of certain events, including stock
dividends, stock splits, combinations or reclassifications on or of the
Common Stock. Additionally, an adjustment would be made in the case of a
reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation or sale of all or substantially all
of the assets of the Company in order to enable holders of Private Placement
Warrants to acquire the kind and number of shares of stock or other
securities or property receivable in such event by a holder of the number of
shares that might otherwise have been purchased upon the exercise of the
Private Placement Warrant. No adjustments will be made unless such
adjustment would require an increase or decrease of at least $.10 or more in
such exercise price. No adjustment to the exercise price of the shares
subject to the Private Placement Warrants will be made for dividends
(other than stock dividends), if any, paid on the Common Stock or for
securities issued pursuant to exercise of the Private Placement Warrants.
Transfer, Exchange and Exercise
The Company has agreed to endeavor to register with the Securities and
Exchange Commission the Private Placement Warrants and the shares of Common
Stock underlying the Private Placement Warrants. Prior to such
registration, the Private Placement Warrants are only transferable under
exemption to the registration requirements of the Securities Act of 1933, as
amended, and applicable state securities laws. Following such registration,
as to which no assurance can be given, the Private Placement Warrants may be
presented to the Transfer and Warrant Agent for transfer, exchange or
exercise at any time at or prior to the close of business on February 28,
2001, at which time the Private Placement Warrants become wholly void and of
no value. If the Private Placement Warrants are registered and a market for
the Private Placement Warrants is developed and maintained, the holder may
sell the Private Placement Warrants instead of exercising them. There can
be no assurance, however, that a market for the Private Placement Warrants
will be developed or maintained. If the Company is unable to qualify for
sale in particular states its Common Stock underlying the Private Placement
Warrants, holders of the Private Placement Warrants desiring to exercise the
Private Placement Warrants in those states will have no choice but to either
sell such Private Placement Warrants or let them expire.
Warrantholder not a Stockholder
The Private Placement Warrants do not confer upon holders any voting
or other rights as stockholders of the Company.
Transfer and Warrant Agent
The Company has appointed Continental Stock Transfer & Trust Company
of New York, New York, as its Transfer Agent for its Common Stock.
Limitation of Officers' and Directors' Liabilities Under Delaware Law
In accordance with Delaware law, the Company's Certificate of
Incorporation, as amended, eliminates in certain circumstances the liability
of Directors of the Company for monetary damages for breach of their
fiduciary duty as Directors. This provision does not eliminate the
liability of a Director (i) for a breach of the Director's duty of loyalty
to the Company or its securityholders, (ii) for acts or omissions by the
director not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for a willful or negligent declaration of an
unlawful dividend, stock purchase or redemption, or (iv) for transactions
from which the Director derived an improper personal benefit.
In addition, the Company's Bylaws include provisions to indemnify its
officers and Directors and other persons against expenses, judgments, fines
and amounts paid in settlement in connection with threatened, pending or
completed suits or proceedings against such persons by reason of serving or
having served as officers, directors or in other capacities, except in
relation to matters with respect to which such persons shall be determined
not to have acted in good faith, unlawfully or in the best interests of the
Company. With respect to matters as to which the Company's officers and
Directors and others are determined to be liable for misconduct or
negligence in the performance of their duties, the Company's Bylaws provide
for indemnification only to the extent that the Company determines that such
person acted in good faith and in a manner not opposed to the best interests
of the Company.
However, insofar as indemnification for liabilities may be permitted
to Directors, officers, or persons controlling the Company pursuant to
Delaware state law, as well as the foregoing charter and bylaw provisions,
the Company has been informed that in the opinion of the Commission, such
indemnification as it relates to federal securities laws is against public
policy, and therefore, unenforceable.
Further, insofar as limitation of liabilities may be so permitted
pursuant to Delaware state law, as well as the foregoing charter and bylaw
provisions, such limitation of liabilities does not apply to any liabilities
arising under federal securities laws.
Dividend Policy
The Company has not paid dividends on its Common Stock since its
inception and has no intention of paying any dividends to its
securityholders in the foreseeable future. The Company intends to reinvest
earnings, if any, in the development and expansion of its business. Any
declaration of dividends in the future will be at the election of the Board
of Directors and will depend upon the earnings, capital requirements and
financial position of the Company, general economic conditions, requirements
of any bank lending arrangements which may then be in place and other
pertinent factors.
LEGAL MATTERS
Certain legal matters relating to the Common Stock offered hereby will
be passed upon for the Company by O'Connor, Broude & Aronson, 950 Winter
Street, Waltham, Massachusetts 02154.
EXPERTS
The financial statements of Hemagen Diagnostics, Inc. as of September
30, 1995 and 1994 and for each of the three years in the period ended
September 30, 1995 and the financial statements of the Immunofluorescent
Assay and IL-2 Product Lines of Schiapparelli BioSystems, Inc. as of June
30, 1995 and for the six-month period then ended included in this Prospectus
have been so included in reliance on the reports of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of the Immunofluorescent Assay and IL-2
Product Lines of Schiapparelli BioSystems, Inc. as of December 31, 1994 and
for the year then ended, have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, and upon the authority of said firm as experts
in accounting and auditing.
The financial statements of Reagent Applications, Inc. as of December
31, 1995 and 1994 and for the years then ended, have been included herein
and in the registration statement in reliance upon the report of BDO
Seidman, LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
CHANGE IN CERTIFYING ACCOUNTANTS
On January 29, 1996, Price Waterhouse LLP ("Price Waterhouse")
declined to stand for re-election as independent accountants for the
Company.
There were no disagreements between the Company and Price Waterhouse
regarding any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedures in connection with the
audit of each of the Company's fiscal years in the period October 1, 1993
through September 30, 1995, or at any time through January 29, 1996 which,
if not resolved to the satisfaction of Price Waterhouse, would have caused
Price Waterhouse to make reference to the subject matter of such
disagreement in connection with its report. There have been no reportable
events (as defined by Regulation S-B Item 304(a)(1)(iv)(B)) during the
period from October 1,1993 through September 30, 1995, and during the period
through January 29, 1996. In addition, during this period, the Company has
not consulted another accountant regarding the application of accounting
principles to a specified transaction.
The report of Price Waterhouse upon the Company's financial statements
for each of the fiscal years in the period October 1, 1993 through September
30, 1995, contained neither an adverse opinion nor a disclaimer of opinion
nor was such report qualified or modified as to uncertainty, audit scope or
accounting principles.
The Company has requested that Price Waterhouse furnish it with a
letter addressed to the SEC stating whether or not it agrees with the above
statements. A copy of such letter, dated February 2, 1996, was filed as an
Exhibit to the Company's report on Form 8-K filed with the Commission on
February 3, 1996 and is incorporated herein by reference.
On May 20, 1996, the Board of Directors of the Company approved the
engagement of BDO Seidman, LLP as the independent accountant for the
Company.
HEMAGEN DIAGNOSTICS, INC.
Index to Financial Statements
Page
Consolidated Balance Sheet of Hemagen Diagnostics, Inc.
as of March 31, 1996 (unaudited)
Consolidated Statement of Operations of Hemagen Diagnostics, Inc.
for the six month period ended March 31, 1996 (unaudited)
Consolidated Statement of Cash Flows for the six month period
ended March 31, 1996 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Report of Independent Accountants - Price Waterhouse LLP
Consolidated Balance Sheet of Hemagen Diagnostics, Inc. as of September 30,
1995 and 1994
Consolidated Statement of Operations of Hemagen Diagnostics, Inc. for
the years ended September 30, 1995, 1994 and 1993
Consolidated Statement of Changes in Stockholders' Equity of Hemagen
Diagnostics, Inc. for the years ended September 30, 1995, 1994 and 1993
Consolidated Statement of Cash Flows of Hemagen Diagnostics, Inc. for
the years ended September 30, 1995, 1994 and 1993
Notes to Consolidated Financial Statements of Hemagen Diagnostics, Inc.
Independent Auditors' Report - KPMG Peat Marwick LLP
Statement of Inventory and Equipment and Leasehold Improvements of
Immunofluorescent Assay and IL-2 Product Lines of Schiapparelli
BioSystems, Inc as of December 31, 1994 .
Statement of Operations Before Administrative, Interest and Income Tax
Expenses of Immunofluorescent Assay and IL-2 Product Lines of
Schiapparelli BioSystems, Inc for the year ended December 31, 1994.
Notes to the December 31, 1994 Financial Statements of the Immunofluorescent
Assay and IL-2 Product Lines of Schiapparelli BioSystems, Inc.
Report of Independent Accountants - Price Waterhouse LLP
Statement of Inventory and Equipment and Leasehold Improvements of
the Immunofluorescent Assay and IL-2 Product Lines of Schiapparelli
BioSystems, Inc. as of June 30, 1995
Statement of Operations Before Administrative, Interest and Income Tax
Expenses of the Immunofluorescent Assay and IL-2 Product Lines of
Schiapparelli BioSystems, Inc. for the six-month period ended June 30, 1995
Notes to the June 30, 1995 Financial Statements of the Immunofluorescent
Assay and IL-2 Product Lines of Schiapparelli BioSystems, Inc.
Report of Independent Accountants - BDO Seidman, LLP
Balance Sheets of Reagents Applications, Inc. as of December 31, 1995
and 1994
Statements of Operations of Reagents Applications, Inc. for the years ended
December 31, 1995 and 1994
Statements of Changes in Stockholder's Equity of Reagents
Applications, Inc. for the years ended December 31, 1995 and 1994
Statements of Cash Flows of Reagents Applications, Inc. for the years ended
December 31, 1995 and 1994
Notes to Financial Statements of Reagents Applications, Inc.
Pro forma Condensed Combined Statements of Operations of the Company and
Reagents Applications, Inc. for six months ended March 31, 1996
and of the Company, Reagents Applications, Inc. and IL-2 Product
Lines of Schiapparelli BioSystems, Inc. for the year ended September
30, 1995 (unaudited)
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
------
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
---------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 483,381 $1,333,067
Short-term investments (Note D) 1,957,264 803,000
Accounts and other receivables, less allowance for
doubtful accounts of $65,400 at March and $26,900
at September 1,791,941 949,254
Inventories 3,253,640 1,084,926
Prepaid expenses and other current assets 224,950 195,140
-------------------------
Total current assets 7,711,176 4,365,387
Property and Equipment:
Fixed assets 4,530,898 3,374,797
Less accumulated depreciation 1,180,760 836,515
-------------------------
3,350,138 2,538,282
Intangible assets (net) 1,626,767 --
Other assets 112,078 401,414
-------------------------
$12,800,159 $7,305,083
=========================
</TABLE>
See Notes to Consolidated Financial Statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
----------- -------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 1,365,485 $ 792,574
Notes Payable -- 382,584
Current portion of long-term debt 758,183 672,073
-------------------------
Total current liabilities 2,123,668 1,847,231
-------------------------
Long-term debt, less current portion 2,015,987 3,593,566
-------------------------
Stockholders' Equity:
Preferred stock, no par value - 1,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value - 30,000,000 shares
authorized; issued and outstanding: 6,766,005 at
March and 3,162,000 at September 67,660 31,620
Additional paid-in capital 12,609,242 5,154,912
Accumulated deficit (4,010,398) (3,316,246)
-------------------------
8,666,504 1,870,286
Receivable from stockholder (6,000) (6,000)
-------------------------
8,660,504 1,864,286
-------------------------
$12,800,159 $7,305,083
=========================
</TABLE>
See Notes to Consolidated Financial Statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $2,124,660 $ 764,293 $3,666,704 $1,277,708
License and contract revenue 10,000 -- 20,000 --
----------------------------------------------------
2,134,660 764,293 3,686,704 1,277,708
Costs and expenses:
Cost of product sales 1,392,424 426,767 2,253,235 697,217
Research and development 179,991 137,589 323,425 320,507
Selling, general and administrative 891,973 491,987 1,504,652 988,205
----------------------------------------------------
2,464,388 1,056,343 4,081,312 2,005,929
----------------------------------------------------
Operating Loss (329,728) (292,050) (394,608) (728,221)
Other income (expense), net (159,859) 8,545 (299,544) 4,841
Loss before income taxes (489,587) (283,505) (694,152) (723,380)
----------------------------------------------------
Provision for income taxes -- -- -- --
----------------------------------------------------
Net Loss $ (489,587) $ (283,505) $ (694,152) $ (723,380)
====================================================
Net loss per share $ (0.11) $ (0.09) $ (0.18) $ (0.23)
====================================================
Weighted average shares outstanding 4,533,404 3,154,133 3,840,167 3,152,044
====================================================
</TABLE>
See Notes to Consolidated Financial Statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) OF CASH AND CASH EQUIVALENTS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
------------------------
1996 1995
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $ (694,152) $(723,380)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 302,965 148,701
Changes in assets and liabilities net of effect of
acquisition of business:
Accounts and other receivables 17,202 69,230
Prepaid expenses and other current assets 46,462 (103,738)
Refundable income taxes -- 17,661
Inventory (539,645) (141,919)
Accounts payable and accrued expenses 246,565 117,011
------------------------
Net cash used by operating activities (620,603) (616,434)
------------------------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (4,920,648) --
Purchase of property and equipment (109,824) (224,135)
Other assets 289,336 (120,508)
Payment of note payable (382,584) --
Proceeds from (issuance of) short-term investments (1,154,264) 400,000
------------------------
Net cash provided (used) by investing activities (6,277,984) 55,357
------------------------
Cash flows from financing activities:
Proceeds from issuances (payments) of long-term debt, net (610,219) 939,626
Proceeds from the issuance of Common Stock 27,228 24,000
Additional-paid-in-capital 6,631,892 35,000
------------------------
Net cash provided by financing activities 6,048,901 998,626
------------------------
Net increase (decrease) in cash and cash equivalents (849,686) 437,549
Cash and equivalents at beginning of year 1,333,067 321,677
------------------------
Cash and cash equivalents at end of period $ 483,381 $ 759,226
========================
</TABLE>
See Notes to Consolidated Financial Statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB
and Item 310(b) of Regulation SB-2. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. Reference should be made to
the financial statements and related notes included in the Company's Form
10-KSB which was filed with the Securities and Exchange Commission on or
about December 28, 1995.
In the opinion of the management of the Company, the accompanying
financial statements reflect all adjustments which were of a normal
recurring nature necessary for a fair presentation of the Company's
results of operations and changes in financial position for the three and
six month periods ended March 31, 1996. Operating results for the three
and six month periods ended March 31, 1996 are not necessarily indicative
of the results that may be expected for the year ending September 30,
1996.
NOTE B - DEBT CONVERSION AND ISSUANCE OF WARRANTS
$881,250 of convertible promissory notes were converted into common
stock at a conversion price of $1.00 per share during the period of this
report. 100,000 warrants allowing the holder to purchase common stock at
$1.00 per share were issued during the period. The value of these
warrants has been estimated at $.50 each.
NOTE C - ACQUISITION OF REAGENTS APPLICATIONS, INC.
The Company's business acquisition, based on estimated fair values
of assets acquired and liabilities assumed, involved the following:
Fair value of assets acquired, other than
cash and cash equivalents: $5,246,994
Liabilities assumed: (326,346)
----------
Cash payments made: $4,920,648
==========
NOTE D - CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all investments with an original maturity of
three months or less to be cash equivalents. The Company invests its
excess cash in certificates of deposit. Accordingly, the investments are
subject to minimal credit and market risk.
Effective October 1, 1994, the Company adopted Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities . All of the Company's investments are classified as
available-for-sale. No realized or unrealized gain or loss was incurred
during the period.
160 Federal Street Telephone 617-439-4390
Boston MA 02110
Price Waterhouse LLP
Report of Independent Accountants
To the Board of Directors and
Stockholders of Hemagen Diagnostics, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity and
of cash flows present fairly, in all material respects, the financial
position of Hemagen Diagnostics, Inc. and its subsidiary at September 30,
1995 and 1994, and the results of their operations and their cash flows
for each of the three years in the period ended September 30, 1995, in
conformity with generally accepted accounting principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above. We
have not audited the consolidated financial statements of Hemagen
Diagnostics, Inc. and its subsidiary for any period subsequent to
September 30, 1995.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
November 30, 1995
Hemagen Diagnostics, Inc.
Consolidated Balance Sheet
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
1995 1994
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $1,333,067 $ 268,677
Restricted cash - 53,000
Short-term investments 803,000 1,150,000
Accounts receivable, less allowance for doubtful accounts of
$26,900 and $6,500 at September 30, 1995 and 1994, respectively 949,254 480,510
Refundable income taxes - 17,661
Inventories 1,084,926 353,698
Prepaid expenses and other current assets 195,140 53,746
------------------------
Total current assets 4,365,387 2,377,292
Property and equipment, net 2,538,282 2,431,411
Other assets 401,414 47,786
------------------------
$7,305,083 $4,856,489
========================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 672,073 $ 329,084
Notes payable 382,584 -
Accounts payable and accrued expenses 772,574 1,055,381
Deferred revenue 20,000 -
------------------------
Total current liabilities 1,847,231 1,384,465
------------------------
Long-term debt payable to related parties 350,000 -
------------------------
Long-term debt 3,243,566 817,795
------------------------
Minority interest in consolidated subsidiary - -
------------------------
Stockholders' equity:
Preferred stock, no par value - 1,000,000 shares authorized;
none issued - -
Common stock, $.01 par value - 5,000,000 shares authorized;
3,162,000 and 3,150,000 shares issued and outstanding at
September 30, 1995 and 1994, respectively 31,620 31,500
Additional paid-in capital 5,154,912 4,960,032
Accumulated deficit (3,316,246) (2,331,303)
------------------------
1,870,286 2,660,229
Less - receivable from stockholders (6,000) (6,000)
------------------------
1,864,286 2,654,229
Commitments and contingencies (Note 14)
------------------------
$7,305,083 $4,856,489
========================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
Hemagen Diagnostics, Inc.
Consolidated Statement of Operations
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994 1993
<S> <C> <C> <C>
Revenue:
Product sales $3,935,195 $ 2,360,541 $ 1,715,718
Research and development contracts 20,000 - 93,500
----------------------------------------
3,955,195 2,360,541 1,809,218
----------------------------------------
Costs and expenses:
Cost of product sales 2,173,087 1,185,022 606,438
Cost of research and development revenue 10,814 - 101,537
Research and development contract support costs - - 39,484
Research and development 562,497 727,149 400,305
Selling, general and administrative 2,054,908 1,579,376 1,289,204
----------------------------------------
4,801,306 3,491,547 2,436,968
----------------------------------------
Operating loss (846,111) (1,131,006) (627,750)
----------------------------------------
Other income (expenses):
Interest income 108,961 129,743 108,653
Interest expense (265,696) (87,833) (662,056)
Foreign exchange gain (loss) 17,903 (46,001) (52,233)
----------------------------------------
(138,832) (4,091) (605,636)
----------------------------------------
Loss before provision for income taxes and
minority interest (984,943) (1,135,097) (1,233,386)
Provision (benefit) for income taxes - (17,661) 11,000
----------------------------------------
Loss before minority interest (984,943) (1,117,436) (1,244,386)
Minority interest in net income (loss) of
consolidated subsidiary - (9,314) 6,949
----------------------------------------
Net loss $ (984,943) $(1,108,122) $(1,251,335)
========================================
Net loss per share $ (.31) $ (.35) $ (.46)
========================================
Weighted average shares outstanding 3,157,759 3,150,000 2,716,575
========================================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
Hemagen Diagnostics, Inc.
Consolidated Statement of Stockholders' Equity
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Common stock Additional earnings Receivable
Par paid-in (accumulated from Stockholders'
Shares value capital deficit) stockholders equity
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992 2,000,000 $20,000 $ 538,159 $ 28,154 $(10,000) $ 576,313
Issuance of common stock, net of issuance
costs 1,150,000 11,500 4,421,873 - - 4,433,373
Payments from stockholders 4,000 4,000
Net loss - - - (1,251,335) - (1,251,335)
---------------------------------------------------------------------------
Balance at September 30, 1993 3,150,000 31,500 4,960,032 (1,223,181) (6,000) 3,762,351
Net loss - - - (1,108,122) - (1,108,122)
---------------------------------------------------------------------------
Balance at September 30, 1994 3,150,000 31,500 4,960,032 (2,331,303) (6,000) 2,654,229
Issuance of common stock to Board of
Directors in lieu of compensation 12,000 120 23,880 - - 24,000
Issuance of stock purchase warrants - - 171,000 - - 171,000
Net loss - - - (984,943) - (984,943)
---------------------------------------------------------------------------
Balance at September 30, 1995 3,162,000 $31,620 $5,154,912 $(3,316,246) $ (6,000) $1,864,286
===========================================================================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
Hemagen Diagnostics, Inc.
Consolidated Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (984,943) $(1,108,122) $(1,251,335)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 415,803 231,281 105,197
Amortization of deferred financing costs and
debt discount 37,530 - 572,776
Foreign exchange (gain) loss (17,903) 46,001 52,233
Minority interest in net income (loss) of
consolidated subsidiary - (9,314) 6,949
Loss on sale of fixed assets - 3,866 -
Changes in assets and liabilities:
Restricted cash 53,000 (53,000) -
Accounts receivable (437,744) (192,007) 29,253
Amounts due from related party - 20,000 -
Refundable income taxes 17,661 (7,993) (3,247)
Inventories (141,728) (135,347) (359,022)
Prepaid expenses and other current assets (42,394) 25,065 (61,540)
Deferred income taxes - - 11,000
Accounts payable and accrued expenses 479,128 830,356 149,176
Income taxes payable - - (17,000)
Deferred revenue 20,000 - (4,680)
-------------------------------------------
Net cash used by operating activities (601,590) (349,214) (770,240)
-------------------------------------------
Cash flows from investing activities:
Payment for acquisition (1,034,670)
Purchases of short-term investments (303,000) - (2,000,000)
Proceeds from maturity of short-term investments 650,000 850,000 -
Purchases of property and equipment (330,636) (957,489) (309,561)
Proceeds from sale of fixed assets - 14,575 -
Other assets (255,346) (8,678) (29,980)
Net cash from investment in foreign affiliate - - 9,385
-------------------------------------------
Net cash used by investing activities (1,273,652) (101,592) (2,330,156)
-------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable to related party 350,000 - -
Repayment of notes payable to related party - - (50,000)
Proceeds from issuance of long-term debt 3,007,052 - -
Repayments of long-term debt (355,942) (220,306) (77,604)
Repayments of promissory notes - - (1,200,000)
Proceeds from issuance of common stock, net - - 4,537,474
Capital contributions - - 4,000
Deferred financing costs (51,095) - -
-------------------------------------------
Net cash provided (used) by financing activities 2,950,015 (220,306) 3,213,870
-------------------------------------------
Effect of exchange rates on cash and cash equivalents (10,383) (54,541) (97,604)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,064,390 (725,653) 15,870
Cash and cash equivalents at beginning of year 268,677 994,330 978,460
-------------------------------------------
Cash and cash equivalents at end of year $ 1,333,067 $ 268,677 $ 994,330
===========================================
Cash payments of interest $ 242,930 $ 87,833 $ 121,070
===========================================
Cash payments (refunds) of taxes $ (17,661) $ 0 $ 20,247
===========================================
Supplemental disclosure of non-cash financing and
investing activities, see Note 2.
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
Hemagen Diagnostics, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
1. Nature of Business and Organization
Hemagen Diagnostics, Inc. ("Hemagen" or the "Company") is a
biotechnology company which develops, manufactures and markets
laboratory medical diagnostic kits used to aid in the diagnosis of
certain autoimmune and infectious diseases. The Company was
incorporated in the Commonwealth of Massachusetts in 1985 and
reincorporated in the state of Delaware in 1992.
2. Significant Accounting Policies
Principles of Consolidation
---------------------------
During 1993, the Company acquired a 51% interest in Hemagen
Diagnostics Commercio, Importaco & Exporataco, Ltd. ("HDC") in
exchange for the forgiveness of the $25,000 advance to HDC. HDC is
a Brazilian corporation which previously was 100% owned by an
officer and stockholder of the Company. The consolidated financial
statements include the accounts of the Company and HDC. Minority
interest in consolidated subsidiary represents the minority
shareholder's proportionate share of the earnings of HDC. The
results of operations of HDC are consolidated from October 1, 1992,
the date of the Company's investment in HDC. All losses of HDC in
excess of the minority shareholder's investment have been allocated
to the Company.
Foreign Currency Translation
----------------------------
The functional currency of HDC is the U.S. dollar. Certain assets
(primarily inventories and property and equipment) and liabilities
and related income and expenses of HDC are translated into U.S.
dollars at exchange rates in effect when the assets were acquired or
the liabilities were incurred. All other assets and liabilities are
translated at the exchange rates in effect as of the balance sheet
date, and income and expense items are translated at average
exchange rates for the period. Translation gains and losses are
included in operations as they occur.
Cash Equivalents and Short-term Investments
-------------------------------------------
The Company considers all investments with an original maturity of
three months or less to be cash equivalents. The Company invests
its excess cash in certificates of deposit.
Effective October 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for
Certain Investments in Debt and Equity Securities", which requires
that debt and marketable equity securities be classified as trading,
available-for-sale or held-to-maturity. Available-for-sale
securities are reported in the balance sheet at fair value with
unrealized gains or losses included in a separate component of
stockholders' equity. At September 30, 1995, the Company held
certificates of deposit of $803,000, all of which mature within one
year. These certificates of deposit are classified as available-
for-sale and are recorded at cost at September 30, 1995, which
approximates fair value.
Restricted Cash
---------------
Restricted cash at September 30, 1994 consisted of amounts in escrow
pertaining to Brazilian import taxes due if instruments imported by
the Company were placed at "for-profit" entities. The Company
subsequently placed the instruments in "not-for-profit" entities and
did not record any expense related to such import taxes during the
years ended September 30, 1995 and 1994.
Inventories
-----------
Inventories are stated at the lower of cost, determined on a first-
in, first-out basis, or market.
Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is provided
on a straight-line basis over the estimated useful lives of the
related assets. Expenditures for repairs and maintenance are
expensed as incurred.
Income Taxes
------------
The Company utilizes the liability method of accounting for income
taxes, as set forth in Statement of Financial Accounting Standards
No. 109, "Accounting For Income Taxes". Under this method, deferred
tax liabilities and assets are recognized for the expected future
tax consequences of temporary differences between the carrying
amount and the tax basis of assets and liabilities.
Revenue Recognition
-------------------
Revenue from the sale of products is recognized when the product is
shipped. Revenue from contracts to conduct research and development
is recognized using the percentage-of-completion method. Losses are
provided for at the time that management determines that contract
costs will exceed related revenues. The portion of contract
billings related to research and development not complete at the
balance sheet date is included in deferred revenue.
Advertising
-----------
The Company expenses advertising costs as incurred. Advertising
expense was approximately $32,000, $23,000 and $26,000 in fiscal
1995, 1994 and 1993, respectively.
Net Income (Loss) Per Share
---------------------------
Net income (loss) per share is based on the weighted average number
of shares of common stock and common stock equivalents outstanding
during each period, and shares obtainable through conversion of
convertible debt. Convertible debt and common stock equivalents,
consisting of outstanding stock options and warrants, are excluded
from the computation in loss periods as their effect is
antidilutive. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common stock issued and common stock
equivalents granted in the twelve months preceding the initial
public offering (see Note 10) have been included in the calculation
of net income (loss) per share as if they had been outstanding for
all periods prior to the initial public offering.
Reclassifications
-----------------
Certain reclassifications have been made to the fiscal 1994 and 1993
financial statements to conform to the current presentation. These
reclassifications have no impact on the Company's results of
operations or financial position.
Statement of Cash Flows - Disclosure of Non-Cash Financing and
Investing Activities
---------------------------------------------------------------
During fiscal 1993, in connection with the acquisition of HDC, the
Company forgave the $25,000 advance to HDC and acquired assets of
$53,331 and assumed liabilities of $48,504.
Capital lease obligations of $400,802, 643,564 and $734,988 related
to sale and leaseback transactions, were incurred in fiscal 1995,
1994 and 1993, respectively, when the Company entered into capital
lease agreements for fixed assets. An additional capital lease
obligation for fixed assets of $117,650 was entered into in 1995.
The capital lease obligations entered into in 1994 include an asset
of $174,750 acquired by the Company in 1993 and recorded in accounts
payable at September 30, 1993. In fiscal 1994, this liability was
paid directly by the leasing company and the lease liability was
recorded by the Company.
An instrument with a cost of $174,750 was transferred from inventory
to fixed assets in 1994.
Long term debt of $3,994 was forgiven in conjunction with the sale
of fixed assets in 1994.
Fixed assets with a book value of $799,500, recorded in accounts
payable at September 30, 1994, were returned in 1995 prior to being
paid for.
In conjunction with the purchase of certain assets and liabilities
of Schiapparelli, a note payable for $382,584 was issued (see
Note 3).
Common stock purchase warrants with a total estimated value of
$116,000 were issued in 1995 to outside consultants for services to
be rendered (see Note 10).
Common stock purchase warrants with a total estimated value of
$55,000 were issued in 1995 to a leasing company in conjunction with
financing agreements (see Note 10).
Common stock with a value of $24,000 was issued to non-employee
members of the Board of Directors in lieu of compensation during
1995 (see Note 10).
New Accounting Pronouncement
----------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation." SFAS 123 allows the
Company to account for its stock-based employee compensation plans
based upon either a fair value method or the intrinsic value method
currently followed by the Company. If the current method is
retained, SFAS 123 requires certain additional disclosures regarding
the impact which the fair value method would have on the results of
the Company's operations. The Company expects to retain its current
method of accounting for stock-based compensation plans, and
therefore, the adoption of SFAS 123 will have no impact on the
Company's financial position or results of operations. Adoption of
SFAS 123 is required for financial statements of fiscal years
beginning after December 15, 1995. The Company will implement the
disclosure requirements of SFAS 123 as required in fiscal 1997.
3. Acquisition
The Company acquired certain assets, primarily inventory and fixed
assets, and assumed certain liabilities, related to the Virgo(R)
product line of Schiapparelli Biosystems, Inc. ("Schiapparelli") on
July 1, 1995 for total consideration and related costs of
$1,417,254. The purchase price is to be paid in three installments:
$1,000,000 upon closing and notes payable of $250,000 due on
December 31, 1995 and $132,584 due on June 30, 1996. Both parties
subsequently agreed to accelerate the payment of these notes to
December 15, 1995. The notes payable to Schiapparelli are secured
by a first priority security interest in the accounts receivable and
inventory of the Virgo(R) business. At September 30, 1995, the
accounts receivable and inventory balance of the Virgo(R) business
exceeded the amount of the note. The acquisition was funded by the
issuance of $2,000,000 13% convertible notes through a private
placement offering (see Note 9). The acquisition was accounted for
under the purchase method of accounting, and accordingly, the
purchase price was allocated to the assets acquired and liabilities
assumed based upon their fair values at the date of acquisition.
The excess of the fair value of net assets acquired over the
purchase price was recorded as a reduction of the value of fixed
assets acquired, in accordance with the provisions of Accounting
Principles Board Opinion No. 16, "Business Combinations". The
Virgo(R) products consist primarily of assays that aid in the
diagnosis of infectious and autoimmune diseases using
immunofluorescence technology.
The consolidated statements of operations and cash flows for the
year ended September 30, 1995 include the results of operations and
cash flows for Virgo(R) from July 1, 1995 through September 30, 1995.
The unaudited pro forma combined results of operations of the
Company and Virgo(R) for the years ended September 30, 1995 and 1994,
assuming that the acquisition had occurred at the beginning of each
period presented and after giving effect to certain pro forma
adjustments are as follows:
<TABLE>
<CAPTION>
(unaudited)
September 30,
1995 1994
<S> <C> <C>
Revenue $5,857,000 $5,022,000
Net loss (456,000) (378,000)
Net loss per share (0.14) (0.12)
</TABLE>
4. Related Party Transactions
Notes Payable
-------------
In 1985, the Company issued a $50,000, 8% demand note payable to
Boston University (the "University"). The Company's Chairman of the
Board, Chief Executive Officer, President and principal stockholder
is the Chairman of the University's Biochemistry Department and a
Professor and Associate Dean for Graduate Affairs of the
University's School of Medicine. Certain other directors and
stockholders of the Company are also employed by the University.
The principal and related outstanding interest was repaid in
February 1993.
Product Development Agreement
-----------------------------
In February 1992, the Company entered into a product development
agreement with the University to develop, on a best efforts basis, a
product which can indicate certain diseases. Under this agreement,
the Company is obligated to provide facilities, personnel, supplies
and services totaling $100,000, which are recorded as research and
development contract support costs as incurred. The Company
recorded $39,484 of such costs in the year ended September 30, 1993.
No such costs were incurred in the years ended September 30, 1995 or
1994. The Company retains a 50% interest in all intellectual
property developed. The University is obligated to provide $100,000
in cash to the Company over the term of the agreement to pay for the
services of two employees of the Company and certain equipment and
other costs which are recorded as costs of research and development
revenues as incurred. The Company recorded $10,814 and $9,186 of
such costs in the years ended September 30, 1995 and 1993,
respectively. No such costs were incurred in the year ended
September 30, 1994. The Company received $40,000 from the
University under this agreement in the year ended September 30,
1995, of which $20,000 of revenue was recognized in 1995 and $20,000
of revenue has been deferred. No revenue was recognized under this
product development agreement in the years ended September 30, 1994
and 1993. No amounts were due to the Company at September 30, 1995
or 1994 under this agreement.
If the technology developed is licensed to a third party, royalties
will be distributed in proportion to the number of patents and
patent applications licensed to the Company and the University,
respectively. License fees will be distributed equally up to a
maximum of $215,000; thereafter, the fees will be allocated in the
same manner as royalties.
The agreement terminated in September 1993. The agreement provided
that following its termination (i) if the Company and the University
both desire to further develop and market the technology, that they
enter into a joint venture for that purpose, (ii) if only the
Company desires to further develop the technology, it may purchase
the rights to the technology and reimburse the University for its
initial $100,000 investment, (iii) if only the University desires to
pursue the technology, then the University will repay the Company
for its initial investment, (iv) if neither party desires to pursue
the technology, neither party will have any obligation to the other.
The rights to the technology will be assigned in accordance with
patent law and the University shall own any equipment purchased with
University funds. If neither party desires to pursue the
technology, the Company has agreed to assign its rights to the
technology to the University. The Company intends to further
develop the technology and is discussing the alternatives with the
University.
License Agreements
------------------
In March 1992, the Company entered into a license agreement with the
University under which the Company obtained the exclusive right to
use the University's patented and patent-pending technology to
manufacture and market certain products. Under the agreement, the
Company is obligated to pay an annual royalty of 5% of the first
$50,000 of the Company's net sales of these products and 10% of net
sales of these products in excess of $50,000 until the Company has
paid the University a license fee of $10,000 in total and reimbursed
it for certain patent expenses. All royalties to be paid thereafter
will equal 5% of the Company's net sales of these products. Sales
of products using technology obtained under the agreement, but not
specifically covered under the patent application, and sales which
occur if no patents are granted, are subject to a 3% royalty for a
period of ten years. The Company also agreed to pay the University
27.5% of royalties the Company receives if it sublicenses the
technology and 25% of the license fees resulting from any sublicense
agreement. There were no royalties paid in the year ended September
30, 1995. Royalties of $2,873 and $4,227 were paid in the years
ended September 30, 1994 and 1993, respectively, and $618 and $572
was accrued at September 30, 1995 and 1994, respectively. The
agreement terminates upon the termination of the patents.
In July 1994, the Company entered into a license agreement with the
University under which the Company obtained the exclusive right to
use additional patented and patent-pending technology of the
University to manufacture and market certain products. The
royalties due under the terms of the agreement are the same as the
initial license agreement and will be applied to the license fee of
$15,000. No royalties were paid in the years ended September 30,
1995 or 1994 and no amounts were accrued for royalties at September
30, 1995 or 1994. The agreement terminates upon the termination of
the patents.
Convertible Notes
-----------------
In fiscal 1995, the Company issued approximately $350,000 of the
$1,956,250 private placement offering of convertible notes (see
Note 9) to related parties. The related parties consist primarily of
board members, officers, and management of the Company and their
family members. At September 30, 1995, the Company had accrued
interest of approximately $7,000 relating to these notes and the
same amount of interest expense had been incurred for fiscal 1995.
5. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30,
1995 1994
<S> <C> <C>
Raw materials $ 382,578 $204,603
Work-in-process 346,517 90,044
Finished goods 355,831 59,051
----------------------
$1,084,926 $353,698
======================
</TABLE>
6. Property and Equipment
Property and equipment include the following:
<TABLE>
<CAPTION>
September 30,
1995 1994
<S> <C> <C>
Furniture and equipment $2,893,063 $2,500,352
Leasehold improvements 481,734 363,052
------------------------
3,374,797 2,863,404
Less - accumulated depreciation and amortization 836,515 431,993
------------------------
$2,538,282 $2,431,411
========================
</TABLE>
Depreciation and amortization expense relating to property and
equipment was $404,522, $219,766 and $103,297 for the years ended
September 30, 1995, 1994 and 1993, respectively.
Included in the above amounts is equipment of $174,750 and
$1,673,250 which was not in service at September 30, 1995 and 1994,
respectively. The equipment will be depreciated over a period of
seven years once it is placed in service. $799,500 of the equipment
not in service at September 30, 1994 was returned during 1995. No
depreciation expense had been recorded on these fixed assets.
Included in the above amounts is property and equipment acquired under
capital leases of $1,927,004 and $1,408,552 at September 30, 1995 and
1994, respectively. Accumulated depreciation and amortization on
property and equipment under capital leases totaled $119,829 and
$85,083 at September 30, 1995 and 1994, respectively.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
<TABLE>
<CAPTION>
September 30,
1995 1994
<S> <C> <C>
Accounts payable - trade $556,739 $ 946,175
Accrued professional fees 60,100 41,900
Accrued other 155,735 67,306
$772,574 $1,055,381
======================
8. Development and License Agreements
In October 1992, the Company entered into a product development
agreement with a customer, under which the customer and the Company
would each contribute $93,500, subject to the Company meeting
specified goals in connection with the development of a product line
by December 31, 1993. The Company completed the development in the
year ended September 30, 1993, and all amounts due under the terms
of the agreement were paid in full. Under this agreement, the
customer received a perpetual, non-exclusive license to manufacture
the product. The customer and the Company agreed to pay royalties
to each other, ranging from 2% to 6%, on net sales of the product
sold by the other during the first ten years after development. In
addition, the selling party shall pay a royalty equal to 6% of net
sales of the product to the other party until a total amount of
$93,500 has been paid to the other party. After the Company has
been reimbursed its $93,500 contribution, the balance of the
customer's contribution not already repaid by the Company shall be
repaid in eight quarters by offsetting any royalty payments due to
the customer. If the customer elects not to manufacture the product
itself, then Hemagen shall have the right of first refusal to
manufacture the product for sale by the customer. Hemagen retains
ownership rights in all technology developed under this agreement.
There were no sales of this product in the years ended September 30,
1995, 1994 or 1993. The Company and the customer are in the process
of filing for FDA clearance for sale of such products in the U.S.
In November 1993, the Company entered into a product development
agreement with a customer under which the Company would develop a
product which would work in conjunction with the customer's blood
analyzer. Under the terms of the agreement, the Company would
provide facilities and personnel and the customer would provide the
use of its blood analyzer and materials. The Company completed the
development in the year ended September 30, 1994. Under this
agreement, the Company maintains exclusive rights to manufacture and
sell the product and may enter into an OEM agreement with the
customer. The Company may grant the customer the right to
manufacture the product on its own under mutually agreeable terms
but neither party has the right to license or assign the right to
manufacture the product to a third party without the permission of
the other party. As of September 30, 1995, no OEM or license
agreements have been entered into by the Company and the customer.
There were no sales of this product in the years ended September 30,
1995 or 1994.
9. Financing Arrangements
Long-Term Debt
--------------
Borrowings classified as long-term debt consist of the following:
</TABLE>
<TABLE>
<CAPTION>
September 30,
1995 1994
<S> <C> <C>
Term loan at an effective interest rate of
approximately 13%, monthly principal and
interest payments of $31,309 from January
1996 through December 1998 $1,000,000 $ -
Obligations under capital leases (Note 14) 1,309,389 1,146,879
Convertible 13% notes, due August 1997 1,956,250 -
------------------------
4,265,639 1,146,879
Less - current portion 672,073 329,084
------------------------
$3,593,566 $ 817,795
========================
</TABLE>
Term Loan
---------
In December 1994, the Company borrowed $1,000,000 from a leasing
company, using certain patents as collateral, to fund working
capital requirements. The Company's first year of interest was
netted from the proceeds of the loan and recorded as prepaid
interest. Principal and interest payments are due in monthly
installments of $31,309 beginning in January 1996 through December
1998, with a balloon payment of $100,000 due at the end of
the term. At the Company's option, the amount due at the end of the
term may be paid in four additional monthly installments of $25,437.
Principal repayments for the fiscal years ending September 30, 1996,
1997, 1998 and 1999 will be $193,693, $288,853, $328,173 and
$189,281, respectively.
Convertible 13% Notes
---------------------
In the fourth quarter of fiscal 1995, the Company completed a
private placement offering of $1,956,250 in notes to fund the
acquisition of the Virgo(R) product line (see Note 3). An additional
$43,750 of notes were issued in October 1995. The notes bear
interest at 13%, payable August 1 and February 1, and mature on
August 1, 1997. The notes, including any accrued interest thereon,
are convertible into shares of the Company's Common Stock at a
conversion price of $1.00. The Company can force conversion at any
time after the registration of the shares of the underlying common
stock is declared effective if the quoted market price of the
Company's common stock is greater than or equal to $3.00 for 5
consecutive days. The Company is obligated to register the shares
of common stock issuable upon conversion of the notes by February
29, 1996 with the Securities and Exchange Commission (the
"Commission"). If the shares are not registered by that date, the
Company will be obligated to issue upon conversion an additional 10%
of the shares underlying the notes for each 30 day period or portion
thereof that the securities remain unregistered. The notes are
unsecured and are subordinate to all of the Company's other
indebtedness. In conjunction with this offering, the Company
incurred debt issuance costs of $51,095, which will be amortized
over the life of the debt.
Secured Promissory Notes with Detachable Warrants - Bridge Financing
--------------------------------------------------------------------
In September 1992, the Company received cash of $1,200,000 in a
bridge financing, of which $200,000 was received from eight
directors, officers and stockholders of the Company. Secured
promissory notes were issued with a principal value of $1,200,000
bearing interest at the stated rate of 10% per annum. The secured
promissory notes were issued in units which consisted of a
detachable warrant with each $100,000 of principal. Each warrant
provides for the purchase of 30,000 shares of the Company's common
stock at a price per share of $3.00 and is exercisable through
December 31, 1997. The Company repriced 90,000 warrants for certain
individuals who participated in the bridge financing and
subsequently participated in the 1995 private placement offering.
The exercise price of these warrants was reduced from $3.00 per
share to $1.50 (see Note 10). The Company also issued a warrant to
the placement agent of the bridge financing exercisable through
December 31, 1997 to purchase 36,000 shares of the Company's common
stock at $3.60 per share. Upon the effective date of the Company's
registration statement filed in connection with its initial public
offering (see Note 10), the warrant held by the placement agent was
cancelled. The promissory notes were secured by substantially all
of the Company's assets. The promissory notes and related accrued
interest were paid following completion of the Company's initial
public offering in February 1993.
The proceeds of this financing were allocated based on management's
estimate of the relative fair value of the debt and warrants, which
resulted in $450,000 being credited to additional paid-in capital
and a corresponding discount on the note. This discount and
$207,000 of deferred financing costs were amortized over the period
from September 1992 to December 31, 1992.
Interest expense included in the accompanying statement of
operations included the following:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Amortization of discount on promissory notes $ - $ - $395,100
Amortization of deferred financing costs 23,036 - 177,676
Interest on bridge financing promissory notes
based on nominal rate - - 44,268
Interest on term debt and other obligations 242,660 87,833 45,012
---------------------------------
$265,696 $87,833 $662,056
=================================
</TABLE>
10. Stockholders' Equity
Preferred Stock
---------------
The Company is authorized to issue up to 1,000,000 shares of
preferred stock, $.01 par value per share. The preferred stock may
be issued in one or more series, the terms of which may be
determined at the time of issuance by the Board of Directors and may
include voting rights, preferences as to dividends and liquidation,
conversion and redemption rights and sinking fund provisions.
Common Stock
------------
In February 1993, the Company completed an initial public offering
of its common stock. The Company sold 1,150,000 shares of common
stock realizing net proceeds of $4,433,000, after deducting offering
costs.
Board of Directors Common Stock
-------------------------------
During 1995, the Company issued 12,000 shares of common stock to
non-employee members of the Board of Directors in lieu of cash
compensation. At the time of issuance the quoted market price of
the Company's common stock was $2.00 per share. The related
compensation expense is being amortized over the one year service
period.
Common Stock Purchase Warrants
------------------------------
In connection with the bridge financing (Note 9), the Company issued
warrants to purchase 360,000 shares of common stock at $3.00 per
share and a warrant to purchase 36,000 shares of common stock at
$3.60 per share exercisable through December 31, 1997. During 1995,
the Company repriced 90,000 warrants to individuals who participated
in both the 1992 bridge financing and the 1995 private placement.
The warrants were repriced from $3.00 per share to $1.50 per share.
The incremental value of the repriced warrants over the original
warrants at the time of repricing was estimated by management and
determined not to be material to the Company's results of operations
or financial position. Upon the effective date of the registration
statement filed in connection with the initial public offering, the
warrant to purchase 36,000 shares was cancelled. This was replaced
with warrants to purchase 100,000 shares of common stock at $8.00
per share exercisable through February 3, 1998. During 1995, 70,000
of these warrants were forfeited.
In conjunction with sale and leaseback transactions (see Notes 2, 6,
9 and 14), the Company issued warrants to purchase 50,000 and 20,000
shares of common stock at $3.25 per share exercisable through April
1, 1998 and April 29, 1999 in fiscal 1993 and 1994, respectively.
The value of the warrants at the time of issuance was estimated by
management and determined not to be material to the Company's
results of operations and financial position.
In conjunction with the $1,000,000 term loan and a sale and
leaseback transaction with a leasing company (see Notes 9 and 14) in
fiscal 1995, the Company issued warrants to purchase 52,000 and
35,000 shares of common stock at $2.50 and $2.00 per share,
respectively, exercisable through December 30, 1999 and June 30,
2000, respectively. The value of the warrants at the time of
issuance was estimated by management to be $35,000 and $20,000,
respectively, which will be amortized over the term of the related
financings.
In 1995, the Company issued 250,000 warrants to purchase common
stock at $1.00 per share exercisable through August 10, 2000 to
three consultants for services provided to the Company during the
period July 1, 1995 through June 30, 1996. The value of the
warrants at the time of issuance was estimated by management to be
$116,000. The value will be amortized over the period the services
will be provided.
In October 1995, the Company issued 10,000 warrants to purchase
common stock at $2.37 per share exercisable through October 16, 1997
to an investor. The value of the warrants at the time of issuance
was estimated by management and determined not to be material to the
Company's results of operations and financial position.
Reserved Shares
---------------
At September 30, 1995, the Company has reserved 3,297,000 shares of
common stock for issuance upon the exercise of outstanding common
stock options and warrants, and upon the conversion of the
convertible 13% notes.
1992 Stock Option Plan
----------------------
The 1992 Stock Option Plan (the "Plan") provides for the grant of
incentive and nonqualified stock options for the purchase of up to
an aggregate of 200,000 shares of the Company's common stock by
employees, directors and consultants of the Company. In 1994, the
stock option plan was amended to provide for the purchase of up to
an aggregate of 500,000 shares of the Company's common stock. The
Board of Directors is responsible for the administration of the
Plan. The Board determines the term of each option, number of
shares for which each option is granted and the rate at which each
option is exercisable. The Company may not grant an employee
incentive stock options with a fair market value in excess of
$100,000 that is exercisable during any one calendar year. The term
of incentive stock options granted cannot exceed ten years (five
years for options granted to holders of more than 10% of the voting
stock of the Company). The exercise price for incentive stock
options granted may not be less than 100% of the fair market value
per share of the underlying common stock (110% for options granted
to holders of more than 10% of the voting stock of the Company).
The Board, at the request of any optionee, may convert incentive
stock options that have not been exercised at the date of conversion
into non-qualified stock options.
In the years ended September 30, 1995, 1994 and 1993, 128,100, 8,000
and 22,500 options were granted, respectively, at exercise prices
ranging from $1.75-$5.50. During 1995, the Board of Directors
approved the repricing of 53,250 stock options from $5.50 to $1.75.
The exercise price of the repriced options approximated the fair
market value of the Company's common stock on the date of repricing.
In the years ended September 30, 1995 and 1994, 750 and 250 options
were forfeited, respectively. At September 30, 1995, 1994 and 1993,
227,350, 100,000 and 92,000 options were outstanding, respectively.
At September 30, 1995 and 1994, 181,850 and 75,000 options,
respectively, were exercisable and 272,650 and 400,000 options,
respectively, were available for future grant.
11. Income Taxes
Domestic and foreign income (loss) before income taxes and minority
interest in net income (loss) of consolidated subsidiary are as
follows:
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994 1993
<S> <C> <C> <C>
Domestic $(886,947) $ (972,337) $(1,247,567)
Foreign (97,996) (162,760) 14,181
-----------------------------------------
$(984,943) $(1,135,097) $(1,233,386)
=========================================
</TABLE>
The following summarizes the provision (benefit) for income taxes:
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ - $ (17,661) $ -
---------------------------------
- (17,661) -
Deferred:
Federal - - 11,000
---------------------------------
$ - $ (17,661) $ 11,000
=================================
</TABLE>
The difference between income taxes provided at the Company's
effective tax rate and the federal statutory rate is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994 1993
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate $(334,881) $(385,933) $(419,351)
Losses without tax benefit 334,881 368,272 419,351
Other - - 11,000
-----------------------------------
$ - $ (17,661) $ 11,000
===================================
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
September 30,
1995 1994
<S> <C> <C>
Net operating loss carryforwards $1,026,000 $663,000
Research and development and investment
tax credit carryforwards 95,000 114,000
Other, net 131,000 71,000
----------------------
Gross deferred tax assets 1,252,000 848,000
Deferred tax asset valuation allowance (1,252,000) (848,000)
----------------------
$ - $ -
======================
</TABLE>
The change in the valuation allowance for deferred tax assets was an
increase of $404,000, primarily related to carryforwards for net
operating loss and research and development tax credits, since the
realization of these future benefits is not sufficiently assured as
of September 30, 1995. If the Company achieves profitability, these
deferred tax assets may be available to offset future income tax
liabilities or expenses.
At September 30, 1995, the Company has $2,391,000, $2,481,000, and
$254,000 of federal, state and foreign net operating losses,
respectively, available to offset future taxable income, which
expire on various dates through 2010. At September 30, 1995, the
Company has $50,000 of federal research and development tax credit
carryforwards and $45,000 of state research and development and
investment tax credit carryforwards available to offset future
income taxes payable, which expire on various dates through 2010.
Ownership changes as defined in the Internal Revenue Code may limit
the amount of net operating loss and tax credit carryforwards that
may be utilized annually.
12. Significant Sales and Concentration of Credit Risk
In 1995, the Company derived revenues from one customer of $827,000.
In 1994, the Company derived revenues from the same customer of
$748,000, and two additional customers of $499,000 and $277,000,
respectively. In 1993, the Company derived revenues from the same
three customers of $479,000, $293,000 and $185,000, respectively,
and from a fourth customer of $205,000. Revenues derived from
export sales, which include revenues from certain of the customers
disclosed above, amounted to $1,601,000 in 1995, $759,000 in 1994
and $507,000 in 1993. Export sales to Europe were approximately
$477,000 in 1995, $607,000 in 1994 and $365,000 in 1993. Export
sales to South America were approximately $1,029,000 in 1995. Export
sales to South America were less than 10% of consolidated revenues
in 1994 and 1993.
13. International Operations
The following is a summary of certain selected financial information
as of September 30, 1995, 1994 and 1993 and for the years then ended
of the Company's 51% owned subsidiary, excluding the applicable
intercompany balances.
<TABLE>
<CAPTION>
September 30,
1995 1994 1993
<S> <C> <C> <C>
Assets $950,826 $352,284 $126,837
Liabilities 77,158 23,223 15,816
Revenues 972,730 268,094 182,975
</TABLE>
14. Commitments
Leases
------
The Company leases an office and manufacturing facility under a
cancelable operating lease, under which it has no future minimum
rental commitments. In May 1992, the Company entered into a five
year noncancelable operating lease for a second office and
manufacturing facility. During 1995, in connection with the
acquisition of the Virgo(R) product line (see Note 3), the Company
leased an office and manufacturing facility under a five year
noncancelable term. In 1993, the Company entered into finance
arrangements with two leasing companies to extend lease lines of
credit for furniture and equipment of up to approximately
$1,150,000. In 1994, one of the leasing companies extended its
lease line of credit by $500,000. Future minimum lease commitments
under the noncancelable operating leases and capital leases (see
Note 6) are as follows:
<TABLE>
<CAPTION>
Year ending Operating Capital
September 30, Leases Leases
<S> <C> <C>
1996 $197,053 $ 587,064
1997 163,661 498,860
1998 105,380 304,670
1999 109,594 117,720
2000 74,984 -
------------------------
$650,672 $1,508,314
========
Less - amount representing interest 198,925
----------
$1,309,389
==========
</TABLE>
Rent expense approximated $174,000, $155,000, and $125,000 in 1995,
1994 and 1993, respectively.
KPMG Peat Marwick LLP
New Jersey Headquarters Telephone 201 467 9650 Telefax 201 467 7930
150 John F. Kennedy Parkway Telex 136584
Short Hills, NJ 07078
Independent Auditors' Report
The Board of Directors and Stockholders
Hemagen Diagnostics, Inc.:
We have audited the accompanying statement of inventory and equipment and
leasehold improvements of the Immunofluorescent Assay and IL-2 Product Lines
of Schiapparelli Biosystems, Inc. at December 31, 1994, and the related
statement of operations before administrative, interest and income tax
expenses 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the inventory and equipment and leasehold
improvements of the Immunofluorescent Assay and IL-2 Product Lines of
Schiapparelli Biosystems, Inc. at December 31, 1994, and the results of
their operations before administrative, interest and income tax expenses
(see note 2(a)) for the year then ended in conformity with generally
accepted accounting principles.
The accompanying statement of inventory and equipment and leasehold
improvements at December 31, 1993 and the related statement of operations
before administrative, interest and income tax expenses for the year then
ended were not audited by us and, accordingly, we do not express an opinion
on them.
KPMG PEAT MARWICK LLP
September 1, 1995
IMMUNOFLUORESCENT ASSAY AND IL-2 PRODUCT
LINES OF SCHIAPPARELLI BIOSYSTEMS, INC.
Statements of Inventory and Equipment
and Leasehold Improvements
December 31, 1994 and 1993
(Thousands of Dollars)
<TABLE>
<CAPTION>
1994 1993
---- ----
(Unaudited)
<S> <C> <C>
Inventory (note 3) $520 634
Equipment and leasehold improvements, net (note 4) 297 525
- ------------------------------------------------------------------------
$817 1,159
========================================================================
</TABLE>
See accompanying notes to financial statements.
IMMUNOFLUORESCENT ASSAY AND IL-2 PRODUCT
LINES OF SCHIAPPARELLI BIOSYSTEMS, INC.
Statements of Operations Before
Administrative, Interest
and Income Tax Expenses
Years ended December 31, 1994 and 1993
(Thousands of Dollars)
<TABLE>
<CAPTION>
1994 1993
---- ----
(Unaudited)
<S> <C> <C>
Net sales:
Trade including export sales to nonaffili-
ated entities of $448 in 1994 and $675
in 1993 (note 5) $2,329 2,681
Affiliate 332 345
- ----------------------------------------------------------------------
2,661 3,026
Cost of sales (notes 5 and 6) 1,426 1,823
- ----------------------------------------------------------------------
Gross margin 1,235 1,203
- ----------------------------------------------------------------------
Selling and marketing expenses (note 6) 98 285
Warehousing, shipping and distribution expenses
(note 6) 187 169
Research and development expenses (note 6) - 77
Product lines revalidation expenses (note 5) - 360
Other income, net (note 7) (36) (34)
- ----------------------------------------------------------------------
249 857
- ----------------------------------------------------------------------
Operating profit before administrative,
interest and income tax expenses $ 986 346
======================================================================
</TABLE>
See accompanying notes to financial statements.
IMMUNOFLUORESCENT ASSAY AND IL-2 PRODUCT
LINES OF SCHIAPPARELLI BIOSYSTEMS, INC.
Notes to Financial Statements
December 31, 1994
(Thousands of Dollars)
(1) Business
On June 30, 1995, Hemagen Diagnostics, Inc. (Hemagen) acquired the
Immunofluorescent Assay and IL-2 Product Lines (VIRGO) of Schiapparelli
Biosystems, Inc. (SBI or the Company). Under the terms of the acquisition,
Hemagen acquired certain intellectual property, as defined in the
acquisition agreement, equipment and leasehold improvements, inventory and
the rights to certain manufacturing facility leases related to the VIRGO
business.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying statements of inventory and equipment and leasehold
improvements at December 31, 1994 and 1993 and statements of
operations before administrative, interest and income tax expenses for
the years ended December 31, 1994 and 1993 were prepared from the
books and records maintained by SBI using the historical cost method,
of which VIRGO represents several product lines. The statements of
operating results do not include charges for administrative, interest
and income tax expenses since such items are considered to be
corporate expenses and are not allocable to individual product lines.
The VIRGO product lines have never operated as a separate business
entity but rather have been an integrated part of SBI's consolidated
business.
The statements of operations before administrative, interest and
income tax expenses include identified sales costs that substantially
relate directly to the VIRGO product lines and expenses which are
allocated based on estimates and assumptions made by SBI management,
as described in note 6, as if the VIRGO lines had been operated on a
stand-alone business.
The allocations described above are believed by SBI's management to be
reasonable allocations under the circumstances; however, there can be
no assurances that such allocations will be indicative of future
results of operations.
(b) Inventory
Inventory is presented at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(c) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation
on equipment is calculated on a straight-line basis over the estimated
useful lives of the assets. Leasehold improvements are amortized over
the shorter of the lease term or estimated useful life of the asset
using the straight-line method. Repairs and maintenance costs are
charged to operations as incurred.
(d) Revenue Recognition
Revenue is recognized when a product is shipped.
(e) Research and Development Costs
Research and development costs are charged to expense as incurred.
(3) Inventory
Inventory at December 31, 1994 and 1993 consists of the following:
<TABLE>
<CAPTION>
1994 1993
---- ----
(Unaudited)
<S> <C> <C>
Raw materials and work in process $385 524
Finished goods 135 110
----------------------------------------------------
$520 634
====================================================
</TABLE>
(4) Equipment and Leasehold Improvements
Equipment and leasehold improvements at December 31, 1994 and 1993
consist of the following:
<TABLE>
<CAPTION>
1994 1993
---- ----
(Unaudited)
<S> <C> <C>
Machinery and equipment $269 269
Leasehold improvements 513 513
----------------------------------------------------
782 782
Less accumulated depreciation
and amortization 485 257
----------------------------------------------------
$297 525
====================================================
Depreciation expense $228 216
====================================================
</TABLE>
(5) Net Sales and Product Lines Revalidation (Unaudited)
Net sales exclude net sales made by a European affiliate of the
Company to the affiliate's customers totaling $369 and $370 in 1994 and
1993, respectively. The transfer price to the affiliate of $129 and $143 in
1994 and 1993, respectively, is included in cost of sales.
In 1993 the Company relocated the VIRGO product lines to the current
facility in Maryland. In connection with this move the Company incurred
costs of $360 primarily to revalidate its manufacturing processes.
Accordingly, these expenses are reflected in the 1993 statement of
operations before administrative, interest and income tax expenses.
(6) Allocated Costs
As mentioned in note 1, the VIRGO product lines are a component of
SBI's consolidated business; accordingly, certain common costs have been
allocated as estimated by management as described below. The following
table sets forth the amounts allocated by management:
<TABLE>
<CAPTION>
1994 1993
---- ----
(Unaudited)
<S> <C> <S>
Cost of sales - manufacturing overhead variances $ 66 -
==================================================================
Warehouse, shipping and distribution $187 169
==================================================================
</TABLE>
The manufacturing overhead variance component of cost of sales and
warehousing, shipping and distribution expenses represent common costs
incurred at SBI's Maryland facility, which is used to manufacture both VIRGO
and other nonrelated products. This facility contains a workforce that is
responsible for several product lines, including the VIRGO product lines,
and, therefore, common expenses are allocated by SBI management to each
product line based on a ratio of net sales of the VIRGO lines to total net
sales of products manufactured at the Maryland facility.
Selling and marketing expenses represent payroll and other charges
incurred by specific employees of SBI who are responsible only for VIRGO
sales, marketing and product promotion. A charge of $46 has been included
in the 1993 selling and marketing costs which represents expenses primarily
related to reprinting labels for the VIRGO product lines after its
acquisition by the Company.
Research and development expenses in 1993 represent primarily salary
and related expenses for specific employees who performed research functions
as well as an allocation of $26 (made by SBI management based on budgeted
costs) of costs for one employee who was responsible for research and other
functions. Research and development related to the VIRGO product lines were
discontinued in 1993.
(7) Other Income, Net
Included in other income, net is royalty expense of $14 and $16 paid
to a third party in 1994 and 1993, respectively.
During 1994 and 1993, the Company received income of $50 each year
from an affiliate for the right to distribute VIRGO products in a defined
region of Italy.
(8) Sales Concentration
In 1993, one customer accounted for 11% of net sales. No individual
customer exceeded 10% of net sales in 1994.
(9) General and Administrative Expenses (Unaudited)
Since the VIRGO product lines have not been operated as separate
businesses or divisions of the Company, the Company has never allocated
general and administrative expenses such as legal, accounting, officers'
salaries, or general home office overhead to the VIRGO product lines.
Management estimates that general and administrative expenses related to the
VIRGO product lines, calculated as a percentage of its net sales, amounted
to $198 and $222 in 1994 and 1993, respectively.
160 Federal Street Telephone 617 439 4390
Boston, MA 02110
Report of Independent Accountants
The Board of Directors and Stockholders of
Hemagen Diagnostics, Inc.
We have audited the accompanying statement of inventory and equipment and
leasehold improvements of the Immunofluorescent Assay and IL-2 Product Lines
of Schiapparelli Biosystems, Inc. as of June 30, 1995, and the related
statement of operations before administrative, interest and income tax
expenses for the six-month period 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly, in
all material respects, the inventory and equipment and leasehold
improvements of the Immunofluorescent Assay and IL-2 Product Lines of
Schiapparelli Biosystems, Inc. as of June 30, 1995, and the results of their
operations before administrative, interest and income tax expenses for the
six-month period then ended, in conformity with generally accepted
accounting principles.
/s/ Price Waterhouse LLP
Boston, Massachusetts
December 8, 1995
Immunofluorescent Assay and IL-2 Product Lines of Schiappareli Biosystems, Inc.
Statement of Inventory and Equipment and Leasehold Improvements
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1995
<S> <C>
Inventory (Note 3) $376,976
Equipment and leasehold improvements, net (Note 4) 183,553
--------
$560,529
========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
Immunofluorescent Assay and IL-2 Product Lines of Schiappareli Biosystems, Inc.
Statement of Operations Before Administrative, Interest and Income Tax Expenses
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six
month period ended
June 30, 1995
<S> <C>
Revenue:
Product sales (Note 5) $1,033,643
Product sales to affiliates 152,339
----------
1,185,982
Cost of sales (Note 6) 629,849
----------
Gross margin 556,133
Selling and marketing expenses (Note 6) 33,837
Warehousing, shipping and distribution expenses (Note 6) 57,443
Other income (Note 7) 12,500
----------
78,780
----------
Operating profit before administrative, interest and
income tax expenses $ 477,353
==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
Immunofluorescent Assay and IL-2 Product Lines of Schiappareli Biosystems, Inc.
Notes to Financial Statements
Six Months Ended June 30, 1995
- -------------------------------------------------------------------------------
1. Business
On July 1, 1995, Hemagen Diagnostics, Inc. ("Hemagen") acquired the
Immunofluorescent Assay and IL-2 Product Lines ("VIRGO") of Schiapparelli
Biosystems, Inc. ("SBI" or the "Company"). Under the terms of the
acquisition, Hemagen acquired certain intellectual property, as defined in
the acquisition agreement, equipment and leasehold improvements, inventory
and the rights to certain manufacturing facility leases related to the
VIRGO business.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying statement of inventory and equipment and leasehold
improvements as of June 30, 1995 and statement of operations before
administrative, interest and income tax expenses for the six-month period
ended June 30, 1995 were prepared from the books and records maintained by
SBI using the historical cost method, of which VIRGO represents several
product lines. The statement of operating results does not include
charges for administrative, interest and income tax expenses since such
items are considered to be corporate expenses and are not allocable to
individual product lines. The VIRGO product lines have never operated as
a separate business entity but rather have been an integrated part of
SBI's consolidated business.
The statement of operations before administrative, interest and income tax
expenses includes identified sales costs that substantially relate
directly to the VIRGO product lines and expenses which are allocated based
on estimates and assumptions made by SBI management, as described in Note
6, as if the VIRGO lines had been operated as a stand-alone business.
The allocations described above are believed by SBI's management to be
reasonable allocations under the circumstances; however, there can be no
assurances that such allocations will be indicative of future results of
operations.
Inventory
Inventory is presented at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation on
equipment is calculated on a straight-line basis over the estimated useful
lives of the assets. Leasehold improvements are amortized over the
shorter of the lease term or estimated useful life of the asset using the
straight-line method. Repairs and maintenance costs are charged to
operations as incurred.
Revenue Recognition
Revenue is recognized when a product is shipped.
3. Inventory
Inventory at June 30, 1995 consists of the following:
<TABLE>
<S> <C>
Raw materials and work in process $274,202
Finished goods 102,774
--------
$376,976
</TABLE>
4. Equipment and Leasehold Improvements
Equipment and leasehold improvements at June 30, 1995 consist of the
following:
<TABLE>
<S> <C>
Machinery and equipment $268,500
Leasehold improvements 513,211
--------
781,711
Less: accumulated depreciation and amortization 598,158
--------
$183,553
========
Depreciation expense for the six month period
ended June 30, 1995 $113,700
========
</TABLE>
5. Export Sales
Export sales to non-affiliated customers totalled $191,640 during the six
month period ended June 30, 1995.
6. Allocated Costs
As described in Note 1, the VIRGO product lines are a component of SBI's
consolidated business. Accordingly, certain common costs have been
allocated as estimated by management, as described below. The following
sets forth the amounts allocated by management to the VIRGO product lines
during the six month period ended June 30, 1995:
<TABLE>
<S> <C>
Cost of sales - manufacturing, direct labor and
overhead variances $28,318
=======
Warehouse, shipping and distribution $57,443
=======
</TABLE>
The manufacturing, direct labor and overhead variance component of cost of
sales and warehousing, shipping and distribution expenses represent common
costs incurred at SBI's Maryland facility, which is used to manufacture
both VIRGO and other nonrelated products. This facility contains a
workforce that is responsible for several product lines, including the
VIRGO product lines, and therefore, common expenses are allocated by SBI
management to each product line based on a ratio of net sales of the VIRGO
product lines to total net sales of products manufactured at the Maryland
facility.
Selling and marketing expenses represent payroll and other charges
incurred by specific employees of SBI who are responsible only for VIRGO
sales, marketing and product promotion.
7. Other Income
During the six month period ended June 30, 1995, the Company earned income
of $12,500 from an affiliate for the right to distribute VIRGO products in
a defined region of Italy.
8. Sales Concentration
For the six month period ended June 30, 1995, one customer accounted for
10% of revenue.
9. Facility Lease
The Company occupies the Maryland facility at which both VIRGO products
and other nonrelated products are manufactured under an operating lease.
Rent expense for the six month period ended June 30, 1995 was
approximately $78,000 for the entire facility, which is allocated among
the product lines as described in Note 6. The lease for this property was
scheduled to terminate on September 30, 1995. In conjunction with the
acquisition of VIRGO by Hemagen, as described in Note 1, a portion of this
lease was terminated as of June 30, 1995.
10. General and Administrative Expenses (unaudited)
Since the VIRGO product lines have not been operated as separate
businesses or divisions of the Company, the Company has never allocated
general and administrative expenses such as legal, accounting, officers'
salaries, or general corporate overhead to the VIRGO product lines.
Management estimates that general and administrative expenses related to
the VIRGO product lines, calculated as a percentage of their net sales,
amounted to $87,000 for the six month period ended June 30, 1995.
Independent Auditors' Report
To the Board of Directors and Stockholder
of Reagents Applications, Inc.
We have audited the accompanying balance sheets of Reagents Applications, Inc.
as of December 31, 1995 and 1994, and the related statements of operations,
changes in stockholder's 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 Reagents Applications, Inc.
as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Boston, Massachusetts
May 31, 1996
Reagents Applications, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 135 913 $ 34 153
Accounts receivable, less allowance for doubtful
accounts of $26,000 and $13,000, respectively (Note 10) 784 897 1 206 988
Receivable from KONE Holdings, Inc. 101 261 443 259
Inventories (Notes 2 and 3) 1 361 406 1 260 852
Prepaid expenses and other current assets 62 333 68 766
Deferred income taxes (Note 7) 25 700 70 700
- ---------------------------------------------------------------------------------------
Total current assets 2 471 510 3 084 718
Furniture and equipment, net (Note 4) 758 618 775 658
Product formulas (Note 5) 1 967 757 2 662 259
- ---------------------------------------------------------------------------------------
$5 197 885 $6 522 635
=======================================================================================
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 175 936 $ 249 505
Accrued expenses 203 999 261 925
Current portion of notes payable to
KONE Holdings, Inc. (Note 6) 3 900 000 1 000 000
- ---------------------------------------------------------------------------------------
Total current liabilities 4 279 935 1 511 430
Notes payable to KONE Holdings, Inc.,
less current portion (Note 6) - 3 600 000
Deferred income taxes (Note 7) 79 400 101 700
- ---------------------------------------------------------------------------------------
Total liabilities 4 359 335 5 213 130
- ---------------------------------------------------------------------------------------
Commitments (Notes 8, 9 and 11)
Stockholder's equity:
Common stock, $1 par value; 1,000 shares authorized;
100 shares issued and outstanding 100 100
Additional paid-in capital 499 900 499 900
Retained earnings 338 550 809 505
- ---------------------------------------------------------------------------------------
Total stockholder's equity 838 550 1 309 505
- ---------------------------------------------------------------------------------------
$5 197 885 $6 522 635
=======================================================================================
</TABLE>
See accompanying notes to financial statements.
Reagents Applications, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C>
Net revenues (Note 10) $5 806 684 $7 091 163
Cost of products sold 3 090 853 3 626 774
- ---------------------------------------------------------------------------------------
Gross profit 2 715 831 3 464 389
- ---------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative expenses 2 152 112 1 998 435
Amortization of intangible assets 694 502 694 502
Research and development costs 258 931 362 994
- ---------------------------------------------------------------------------------------
Total costs and expenses 3 105 545 3 055 931
- ---------------------------------------------------------------------------------------
Operating income (loss) (389 714) 408 458
- ---------------------------------------------------------------------------------------
Other income (expense):
Interest expense (380 287) (299 321)
Other, net 24 046 40 400
- ---------------------------------------------------------------------------------------
Other expense, net (356 241) (258 921)
Income (loss) from continuing operations
before taxes on income (credit) (745 955) 149 537
Taxes on income (credit) (Note 7) (275 000) 65 000
- ---------------------------------------------------------------------------------------
Income (loss) from continuing operations (470 955) 84 537
Discontinued operations (Notes 2 and 7):
Income from discontinued operations,
net of income taxes of $32,000 in 1994 - 49 226
Loss on disposal of discontinued operations,
net of income tax benefit of $35,000 in 1994 - (53 457)
- ---------------------------------------------------------------------------------------
Net income (loss) $ (470 955) $ 80 306
=======================================================================================
</TABLE>
See accompanying notes to financial statements.
Reagents Applications, Inc.
Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
Common Additional
Years ended Stock Paid-In Retained
December 31, 1995 and 1994 Shares Amount Capital Earnings Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 100 $100 $499 900 $ 729 199 $1 229 199
Net income for the year - - - 80 306 80 306
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1994 100 100 499 900 809 505 1 309 505
Net loss for the year - - - (470 955) (470 955)
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1995 100 $100 $499 900 $ 338 550 $ 838 550
===============================================================================================
</TABLE>
See accompanying notes to financial statements.
Reagents Applications, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(470 955) $ 80 306
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 140 709 140 325
Amortization of intangible assets 694 502 694 502
Deferred income taxes 22 700 (19 000)
Provision for doubtful accounts 13 000 10 811
Loss on disposal of discontinued operations - 51 157
Loss on disposal of furniture and equipment 6 859 8 791
Changes in operating assets and liabilities:
Accounts receivable 409 091 (60 069)
Inventories (100 554) (351 279)
Prepaid expenses and other current assets 6 433 (3 043)
Accounts payable (73 569) 62 021
Accrued expenses (57 926) 4 709
- -------------------------------------------------------------------------------
Net cash provided by operating activities 590 290 619 231
Cash flows from investing activities:
Purchases of property and equipment (269 509) (183 346)
Proceeds from sale of furniture and equipment 138 981 -
Receivable from KONE Holdings, Inc. 341 998 (425 935)
- -------------------------------------------------------------------------------
Net cash provided by (used for) investing
activities 211 470 (609 281)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Payments of notes payable to KONE Holdings, Inc. (700 000) -
- -------------------------------------------------------------------------------
Net cash used for financing activities (700 000) -
- -------------------------------------------------------------------------------
Net increase in cash and cash equivalents 101 760 9 950
Cash and cash equivalents, beginning of year 34 153 24 203
- -------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 135 913 $ 34 153
===============================================================================
</TABLE>
See accompanying notes to financial statements.
Reagents Applications, Inc.
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Description of Business
Reagents Applications, Inc. (the "Company") is a wholly-owned subsidiary
of KONE Holdings, Inc. ("KONE"). It primarily produces clinical chemical
reagents for automated chemistry analyzers used in hospitals and private
laboratories in North America and Europe.
Cash and Cash Equivalents
Cash and cash equivalents includes liquid investments with an original
maturity of three months or less. Cash paid for income taxes was
approximately $0 in 1995 and $109,000 in 1994. Cash paid for interest was
approximately $380,000 in 1995 and $315,000 in 1994.
Concentration of Credit Risks
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of clients comprising the Company's client
base. Ongoing credit reviews of clients' financial condition are performed,
and collateral is not required. The Company maintains reserves for potential
credit losses and such losses, in the aggregate, have not exceeded
management's expectations.
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.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
Furniture and Equipment
Furniture and equipment is stated at cost. Depreciation is computed
by the straight-line method using the following estimated useful lives:
Machinery and equipment 7-10 Years
Furniture and fixtures 5 Years
Product Formulas
Product formulas are recorded at cost and are being
amortized using the straight-line method over 10 years. On an annual basis,
the Company reviews the carrying value of its intangible assets in comparison
to projections of undiscounted cash flows and, if necessary, records
impairment.
Revenue Recognition
Revenue is recognized upon shipment of products to customers.
Income Taxes
Deferred tax assets or liabilities are recognized for the
estimated tax effects of temporary differences between the tax and financial
reporting bases of the Company's assets and liabilities and for loss
carryforwards based on enacted tax laws and rates.
New Accounting Standard
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." This standard
establishes new guidelines regarding when impairment losses on long-lived
assets, which include plant and equipment and certain identifiable intangible
assets, should be recognized and how impairment losses should be measured.
The adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
2. Discontinued Operations
On August 31, 1994, the Company discontinued the operations of its
Cuvette division, which produced injection molded plastic parts for a
subsidiary of KONE Corporation, the parent company of KONE Holdings, Inc.
("KONE"), and another customer. During 1995 property and equipment from this
operation was sold for approximately $139,000, resulting in a loss of
approximately $9,000, which has been included in loss on disposal of
discontinued operations in 1994 in the accompanying financial statements. The
remaining inventory was sold for approximately $10,000, resulting in a loss of
approximately $43,000. Additional costs, including lease related expense and
severance costs, incurred subsequent to August 31, 1994, amounted to
approximately $45,000, of which approximately $19,000 was paid prior to
December 31, 1994. These transactions have been accounted for as a loss on
disposal of discontinued operations in 1994 in the accompanying financial
statements.
Revenue from discontinued operations approximated $325,000 for the eight
months of operation during the year ended December 31, 1994. Identifiable
assets of the discontinued operations were $168,000 at December 31, 1994.
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 1994
----------------------------------------------------------
<S> <C> <C>
Finished goods $1 143 536 $ 966 807
Raw materials 217 870 294 045
----------------------------------------------------------
Total $1 361 406 $1 260 852
==========================================================
</TABLE>
4. Furniture and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 1994
----------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 597 585 $ 795 795
Furniture and fixtures 713 138 622 359
----------------------------------------------------------
1 310 723 1 418 154
Less accumulated depreciation 552 105 642 496
----------------------------------------------------------
Total $ 758 618 $ 775 658
==========================================================
</TABLE>
5. Product Formulas
Product formulas are comprised of the following:
<TABLE>
<CAPTION>
December 31, 1995 1994
----------------------------------------------------------
<S> <C> <C>
Product formulas $6 945 023 $6 945 023
Less accumulated amortization 4 977 266 4 282 764
----------------------------------------------------------
Total $1 967 757 $2 662 259
==========================================================
</TABLE>
6. Notes Payable to KONE Holdings, Inc.
Notes payable, totaling $3,900,000 and $4,600,000 at December 31, 1995
and 1994, respectively, to KONE bear interest at the prime rate charged by
KONE's bank (9.0% at December 31, 1995). In connection with the sale of the
Company to Hemagen Diagnostics, Inc. ("Hemagen") on March 1, 1996 (see also
Note 11), the outstanding notes payable to KONE Holdings, Inc. amounting to
$3,900,000 were contributed to capital immediately prior to the sale.
Interest expense on these notes was approximately $380,000 in 1995 and
$299,000 in 1994.
The carrying value of the Company's notes payable approximate fair value
because the interest rates on these notes change with market rates.
7. Income Taxes
For the years ended December 31, 1995 and 1994, the Company joined in
the filing of a consolidated Federal income tax return with KONE, its parent
until the sale of the Company on March 1, 1996 (see also Note 11). For state
tax purposes, the Company files a separate income tax return. In 1995 and
1994, KONE allocated Federal income taxes to the Company based upon the
Company's share of taxable income or loss at the Federal statutory rate.
The provision for (benefit from) income taxes is comprised of the
following:
<TABLE>
<CAPTION>
December 31, 1995 1994
----------------------------------------------------------
<S> <C> <C>
Current:
Federal $ (297 700) $ 65 000
State - 19 000
----------------------------------------------------------
(297 700) 84 000
----------------------------------------------------------
Deferred:
Federal 19 700 (16 000)
State 3 000 (3 000)
----------------------------------------------------------
22 700 (19 000)
----------------------------------------------------------
Total $ (275 000) $ 65 000
==========================================================
</TABLE>
The components of the provision for (benefit from) income taxes in the
statement of operations are classified as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
----------------------------------------------------------
<S> <C> <C>
Continuing operations:
Current $ (275 700) $ 84 000
Deferred 700 (19 000)
----------------------------------------------------------
(275 000) 65 000
----------------------------------------------------------
Discontinued operations:
Current (22 000) 15 000
Deferred 22 000 (18 000)
----------------------------------------------------------
- (3 000)
----------------------------------------------------------
Total provision (benefit):
Current (297 700) 99 000
Deferred 22 700 (37 000)
----------------------------------------------------------
Total $ (275 000) $ 62 000
==========================================================
</TABLE>
The following is a reconciliation of the Company's effective tax rate to
the United States' statutory rate:
<TABLE>
<CAPTION>
December 31, 1995 1994
----------------------------------------------------------
<S> <C> <C>
Computed tax expense at 34% $ (254 000) $ 47 000
State, net of Federal tax benefit 2 000 9 000
Other (23 000) 6 000
----------------------------------------------------------
Total $ (275 000) $ 62 000
==========================================================
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities at December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
----------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Inventories $ 6 000 $ 43 000
Accounts receivable 10 000 5 000
Accrued expenses 9 700 22 700
----------------------------------------------------------
25 700 70 700
----------------------------------------------------------
Deferred tax liabilities:
Depreciation 79 400 101 700
----------------------------------------------------------
79 400 101 700
----------------------------------------------------------
Net deferred tax liability $ 53 700 $ 31 000
==========================================================
</TABLE>
8. Lease Commitments
The Company leases office and plant facilities and certain equipment
under non-cancelable operating leases which expire at various dates through
1997. Rental expense charged to operations amounted to approximately $312,000
in 1995 and $299,000 in 1994.
Approximate future minimum lease payments under noncancelable operating
leases as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
-----------------------------------------
<C> <C>
1996 $302 000
1997 3 000
-----------------------------------------
Total $305 000
=========================================
</TABLE>
9. Employee Benefits
The Company sponsors a 401(k) profit sharing plan for all employees
meeting certain eligibility requirements. Employees may contribute a portion
of their gross salary to the Plan and the Company matches 50% of the first 5%
of the employees' compensation contributed. Total contributions to the Plan
amounted to approximately $40,000 in 1995 and $38,000 in 1994.
10. Business Concentrations and Foreign Sales
The Company had sales to two significant customers whose purchases from
time-to-time comprise in excess of ten percent of the Company's revenues. One
of these customers is a related party, a wholly-owned subsidiary of KONE
Corporation to whom sales amounted to approximately $733,000 in 1995 and
$1,076,000 in 1994, of which approximately $110,000 in 1994 were sales of
discontinued operations. Accounts receivable from this related party
approximated $65,000 at December 31, 1995 and $151,000 at December 31, 1994.
Sales to the other significant customer amounted to approximately $529,000 in
1995 and $729,000 in 1994.
The Company had foreign sales, primarily to customers in Europe and
Mexico, of approximately $2,007,000 in 1995 and $3,358,000 in 1994.
11. Subsequent Event
Effective March 1, 1996, 100% of the Company's outstanding common stock
was sold to Hemagen Diagnostics, Inc. for a purchase price of $4,920,648 under
a Stock Purchase Agreement (the "Agreement") dated May 25, 1995, as
subsequently amended.
In accordance with the Agreement, immediately prior to the sale, the
outstanding notes payable to KONE amounting to $3,900,000 were contributed to
capital.
Condensed and Pro Forma Combined Financial Statements
The unaudited pro forma combined statements of operations for the year
ended September 30, 1995 and the six months ended March 31, 1996 are
presented as if the Schiapparelli and RAI acquisitions had been
consummated as of the beginning of the periods indicated, except that the
operating results for RAI's year ended December 31, 1995 were used to
prepare the unaudited pro forma condensed combined statement of operations
for Hemagen's fiscal year ended September 30, 1995.
The unaudited pro forma condensed combined financial statements have been
prepared by Hemagen and all calculations have been made based upon
assumptions deemed appropriate. The unaudited pro forma condensed
combined financial statements were prepared utilizing the accounting
policies of Hemagen. The preliminary allocations of the purchase price,
which may be subject to certain adjustments as Hemagen finalizes the
allocation of the purchase price in accordance with generally accepted
accounting principles, are included below. The purchase price has been
allocated based upon the estimated fair value of the assets and
liabilities acquired.
The results of operations of Schiaparelli included in the unaudited pro
forma condensed combined statement of operations represent the operations
of the Virgo product line acquired by Hemagen, and are based, in part,
upon assumptions made by Schiapparelli management regarding allocable
costs.
The acquisition of RAI was financed through the private placement (the
"Private Placement") of 2,695,255 units (the "Units") at a purchase price
of $2.75 per unit which resultd in net proceeds of $6,617,555 after
deduction of offering ocst amounting to $794,520. The pro forma condensed
statement of operations reflects pro forma adjustments for the amount of
common shares sold which were used to finance the acquisition of RAI.
The unaudited pro forma financial information does not purport to be
indicative of the results of operations which would have actually been
obtained if the acquisition had been consummated on the dates indicated.
In addition, the unaudited pro forma financial information does not
purport to be indicative of results of operations which may be achieved in
the future.
The unaudited pro forma financial information should be read in
conjunction with Hemagen's historical consolidated financial statements
and notes thereto contained in the 1995 Annual Report on Form 10-KSB and
the Quarterly Report on Form 10-QSB for the quarters ended December 31,
1995 and March 31, 1996.
The components of the purchase price and its allocation to the assets and
liabilities of RAI are as follows:
<TABLE>
<S> <C>
Components of purchase price:
Cash paid at closing, net of $230,500 received from seller: $4,704,780
Deposit to Kone Holdings, Inc, and prepaid
expenses related to the acquisition: 264,729
----------
Total purchase price: $4,969,509
Allocation of purchase price:
Stockholders' equity in RAI $ 832,523
Increase in inventories (adjustment to fair value) 343,256
Increase in property and equipment (adjustment to fair value) 290,121
Contribution to capital of loan from Kone at closing 3,900,000
Write off of intangible asset at closing (1,967,757)
----------
Cost in excess of net assets acquired $1,571,366
</TABLE>
The components of the purchase price and its allocation to the assets and
liabilities of Schiapparelli are as follows:
<TABLE>
<S> <C>
Components of purchase price:
Deposit to Schiapparelli: $1,000,000
Note payable to Schiapparelli: 380,000
Expenses related to purchase: 86,254
----------
Total purchase price: $1,466,254
Allocation of purchase price:
Inventories (adjusted to fair value): 589,500
Property and equipment (adjusted to fair value): 912,505
Liabilities assumed: (35,751)
----------
Net assets acquired: $1,466,254
</TABLE>
Hemagen Diagnostics, Inc. and Subsidiary
Pro Forma Condensed Combined Statement of Operations
Six Months Ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical
----------------------------------
Reagents
Hemagen Applications, Inc.
Six Months Five Months Pro forma Pro forma
Ended 3/31/96 Ended 2/29/96 Adjustments Combined
------------- ------------------ ----------- ---------
<S> <C> <C> <C> <C>
Sales $3,687,000 $2,115,000 $ 5,802,000
Costs and expenses:
Cost of product sales 2,253,000 1,287,000 50,000 (1) 3,590,000
Amortization of intangible asset 8,000 274,000 (230,000)(1) 52,000
Research and development 324,000 105,000 429,000
Selling, general and administrative 1,497,000 984,000 36,000 (1) 2,517,000
--------------------------------------------------------------
4,082,000 2,650,000 (144,000) 6,588,000
--------------------------------------------------------------
Operating income (loss) (395,000) (535,000) 144,000 (786,000)
Interest expense (net) (300,000) (147,000) 147,000 (1) (300,000)
Income (loss) before income taxes (695,000) (682,000) 291,000 (1,086,000)
Provision (benefit) for income taxes 0 (328,000) 328,000 (1) 0
--------------------------------------------------------------
Net Income (loss) $ (695,000) (354,000) (37,000) $(1,086,000)
--------------------------------------------------------------
Net loss per share $ (0.18) $ (0.19)
---------- -----------
Weighted average shares outstanding 3,840,167 2,024,058 (2) 5,864,225
---------- -----------
</TABLE>
See Notes to Pro Forma Condensed Combined Financial Statements.
Hemagen Diagnostics, Inc. and Subsidiary
Notes to the Pro Forma Condensed Consolidated Financial Statements
Six Months Ended March 31, 1996
(Unaudited)
The pro forma adjustments to the condensed consolidated statement of
operations for the period ended March 31, 1996 are as follows:
(1) Decrease in amortization of intangible assets: $ 230,000
Decrease in interest expense 147,000
Increase in depreciation expense allocated to
cost of goods sold: (50,000)
Increase in depreciation expense allocated to
SG&A expense: (36,000)
Eliminate benefit for income taxes: (328,000)
---------
Total pro forma adjustment to income: $ (37,000)
=========
The pro forma adjustments reflect the acquisition being recorded as a
purchase and the preliminary allocation of the purchase price. The
purchase will be allocated to the assets based on their
estimated fair value and accordingly may be subject to certain
significant adjustments as the Company finalizes the allocation of the
purchase price in accordance with generally accepted accounting
principles. The Company will review, with the assistance of independent
auditors, the fair value of the assets and liabilities acquired,
and accordingly, the amount recorded herein, including goodwill, will be
adjusted to reflect those values.
(2) The weighted average number of shares is adjusted to reflect the
issuance of 2,024,058 common shares from the Private Placement which
were used to finance the RAI acquisition.
(3) Operating results for RAI for the month ended March 31, 1996
are included in Hemagen's historical information.
Hemagen Diagnostics, Inc. and Subsidiaries
Pro Forma Condensed Combined Statement of Operations
Fiscal Year Ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Historical
------------------------------------------------
Certain Assets
Acquired from
Hemagen RAI Schiapparelli Pro Forma
Year Ended Year Ended Nine Months Pro Forma Combined
09/30/95 12/31/95 Ended 6/30/95 Adjustments As Adjusted
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
Product sales $3,935,195 $5,806,684 $1,902,000 $11,643,879
R & D contracts 20,000 20,000
- ------------------------------------------------------------------------------------------------------------------
Total Revenue 3,995,195 5,806,684 1,902,000 11,663,879
- ------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of product sales 2,173,087 3,090,853 1,137,000 54,740 (1)(2) 6,455,680
Amortization of intangible
assets 694,502 (589,744) (2) 104,758
Cost of R & D revenue 10,814 10,814
Research and development 562,497 258,931 821,428
Selling, general and
administrative 2,054,908 2,152,112 192,000 72,228 (2) 4,471,248
- ------------------------------------------------------------------------------------------------------------------
Total operating costs 4,801,306 6,196,398 1,329,000 (462,776) 11,863,928
- ------------------------------------------------------------------------------------------------------------------
Operating income (loss) (846,111) (389,714) 573,000 462,776 (200,049)
- ------------------------------------------------------------------------------------------------------------------
Other income (expense), net (138,832) (356,241) 9,000 258,241 (1)(2) (227,832)
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes (984,943) (745,955) 582,000 721,017 (427,881)
- ------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income
taxes 0 (275,000) 239,000 36,000 (1)(2) 0
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) ($ 984,943) ($ 470,955) $343,000 $685,017 ($ 427,881)
==================================================================================================================
Net loss per share ($0.31) ($0.08)
==================================================================================================================
Weighted average shares
outstanding 3,157,759 2,024,058 (3) 5,181,817
==================================================================================================================
</TABLE>
See Notes to Pro Forma Condensed Combined Financial Statements.
Hemagen Diagnostics, Inc. and Subsidiary
Notes to the Pro Forma Condensed Consolidated Financial Statements
Year Ended September 30, 1995
(Unaudited)
The pro forma adjustments to the condensed consolidated statements of income
for the period ending September 30, 1995 are as follows:
(1) For purchase of certain assets acquired from Schiapparelli Biosystems:
<TABLE>
<S> <C>
Decrease in depreciation expense
after purchase accounting adjust-
ments related to the acquired
fixed assets: $ 45,000
Interest expense for debt
incurred in the financing of
the acquisition: (98,000)
Reduction in income tax re-
sulted from combination: 239,000
--------
Total pro forma adjustment to income: $186,000
========
</TABLE>
(2) For purchase of RAI:
<TABLE>
<S> <C>
Decrease in amortization of
intangible assets $589,744
Decrease in interest expense 356,241
Increase in depreciation expense
allocated to cost of goods sold (99,740)
Increase in depreciation expense
allocated to SG&A expense (72,228)
Eliminate benefit for income taxes (275,000)
--------
Total pro forma adjustment to income $499,017
========
</TABLE>
The pro forma adjustments reflect the acquisition being recorded as a purchase
and the preliminary allocation of the purchase price. The purchase will be
allocated to the assets and liabilities based on their estimated fair value
and accordingly may be subject to certain significant adjustments as the
Company finalizes the allocation of the purchase price in accordance with
generally accepted accounting principles. The Company will review, with the
assistance of independent outside auditors, the fair value of the assets
and liabilities acquired, and accordingly, the amount recorded herein,
including goodwill, will be adjusted to reflect those values.
(3) The weighted average number of shares for each period presented is
adjusted to reflect the issuance of 2,024,058 common shares from the
Private Placement which were used to finance the RAI acquisition.
(4) Operating results for the assets acquired from Schiapparelli for the
three month period ended September 30, 1995 are included in Hemagen's
historical information.
==============================================================================
All dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions. No dealer, salesman or any other person has
been authorized in connection with this Offering to give any information or
to make any representations other than those contained in this Prospectus
and, if given or made, such information or representations must not be
relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is
unlawful to make such an offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create an implication that there has been no change in the circumstances of
the Company or the facts herein set forth since the date hereof.
-------------------
TABLE OF CONTENTS
Page
----
Available Information ...................................... 2
The Company ................................................ 3
Risk Factors ............................................... 7
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Price Range of Common Stock................................. 14
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 15
Business.................................................... 20
Management.................................................. 34
Selling Securityholders .................................... 41
Principal Stockholders...................................... 45
Certain Transactions........................................ 47
Plan of Distribution......................................... 49
Description of Securities ................................... 50
Legal Matters ............................................... 53
Experts ..................................................... 53
==============================================================================
==============================================================================
2,388,035 Shares of Common Stock
HEMAGEN DIAGNOSTICS, INC.
-------------------
PROSPECTUS
-------------------
June __, 1996
==============================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
Delaware General Corporation Law, Section 102(b)(7), enables a
corporation in its original certificate of incorporation or an amendment
thereto validly approved by Securityholders to eliminate or limit personal
liability of members of its Board of Directors for violations of a
director's fiduciary duty of care. However, the elimination or limitation
shall not apply where there has been a breach of the duty of loyalty,
failure to act in good faith, engaging in intentional misconduct or
knowingly violating a law, paying a dividend or approving a stock repurchase
which was deemed illegal or obtaining an improper personal benefit. The
Company's Certificate of Incorporation includes the following language:
"To the maximum extent permitted by Section 102(b)(7) of
the General Corporation Law of Delaware, a director of this
Corporation shall not be personally liable to the Corporation or its
Securityholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its Securityholders, (ii) for
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit."
Delaware General Corporation Law, Section 145, permits a corporation
organized under Delaware law to indemnify directors and officers with
respect to any matter in which the director or officer acted in good faith
and in a manner he reasonably believed to be not opposed to the best
interests of the Company, and, with respect to any criminal action, in which
he had reasonable cause to believe his conduct was lawful. The Bylaws of
the Company include the following provision:
"Reference is made to Section 145 and any other relevant
provisions of the General Corporation Law of the State of Delaware.
Particular reference is made to the class of persons, hereinafter
called "Indemnitees," who may be indemnified by a Delaware corporation
pursuant to the provisions of such Section 145, namely, any person, or
the heirs, executors, or administrators of such person, who was or is
a party or is threatened to be made a party to any threatened, pending
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, by reason of the fact that such
person is or was a director, officer, employee, or agent of such
corporation or is or was serving at the request of such corporation as
a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise. The
Corporation shall, and is hereby obligated to, indemnify the
Indemnitees, and each of them, in each and every situation where the
Corporation is obligated to make such indemnification pursuant to the
aforesaid statutory provisions. The Corporation shall indemnify the
Indemnitees, and each of them, in each and every situation where,
under the aforesaid statutory provisions, the Corporation is not
obligated, but is nevertheless permitted or empowered, to make such
indemnification, it being understood that, before making such
indemnification with respect to any situation covered under this
sentence, (i) the Corporation shall promptly make or cause to be made,
by any of the methods referred to in Subsection (d) of such Section
145, a determination as to whether each Indemnitee acted in good faith
and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the Corporation, and, in the case of any
criminal action or proceeding, had no reasonable cause to believe that
his conduct was unlawful, and (ii) that no such indemnification shall
be made unless it is determined that such Indemnitee acted in good
faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Corporation, and, in the case of any
criminal action or proceeding, had no reasonable cause to believe that
his conduct was unlawful."
Item 25. Other Expenses of Issuance and Distribution
The Company expects to incur the following costs and expenses in
connection with the registration of the shares of Common Stock covered by
this Prospectus:
<TABLE>
<C> <C>
*Registration Fee .............................. $ 2,903.79
*Legal Fees .................................... $50,000.00
*Accounting Fees................................ $ 5,000.00
*Miscellaneous.................................. $17,096.21
----------
*Total ..................................... $75,000.00
==========
- -------------------
<F*> Estimate
</TABLE>
Item 26. Recent Sales of Unregistered Securities
Set forth below in chronological order is information regarding
securities issued by the Company since November 1, 1992, the consideration
received by the Company for such securities and information relating to the
sections of the Securities Act of 1933, as amended (the "Act") or rules of
the Commission under which exemption from registration was claimed. None of
these securities were registered under the Act. Except as otherwise
indicated, no sales of securities involved the use of an underwriter and no
commissions were paid in connection with the sale of any securities.
1. From April 1993 through June 1995 the Company issued warrants to
purchase a total of 157,000 shares of Common Stock to Aberlyn Capital
Management Limited Partnership ("Aberlyn") in connection with leasing
arrangements between the Company and Aberlyn. The weighted average exercise
price of these warrants is $2.72 per share.
2. In fiscal 1995, the Company issued an aggregate of 12,000 shares
of Common Stock to its non-employee Directors in lieu of the cash
compensation previously paid by the Company.
3. In July 1995, the Company issued warrants to purchase 125,000,
62,500 and 62,500 shares of Common Stock, respectively, to Pinecrest
Management, Inc., Synergy Growth Concepts Ltd., and KCID Industries,
respectively, in connection with financial consulting services rendered to
the Company. The exercise price of these warrants is $1.00 per share.
4. In September 1995, the Company sold the Notes with an aggregate
principal balance of $2,000,000. The Notes are convertible into Common
Stock at the conversion rate of $1.00 per share. The Company paid
commissions of approximately 10% to registered broker/dealers in connection
with these sales.
5. In December 1995, the Company issued warrants to purchase 100,000
shares of Common Stock to an unaffiliated investor in connection with the
repayment of a convertible promissory note with principal balance of
$450,000.
6. In March 1996, the Company issued a total of 20,000 shares of
Common Stock to its nonemployee Directors in lieu of cash compensation.
7. In March 1996, the Company sold 2,695,255 units at $2.75 per unit,
each unit consisted of one share of Common Stock and one five-year warrant
to purchase one share of Common Stock at $2.75 per share. The Company paid
commissions of approximately 10% to registered broker/dealers in connection
with these sales and issued a warrant to purchase 269,526 Units to Jesup and
Lamont Securities Corporation in connection with its services as placement
agent.
Item 27. Exhibits
(a) The following exhibits are filed herewith:
Exhibit
No. Title
- ------- -----
* 3(c) Certificate of Correction to the Certificate of Incorporation,
dated December 28, 1995.
* 5 Opinion Letter as to legality of shares being registered.
23 Consents of Price Waterhouse LLP, KPMG Peat Marwick LLP and BDO
Seidman, LLP.
* Filed with the Commission on January 8, 1996.
(b) The following exhibits were filed as part of the Company's
Current Report on Form 8-K, filed with the Securities and Exchange
Commission (the "Commission") on February 2, 1996 and are incorporated
herein by reference:
Exhibit
No. Title
- ------- -----
16 Letter from Price Waterhouse LLP to the Securities and Exchange
Commission dated February 2, 1996
(c) The following exhibits were filed as part of the Company's
Current Report on Form 8-K, filed with the Securities and Exchange
Commission (the "Commission") on December 28, 1995 and are incorporated
herein by reference:
Exhibit
No. Title
- ------- -----
99a Option Agreement dated December 29, 1995 between the Company
and Kone Holdings, Inc.
99b Stock Purchase Agreement dated May 25, 1995, as amended,
between the Company and Kone Holdings, Inc.
(d) The following exhibit was filed as part of the Company's Form 8-
K filed with the Securities and Exchange Commission (the "Commission") on
July 13, 1995 and is incorporated herein by reference:
Exhibit
No. Title
- ------- -----
* 1 Purchase and Sale Agreement by and between Hemagen Diagnostics,
Inc. and Schiapparelli BioSystems, Inc., dated June 30, 1995.
* Certain information withheld and filed separately with the
Securities and Exchange Commission pursuant to a request for
confidential treatment.
(e) The following exhibits were filed as a part of the Company's
Form 8-K filed with the Commission on March 14, 1996 and are herein
incorporated by reference:
Exhibit
No. Title
- ------- -----
2a. Stock Purchase Agreement by and between Hemagen Diagnostics,
Inc. and Kone Holdings, Inc., dated May 25, 1995 (the "Stock \
Purchase Agreement").
2b. List of Schedules and Exhibits omitted from the Agreement.
2c. First Amendment to the Stock Purchase Agreement, dated July 28,
1995.
2d. Second Amendment to the Stock Purchase Agreement, dated
August 3, 1995.
2e. Third Amendment to the Stock Purchase Agreement, dated
September 1, 1995.
2f. Fourth Amendment to the Stock Purchase Agreement, dated
December 1, 1995.
2g. Form of Fifth Amendment to the Stock Purchase Agreement, dated
January 31, 1996.
(f) The following exhibits were filed as part of the Company's Form
10-QSB for the quarter ended December 31, 1994 and are herein incorporated
by reference:
Exhibit
No. Title
- ------- -----
10dd Distributorship Agreement between the Company and Labor
Diagnostika GmbH dated October 1, 1994.
10ee Agreement between the Company and Carter-Wallace, Inc. dated
December 22, 1994.
10ff License Assignment and License Agreement between the Company
and Aberlyn Capital Management Limited Partnership dated
December 30, 1994.
(g) The following exhibit was filed as part of the Company's Form
10-KSB for the fiscal year ended September 30, 1994 and is herein
incorporated by reference:
Exhibit
No. Title
- ------- -----
10cc License Agreement between the Company and Boston University,
dated July 1994.
(h) The following exhibits were filed as part of the Company's Form
10-KSB for the Fiscal Year ended September 30, 1993 and are herein
incorporated by reference:
Exhibit
No. Title
- ------- -----
10a Product Development Agreement between the Company and
Boehringer Mannheim GmbH, dated November 25, 1993.
10b Option Agreement between the Company and Boston University,
dated October 15, 1993.
(i) The following exhibit was filed as part of the Company's Form
10-QSB for the quarter ended March 30, 1993 and are herein incorporated by
reference:
Exhibit
No. Title
- ------- -----
10a Master Lease Agreement between the Company and Aberlyn Capital
Management Limited Partnership, dated April 1, 1993.
(j) The following exhibits were filed as part of the Company's Form
SB-2 Registration Statement (33-52686-B) declared effective by the
Securities and Exchange Commission (the "Commission") on February 4, 1993
and are herein incorporated by reference:
Exhibit
No. Title
- ------- -----
3a Certificate of Incorporation.
3b Bylaws.
3c Certificate of Agreement of Merger between Hemagen Diagnostics,
Inc., a Massachusetts corporation, and the Company, dated
May 1, 1992.
3d Articles of Merger between Hemagen Diagnostics, Inc., a
Massachusetts corporation, and the Company, dated May 1, 1992.
4a Rights of security holders (included in Exhibits 3a and 3b).
4b Specimen Stock Certificate.
4c Form of Representative's Warrant Agreement with Form of Warrant
attached thereto.
10a Technology Purchase Agreement between Dr. de Oliveira and Dr.
Lazzari and Seragen, Inc., dated April 15, 1983.
10b Assignment of Assumption Agreement between the Company and
Seragen, Inc., dated September 12, 1985.
10c Product Development Agreement between the Company and Boston
University, dated February 14, 1992.
10d License Agreement between the Company and Boston University,
dated March 1992.
10e Distributorship Agreement between the Company and Eurobio
Laboratories, dated June 11, 1991.
10f Distributorship Agreement between the Company and International
Reagents Corporation, dated February 1, 1990.
10g Financial Assistance Agreement between the Company and Hemagen
Diagnosticos, Comercio, Importacao e Exportacao Ltd., dated
July 31, 1991.
10h Distribution Agreement between the Company and Hemagen
Diagnosticos, Comercio, Importacao e Exportacao Ltd., dated
July 31, 1991.
*10i Form of Employment Agreement between the Company and
Dr. Franzblau.
*10j Form of Employment Agreement between the Company and
Dr. de Oliveira.
*10k 1992 Stock Option Plan.
10l Distributorship Agreement between the Company and Labor
Diagnostika GmbH, dated July 1, 1990.
10m Product Purchase Agreement between the Company and Olympus
Corporation dated February 24, 1989.
10n OEM Agreement between the Company and Sigma Diagnostics, Inc.,
dated May 11, 1992.
10o Note issued by the Company to Boston University, dated
December 15, 1985.
10p Letter Agreement between the Company and Antonio Lazzari, M.D.,
dated April 28, 1985.
10q Lease between the Company and Philip Pagliazzo and Rose
Pagliazzo, dated May 15, 1992.
10r Distribution Agreement between the Company and Olympus
Corporation, dated September 1, 1992.
*10s Form of Employment Agreement between the Company and
Mr. von Stein.
10t Product Development Agreement between the Company and Sigma
Diagnostics, Inc., dated October 16, 1992.
*10u Revised Employment Agreement between the Company and
Dr. de Oliveira.
*10v Revised Employment Agreement between the Company and
Dr. Franzblau.
10w Description of the Company's lease for certain premises located
in Waltham, Massachusetts.
10x Lease for office space of Hemagen Diagnosticos, Comercio,
Importacao e Exportacao, Ltd. ("HDC") in Sao Paulo, Brazil.
10x Description of the Lease for office space of HDC in Sao Paulo,
Brazil.
10y Equity Purchase Agreement between the Company and HDC, dated as
of October 1, 1992.
10aa Form of Warrant issued in connection with Bridge Loan and
Statement of Registration Rights.
10cc Form of Subscription Agreement used in connection with the
Bridge Loan.
**16 Letter on Change in Certifying Accountants.
21 List of the Company's Subsidiaries.
* These exhibits relate to a management contract or compensatory
plan or arrangement.
** Filed with the Company's Form 8-K on August 27, 1993, referenced
below.
Item 28. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the Offering.
(b) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of a registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall
be deemed to be part of the registration statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Waltham, Commonwealth of
Massachusetts, on the 13th day of June, 1996.
HEMAGEN DIAGNOSTICS, INC.
By: /s/ CARL FRANZBLAU, PH.D.
--------------------------------------
Carl Franzblau, Ph.D., President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<C> <C> <C>
/s/ CARL FRANZBLAU, PH.D. Chairman of the Board, June 13, 1996
Carl Franzblau, Ph.D. President and Director
(Principal executive officer)
/s/ MYRNA FRANZBLAU Treasurer June 13, 1996
Myrna Franzblau (Principal accounting officer)
/s/ WILLIAM FRANZBLAU Chief Financial Officer, June 13, 1996
William Franzblau (Principal financial officer)
/s/ ALAN S. COHEN, M.D. Director June 13, 1996
Alan S. Cohen, M.D.
/s/ LAWRENCE GILBERT Director June 13, 1996
Lawrence Gilbert
/s/ RICARDO M. DE OLIVEIRA, M.D. Director June 13, 1996
Ricardo M. de Oliveira, M.D.
/s/ JOHN I. SANDSON, M.D. Director June 13, 1996
John I. Sandson, M.D.
/s/ CHARLES W. SMITH Director June 13, 1996
Charles W. Smith
</TABLE>
EXHIBIT INDEX
Sequentially
Numbered Page
Number
-------------
(a) The following exhibits are filed herewith:
Exhibit
No. Title
- ------- -----
23 Consents of Price Waterhouse LLP and KPMG Peat Marwick LLP
and BDO Seidman, LLP.
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated November 30, 1995
relating to the financial statements of Hemagen Diagnostics, Inc., which
appears in such Prospectus. We also consent to the use of our report dated
December 8, 1995 relating to the Statements of Inventory and Equipment and
Leasehold Improvements and of Operations Before Administrative, Interest and
Income Tax Expenses of the Immunofluorescent Assay and IL-2 Product Lines of
Schiapparelli Biosystems, Inc., which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Boston, Massachusetts
June 10, 1996
KPMG Peat Marwick LLP
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, NJ 07078
The Board of Directors and Stockholders
Hemagen Diagnostics, Inc.:
We consent to the use of our report included herein, relating to the Statement
of Inventory and Equipment and Leasehold Improvements of the Immunofluorescent
Assay and IL-2 Product Lines of Schiapparelli Biosystems, Inc., as of December
31, 1994 and the related Statement of Operations before Administrative,
Interest and Income Tax Expenses for the year then ended and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
June 10, 1996
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Reagents Applications, Inc.
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement of our report dated May 31, 1996, relating to the
financial statements of Reagents Applications, Inc.
We also consent to the reference to us under the caption "Experts" in
this Prospectus.
/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP
Boston, Massachusetts
June 10, 1996
