<PAGE>
As filed with the Securities and Exchange Commission on January 16, 2001
Registration Statement No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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FIRST SCIENTIFIC, INC.
(Exact name of registrant as specified in its charter)
----------------------
DELAWARE 33-0611745
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1877 West 2800 South, Suite 200
Ogden, Utah 84401
(801) 393-5781
(Address, including zip code, and
telephone number, including area code,
of registrant's principal
executive offices)
----------------------
RANDALL L. HALES
PRESIDENT, CHAIRMAN OF THE BOARD
First Scientific, Inc.
1877 West 2800 South, Suite 200
Ogden, Utah 84401
(801) 393-5781
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
COPY TO:
JEFFREY M. JONES, ESQ.
KEVIN R. PINEGAR, ESQ.
C. PARKINSON LLOYD, ESQ.
DURHAM JONES & PINEGAR, P.C.
111 East Broadway, Suite 900
Salt Lake City, Utah 84111
(801) 415-3000
Fax (801) 415-3500
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: from time to
time after the effective date of this Registration Statement as the selling
stockholder may decide.
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<PAGE>
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. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _______.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
Pursuant to Rule 416, there are also registered such additional
shares of such common stock as may become issuable as dividends or pursuant to
anti-dilution provisions of the preferred stock or the warrants.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Maximum
Title of Class of Amount of Proposed Maximum Aggregate Amount of
Securities to be securities to be Offering Price Per Offering Registration
Registered Registered (1) Share Price Fee (2)
----------------------------------- --------------------------- ------------------------------ --------------------- ------------
<S> <C> <C> <C> <C>
Common stock, par 21,000,000 $0.295 $6,195,000 $1,548.75
value $.001 per share,
issuable upon
conversion of
preferred stock
</TABLE>
(1) All shares offered for resale by the selling stockholder. The amount
registered includes that number of shares issuable assuming an
immediate conversion of the preferred stock, together with an
additional number of shares to allow for fluctuations in the number
of shares issuable upon conversion under the conversion formula.
(2) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(c), based on the average bid and asked price
of the common stock within 5 business days of the date of filing.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
of the Act, may determine.
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<PAGE>
Table of Contents
Page
Risk Factors...................................................................2
Forward-Looking Statements. ..................................................12
Financing Arrangement with Aspen Capital Resources, LLC.......................13
Use of Proceeds...............................................................14
Price Range of Common Stock...................................................14
Dividend Policy...............................................................15
Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................................15
Business......................................................................18
Management....................................................................27
Principal Security Holders....................................................31
Certain Transactions..........................................................33
Description of Securities.....................................................33
Selling Stockholder...........................................................36
Plan of Distribution..........................................................37
Legal Matters.................................................................38
Experts.......................................................................38
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................................39
Disclosure of Commission Position on Indemnification for Securities
Act Liabilities...............................................................39
Where You Can Find Additional Information.....................................39
Index to Financial Statements.................................................40
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The information in this prospectus is not complete and it may change. This
prospectus is included in a registration statement filed with the Securities and
Exchange Commission. The selling stockholder may not sell these securities until
that registration statement is effective. This prospectus is not an offer to
sell these securities or the solicitation of an offer to buy these securities in
any state where the offer or sale is not permitted.
Prospectus
Subject to completion, dated January 12, 2001
[FIRST SCIENTIFIC LOGO]
First Scientific, Inc.
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Common Stock, par value $0.001 per share
This prospectus covers the resale by Aspen Capital Resources, LLC (the
"selling stockholder"), from time to time, of up to 21,000,000 shares of common
stock of First Scientific, Inc., consisting of shares issuable upon conversion
of preferred stock. We refer to these shares collectively as the "shares."
Investment in the shares involves a high degree of risk. You should
consider carefully the risk factors beginning on page 2 of this prospectus
before purchasing any of the shares offered by this prospectus.
The shares offered may be sold from time to time for the account of the
selling stockholder. The selling stockholder will receive all of the proceeds
from the sale of the shares and we will receive none of those proceeds. We have
agreed to pay the costs of registering the shares, excluding commissions,
transfer taxes and other expenses related to the resale of the shares by Aspen
Capital.
The price at which we issue the conversion shares to Aspen Capital may
fluctuate. We issued warrants to Aspen Capital in connection with the financing
and the exercise price of the warrants may be adjusted to prevent dilution under
certain circumstances. See "Financing Arrangement with Aspen Capital," beginning
on page __.
Our common stock is quoted on the over-the-counter market on the NASD
Electronic Bulletin Board under the symbol "FSFI". The closing bid price of our
common stock on January 9, 2001 was $0.29 per share. There is only a limited
market for our common stock and therefore, shareholders may have difficulty
selling shares.
The selling stockholder may offer, under this prospectus, shares to
purchasers from time to time in transactions on the over-the-counter market, in
negotiated transactions, or otherwise or by a combination of these methods.
Aspen Capital is an "underwriter" within the meaning of the Securities Act.
Our principal executive offices are located at 1877 West 2800 South, Suite
200, Ogden, Utah. Our phone number is (801) 393-5781.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved the shares, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is __________ __, 2001.
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RISK FACTORS
Before you invest in our common stock you should be aware that there are various
risks, including those described below. You should consider carefully these risk
factors together with all of the other information included in this prospectus.
No investment should be made by any person who is not in a position to lose the
entire amount of his investment.
Our limited working capital and limited operating history, combined with our
accumulated deficit and potential anticipated losses, raise substantial doubt as
to our ability to continue as a going concern.
As of September 30, 2000, we had limited working capital of $2,293,808. We also
have a limited operating history. Historically, our revenues have been related
to product sales, product testing, and licensing fees. We are still a
development stage company. As of September 30, 2000, our accumulated deficit
since inception was $12,608,497, of which $3,776,440 was attributable to a
non-recurring charge for purchased research and development and $3,166,907 was
attributable to dividends and the beneficial conversion features on preferred
stock. The remaining $5,665,150 deficit resulted primarily from costs incurred
in connection with research and development; compliance of our proprietary
products with Food and Drug Administration ("FDA") requirements; and operating
expenses related to startup sales, marketing and administration. Our ability to
become profitable largely depends on successfully marketing our products and
developing new formulations and products. The problems and expenses frequently
encountered in developing new products and the competitive industry in which we
operate will impact whether we are successful. We may never achieve
profitability. Furthermore, we may encounter substantial delays and unexpected
expenses related to research, development, production, marketing, regulatory
matters, or unforeseen difficulties.
Current working capital will not be sufficient to meet our future capital needs.
We may require substantial funds for various reasons, including: continuing
research and development; expanded testing, primarily efficacy testing; and
manufacturing and marketing our existing products. In the short term, based on
past financial needs and on currently planned programs, we anticipate that the
funds on hand, together with funds generated from future product sales, will not
be sufficient to satisfy our capital requirements through 2001. Adequate funds
may not be available when needed or on terms acceptable to us. Insufficient
funds may require us to delay, scale back or eliminate certain or all of our
research and development programs or to license third parties to commercialize
products or technologies that we would otherwise seek to develop ourselves,
which may materially adversely affect our continued operations.
Additional financing will be necessary to provide sufficient working capital.
While we have recently completed financings through the sale of our common and
preferred stock, we may not be able to fully expand or operate our business as
planned without obtaining additional financing during 2001. If such financing is
not available or obtainable, investors may lose a substantial portion or all of
their investment and our business may be inadequately funded to satisfy our
capital requirements, fund our research and development, and sustain the
marketing, sales, and contract manufacturing of our existing products. We
currently have no immediate means for obtaining this additional financing.
Consequently, we cannot assure investors that additional financing, when
necessary, will be available on acceptable terms, or at all.
We are in the early stage of product development and the science and technology
underlying our products are relatively new.
The science and technology of products for the health care and personal hygiene
markets, including antimicrobial preparation, are rapidly evolving. Our products
may require significant further research, development, testing, and regulatory
compliance efforts. They are also subject to the risks of failure inherent in
the development of products based on innovative technologies. These risks
include the possibility that any or all of the future products will prove to be
ineffective or unsafe, that the proposed products are uneconomical, that others
hold proprietary rights which preclude us from marketing such products, or that
others market better products. Accordingly, we are unable to
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predict whether our research and development activities will result in any new
commercially profitable products. Further, due to the extended testing process
required, we may be unable to sell certain new products in the future. There is
also no guarantee that we will be able to sell our proprietary formulation in
sustained, profitable volumes.
We have no business experience with large product volumes connected with growth
from sales and marketing efforts.
We may encounter scale-up difficulties as anticipated sales require us to
produce larger commercial volumes of our products. If we were to receive sales
orders larger than we or our contract manufacturers and suppliers could fill
within a reasonable time, we would face the alternative of either turning down
such orders, being late in fulfilling them, or being constrained to subcontract
the production on terms less favorable to us. In either of the first two events,
we could lose credibility with existing or potential customers, which could
result in the loss of future business. Our anticipated revenues and earnings
would probably be materially adversely affected if any of these events occurred.
We are subject to numerous government regulations and we are required to comply
with FDA standards and guidelines.
We are subject to certain United States and international laws and regulations
regarding the development, production, transportation, and sale of our products.
As a result, we may be required to comply with certain restrictive regulations,
or potential future regulations, rules, or directives. Such potential regulatory
conditions or compliance with such regulations may increase our cost of
operations or decrease our ability to generate income.
We are subject to regulation by the FDA and other federal and state regulatory
agencies. FDA standards and guidelines require us to use only approved
ingredients, and to conduct efficacy, shelf-life and stability testing. Any
changes in existing FDA requirements may materially adversely affect us.
Rapid technological change could cause our technology and products to become
obsolete.
Our market is subject to rapid technological change. Development by others of
new or improved products, formulation, processes or technologies may make our
products obsolete or less competitive. Accordingly, we must continue investing
in research and development of our existing products and developing new
products. Despite such investment, our current or proposed products may be
unsuccessful.
Competition within the hand cleansing products industry is a significant barrier
to entry into the hand cleansing products market which could adversely impact
our performance.
Our products compete with antimicrobial and antibacterial skin protection
products currently on the market. The professional health care and personal
hygiene industry is dominated by a small number of large competitors that are
well established in the marketplace, have experienced management, are well
financed, and have well recognized trade names related to their respective
product lines. We may be unable to penetrate the existing market and acquire a
sufficient market share to be profitable. Significant competitive factors which
will affect future sales include performance, pricing, timely product shipment,
safety, customer support, convenience of use and general market acceptance.
Competition among hand care products is strong and presents a significant
barrier to entry by new products such as the ones we produce. Consumers tend to
purchase and use products produced or distributed by manufacturers with
recognizable names. We have not yet developed a highly recognizable name in the
marketplace. In addition, we have identified a number of competitors who offer
products that appear to be substantially similar to ours, a number of which are
significantly larger and more experienced in the marketplace than we are.
Furthermore, we face competition from companies that currently market or are
developing products similar to those we offer. Many of these companies have
significantly greater marketing, financial, and managerial resources than we do.
In the face of such competition, our products may become obsolete.
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Because we are a development stage business with limited operating history, we
face risks associated with emerging companies such as failure of our
technologies and formulations, unexpected costs related to quality control and
production, and an inability to achieve full-scale production.
Because we are a new venture involved in highly technical industries such as the
healthcare and personal hygiene industry, we have substantial inherent risks.
Notwithstanding any pre-production planning, our products may incur unexpected
problems in full-scale production, which cannot always be foreseen or accurately
predicted or planned for. Our formulas may become unworkable for unpredicted
reasons. Quality control and component sourcing failures may occur from time to
time. Our business is substantially dependent upon the capabilities and
performance of both management and sales personnel. Mistakes in judgment or
performance by our management or personnel could be costly and, in certain
instances, disabling. These risks present significant challenges to our business
and our ability to generate revenue, and there is no guarantee that we will be
able to meet these challenges and generate revenues.
We depend heavily on key management, consultants, and sales personnel, the loss
of whom could adversely impact our business.
Due to the highly technical nature of our business, we are dependent on certain
key personnel. Our success will be largely dependent on the decisions made by
members of management. The loss of services of one or more members of our
management team could have a material adverse effect on our Company, including
the further development and sale of proprietary formulations. We are especially
dependent upon the efforts and abilities of our senior technology consultant,
Dr. Edward B. Walker. Dr. Walker is also a member of our board of directors. We
have a consulting agreement with Pharmulations, LLC, an entity controlled by Dr.
Walker. The loss of any of our key executives could have a material adverse
effect on us and our operations and prospects, although the loss of the personal
services of Dr. Walker under the consulting agreement could have a more
significant adverse effect. We have a $2,000,000 key man life insurance policy
on Dr. Walker.
Furthermore, we believe that our future success will depend, in part, upon our
ability to attract, retain, and motivate qualified personnel by offering
competitive compensation packages, equity participation, and other benefits
which may reduce the working capital available for our operations. Management
may also seek to obtain outside independent professionals to assist in assessing
the merits and risks of business proposals we consider as well as assisting in
the development and operation of our business projects. There is no assurance,
however, that we will be successful in attracting and retaining such personnel.
Because our approach to hand washing and cleansing is different from approaches
currently on the market, there is no assurance of market acceptance of our new
approach to handwashing which could materially adversely impact our revenues.
Because our formulations and products approach handwashing differently from
other products currently on the market, our products may not be accepted in the
marketplace. Such acceptance will depend on a number of factors, including
demonstrating the efficacy and advantages of our products over those of our
current and future competitors. Further, we may be unable to successfully market
our products even though they perform successfully in independent laboratory and
clinical testing. Our inability to market our products, either alone or combined
with the market's refusal to accept our products, could significantly adversely
impact our business and our ability to generate revenues.
We depend heavily on our patents and the protection of proprietary technology,
and any loss of such intellectual property protection could have a negative
impact on our business.
We depend on our ability to license and obtain patents and on the adherence to
confidentiality agreements executed by employees, consultants, and third parties
to maintain the proprietary nature of our technology and to operate without
infringing on the proprietary rights of others. We have applied for a United
States patent for protection on our antimicrobial formulation, and our rash
treatment and prevention formulations. The pending patents may not be granted.
Also, our present or future products may be found to infringe upon the patents
of others. If our products
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are found to infringe on the patents, or otherwise to utilize the intellectual
property of others without authority, our development, manufacture, and sale of
such products could be severely restricted or prohibited. In such case we might
be required to obtain licenses to utilize such patents or proprietary rights of
others, for which acceptable terms may be unavailable. If we were not able to
obtain such licenses, the development, manufacture or sale of products requiring
such licenses would be materially adversely affected. In addition, we could
incur substantial costs in defending ourselves against challenges to our patents
or infringement claims made by third parties, or in bringing actions to enforce
any patents we may obtain.
Because patents and intellectual property laws provide limited protection, there
is a risk that our proprietary information and formulations may be lost through
challenges to our rights.
Other companies may sell products similar to ours before we can market our
products adequately. We rely on the protections we hope to realize under the
United States and foreign patent laws. However, patents provide limited
protection. We have applied for a United States patent on the antimicrobial
formulation and on our rash treatment and prevention formulations. Applications
for various other domestic and foreign patents are either pending or planned.
Similar formulations and products, however, could be designed that do not
infringe on our patent rights, but which may be similar enough in formulation or
effect to compete against our patented products. Moreover, it is possible that
unpatented formulations and products which were created prior to ours may exist.
Such unpatented formulations and products may have never been made public and
therefore are not known to us or the industry in general. Such a product could
be introduced into the market without infringing on our future patents. If any
such competing, non-infringing products were produced and distributed, our
profit potential would be materially limited, which would seriously impair the
viability of our business.
In addition, there can be no assurance that any intellectual property rights
eventually issued or exerted by us will not be challenged, invalidated, or
circumvented, or that our competitors will not independently develop or patent
technologies that are substantially equivalent or superior to ours. Furthermore,
a court may find that we have infringed on patents owned by others. We may be
required to go to court to defend our rights or products, to prosecute
infringements, or to defend ourselves from infringement claims by others.
Although we are not aware of any such litigation at this time, there can be no
assurance that such claims will not be brought in the future.
Patent litigation is expensive and time-consuming, and well-funded adversaries
can use such actions as part of a strategy for depleting the resources of a
small company such as ours. We cannot assure investors that we will have
sufficient resources to successfully protect our interests in any such
litigation that may be brought.
Potential limitations on Medicare reimbursement for our products could have a
negative impact on our revenues.
A major market for our products could also be adversely affected by federal
legislation that may reduce reimbursements under the capital cost pass-through
system utilized in connection with the Medicare program. Failure by hospitals
and other users of our products to obtain reimbursement from third-party payors,
or changes in government and private third-party payors' policies toward
reimbursement for medical procedures could result in reduction of revenues to
hospitals and other users of our products. Such reduction of revenues could
result in the hospitals' reducing spending for products such as our
formulations, especially if our products are not the least expensive products on
the market. Such reduction in spending could have a material adverse effect on
our business.
Disruption of service or insufficient production capacity by our outside
suppliers or manufacturers could have a detrimental effect on our business.
We currently purchase all of our chemical components, supplies, and contract
manufacturing from third-party suppliers. Substantially all of our current
products are mixed and packaged by outside companies under supply agreements. If
we were required to locate other suppliers or manufacturers, we could experience
increased costs and significant delays in both locating and switching to new
vendors. Although we have access to adequate supplies of raw materials for our
current and foreseeable needs, a significant disruption in this supply could
have a short-term material adverse impact on our revenue production and
financial results. We have sought to mitigate this
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risk by entering into contracts with our suppliers to assure a continuing supply
of raw materials for our product. However, long-term hedging opportunities
against price increases for these items are generally not available.
Similarly, because we depend so heavily on third-party suppliers and
manufacturers, an increase in demand beyond predicted capacity levels of our
suppliers or manufacturers could require us to locate additional suppliers and
manufacturers to help us meet the increased demand. There can be no assurance
that we would be able to locate such additional suppliers or manufacturers at
costs and rates that would allow us to realize a profit from such additional
production. Finally, if we are unable to locate such additional suppliers or
manufacturers, and our demand exceeds our ability to provide our products, we
could lose current and potential customers, which would have a material adverse
impact on our business.
If a successful product liability claim or series of claims is brought against
us for uninsured liabilities or in excess of insured liabilities, we could be
forced to pay substantial damage awards.
We have a limited operating history upon which to evaluate the performance and
effects of our products in actual use on consumers. We can provide no absolute
assurance that our product line will operate as designed or that no injury to
persons will result from the use of our products. For example, there is
potential that someone may have an allergic reaction or sustain injury in some
other way after using our antimicrobial hand cleansing or rash prevention
products. Such individuals may subsequently seek to hold us responsible for any
losses incurred. In such a case, we may experience losses or other material
adverse consequences, which may, in severe cases, cause us to cease operations.
The manufacture, development, and marketing of antimicrobial hand cleansing
products exposes us to the potential risk from product liability claims and
there can be no assurance that we can avoid significant product liability
exposure. We maintain product liability insurance providing coverage up to
$1,000,000 per claim with an aggregate policy limit of $2,000,000. There is
substantial doubt that this amount of insurance would be adequate to cover
potential liabilities in the event that we were to face significant claims. A
successful product liability claim brought against us could have a material
adverse effect on our business, operating results and financial condition.
Further, product liability insurance is becoming increasingly expensive, and
there can be no assurance that we will successfully maintain adequate product
liability insurance at acceptable rates, or at all. Should we be unable to
maintain adequate product liability insurance, our ability to market our
products would be significantly impaired. The financial losses that we may
suffer from future liability claims or a voluntary or involuntary recall of our
products and the damage that any product liability litigation or a voluntary or
involuntary recall may do to the reputation and marketability of our products
would have a material adverse effect on our business, operating results and
financial condition.
Our dependence on domestic markets could limit our potential growth and
profitability.
While a number of our competitors have diversified their customer base to
include a strong international component, we are currently dependent primarily
on sales generated in U.S. markets. To sustain growth in the domestic markets,
we will depend on increased usage of our products by health care professionals,
the food handling industry, hospitality, government, education, e-commerce,
retail and other niche markets. In addition, we will need to promote innovation
and expansion of our product line as well as capture market share from our
competitors. There can be no assurance that we will succeed in implementing our
strategies to achieve such domestic growth.
Our international expansion efforts may prove unsuccessful.
In order to reduce our dependence on domestic revenues, we have adopted a
strategy to begin penetrating international markets. In implementing this
strategy, we face barriers to entry and the risk of competition from local and
other companies that already have established global businesses. The risks
generally associated with conducting business internationally include: exposure
to currency fluctuations, limitations on foreign investment, import/export
controls, nationalization, unstable governments and legal systems and the
additional expense and risks inherent in operating in geographically and
culturally diverse locations. Because we plan to develop our
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international business through joint ventures, co-packaging arrangements, agent
and other alliances, we may also be subject to risks associated with such joint
venture arrangements and alliances, including those relating to the combining of
different corporate cultures and shared decision-making. In addition, since our
current international distribution capabilities are extremely limited, we will
also need to acquire a distribution network or enter into alliances with
existing distributors before we can effectively conduct operations in new
markets. There can be no assurance that we will succeed in increasing our
international business in a profitable manner, and a failure to expand this
business may have a material adverse effect on our business and results of
operations.
At the present time, we do not have any registered foreign trademarks or any
pending foreign trademark applications. There can be no assurance that we will
successfully register any foreign trademarks. Furthermore, in the event that we
are successful in registering foreign trademarks on our products and
formulations there can be no assurance that such trademarks will be protected in
the foreign markets in which they are used.
Our projected expansion into international markets could include many of the
risks we currently face in domestic markets.
We intend to establish and expand our operations to encompass international
sales and marketing efforts. In order to maximize our expansion abroad with
minimum capital outlay, we may recruit business partners in various foreign
markets to conduct operations, establish local networks and coordinate sales and
marketing efforts. Our success in such markets is directly dependent on locating
good business partners and their dedication of sufficient resources to our
business relationships.
International expansion will subject us to additional currency exchange risks
and will require management attention and resources. We expect to pursue
expansion through a number of international alliances and to rely extensively on
these business partners initially to conduct operations, register web sites, and
coordinate sales and marketing efforts. Our success in these markets will depend
on the success of our business partners and their willingness to dedicate
sufficient resources to our business relationships. We cannot provide assurances
to investors that we will be successful in our efforts internationally.
International operations are subject to other inherent risks, including: the
impact of recessions in economies outside the United States; changes in domestic
regulatory requirements, as well as differences between domestic and foreign
regulatory requirements; export restrictions, including export controls relating
to product formulas, reduced protection for intellectual property rights in some
countries; potentially adverse tax consequences; difficulties and costs of
staffing and managing foreign operations; political and economic instability;
tariffs and other trade barriers; and seasonal reductions in business activity
during the summer months in Europe and certain other parts of the world.
Our failure to address these risks adequately could materially and adversely
affect our business, results of operations and financial condition.
Holders of our common stock are subject to the risk of immediate additional and
substantial dilution to their interests as a result of the conversion of
presently issued preferred stock.
Introduction
We have one series of preferred stock outstanding: the Series 2000-B 8%
Convertible Preferred Stock ("Series B preferred stock"). All of the presently
outstanding preferred stock is convertible into shares of our common stock
according to a formula based in part on the market price of our common stock
during the 15 trading days prior to the conversion date.
By agreement, the selling stockholder has covenanted that it will not convert
any shares of Series B preferred stock prior to April 3, 2001. In addition, the
Series B preferred stock may only be converted during the period of April 3,
2001, through December 31, 2001, inclusive, at a rate that would result in the
issuance of common shares in an aggregate amount equal to 42% of our issued and
outstanding common stock on a fully diluted basis, after
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adjustment as provided in the designation of rights and preferences for the
Series B preferred stock. After December 31, 2001, or earlier in the event of an
occurrence of an event of noncompliance, the conversion rate will be calculated
at 80% of the average of the three lowest closing bid prices of our common stock
during the 15 trading days prior to the conversion, subject to a maximum
conversion price of $1.20 per share.
Based on the conversion limitations, but assuming immediate conversion of all of
the Series B preferred stock under the formula applicable to conversion from
April 3, 2001 through December 31, 2001, at December 31, 2000 the 3,652
outstanding shares of Series B preferred stock would convert into 16,968,702
shares of our common stock, which would represent 42% of all shares of common
stock outstanding, on a fully diluted basis as provided in the certificate of
designation. However, this calculation excludes the possible issuance of shares
of common stock as payment of dividends accrued on the Series B preferred stock
at the date of conversion.
The following table describes the number of shares of common stock that would be
issuable assuming that all of the presently outstanding shares of the Series B
preferred stock were converted, either after the occurrence of an event of
noncompliance or after December 31, 2001, and further assuming that the
applicable conversion or exercise prices at the time of such conversion or
exercise were the following amounts. The table excludes the effect of the
possible issuance of shares of common stock as payment of accrued dividends.
Shares of Common Stock Issuable
Upon Conversion of
3,652 Outstanding Shares of
Hypothetical Conversion Price Series B Preferred Stock
$0.15 24,346,667
$0.25 14,608,000
$0.75 4,869,333
$1.20 3,043,333
$1.50 3,043,333
$2.00 3,043,333
$3.00 3,043,333
Given the structure of the conversion formulas applicable to the Series B
preferred stock, there effectively is no limitation on the number of shares of
common stock into which the Series B preferred stock may be converted after
December 31, 2001, or if an event of noncompliance occurs. If the market price
of the common stock decreases, the number of shares of common stock underlying
the Series B preferred stock will increase.
Overall Dilution to Market Price of Previously Issued Common Stock
The conversion of the Series B preferred stock may result in substantial
dilution to the equity interests of other holders of our common stock.
Specifically, public resales of common stock following the conversion of the
Series B preferred stock likely would depress the prevailing market price of our
common stock. Even prior to the time of actual conversions, exercises and public
resales, the market "overhang" resulting from the mere existence of our
obligation to honor such conversions or exercises could depress the market price
of the common stock.
Increased Dilution With Decreases in Market Price of Common Stock
The outstanding shares of Series B preferred stock are convertible at a floating
price that may and likely will be below the market price of our common stock
prevailing at the time of conversion or exercise. As a result, the lower
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the market price of our common stock at and around the time the selling
stockholder converts, the more shares of our common stock the selling
stockholder receives. Any increase in the number of shares of common stock
issued upon conversion or put of shares as a result of decreases in the
prevailing market price would compound the risks of dilution described in the
preceding paragraph of this risk factor.
Increased Potential for Short Sales
Downward pressure on the market price of our common stock that likely would
result from sales of common stock issued on conversion of the Series B preferred
stock could encourage short sales of common stock by the holders of the Series B
preferred stock or others. Material amounts of such short selling could place
further downward pressure on the market price of the common stock.
Payment of dividends in additional shares of common stock may result in further
dilution
Under the terms of the Series B preferred stock, the selling stockholder has the
option to receive dividends on the Series B preferred stock in shares of common
stock. The dividends accrue from the date of the issuance of the Series B
preferred stock, subject to any intervening payments in cash. As such, a
decision by the selling stockholder to receive such dividends in shares of
common stock could result in a substantial increase in the number of shares
issued and outstanding and could result in a decrease of the relative voting
control of common stock issued and outstanding prior to such payment of
dividends and interest.
The Board of Directors has the discretion to issue additional shares of common
stock, resulting in further dilution.
The Board of Directors has the inherent right under applicable Delaware law, for
whatever value the Board of Directors deems adequate, to issue additional shares
of common stock up to the limit of shares authorized by the Certificate of
Incorporation, and, upon such issuance, all holders of shares of common stock,
regardless of when it is issued, thereafter generally rank equally in all
aspects of that class of stock, regardless of when issued. The Board of
Directors likewise has the inherent right, limited only by applicable Delaware
law and provisions of the Certificate of Incorporation to increase the number of
shares of preferred stock in a series, to create a new series of preferred stock
and to establish preferences and all other terms and conditions in regard to
such newly created series. Any of those actions will dilute the holders of
common stock and also affect the relative position of the holders of any series
of any class. Current holders of our common stock have no rights to prohibit
such issuances nor inherent "preemptive" rights to purchase any such stock when
offered.
The Board of Directors' right to issue additional series of preferred stock
could result in further dilution of the rights of present shareholders.
Our certificate of incorporation authorizes the issuance of up to 1,000,000
shares of "blank check" preferred stock, which will have such designations,
rights and preferences as may be determined from time to time by the board of
directors. Accordingly, the board of directors is empowered, without stockholder
approval (but subject to applicable government regulatory restrictions), to
issue preferred stock with dividend, liquidation, redemption, conversion, voting
or other rights which could adversely affect the voting power or other rights of
the holders of our common stock. Those terms and conditions may include
preferences on an equal or prior rank to the existing Series B preferred stock.
Those shares may be issued on such terms and for such consideration as the board
of directors then deems reasonable and such stock shall then rank equally in all
aspects of the series and on the preferences and conditions so provided,
regardless of when issued. In the event of such issuance, the preferred stock
could be used, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control.
Under the terms of the Series B preferred stock, the selling stockholder has
voting rights equal to the number of shares into which all of the outstanding
Series B preferred stock is convertible, which may result in a substantial
decrease of the relative voting control of the presently issued shares of our
common stock.
The purchase agreement and the certificate of designation of the terms and
conditions of the Series B preferred stock provide that the voting rights of the
Series B preferred stock are equal to the rights of the number of shares of
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common stock into which the Series B preferred stock is convertible. No
conversion is required for the selling stockholder to have such voting rights.
If the market price of our common stock falls, the number of shares of common
stock issuable on conversion of the Series B preferred stock increases, and the
selling stockholder's voting power increases simultaneously. For example, as of
December 31, 2000, the selling stockholder's voting rights under the Series B
preferred stock would equal 42% of the total shares of common stock then
outstanding or then issuable, assuming conversion at the 42% limitation
applicable to conversion on or after April 3, 2001 and on or before December 31,
2001. Assuming conversion at a price of $0.19 (at the conversion price
applicable after December 31, 2001) the voting rights of the selling stockholder
would be equal to approximately 46% of the total shares of common stock
outstanding. Consequently, should an issue come before our stockholders for a
vote while the preferred stock remains outstanding, the selling stockholder
would have effective control of that vote.
We have no common stock dividend history and no intention to pay dividends to
holders of common stock in the foreseeable future.
The holders of common stock are entitled to receive dividends when, and if
declared by the board of directors out of funds legally available therefor. To
date, we have not paid or declared any cash dividends on our common stock. We
are obligated to pay and we have paid dividends on the outstanding preferred
stock. We do not intend to declare any cash dividends with respect to common
stock in the foreseeable future, but instead intend to retain all earnings, if
any, for use in our business operations. Since we may be required to obtain
additional financing, it is likely that there will be restrictions on our
ability to declare any dividends except for the dividends we are required to pay
on preferred stock. No dividends may be paid to holders of common stock unless
and until dividends have been paid to the holders of the preferred stock.
The price of our common stock has been and may continue to be volatile.
The market price of our common stock has been, and may continue to be highly
volatile. Price volatility is common with publicly traded life sciences
companies and companies whose securities trade on the Electronic Bulletin Board
of the National Association of Securities Dealers, Inc., ("NASD"). Many events
could have a significant impact on our business and the future market price of
our common stock, including:
o announcements of technological innovations or new commercial
products by us or our competitors;
o developments or disputes concerning patent or proprietary rights;
o publicity regarding actual or potential benefits relating to
products under development by us or our competitors;
o general regulatory developments affecting our products in both
the United States and foreign countries;
o market conditions for drug or medical companies in general; and
o economic and other internal and external factors, including
period-to-period fluctuations in our financial results.
Since October 2000, the average daily trading volume in the common stock as
reported on the NASD Electronic Bulletin Board has been relatively low. We
cannot ensure that a more active public trading market will ever develop for our
common stock.
Our common stock is considered a penny stock and is traded in the
over-the-counter market, which may make the stock more difficult to trade on the
open market.
Our common stock is currently traded in the over-the-counter market on the NASD
Electronic Bulletin Board. Securities on the NASD Electronic Bulletin Board are
generally more difficult to trade than those on the Nasdaq
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National Market, the Nasdaq SmallCap Market or the major stock exchanges. In
addition, accurate price quotations are also more difficult to obtain.
Our common stock is considered a "penny stock," which is defined by regulations
of the Securities and Exchange Commission as an equity security with a market
price of less than $5.00 per share. However, an equity security with a market
price under $5.00 will not be considered a penny stock if it fits within any of
the following exceptions:
o the equity security is listed on Nasdaq or a national securities
exchange;
o the issuer of the equity security has been in continuous
operation for less than three years, and either has (a) net
tangible assets of at least $5,000,000, or (b) average annual
revenue of at least $6,000,000; or
o the issuer of the equity security has been in continuous
operation for more than three years, and has net tangible assets
of at least $2,000,000.
If you buy or sell a penny stock, Securities and Exchange Commission regulations
require that you receive, prior to the transaction, a disclosure explaining the
penny stock market and associated risks. Furthermore, trading in our common
stock is currently subject to Rule 15g-9 of the Exchange Act, which relates to
non-Nasdaq and non-exchange listed securities. Under this rule, broker/dealers
who recommend our securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if their market price is at
least $5.00 per share.
Penny stock regulations will tend to reduce market liquidity of our common
stock, because they limit the broker/dealers' ability to trade, and a
purchaser's ability to sell, the stock in the secondary market. The low price of
our common stock has a negative effect on the amount and percentage of
transaction costs paid by individual shareholders. The low price of our common
stock also limits our ability to raise additional capital by issuing additional
shares. There are several reasons for these effects. First, the internal
policies of certain institutional investors prohibit the purchase of low-priced
stocks. Second, many brokerage houses do not permit low-priced stocks to be used
as collateral for margin accounts or to be purchased on margin. Third, some
brokerage house policies and practices tend to discourage individual brokers
from dealing in low-priced stocks. Finally, broker's commissions on low-priced
stocks usually represent a higher percentage of the stock price than commissions
on higher priced stocks. As a result, our shareholders pay transaction costs
that are a higher percentage of their total share value than if our share price
were substantially higher.
The sale of a substantial number of shares of our common stock could cause the
market price of our common stock to decline.
As of December 31, 2000, we had 23,045,436 shares of common stock outstanding.
Of these shares, approximately 9,300,000 have either been registered under the
Securities Act or are freely tradable without volume limitations under Rule
144(k) of the Securities Act.
We cannot predict the effect, if any, that sales of shares of our common stock
or the availability of such shares for sale will have on prevailing market
prices. However, substantial amounts of our common stock could be sold in the
public market, which may adversely affect prevailing market prices for the
common stock and could impair our ability to raise additional capital through
the sale of equity securities.
Shareholders may experience significant dilution from our sale or issuance of
shares to Aspen Capital under the purchase agreement and warrants. In addition,
the resale by Aspen Capital of our common stock may lower its market price.
The issuance of our common stock to Aspen Capital upon conversion of the Series
B preferred stock and the exercise of the warrants will have a dilutive effect
on our stockholders. In addition, Aspen Capital's resale of the
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common stock will significantly increase the number of publicly traded shares,
which could also lower the market price of our common stock.
We face substantial penalties for any failure to maintain the effectiveness of
this registration statement.
We are subject to a registration rights agreement that requires us to register
certain shares of our common stock with the Securities and Exchange Commission.
Under this agreement, we must also maintain this registration and any others
filed under the agreement until all of the covered securities are sold or can be
sold publicly without benefit of the registration. If we are unable to obtain
this registration prior to April 3, 2001 (or such later date as may be permitted
under the second amendment agreement, but not later than April 15, 2001) or to
maintain this registration, we will be subject to substantial penalties. Those
penalties would include an increase in the dividend rate on the Series B
preferred stock from 8% to 21% per year and an increase in the maximum number of
shares issuable upon conversion equal to 5% of the total number of shares of
common stock issued or issuable upon conversion of the Series B preferred stock
for every 30 days that the noncompliance continues.
An investor purchasing our common stock should carefully weigh the risks and any
assertions constituting forward-looking statements in this prospectus.
Because forward-looking statements are inherently unreliable, investors should
not rely on such assessments in making their investment decisions. The
information contained in this section and elsewhere may at times represent our
best estimates of our future financial and technological performance, based upon
assumptions believed to be reasonable. We make no representation or warranty,
however, as to the accuracy or completeness of any of these assumptions, and
nothing contained in this document should be relied upon as a promise or
representation as to any future performance or events.
Our ability to accomplish our objectives, and whether or not we will be
financially successful is dependent upon numerous factors, each of which could
have a material effect on the results obtained. Some of these factors are within
the discretion and control of management and others are beyond management's
control. Our management considers the assumptions and hypotheses used in
preparing any forward-looking assessments of profitability contained in this
document to be reasonable; however, we cannot assure investors that any
projections or assessments contained in this document, or otherwise made by
management, will be realized or achieved at any level. Prospective investors
should have this prospectus reviewed by their personal investment advisors,
legal counsel or accountants to properly evaluate the risks and contingencies of
purchasing our common stock.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this prospectus, the words "anticipate,"
"believe," "estimate," "will," "may," "intend" and "expect" and similar
expressions identify forward-looking statements. Forward-looking statements in
this prospectus include, but are not limited to, statements, trend analysis, and
other information relative to markets for our products and trends in revenues
and anticipated expense levels. Although we believe that our plans, intentions
and expectations reflected in these forward-looking statements are reasonable,
we can give no assurance that these plans, intentions or expectations will be
achieved. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied, by the forward-looking statements
contained in this prospectus. Important factors that could cause actual results
to differ materially from our forward-looking statements are set forth in this
prospectus, including those set forth in the "Risk Factors" section above. These
factors are not intended to represent a complete list of the general or specific
factors that may affect us. It should be recognized that other factors,
including general economic factors and business strategies, may be significant,
presently or in the future, and the factors set forth in this prospectus may
affect us to a greater extent than indicated. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements set forth in this prospectus. Except
as required by
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law, we undertake no obligation to update any forward-looking statements after
the date of this prospectus to conform such statements to actual results or to
change our expectations.
FINANCING ARRANGEMENT WITH ASPEN CAPITAL RESOURCES, LLC
The shares covered by this prospectus are shares of our common stock issued or
issuable upon the conversion of certain shares of Series B preferred stock.
On May 16, 2000, we signed a securities purchase agreement (the "purchase
agreement") with Aspen Capital Resources, LLC (the "selling stockholder"). Under
the purchase agreement, the selling stockholder purchased 1,000 shares of Series
2000-A Convertible Preferred Stock ("Series A preferred stock") for $1,000,000,
less a 10% placement fee paid to the selling stockholder, and warrants
exercisable for the purchase of additional shares of common stock by the selling
stockholder. The purchase agreement provided for subsequent purchases of an
additional 3,000 shares of Series A preferred stock, with accompanying warrants,
for an aggregate purchase price of $3,000,000, less the 10% placement fee. From
May through September 2000, we issued a total of 4,000 shares of Series A
preferred stock in exchange for net proceeds of $3,600,000.
In connection with the purchase agreement, we agreed to file a registration
statement to register the resale of the shares of common stock issuable to the
selling stockholder upon conversion of the Series A preferred stock. On June 14,
2000, we filed a registration statement with the Securities and Exchange
Commission to register the resale by the selling stockholder of (i) 2,000,000
shares of common stock issuable upon conversion of the Series A preferred stock,
(ii) 2,000,000 shares of common stock issuable upon exercise of the related
warrants, and (iii) all additional shares of common stock issued or issuable to
the selling stockholder pursuant to the purchase agreement. That registration
statement was declared effective on July 7, 2000. The selling stockholder
subsequently converted 348 shares of Series A preferred stock into 2,000,000
shares of common stock. As of the date of this prospectus, the selling
stockholder has sold all of the shares of common stock issued in that
conversion.
On November 13, 2000, we entered into an arrangement (the "amendment agreement")
with the selling stockholder to amend the terms of the purchase agreement and
the warrants. Under the amendment agreement, the selling stockholder was granted
the right to convert the stated value and any accrued and unpaid dividends on
the Series A preferred stock into shares of common stock by dividing the stated
value of such shares to be converted together with any accrued but unpaid
dividends thereon by the conversion price, which is 80% of the average of the
three lowest closing bid prices for our common stock quoted on the Nasdaq Stock
Market system or reported on the NASD Electronic Bulletin Board during the 15
trading days preceding the conversion date, subject to a maximum conversion
price of $1.20 per share. The selling stockholder also waived any penalty or
event of noncompliance arising from our failure to cause the common stock to be
included in the Nasdaq Stock Market System or the NASD Electronic Bulletin Board
on or before September 30, 2000. Our common stock began trading on the NASD
Electronic Bulletin Board on October 26, 2000.
As of December 29, 2000, we entered into a second amendment to the purchase
agreement (the "second amendment agreement"), which modified the terms of the
purchase agreement and the amendment agreement. Under the second amendment
agreement, we agreed to adopt a certificate of designation for a new series of
preferred stock, the Series B preferred stock. The terms of the Series B
preferred stock are set forth in more detail under the heading "Description of
Securities." Under the second amendment agreement, the selling stockholder
exchanged its remaining 3,652 shares of Series A preferred stock for an equal
number of shares of Series B preferred stock. Further, the selling stockholder
agreed that prior to April 3, 2001, it would not (i) offer or sell any shares of
our common stock or enter into any swap or other similar arrangement at prices
less than $0.25 per share, or (ii) convert any shares of Series B preferred
stock. Additionally, the selling stockholder agreed to surrender for
cancellation all of the warrants received in connection with the purchase
agreement, provided that (i) all of the terms of the second amendment agreement
have been met; (ii) we have redeemed all of the Series B preferred stock as
provided in the certificate of designation for such series, and (iii) no event
of noncompliance has occurred under the purchase agreement, as amended,
including the failure to have the registration statement of which this
prospectus is a part declared effective by April 2, 2001.
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Under the second amendment agreement we acquired the right to redeem all, but
not less than all of the outstanding shares of Series B preferred stock on or
before April 2, 2001, for $6.5 million. The selling stockholder acquired the
right to require that we redeem the Series B preferred stock at a mandatory
redemption price of 125% of the stated value of the Series B preferred stock per
share, plus accrued and unpaid dividends and penalties, if any, through the date
of redemption. The mandatory redemption may be exercised on or after April 3,
2001 by the selling stockholder or before April 3, 2001 if an event of
noncompliance occurs. The selling stockholder may exercise the mandatory
redemption right prior to April 3, 2001 if either Randall L. Hales ceases to be
employed by us or Pharmulations, LLC (specifically, Dr. Edward B. Walker) ceases
to provide services as our consultant.
The restrictions on selling stockholder's exercise of conversion, trading and
redemption rights under the second amendment agreement are contingent on the
agreement of Randall L. Hales to remain our President and CEO, and
Pharmulations, LLC to continue as our consultant at least through April 2, 2001.
Under the second amendment agreement, we also agreed to appoint the selling
stockholder's nominee to our board of directors. On January 8, 2001, we
appointed Joe K. Johnson, the manager of Aspen Capital to serve as a member of
the board of directors as provided by our bylaws, the laws of Delaware, and any
applicable SEC rules or regulations.
We have filed a registration statement, of which this prospectus forms a part,
in order to permit Aspen Capital to resell to the public any common stock it
acquires upon conversion of the preferred stock. Aspen Capital may be entitled
to indemnification by us for lawsuits based on language in this prospectus. We
will prepare and file such amendments and supplements to this registration
statement as may be necessary in accordance with the Securities Act and the
rules and regulations promulgated under it, in order to keep this registration
statement effective so that we may comply with the registration rights granted
to Aspen Capital in the purchase agreement. In connection with the purchase
agreement as amended, we agreed to pay certain expenses of Aspen Capital,
including legal fees for the preparation of the second amendment agreement of
$4,500.
Additional information regarding the purchase agreement, the amendment
agreement, the Series B preferred stock private placement, and the second
amendment agreement can be found under the headings "Description of Securities"
and "Selling Stockholder."
Aspen Capital is an "underwriter" within the meaning of the Securities Act in
connection with its resale of shares of our common stock under this prospectus.
USE OF PROCEEDS
The proceeds from the sale of all of the shares of common stock pursuant to this
prospectus will be received directly by the selling stockholder. We will not
receive any proceeds from those sales.
PRICE RANGE OF COMMON STOCK
Our common stock is traded in the over-the-counter market on the NASD Electronic
Bulletin Board under the trading symbol "FSFI." Trading of the common stock
commenced on October 26, 2000. The following table shows the high and low bid
quotations for our common stock as reported by our market makers. These
quotations are believed to represent inter-dealer quotations without adjustment
for retail mark-up, mark-down or commissions and may not represent actual
transactions.
Quarter Ended High Bid Low Bid
December 31, 2000 $2.00 $0.1875
As of December 31, 2000 we had approximately 370 shareholders of record of our
23,045,436 outstanding shares of common stock.
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DIVIDEND POLICY
We have never paid cash dividends on our common stock. During the year ended
December 31, 2000, we paid dividends on preferred stock at an annual rate of 8%,
which totaled $160,480. We currently intend to retain all available funds to
operate and expand our business. We do not anticipate paying any cash dividends
with respect to our common stock in the foreseeable future. As of September 30,
2000, we had an accumulated deficit from inception of $12,608,497 and until this
deficit is eliminated we can pay dividends to our common shareholders only out
of net profits.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following description of our financial condition and results
operations in conjunction with the financial statements and the notes thereto
and the unaudited financial statements and the notes thereto included elsewhere
in this prospectus. This discussion contains forward-looking statements based
upon current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Our actual results and the timing of certain events
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a discrepancy include, but are not
limited to, those discussed in "Risk Factors," "Business" and elsewhere in this
prospectus.
Outlook
Our cash requirements through the end of 2001 will vary based upon a number of
factors including, but not limited to, continuing research and development
levels, increased market development activities, facilities enhancement,
additional personnel, travel, and other expenses related to projected growth.
With respect to the year 2001, we expect that additional cash funding will be
needed. Efforts are currently under way to secure additional financing of
approximately $2 million, which we believe will be sufficient until cash flows
from operations meet future operating needs.
Product research and development is an ongoing process. Existing products are
continuously being refined and new technology developed to solve unmet market
needs. Ongoing spending is anticipated in future quarters for lab equipment,
furniture and fixtures.
Our existing facilities and equipment are projected to be sufficient to meet
most of our growth needs. However, should we be required to perform expanded
testing for our customers or should we undertake in-house manufacturing,
additional capital would be required to establish such activities. Management is
actively pursuing additional outsourced manufacturing capacity.
We benefit from an experienced executive management team and a board of
directors comprising several senior-level business executives and medical
professionals. We have assembled an in-house team of respected, results-oriented
research and development, marketing, sales and operations professionals, as well
as outside advertising, public relations and healthcare market consultants to
advise management on business strategy and product innovation.
In late September 2000, we shipped $304,000 of product to Alliegence
Corporation, a large distributor that serves the professional medical market.
The shipments were initial stocking orders of MicrobNZ(TM) technology products.
We anticipate that these shipments are the beginning of a stream of shipments
that will represent significant sales in 2001. The transaction terms were FOB
destination and contained certain rights of return by the distributor. As a
result of these terms and the lack of sell-through history for MicrobNZ(TM)
products, the recording of revenue was deferred.
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PureSoft Solutions LLC Acquisition. On March 15, 2000, we entered into an
agreement (the "PureSoft agreement") to acquire 100% of the common stock of
PureSoft Solutions LLC ("PureSoft"), a New Hampshire limited liability company
involved in the manufacturing and distribution of health care products. As
consideration for the purchase, we agreed to pay $50,000 in cash, issue options
to purchase 87,534 common shares at $0.01 per share and issue a $450,000
promissory note bearing interest at 8.5% per year with a $300,000 payment due on
June 15, 2000, and quarterly payments of $50,000 thereafter through March 15,
2001. The PureSoft agreement, as subsequently amended, also provides that we
will issue additional shares of our common stock on July 1, 2001 and 2002. The
number of shares to be issued is contingent upon the net income before income
taxes of PureSoft, and will vary in proportion to any over- or
under-achievements of established performance milestones stated in the PureSoft
agreement, provided, however, that the aggregate minimum number of shares will
have a market value of no less than $190,000. In addition, the PureSoft
agreement required us to make working capital advances of $300,000 to PureSoft
on each of March 15, 2000, June 15, 2000 and August 15, 2000. All of the working
capital advances were paid on or before the respective due dates and the $50,000
quarterly payments have been made on schedule.
The principal significance of the acquisition of PureSoft is the introduction of
our products into new markets, which might provide significant revenue to us in
future periods.
Results of Operations
Nine months ended September 30, 2000, compared to the nine months ended
September 30, 1999
During the nine months ended September 30, 2000, we recorded revenues of
$383,108, reflecting a decrease of $42,975, or 10%, compared to the same period
in the previous year. Revenues in 1999 included $271,247 from contracts to
qualify and test products for customers, while in 2000 the source of revenue has
shifted to the sale of product, representing 79% of total revenues.
Selling, general and administrative expenses were $3,095,537 and $1,126,647 for
the nine months ended September 30, 2000 and 1999, respectively, representing an
increase of $1,968,890, or 175%, from 1999 to 2000. The increase over the prior
year is due to growth and development related expenses in marketing, sales and
travel of $271,000; the expansion of operations reflecting increases in payroll
expenses of $775,000 due to the addition of an enhanced sales force and
administrative support personnel; non-cash compensation charges associated with
the issuance of stock options of $171,000; and consulting, legal and
professional fees of $439,000.
We incurred research and development expenses of $218,834 during the nine months
ended September 30, 2000, an increase of $176,743 from the same period in the
previous year. This increase was due to the expansion of our testing facilities
including a new lab and personnel to support the testing at the lab. We
anticipate an increase in research and development expenses for future periods
as we expand our product offerings.
We recorded a loss of $100,717 related to the decrease in market value of our
marketable securities. The value has decreased consistently since the time of
purchase and we have no reason to believe that the near-term prospects of the
issuer will change.
Net interest income was $42,049 and $24,599 for the nine months ended September
30, 2000 and 1999, respectively. This represents an increase of $17,450 and is
due primarily to interest income that we have realized from a higher cash
balance generated from issuance of common and preferred stock, partially offset
by interest expense incurred through capital lease obligations that have been
entered into primarily for office equipment.
Year ended December 31, 1999, compared to the year ended December 31, 1998
During the 12 months ended December 31, 1999, we had total operating
revenues of $553,631, comprised primarily of product testing, raw materials
sales and a licensing fee from a major customer, compared with total operating
revenues of $83,149 for 1998, comprised primarily of product sales. Cumulative
operating revenue from inception (April 30, 1990) through December 31, 1999
totaled $789,627. Gross profits for 1999 and 1998 were
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$405,408 and $28,152, respectively. As of December 31, 1999, the cumulative net
losses of First Scientific since inception total $6,231,062 of which $3,766,440
is attributable to a non-recurring charge for purchased research and
development.
Prior to December 1998, our revenues were generated from sporadic sales of
a linseed oil-based soap product and a rash prevention product created for a
distributor who sells this product under private labels to an over-the-counter
customer. We decided to discontinue the sale of these products and to
concentrate on marketing our antimicrobial and rash treatment/prevention
products.
On August 12, 1999, we signed a supply agreement with ConvaTec, a division
of Bristol-Myers Squibb Company, which immediately began to produce revenue.
Under this agreement, we provide raw materials to a third-party manufacturer
designated by ConvaTec, which has a Dimethicone-based, waterless, patient
bathing product. Product testing revenue for FDA compliance, which began during
the quarter ended June 30, 1999, continued during the year ended December 31,
1999. A licensing fee, raw materials sales, and testing revenue accounted for
the majority of the revenue during 1999.
During the third and fourth quarters of 1999, we began initial
negotiations, including the exchange of non-disclosure agreements, with several
professional health care market share leaders concerning our professional health
care handwash.
Our regional distribution agreement with WelMed, Inc., produced minimal
revenues during the year ended December 31, 1999. Initial warehousing inventory
shipped to WelMed during the fourth quarter of 1999. This agreement covers
several western states. WelMed has non-exclusive distribution rights for our
products in these states and exclusive rights to our Fresh Cleanse(R) branded
products to hospitals, nursing homes, medical clinics and doctors offices in
this territory.
General and administrative expenses were $1,666,555 for the twelve months
ended December 31, 1999, compared with $550,449 for the comparable period from
the prior year. Cumulative general and administrative expenses from inception
through December 31, 1999 were $2,503,887. The increase in expenditures between
1999 and 1998 was due to our continued transition from a one-man product
development entity, with minimal sales, to an increased operational staff
capable of administrating anticipated growth. Executive office space into which
we moved during 1998 was augmented as the finance, sales/marketing and research
and development functions increased to match anticipated growth.
Research and development expenses were $94,982 for the 12 months ended
December 31, 1999 compared to $47,368 after backing out purchased research and
development in the amount of $3,766,440 from the year ended December 31, 1998.
The increase in expenditures between 1999 and net amounts for 1998 resulted from
the continued refinement of our formulations and the development of new product
variations to meet customer requests.
Liquidity and Capital Resources
We had cash of $2,702,510 as of September 30, 2000, representing an increase of
$2,494,576 from December 31, 1999. Working capital, as of September 30, 2000,
increased to $2,293,808 compared to working capital of $297,039 at December 31,
1999. We had an accumulated deficit of $12,608,497 at September 30, 2000, most
of which had been funded out of proceeds received from the issuance of stock.
This deficit includes $3,776,440 attributable to non-recurring charges for the
purchase of research and development and $3,166,907 attributable to dividend and
beneficial conversion features on preferred stock. The remaining $5,665,150
deficit resulted primarily from costs incurred in connection with research and
development; compliance of our proprietary products with FDA requirements; and
operating expenses related to startup sales, marketing and administration.
Historically, we have financed our operations principally through loans, private
placements of equity securities, and minimal product sales. We used net cash of
$2,596,363 in operating activities during the nine months ended September 30,
2000. In the short term, we will be dependent on a few large customers for the
bulk of our revenue.
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Until a broader base of customers is established, the loss of one such customer
could have a serious, material adverse effect on our operating viability.
Because we presently have limited revenue, we will rely primarily on cash
balances and the sale of our equity and debt securities to satisfy future
capital requirements until such time as sufficient revenue can satisfy our
operating requirements. There can be no assurance that we will be able to secure
this funding or that the terms of such financing will be favorable to us.
Furthermore, the issuance of equity or debt securities which are or may become
convertible into our equity securities may result in substantial dilution to the
holders of our stock.
During the nine months ended September 30, 2000, we received cash proceeds in
the amount of $2,477,000 by issuing 825,666 investment units, at $3.00 per unit.
Each investment unit consists of one share of our common stock and a warrant to
purchase one-half share of common stock at $4.50 per share. The warrants expire
December 31, 2001.
During the nine months ended September 30, 2000, we granted 461,000 options
under the 1998 Stock Option Plan. Of the options granted, 155,000 options have
an exercise price of $1.75 per share and 306,000 options have an exercise price
of $3.00 per share. The options are exercisable as follows: 40% on the date of
grant and 60% over a two-year period from the date of grant. All options granted
during this period expire on the fifth anniversary of its respective grant date.
We recorded $193,750 of deferred compensation related to options that have
exercise prices below the estimated fair market value on the measurement date.
Additionally, we granted options to purchase 87,534 common shares at $0.01 per
share in connection with the acquisition of PureSoft. These options are
exercisable immediately and have no expiration date.
We estimate a need for approximately $2,000,000 in new financing over the next
twelve months. In addition, we intend to seek financing to exercise the optional
redemption right under the designation of rights and preferences of the
preferred stock to repurchase the outstanding preferred stock from Aspen Capital
for $6.5 million. We will need to raise this capital through the sale of our
securities or through borrowings. At this time we do not have a line of credit
or other credit facility sufficient to provide this capital. We cannot guarantee
success in raising future capital necessary to sustain or expand our operations,
nor are we certain that such capital will be available on terms that prevent
substantial dilution to existing investors. If we cannot raise sufficient
capital, then we might be forced to significantly curtail operations. Any
reduction in operating activity could have a material adverse effect on our
business, financial condition, results of operations and relationships with
corporate partners.
BUSINESS
Introduction
We are a Utah-based development stage company engaged in the research,
development and commercialization of break-through, patent-pending technologies,
as well as personal skin care and disinfectant products. Our subsidiary,
PureSoft, is based in New Hampshire. We sell our technologies and products in
the United States and internationally into four active market segments:
professional health care, food service, hospitality, and janitorial/sanitation.
We have also targeted market segment opportunities in retail and health and
fitness.
We maintain additional information about our business, products, test results,
media coverage and investor relations at our corporate website,
www.firstscientific.com and the website for PureSoft at www.puresoft.ws.
Reference to these websites is not intended to incorporate by reference any
information or material contained on them into this prospectus.
Corporate Development
In September 1998, we acquired the business operations and intellectual property
of Linco Industries, Inc. ("Linco"), a Utah corporation. Prior to that time, we
had not conducted any substantive business operations. In connection with this
acquisition, we changed our corporate name from SPPS Financial Corporation to
First
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Scientific, Inc. Linco changed its name to First Scientific Corporation and
remained as our wholly owned subsidiary. In June 2000, we acquired PureSoft.
Mission
We are dedicated to developing and marketing break-through products that advance
healthy living, exceed customer expectations and create exceptional shareholder
value.
We expect to achieve this corporate mission by:
o leveraging exceptional research and development capabilities to
continue the development of breakthrough products that address
unmet market needs of significant potential;
o taking our products through a structured new product process
driven by marketing in close cooperation with sales, research and
development, and manufacturing;
o managing and partnering with contract manufacturers that deliver
the highest quality products on time;
o building upon the "customer first" attitude necessary to exceed
customer expectations and maintain long-lasting relationships;
o generating product awareness, high performance image and brand
insistence.
Critical Success Factors
We have identified as critical factors for the success of our mission the
following:
o Identify unmet and under-served customer needs;
o Consistently develop and introduce break-through products that
solve key customer needs;
o Aggressively protect current patents as necessary and patent new
technology;
o Comply with GMP and regulatory protocols, such as FDA, EPA, at
every stage of development and manufacturing;
o Design and execute aggressive revenue generating marketing and
sales programs;
o Maintain effective operational infrastructure procedures and
processes; and
o Create brand and technology recognition and loyalty.
Technology Platforms and Products
We are primarily engaged in commercializing the following technology platforms
and products:
Antimicrobial Technology
MicrobNZ(TM). We believe this product to be highly efficacious, long-lasting
with a high degree of persistence, and fast-acting against a broad spectrum of
pathogens, including Escherichia coli, Pseudomonas aeruginosa, Staphylococcus
aureus and drug resistant bacteria such as Methicillin resistant Staphylococcus
aureus (MRSA) and Vancomycin resistant Enterococcus (VRE). The MicrobNZ
formulation does not contain any irritating or degrading active ingredients such
as Triclosan(R), CHG (Chlorhexidine Gluconate), PCMX (Chloroxlyenol), iodine, or
alcohol.
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Unlike these other degrading active ingredients, products formulated with
MicrobNZ significantly improve and moisturize the skin.
Our antimicrobial formulation exceeds the Food and Drug Administration protocols
required for classification as a Health Care Personnel Handwash and as a
First-Aid Antiseptic (21 CFR 333).
MicrobNZ can be used facility-wide and is appropriate for patient, public and
staff handwashing. This technology can be packaged as an antimicrobial handwash,
antimicrobial First-Aid Antiseptic lotion, antimicrobial First-Aid Antiseptic
spray, and antimicrobial First-Aid Antiseptic towelettes. We market our
antimicrobial technology under the MicrobNZ brand to domestic and international
organizations in the professional health care, food service, hospitality, and
janitorial/sanitation market categories.
Skin Healing Technology
Our patent-pending, skin healing technology brings together Dimethicone with
skin-conditioning emollients and botanical oils to create a unique formulation
for the treatment and prevention of rashes. Our testing has demonstrated shelf
life of this stable Dimethicone oil-in-water emulsion for periods in excess of
two years. This technology meets FDA requirements to be considered an
over-the-counter drug product. This formulation in towelette form is used for
the treatment and prevention of skin rashes caused by infant and adult
incontinence. We currently supply a version of this skin healing technology as a
waterless, rinse-free, patient-bathing product to ConvaTec, a division of
Bristol-Myers Squibb Company.
Institutional Care
Available through our PureSoft subsidiary are products that address trends in
the geriatric and physical therapy communities, including PureSound(TM), a
hydrosonic bath additive; PureCleanse(TM), a hard-surface disinfectant;
PureMoisture(TM) bath oil; and PureBathe(TM) body wash and shampoo.
Product Testing
Independent FDA-compliant laboratories have tested our antimicrobial
formulations and demonstrated their ability to surpass FDA testing protocols (21
CFR 333) for health care handwash in-vivo efficacy, in-vitro time kill, and
in-vitro minimum inhibitory concentration (MIC). In addition, transepidermal
moisture gain/loss, skin irritation and virucidal studies have been conducted to
support product claims.
We believe that these tests clearly demonstrate that our antimicrobial
technology delivers:
o High pathogenic efficacy by removing 99.99% of disease-causing
bacteria, yeast, fungi and viruses (HIV, Herpes, Influenza, and
Tuberculosis) in 15 seconds or less.
o Improved skin condition with high frequency of product use versus
the skin degrading actives found in leading antimicrobial
products that contain Triclosan(R), CHG, PCMX, iodine or alcohol.
o Continued bacteria-killing efficacy for hours after use.
o Fast-acting efficacy against a broad spectrum of microorganisms,
including the antibiotic resistant bacteria MRSA and VRE.
o Long-lasting protection against the leading culprits of foodborne
illness, including: E. coli O157:H7, Staphylococcus aureus,
Salmonella, Campylocbacter jejuni, Clostridium, Listeria
monocytogenes, Shigella, Vibrio vulnificus, Yernsinia
enterocolitica and Bacillus subtilis.
Independent laboratories have also tested and validated our Dimethicone-based
skin protection products with exceptional results. The PureCleanse hard-surface
disinfectant is also an EPA-registered formulation.
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Patents, Licenses and Proprietary Technology
We rely upon a combination of patents, copyright protection, trade secrets,
know-how, continuing technological innovation and licensing opportunities to
develop and maintain our competitive position. Our future prospects depend in
part on our ability to obtain patent protection for our products and
formulations. We need to preserve our copyrights, trademarks and trade secrets.
We also need to operate without infringing the proprietary rights of third
parties. Product patents are pending with the U.S. Patent and Trademark Office
for the antimicrobial protection and skin healing technologies. We claim as
trademarks the marks "First Scientific," "MicrobNZ," "ProCleanse," and
"Protection at the Microbial Level."
The patent positions of pharmaceutical and biotechnology companies, which are
similar to ours, are generally uncertain and involve complex legal and factual
questions. We cannot guarantee that any of our pending patent applications will
result in issued patents, nor can we assure that we will develop more
proprietary technologies that are patentable. Patents issued to our strategic
partners or us may not provide a basis for commercially viable products or may
not provide any competitive advantages. Our patents could be challenged by third
parties. The patents of others could limit our ability to use certain processes
or technologies. Any of these preceding situations could have a material adverse
effect on our ability to do business. Furthermore, patent law relating to the
scope of claims is still evolving in the technology fields in which we operate.
As a result, the degree of future protection for our proprietary rights is
uncertain. We cannot prevent others from independently developing similar or
alternative technologies, duplicating any of our technologies, or, if patents
are issued to us, designing around our patented technologies. We could incur
substantial costs in litigation if we are required to defend ourselves in patent
suits brought by third parties or if we initiate such suits.
Others may have filed and in the future are likely to file patent applications
that are similar or identical to ours. To determine the priority of inventions,
we may have to participate in interference proceedings declared by the United
States Patent and Trademark Office. Such proceedings could result in substantial
cost to us. We cannot ensure that any such third-party patent application will
not have priority over ours. Additionally, the laws of certain foreign countries
may not protect our patent and other intellectual property rights to the same
extent as the laws of the United States.
Our future prospects also depend in part on our neither infringing patents or
proprietary rights of third parties nor breaching any licenses that may relate
to our technologies and products. We cannot guarantee that we will not infringe
the patents, licenses or other proprietary rights of third parties. We could in
the future receive notices claiming infringement from third parties as well as
invitations to take licenses under third party patents. Any legal action against
our strategic partners or us that claim damages and seek to enjoin commercial
activities relating to the affected products and processes could subject us to
potential liability for damages. Such legal actions could also require our
strategic partners or us to obtain a license in order to continue to manufacture
or market the affected products and processes. We cannot ensure that our
strategic partners or we would prevail in any such action. We cannot ensure that
any license, including licenses proposed by third parties, required under any
such a patent would be available on terms that are commercially acceptable, if
at all. We have not conducted an exhaustive patent search and we cannot ensure
that patents do not exist or could not be filed that would have a material
adverse effect on our ability to develop and market our products. If we become
involved in such litigation, it could consume a substantial portion of our
managerial and financial resources, which could have a material adverse effect
on our business, financial condition, results of operations, and relationships
with corporate partners.
The enactment of legislation implementing the General Agreement on Trade and
Tariffs, effective June 8, 1995, has changed certain United States patent laws.
Most notably, the term of patent protection for patent applications filed on or
after that date is no longer a period of seventeen years from the date of grant.
The new term of United States patents begins on the date of issuance and
terminates 20 years after the effective date of filing. This change in the law
could substantially shorten the term of our patent protection, which may
adversely affect our patent position.
We attempt to control the disclosure and use of our proprietary technology,
know-how and trade secrets under agreements with the parties involved. However,
we cannot ensure that others will honor all confidentiality
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agreements. We cannot prevent others from independently developing similar or
superior technology, nor can we prevent disputes that could arise concerning the
ownership of intellectual property.
Government Regulation and Product Testing
Our current and potential products, and our manufacturing and research
activities, are or may become subject to varying degrees of regulation by many
government authorities in the United States and other countries. Such regulatory
authorities could include the State of Utah Department of Health, the U.S. FDA
and comparable authorities in foreign countries. Each existing or potential
antimicrobial or topical product intended for human use that we develop or
market, either directly or through licensees or strategic partners, may present
unique regulatory problems and risks. Relevant regulations depend on product
type, use and method of manufacture. The FDA regulates, in varying degrees and
in different ways, medical devices and pharmaceutical products. Regulations
govern manufacture, testing, exportation, labeling and advertising.
Prescription pharmaceuticals and certain types of medical devices are regulated
more vigorously than foods. Any products we develop for use in human
pharmaceuticals or cosmetics could require that we develop and adhere to GMP as
suggested by the FDA, ISO standards as suggested in Europe, and any other
applicable standards mandated by federal, state, local or foreign laws,
regulations and policies. Our current facilities and procedures and those of our
contract manufacturers fully comply with GMP and ISO standards.
We are or may become subject to other federal, state and foreign laws,
regulations and policies with respect to labeling of products, importation of
products and occupational safety, among others. Federal, state and foreign laws,
regulations and policies are always subject to change and depend heavily on
administrative policies and interpretations. We are working with our
distributors and potential customers to achieve compliance with foreign laws,
regulations and policies pertaining to our products, We are also working with
certain consultants regarding compliance with FDA, GMP and ISO policies and
regulations. We cannot ensure that any of our products will satisfy applicable
regulatory requirements. Changes could occur in federal, state and foreign laws,
regulations and policies and, particularly with respect to the FDA or other such
regulatory bodies, such changes could be retroactive. Such changes could have a
material adverse effect on our business, financial condition, results of
operations and relationships with corporate partners.
We are also subject to numerous environmental and safety laws and regulations,
including those governing the use and disposal of hazardous materials. Any
violation of, and the cost of compliance with, these regulations could have a
material adverse effect on our business, financial condition, results of
operations and relationships with corporate partners.
Industry
According to the U.S. Centers for Disease Control and Prevention ("CDC"),
handwashing is the single most important means of preventing the spread of
infection. Harmful and sometimes deadly infectious bacteria, viruses and fungi
are a growing threat to the world. Germs are becoming impervious to just about
everything doctors throw at them. The infection control battle lines are drawn.
Regulatory agencies are increasing requirements for cleanliness across
industries. Contamination control has become a major concern in protecting our
health in public and workplace environments, and at home. School children,
health care workers, money-handlers, travelers, food service workers,
hospitality providers, and cosmetologists are at particular risk. But everyone
is exposed.
Several major manufacturers have responded to this demand by marketing
antimicrobial and antibacterial products to consumer and professional markets.
However, independent testing reveals that virtually all of these products
contain skin irritating and skin degrading active ingredients, such as
Triclosan(R), CHG (Chlorhexidine Gluconate), PCMX (Chloroxlyenol), iodine, or
alcohol. Moreover, none of these active ingredients provides long-lasting,
efficacious protection, nor have they been proven to improve and moisturize the
skin. Recently Triclosan has come under FDA scrutiny and review by the American
Medical Association (AMA) and industry professionals for its potential to cause
"superbugs" or antibiotic resistant bacteria.
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We believe that our unique and proprietary formulations position us to deliver
to health care providers at every level, food handlers and consumers a
break-through technology that provides demanding efficacy and persistence, while
posing no risk in the creation of superbugs. Unlike other degrading active
ingredients, products formulated with MicrobNZ significantly improve and
moisturize the skin.
Our Dimethicone-based skin healing technology sales are targeted at hospitals
and long-term care facilities, as well as the adult and infant incontinent care
markets. With people living longer, professional and/or in-home care becoming
more common due to skyrocketing health care costs, predictable market growth is
anticipated for our products targeted to markets with these demographics.
Market Category Potential
Professional Health Care
The CDC notes several major forces are behind the emergence of hospital-acquired
or "nosocomial" infections:
o Antibiotic use is increasing in hospitals and long-term care
facilities. Use of antibiotic drugs in long-term care facilities and
transfer of patients between these facilities and hospitals has
created a large reservoir of resistant strains in nursing homes.
o Hospital personnel generally fail to follow basic infection control
precautions, such as handwashing between patient contact due to
patient load and their general dislike of currently available
handwash products. In ICUs, asepsis is often overlooked in the rush
of crisis care.
o Patients in hospitals are increasingly immuno-compromised. The shift
of surgical care to outpatient centers typically leaves the sickest
patients in hospitals, which are becoming more like large ICUs. This
shift has led to the greater prevalence of vascular access-associated
bloodstream infections and ventilator-associated pneumonias.
The professional health care market in the U.S. comprises approximately 5,000
hospitals, 17,500 long-term care facilities and numerous ancillary clinics and
specialty rehab centers. Health care workers are the leading vehicles with which
"nosocomial" or hospital-acquired infections are spread through direct patient
contact. In the case of Hepatitis B, health care workers are between five and 15
times more likely to contract the virus than the general U.S. population
(Association of Infection Control Professionals). Moreover, nosocomial infection
is the most common immediate cause of death in nursing home patients, and the
leading cause of patient hospitalization. The CDC estimates over 2 million cases
of nosocomial infections in hospitals, long-term care facilities and nursing
homes occur each year, resulting in 80,000 - 100,000 deaths. According to the
American Journal of Infection Control (June/August 1991), between 5% and 18% of
all patients has an active infection at any given time.
The large, fast-growing professional health care market comprises a small group
of dominant manufacturers and medical supply distribution companies. They sell
to hospitals, nursing/long-term care facilities, physician and dental offices,
laboratories and other health-related organizations and to group purchasers. The
manufacturers, distribution companies and group-purchase organizations control
product flow to the market. We expect that marketplace success in the
professional health care category will be driven by establishing strategic
private label alliances with manufacturers and distribution companies to get
First Scientific's products to the end user. In addition, an annual industry
study conducted by Kovach & Associates for 2000 confirms the market opportunity
for handwash products in the professional health care market with total dollars
just over $313.5 million.
Food Service
The CDC reports that in the U.S., each week, 1.5 million people get food
poisoning, 10,000 deaths occur annually from food poisoning, and foodborne
illness can cost food service operations thousands of dollars in fees, claims,
wages, and supplies per incidence.
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Foodborne illness is a common, distressing, and sometimes life-threatening
problem for millions of people in the United States and around the world. Over
70% of all outbreaks originate in food service operations; as many as 40% are
the result of poor handwashing and cross-contamination. The National Institute
of Allergy and Infectious Diseases estimates that the annual cost of all
foodborne diseases in the U.S. is $5 to $6 billion in direct medical
expenditures and lost productivity.
Properly cleansed hands are particularly important in controlling the
transmission of foodborne pathogens. Food employees with dirty hands and/or
fingernails can contaminate the food being prepared. According to the U.S. Food
and Drug Administration's 1999 Food Code, employee handwashing is a critical
control point under food safety plan and prevention guidelines. Therefore, the
FDA recommends that any activity which may contaminate the hands must be
followed by thorough handwashing in accordance with the procedures outlined in
the Code.
The food service category has a similar distribution chain to health care with
specialized distribution companies providing consumable goods and supplies to
food service companies and restaurants. Dine-in restaurants (29%), fast food
restaurants (28%) and food service companies (14%) account for 71% of the annual
handwashes in the food service arena. Sources confirm a market opportunity for
handwash products in the food service market with total dollars just over $187
million.
Other Market Segments
Although we have not yet specifically quantified international market potential,
its current due diligence confirms that our technologies and products can be
sold into the same markets that it sells into in the United States. Registration
and regulatory issues must be dealt with in most foreign markets to begin
selling products. However, once we have completed the registration process, it
will pursue market penetration on a selective country by country basis, where
speed to market and acceptable margins can be achieved.
We believe that there is additional market potential for our technologies and
products in other market segments. We have identified the retail and health and
fitness categories as "target" market segments, where the market size and
opportunity justifies sales consideration and discussion. We are also
researching opportunities in government, non-profit organizations and select
niche industries and sectors.
Active End User Market Segments
Our current and near-term sales revenue will be derived from the following
domestic and international "active" end user market segments.
Antimicrobial Technology:
Professional Health Care includes material management and purchasing
personnel at hospitals, nursing homes/long-term care facilities, medical clinic
personnel, lab technicians, infection control practitioners, nurses (all types),
homecare agency personnel, physicians, dentists, dermatologists
Food Service includes segment includes food processing plant personnel,
restaurant workers, central commissary, school cafeteria personnel, service
providers and their patrons
Hospitality includes entertainment and travel personnel and customers
Janitorial/Sanitation including janitorial and sanitation personnel
Skin Healing Technology:
Professional Health Care material management and purchasing personnel at
hospitals, nursing homes/long-term care facilities and homecare agency
personnel, professional pharmacies
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Institutional Skin Care:
Professional Health Care material management and purchasing personnel at
hospitals, nursing homes/long-term care facilities and homecare agency personnel
Marketing Plan
Our marketing plan addresses the development of awareness and demand for our
technologies to create product insistence and generate sales. Marketing
campaigns during the latter half of 2000 and beginning of 2001 are directed
toward establishing and building a superior market position for First Scientific
with an emphasis on our antimicrobial technology -- MicrobNZ.
In addition to mitigating common risks associated with granting private label
contractual arrangements with new customers, the brand promotes and grows
acceptance of our antimicrobial technology across several markets. Through this
branding program, we require that all products containing a formulation derived
from the MicrobNZ technology include the "MicrobNZ" logo on their product
labels.
Supporting this marketing plan, we have engaged outside consultants.
Sales Approach
We anticipate that near-term revenue growth, both in domestic and international
markets, will result from private-label agreements within the identified active
market segments. This approach provides quick market penetration with lower
capital requirements. Due to the large cash investment required to launch,
penetrate and sustain branded products, we have elected to align with market
leaders that have an established sales force, distribution and customer base. We
believe these advantages make private labeling a compelling business sales
strategy for us. Moreover, we can offer proprietary products to a number of
customers by altering botanical, fragrance, and packaging options while
maintaining required FDA protocols.
Additionally, as opportunities arise, we provide our ProCleanse(TM) and
PureCleanse(TM) house brands. We carefully qualify our distribution
relationships, choosing those with an established market presence. We are
pursuing distribution agreements in the professional health care, food service,
hospitality, and janitorial/sanitation markets.
In international markets, we expect private label relationships will dominate
sales. However, various foreign distributors may want to capitalize on using our
brand label as it develops market presence in the U.S. Use of our brand label in
foreign countries will be reviewed and considered on a case-by-case basis.
In support of this plan, we continue to assemble a sales team that is organized
in alignment with the end consumer markets outlined above. The sales team
concentrates its efforts on securing significant market share in its identified
target markets.
Research and Development
We have established a talented, respected and results-oriented research and
development team, with the proven ability to develop unique product formulations
that fulfill user needs. Edward Walker, Ph.D., who developed our antimicrobial
protection and skin healing technologies, leads the Company's research and
development efforts. As a market-driven company, significant unmet product
opportunities continue to be identified through comprehensive market research.
New product endeavors are facilitated through product analysis, market
opportunity assessment, product testing and user validation. Product concepts
are qualified by marketing through interaction with customers, end users, and
several internal sources before research and development begins.
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Manufacturing and Raw Materials
Our depth in manufacturing capabilities ensures that we meet the required
volumes, market demands, and various packaging formats for our products. We
currently contract the manufacturing of products to carefully chosen and
qualified production and co-packaging organizations that comply with both GMP
and FDA guidelines. These providers have a depth of experience in manufacturing
for various customers who require high quality products produced in
FDA-compliant and registered facilities. Strict confidentiality agreements and
protocols are imposed to protect our interests when qualifying contract
manufacturers.
Competition
Our primary competitors are those companies already providing antimicrobial and
antibacterial products, and the promise of a bacteria-free environment, to the
professional health care, foodhandling and other workplace/consumer
environments. The speed to market and demonstrated capability of designing
unique products to address market opportunities and customer needs provides us a
competitive edge to compete against larger, entrenched competitors. However, our
principal competitors are mostly large, well established marketers that have
recognized brands and customer bases that pose a significant barrier to our
achieving our sales and marketing plans.
We have not been able to identify a competitor that provides a single product
that simultaneously eliminates bacteria, improves skin condition and is
effective for hours after use. Additionally, independent testing reveals that
competitive products incorporating skin irritating active ingredients, such as
alcohol, PCMX, CHG, Triclosan and iodine, cause skin degradation. This product
landscape provides us with a critical competitive advantage. We believe we are
well positioned to deliver products that specifically address problems
associated with degradation of the skin caused by the irritating aspects of
competitors' products, while also improving the skin's overall condition and
providing antimicrobial persistence at higher levels.
Properties
Our corporate headquarters are located in approximately 5,000 square feet at
1877 West 2800 South, Suite 200, Ogden, Utah 84401. Located adjacent to the
corporate offices is a recently completed, state-of-the-art research and
development facility occupying approximately 2,000 square feet. Lease payments
total approximately $7,400 per month. The lease expires on February 28, 2003 and
annual rental increases are at the greater of CPI or 5%. A second location is at
2711 Midland Drive, Ogden, Utah 84401. Research and development, warehousing,
mixing, and records storage are performed at this 2,200 square-foot
FDA-compliant facility, as well as the management of environmental chambers for
product stability testing. This facility is leased on a month-to-month basis for
$875 per month.
PureSoft operates from space occupying 4,000 square feet in an office building
located at 167 Exeter Rd., Newfield, New Hampshire. This office serves primarily
as a sales and marketing location and facilitates our interface with several key
manufacturing suppliers. East and West facilities serve strategic objectives in
putting forth a national image, access to international shipping ports through
an East Coast distribution warehouse, and for sales opportunities emanating from
the federal government. The lease term expires December 31, 2004, with monthly
rent payments of approximately $5,400. We paid rent for eight months in advance
when the lease was entered into in January 2001, which gives PureSoft the last
two months rent free under the lease. PureSoft also rents approximately 10,000
square feet of product storage space in a public warehouse in Nashua, New
Hampshire for $4,000 per month. The lease on this facility runs through December
31, 2001.
Employees
As of December 31, 2000, we had 32 full-time employees in management, sales,
administrative and technical positions. A total of 11 of these employees were
employed by our subsidiary, PureSoft. Of the 32 full-time employees, 8 are in
management, 11 in sales and marketing, 4 in research and development and 9 in
administration and support. We also have 5 part-time employees. We consider
relations with our employees to be very good.
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None of our employees are covered by a collective bargaining agreement. We have
not experienced any business interruption as a result of any labor disputes.
Legal Proceedings
We are not involved in any legal proceedings.
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding our directors and
executive officers as of January 9, 2001.
Name Age Position
Randall L. Hales 33 President, CEO, Chairman of the Board
Bradley K. Andrews 45 Chief Operating Officer
John L. Theler 53 Chief Financial Officer
Douglas R. Warren 66 Director
Edward B. Walker, Ph.D. 46 Director
Peter J. Sundwall, Jr., M.D. (1) 34 Director
Gary L. Crittenden (2) 46 Director
Dan C. Jorgensen (2) 61 Director
E. Todd Heiner (1) 39 Director
Frank A. Cereska (2) 60 Director
Frank J. Wilich, Jr. 47 Director
Joe K. Johnson 42 Director
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Randall L. Hales was appointed as our Chairman in August 2000. Mr. Hales has
served as our Chief Executive Officer and as a member of the board since
November 1999. From May 1999 until November 1999, Mr. Hales served as our Vice
President of Sales and Marketing. Prior to joining us, Mr. Hales was managing
director of the glazed wall tile division of Daltile International in Dallas,
Texas from March 1995 until May 1999. From 1990 until 1995, Mr. Hales was
employed by David Weekley Homes, where he held various operations and management
positions, including general manager of operations. Mr. Hales holds a B.S.
degree in engineering from Brigham Young University.
Bradley K. Andrews has more than 20 years of professional management experience.
In September 1996, he founded the Ptarmigan Group, a healthcare consulting firm.
While at the Ptarmigan Group, he co-founded Patientcom, an internet medical
services company, and consulted for companies such as Aqualine Health Resources,
NeighborCare, Inc., and OakCare, Inc. In 1993, Mr. Andrews was one of the three
principal founders of Symphony Health Services, a wholly owned subsidiary of
Integrated Health Services. He served as the senior vice president of operations
and business development for Symphony. Mr. Andrews currently serves on the
advisory board for SurfPartner.com, an online website review service. Mr.
Andrews is a graduate of the University of Utah, where he earned a Bachelor of
Science degree. Mr. Andrews joined us in May 2000.
John L. Theler has been our Chief Financial Officer since July 2000. From
January 1997 to March 2000, Mr. Theler was the Chief Financial Officer of
Franklin Covey. From 1992 through 1996, Mr. Theler was employed by Rubbermaid,
initially as Vice President of the Home Products Division and then as Corporate
Controller. Mr.
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Theler held progressive financial management positions for General Electric from
1971 until 1992. He holds a bachelor's degree from Brigham Young University in
Business Management, and an MBA from Rensselaer Polytechnic Institute.
Douglas R. Warren joined the board in September 1998. From September 1998 until
November 1999, Mr. Warren was our President. Prior to that, he served as the
President of Linco from 1990 until its merger with us in September 1998. Before
joining Linco, Mr. Warren was the founder and owner of Warren's Restaurants in
Ogden, Utah and was engaged in real estate development in Park City, Utah.
Dr. Edward B. Walker joined the board in September 1998. He holds a B.S. degree
from Weber State University and a doctorate degree in chemistry from Texas Tech
University. After completing a post-doctoral fellowship in the Stanford
University Department of Biochemical Pharmacology, Dr. Walker returned to Weber
State University in 1981, where he is currently a professor of chemistry and
director of the Utah Center of Excellence for Chemical Technology. Dr. Walker
has received the Utah Governor's Medal for Science and Technology, Weber State
University's Master Teacher Award, and is a Cortez Professor in the Honors
Program at Weber State University. He has authored many scientific publications
and two university-level chemistry textbooks.
Dr. Peter J. Sundwall, Jr. joined the board in September 1998. He holds a degree
in Psychology and a master's degree in Educational Psychology and Doctor of
Medicine degree from the University of Utah. Dr. Sundwall completed his family
practice residency at St. Peters Hospital in Olympia, Washington, and entered
private practice in June 1997. He is currently an associate physician with the
American Fork Clinic, American Fork, Utah.
Gary L. Crittenden joined the board in March 2000. He is currently the Executive
Vice President and Chief Financial Officer of American Express. Prior to joining
American Express in June 2000, Mr. Crittenden was senior vice president and CFO
of Monsanto Chemical Company, executive vice president and chief financial
officer of Sears Roebuck and Company from 1996 through 1998, and senior vice
president and chief financial officer of Melville Corporation, Rye, New York
from 1994 to 1996. Mr. Crittenden has also served as a consultant to Bain &
Company in Boston, where he held senior management and marketing positions. Mr.
Crittenden serves on the board of directors for Ryerson-Tull and Wilson's The
Leather Expert. Mr. Crittenden earned a bachelor's degree from Brigham Young
University and an MBA degree from Harvard University.
Dan C. Jorgensen joined the board in March 2000. Since 1994, Mr. Jorgensen has
been president of Jorgensen Associates, a consulting firm specializing in
energy, financial services and investment projects in developing countries and
Russia. From 1986 to 1994, Mr. Jorgensen was a senior executive at AIG working
on debt recovery projects in third world nations and director of AIG business in
the former Soviet Union, where he founded the Russian American Investment Bank.
From 1965 to 1986, Mr. Jorgensen was a senior executive at Citicorp working in
corporate lending, foreign exchange, investment banking and risk management. He
founded Citicorp Insurance USA and Citicorp Insurance Bermuda. Mr. Jorgensen
serves on several boards including Conseco Bank (Utah), The Utah Symphony, Snow
College Foundation (Utah), and Foundation Jean Monnet pour l' Europe
(Switzerland). Mr. Jorgensen holds a bachelor's degree from Brigham Young
University and an MBA degree from Harvard University.
E. Todd Heiner joined the board in March 2000. He is Vice President, National
Sales and Operations, of Voicestream Wireless Corporation. As one of that
company's first 10 employees, Mr. Heiner has also held positions of director of
sales, managing director and executive director. A former employee of McCaw
Cellular, Mr. Heiner was instrumental in launching the first cellular services
in Utah and Idaho in 1986. He received a B.A.
in Communications from Utah State University in 1985.
Frank A. Cereska joined the board in March 2000. He is presently the president
of Canaan Enterprises, Inc., an operations management consulting group. He was
vice president and general manager of feminine care and adult incontinence care
products for Paragon Trade Brands, Inc., prior to his retirement from Paragon in
June 2000. He also previously worked as senior vice president of infant care
products manufacturing for Paragon. Before joining Paragon, Mr. Cereska held
senior management positions with Thiokol Corporation (Cordant Technologies) and
managed several manufacturing facilities for Kimberly-Clark Corporation. He
received a B.S. Degree from
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Western Michigan University in 1965 and a M.S. in Physical and Biological
Sciences from Syracuse University in 1969.
Frank J. Wilich, Jr. joined the board in November 2000. Mr. Wilich is one of the
original founders of our subsidiary, PureSoft, and currently works with PureSoft
as a consultant focusing on government relations and the food service industry.
Since 1996, Mr. Wilich has worked as a private investor with FW Associates,
where he founded three other companies: Incon Development, Inc., Continuum Care
Technologies, Inc., and Embrace Healthcare, Inc. Prior to 1996 Mr. Wilich served
as President and Treasurer of Polychem Corporation, a medical products company.
He also worked as Chief Executive Officer of Pharmco Products, Inc. and Director
of Marketing at American Hospital Supply (currently Allegiance Corporation). He
holds a B.A. Degree in English from Dartmouth College and an MBA from the
University of New Hampshire Whittemore School of Business and Economics.
Joe K. Johnson joined the board in January 2001, and is the nominee
representative of Aspen Capital under the second amendment agreement. He has
been the Manager of Aspen Capital since June 1999. Since 1996, Mr. Johnson has
engaged on his own behalf in private business investment activity. This activity
consists of investing in debt and equity securities of various public and
private companies. Mr. Johnson is also affiliated through Aspen Capital's
ownership with Flexpoint Sensor Systems, Inc., E-Automate Corporation, and The
Murdock Group Holding Corporation.
Board of Directors Committees and Other Information
All directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Board of Directors. There are no
family relationships among our directors or officers.
The board of directors currently has an Audit Committee and a Compensation
Committee. The Audit Committee oversees the actions taken by our independent
auditors and reviews our internal financial and accounting controls and
policies. The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for our officers and administers our
stock option plan.
Director Compensation
Members of the board of directors who are not also serving as executive officers
receive a fee of $500 per meeting for attendance or participation in regular
meetings of the board. We also reimburse their expenses incurred in connection
with that attendance or participation. In 1998, 1999 and 2000, new outside
directors were also granted options to purchase common stock when they joined
the board.
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Executive Compensation
Summary Compensation Table
The following table sets forth, for the three fiscal years ended December 31,
2000, the compensation paid to our Chief Executive Officer (the "named executive
officer"). No other executive officer serving at December 31, 2000 received
salary and bonus for all services in all capacities during the year then ended
in excess of $100,000.
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
--------------------
Annual Compensation
----------------------------------------------------------------- --------------------
Name
and Other Annual Securities
Principal Salary Bonus Compensation Underlying
Position Year ($)(1) ($) ($) Options (#)
------------------ ---------------- ------------------- --------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C>
Randall L. Hales 2000 $ 123,322 -- -- -
President, CEO 1999 $ 58,650 -- -- 500,000
1998 $ - -- -- -
</TABLE>
(1) This table does not include John L. Theler, who was hired in July
2000 as our Chief Financial Officer, or Bradley K. Andrews, who
became our Chief Operating Officer in August 2000. Each of Messrs.
Theler and Andrews were initially paid at an annual salary rate of
$110,000. Their annual salaries were increased to an annual rate of
$140,000 each, effective November 1, 2000.
Option Grants in the Last Fiscal Year
No options were granted to the named executive officer in the last fiscal year.
John L. Theler, our Chief Financial Officer and Bradley K. Andrews, our Chief
Operating Officer, were each granted 100,000 shares at an exercise price at
$3.00 per share after joining us in 2000. They were also each granted an
additional 150,000 shares on November 22, 2000, at an exercise price of $0.1875
per share. For each of these grants, options to purchase the first 40% of shares
vested at the date of grant; options to purchase the next 30% will vest on the
first anniversary of the date of grant; and options to purchase the final 30%
will vest on the second anniversary of the date of grant.
Aggregated Option Exercises in Last Fiscal Year and Year End Option Values
The following table sets forth information concerning the exercise of options to
acquire shares of our common stock by the named executive officer during the
fiscal year ended December 31, 2000, as well as the aggregate number and value
of unexercised options held by the named executive officer on December 31, 2000.
No options indicated were in the money at December 31, 2000.
<TABLE>
<CAPTION>
Underlying Value of unexercised
unexercised options In-the-money options
at December 31, at
Shares Acquired 2000 (#) December 31, 2000 ($)
on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
------------------- --------------------- --------------------------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Randall L. Hales None N/A 350,000/150,000 $0/$0
</TABLE>
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<PAGE>
PRINCIPAL SECURITY HOLDERS
The following table sets forth certain information known to us with respect to
the beneficial ownership of our common stock as of December 31, 2000, for: (i)
each entity, group or person that is known by us to beneficially own 5% or more
of our outstanding common stock, (ii) each of our directors, (iii) each of our
executive officers, and (iv) our directors and executive officers as a group. To
the best of our knowledge, each shareholder identified below has voting and
investment power with respect to all shares of common stock shown, unless
community property laws or footnotes to this table are applicable. Unless
otherwise indicated, the address of the shareholder is c/o our principal
executive offices, 1877 West 2800 South, Suite 200, Ogden, Utah 84401.
<TABLE>
<CAPTION>
Amount and
Nature of Percent of
Beneficial Common Stock
Name and Address of Beneficial Owner Ownership(1) Outstanding
<S> <C> <C>
Darrell J. Saunders
998 Fifth Street
Ogden, Utah 84401 2,181,450 9.5%
Charles L. Crittenden (2)
2334 Filmore
Ogden, Utah 84401 1,991,452 8.6%
Aspen Capital Resources, LLC (3)
8989 S. Schofield Cir.
Sandy, Utah 84093 19,534,212 45.9%
Joe K. Johnson (4)
Director 19,534,212 45.9%
Edward B. Walker(5)
Director 5,323,670 23.1%
Douglas R. Warren(6)
Director 1,369,785 5.9%
E. Todd Heiner (7)
Director 965,000 4.1%
Randall L. Hales(8)
Chief Executive Officer, Chairman 350,000 1.5%
Peter Sundwall(9)
Director 63,333 *
Bradley K. Andrews (8) 100,000 *
Chief Operating Officer
John L. Theler (8)
Chief Financial Officer 100,000 *
Frank J. Wilich, Jr. (8) 29,175 *
Gary Crittenden(8)
Director 24,500 *
Dan C. Jorgensen(8)
Director 24,500 *
Frank Cereska (8)
Director 15,000 *
All directors and executive officers as a group (12 persons)(10) 27,899,175 63.7%
</TABLE>
* Less than one percent.
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<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options, warrants, or other
convertible instruments held by that person that are exercisable or
convertible within 60 days of December 31, 2000, are deemed outstanding.
Such shares, however, are not deemed outstanding for purposes of computing
the ownership of any other person.
(2) Charles Crittenden, a former director, is the father of Gary Crittenden,
and disclaims beneficial ownership of any shares of our common stock held
by Gary Crittenden.
(3) Consists of 4,800 shares of common stock held by Aspen Capital; and
19,529,412 shares of common stock issuable upon conversion of 3,652 shares
of Series B preferred stock, assuming immediate conversion at a price of
$0.187. The number reflected in the table does not take into account a
contractual limitation against Aspen Capital's owning more than 42% except
in certain circumstances described more fully in "Description of
Securities."
(4) All shares owned of record by Aspen Capital, of which Mr. Johnson is the
manager and principal owner. Excludes certain shares pledged to Mr.
Johnson and/or Aspen Capital by a third party as collateral for a loan and
which may be acquired under the terms of the applicable pledge agreement.
(5) Includes 2,620,000 shares held by Cbar E LC, a limited liability company
of which Dr. Walker is a managing partner; 2,463,670 shares held jointly
by Dr. Walker and his wife; 100,000 shares held by a trust of which Dr.
Walker is the administrator; 100,000 shares held by a second trust of
which Dr. Walker is the administrator; and 40,000 shares held by Edward
Brian Walker, Dr. Walker's son, who lives at the same residence as Dr.
Walker. Dr. Walker disclaims beneficial ownership of the shares held by
the limited liability company, the two trusts, and his son.
(6) Consists of 1,179,785 shares of common stock and 190,000 shares of common
stock issuable upon exercise of stock options which are exercisable
currently or within 60 days of December 31, 2000.
(7) Consisting of 633,333 shares of common stock, 15,000 shares of common
stock issuable upon exercise of stock options which are exercisable
currently or within 60 days of December 31, 2000, and 316,667 shares of
common stock issuable upon the exercise of warrants which are exercisable
currently or within 60 days of December 31, 2000.
(8) Consisting of shares of common stock issuable upon exercise of stock
options which are exercisable currently or within 60 days of December 31,
2000.
(9) Consisting of 13,333 shares of common stock and options to purchase 50,000
shares of common stock exercisable within 60 days of December 31, 2000.
(10) Based on a total of 23,045,436 shares issued and outstanding,
together with shares issuable upon the exercise of options, warrants
or conversion rights held by the members of the group exercisable or
becoming exercisable within 60 days. Duplicate entries eliminated.
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<PAGE>
CERTAIN TRANSACTIONS
In September 1998, we entered into a private consulting agreement with Jerral R.
Pulley, now a former director, to consult on marketing and market development.
The agreement originally was for $10,000 per month, and had a one-year initial
term, renewable for additional one-year terms. On August 1, 2000, the
compensation under Mr. Pulley's agreement was reduced to $7,500 per month. In
October 2000, Mr. Pulley joined us as a full-time employee and his private
consulting agreement was terminated.
In September 1998, we entered into an agreement with Pharmulations, LLC, an
entity owned and controlled by Dr. Edward B. Walker, a director of the Company,
to consult on product research and development for a period of three years.
Under this agreement, Dr. Walker was to be paid $7,000 per month for the first
year, $8,000 per month for the second year, and $9,000 per month for the third
year of the agreement, with the changes occurring in October of each successive
years. An amended consulting agreement and a master development agreement were
entered into on January 4, 2001. Under these agreements, Pharmulations is paid
$9,000 per month, with annual increases of $1,000 per month in October of each
year the agreements continue in effect. We may also pay cash or stock bonuses
based on the value of Pharmulations' services as determined in our discretion.
We may terminate the consulting agreement for cause or in the event that Dr.
Walker becomes permanently disabled, dies, or otherwise ceases to provide
personal services or to own less than 66% of the equity of Pharmulations. In the
event of disability, the consulting fee would continue to be paid for a period
of 12 months from the date of termination of the consulting agreement. The
consulting agreement, as amended, also contains covenants against competition
and covenants of confidentiality and nondisclosure binding Pharmulations and its
affiliates, including Dr. Walker.
In November 1999, we entered into an agreement with our former Chief Executive
Officer, Douglas R. Warren, for general business consulting. Under this
agreement, Mr. Warren was to be paid $5,000 per month, and the agreement was for
a period of two years, subject to an early termination of six months following
the commencement of public trading of our common stock. Accordingly, Mr.
Warren's agreement may be terminated on April 26, 2001.
On May 16, 2000, we signed the purchase agreement with the selling stockholder,
Aspen Capital, an entity controlled by Joe K. Johnson, a member of our board of
directors since January 8, 2001. Under the purchase agreement, the selling
stockholder purchased 4,000 shares of Series A preferred stock and warrants for
net proceeds to us of $3,600,000. The selling stockholder subsequently converted
348 shares of Series A preferred stock into 2,000,000 shares of common stock,
which it then sold into the market at an average price of approximately $0.37
per share.
On November 13, 2000, we entered into the amendment agreement with the selling
stockholder to amend the terms of the purchase agreement. We entered into the
second amendment agreement as of December 29, 2000 with the selling stockholder,
which modified the terms of the purchase agreement and the amendment agreement.
Under the second amendment agreement, we agreed to adopt a certificate of
designation for a new series of preferred stock, the Series B preferred stock.
The selling stockholder exchanged all of the remaining shares of Series A
preferred stock for an equal number of Series B preferred stock. The terms of
the Series B preferred stock are described in more detail in the section
"Description of Securities."
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of common stock,
$0.001 par value per share, and 1,000,000 shares of preferred stock, $.001 par
value per share. We have created two classes of preferred stock: the Series
2000-A Convertible preferred stock and the Series 2000-B Convertible preferred
stock. As of December 31, 2000, there were no outstanding shares of Series A
preferred stock and there were 3,652 shares of Series B preferred stock
outstanding.
Common Stock. The holders of common stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders. The holders
of common stock are entitled to receive such dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion from
legally available funds. Upon
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<PAGE>
liquidation or dissolution the holders of common stock are entitled to receive,
pro rata, assets remaining available for distribution to stockholders. The
common stock has no cumulative voting, preemptive or subscription rights and is
not subject to any future calls. There are no conversion or redemption rights
applicable to the shares of common stock. All the outstanding shares of common
stock are fully paid and non-assessable. Our transfer agent is Colonial Stock
Transfer Co, 544 East 400 South, Suite 100, Salt Lake City, Utah 84111.
Preferred Stock. The Board of Directors is authorized without further action by
the stockholders, to issue, from time to time, up to a total of 1,000,000 shares
of preferred stock in one or more classes or series, and to fix or alter the
designations, power and preferences and relative participation, option or other
rights, if any, and qualifications, limitations or restrictions thereof,
including, without limitation, dividend rights (and whether dividends are
cumulative), conversion rights, if any, voting rights (including the number of
votes, if any, per share), redemption rights (including sinking fund provisions,
if any), and liquidation preferences of any unissued shares or wholly unissued
series of preferred stock, and the number of shares constituting any such class
or series and its designation and to increase or decrease the number of such
class or series subsequent to the issuance of shares of such class or series,
but not below the number of shares of such class or series then outstanding. The
issuance of any series of preferred stock under certain circumstances could have
the effect of delaying, deferring or preventing a change in control and could
adversely affect the rights of the holders of the common stock.
Series B Preferred Stock. The Board of Directors has authorized the issuance of
a total of 4,000 shares of Series B preferred stock. The rights and preferences
of the Series B preferred stock include the following:
Conversion - The selling stockholder has the right, but not the obligation to
convert the stated value and any accrued and unpaid dividends thereon into
shares of our common stock by dividing the stated value of such shares to be
converted together with any accrued but unpaid dividends thereon by the
conversion price, which is 80% of the average of the three lowest closing bid
prices for the common stock quoted on the Nasdaq Stock Market System or reported
on the NASD Electronic Bulletin Board during the 15 trading days preceding the
conversion date, subject to a maximum conversion price of $1.20 per share. The
conversion rate is limited to 42% of the fully diluted capital stock during the
period April 3, 2001 through December 31, 2001, if there has not been an event
of noncompliance. In addition, the holder of the Series B preferred stock has
agreed that prior to April 3, 2001, it will not (1) offer or sell any shares of
our common stock or enter into any swap or other similar arrangement at prices
less than $0.25 per share, or (2) convert any shares of Series B preferred
stock. Additionally, the selling stockholder agreed to surrender all of the
warrant certificates received in connection with the purchase agreement for
cancellation, provided that (1) all of the terms of the second amendment
agreement have been met; (2) we have redeemed all of the Series B preferred
stock as provided in the certificate of designation for such series, and (iii)
no event of noncompliance has occurred.
On or after April 3, 2001, the selling stockholder may convert the stated value
of all of the issued and unconverted shares of Series B preferred stock,
together with all accrued and unpaid dividends thereon and cash in an amount,
which when added to the stated value and unpaid dividends equals $3,652,000,
into that number of shares of our common stock which equals 42% of our fully
diluted capital stock after adjustment. The term "fully diluted capital stock
after adjustment" is defined in the certificate of designation as the sum of (x)
all issued and outstanding shares of common stock, (y) those shares of common
stock to be issued upon conversion of the Series B preferred stock on the
applicable conversion date, and (z) all shares of common stock issuable upon the
conversion of convertible securities, excluding the Series B preferred stock,
and the exercise of common stock purchase options and warrants having a
conversion price or an exercise price less than $0.75 per share. This conversion
right may be exercised any time from April 3, 2001 through and including
December 31, 2001. However, upon an event of noncompliance, all of the Series B
preferred stock becomes immediately convertible notwithstanding any timing or
other restrictions.
Adjustment of the Conversion Price - If, after April 3, 2001, we issue or sell
any shares of common stock or grant any rights or options to purchase common
stock or any stock or other securities convertible into or exchangeable for
common stock or issue or sell any convertible securities, and the value per
share for such common stock issuable is less than the fair market value per
share, the conversion price of the preferred stock is reduced according to a
formula defined in the certificate of designation.
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<PAGE>
Dividends - The selling stockholder is entitled to receive cumulative dividends
equal to 8% per year and payable quarterly. However, if there is an event of
noncompliance, the selling stockholder is entitled to receive cumulative
dividends equal to 21% per year. The selling stockholder at its option may elect
to receive payment of dividends in cash or in shares of our common stock at the
conversion price. If the selling stockholder chooses to receive payment of
dividends in the form of shares of common stock, the selling stockholder is
required to give written notice of such election to us at least five business
days before the last business day of the quarter.
Optional Redemption - We have the right to redeem all of the outstanding shares
of Series B preferred stock by paying to the selling stockholder the sum of
$6,500,000 (the "optional redemption price"). We must exercise this right before
the close of business on April 2, 2001. We may not redeem any Series B preferred
stock unless all dividends accrued on the outstanding Series B preferred stock
through December 31, 2000 have been paid in full. Dividends for the period
January 1, 2001 through the date of the optional redemption will be deemed
included in the optional redemption price. We may not redeem any share of Series
B preferred stock that has been converted or for which a notice of conversion
has been delivered prior to the date notice of optional redemption is given by
us to the holder of the Series B preferred stock.
Mandatory Redemption - The selling stockholder may require us to redeem all of
the outstanding shares of Series B preferred stock at a price equal to 125% of
the stated value per share, plus accrued and unpaid dividends and penalties (the
"mandatory redemption price") if an event of noncompliance occurs. The selling
stockholder may not exercise its mandatory redemption right prior to April 3,
2001, unless Randall L. Hales ceases to be employed by us full time, or
Pharmulations, LLC (specifically Edward Walker) ceases to act as our consultant.
If we exercise the optional redemption right, or the selling stockholder
exercises its mandatory redemption right, and we fail to pay the optional
redemption price or the mandatory redemption price, respectively, dividends will
accrue on the outstanding Series B preferred stock from the date the payment was
to have been made at a default rate of 21% per annum, and the conversion price
for any subsequent conversion of Series B preferred stock will be reduced by
$0.50 per share.
Under the certificate of designation, an event of noncompliance occurs if (1) we
fail to pay on any dividend payment date the full amount of dividends then
accrued, (2) we fail to make any redemption payment which we are required to
make, (3) we breach or otherwise fail to perform or observe any material
provision of the purchase agreement and such failure is not cured within 15 days
after the occurrence thereof, (4) any representation or warranty contained in
the purchase agreement or required to be furnished to any holder is false or
misleading in any material respect, (5) we make an assignment for the benefit of
creditors or admit in writing the inability to pay our debts generally as they
become due, or an order, judgment or decree is entered adjudicating us bankrupt
or insolvent, (6) any material provision of the purchase agreement shall at any
time for any reason be declared to be null and void, (7) (A) any registration
statement required to be filed by us and declared effective by the Securities
and Exchange Commission pursuant to the purchase agreement shall not become
effective as provided in the purchase agreement or shall cease to be effective
prior to the sale of all shares registered thereunder, (B) the Securities and
Exchange Commission shall issue any stop order suspending the effectiveness
under the Securities Act of any registration statement required to be filed by
us and declared effective by the Securities and Exchange Commission pursuant to
the purchase agreement or any state securities commission suspends the
qualification of the securities covered thereby for offering for sale in any
jurisdiction, (C) any proceeding for purposes of either (A) or (B) above is
initiated, or (D) the common stock is suspended from trading on or the price for
the common stock is not quoted or reported on the Nasdaq Stock Market System or
the NASD Electronic Bulletin Board, (8) we at any time do not have the required
number of reserved and available authorized but unissued shares of common stock,
or (9) there is any material adverse change in our business, condition
(financial or otherwise), prospects, or results of operations taken as a whole.
Voting Rights - Each share of Series B preferred stock issued and outstanding
has the number of votes equal to the number of shares of common stock into which
the share of Series B preferred stock is convertible.
Reserved Shares - We are required to reserve shares of our common stock, solely
for the purpose of issuance upon the conversion of all outstanding Series B
preferred stock.
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<PAGE>
Registration Rights - At the time the Series B preferred stock was issued in
exchange for the outstanding shares of Series A preferred stock, we agreed to
register the shares of common stock issuable upon conversion of the Series B
preferred stock as required by the purchase agreement, as amended. We filed the
registration statement of which this prospectus is a part to satisfy those
registration rights. If this or any other registration statement filed by us in
connection with the purchase agreement or any amendment agreement ceases to
remain effective as provided in the purchase agreement, we are required to issue
to the selling stockholder on such date and on every date which is 30 days or a
multiple thereof after such date, until such registrations or qualifications
shall become effective, additional shares of common stock equal in number to 5%
of the total number of shares of common stock issued or issuable upon conversion
of all issued and outstanding Series B preferred shares and to cause the resale
of all such additional shares to be included in the registrations or
qualifications.
Warrants. The warrants were issued in connection with a private placement of our
Series A preferred stock. Each warrant entitles the holder to purchase one share
of common stock at an exercise price of $2.25 per share. As of December 29,
2000, 2,000,000 warrants had been issued. The holder of the warrants will not
possess any right as a shareholder unless or until it exercises the warrants.
The warrants are exercisable from November 16, 2001, or earlier upon the
occurrence of an event of default or a change in control. Warrants are
exercisable through May 16, 2004, provided that at the time of exercise a
current prospectus relating to the common stock is then in effect and the common
stock is qualified for sale or exempt from qualification under applicable state
securities laws. The warrants are not subject to early redemption by us.
However, under the terms of the second amendment agreement, the selling
stockholder has agreed to surrender all of the warrants received in connection
with the purchase agreement for cancellation, provided that (i) all of the terms
of the second amendment agreement have been met; (ii) we have redeemed all of
the Series B preferred stock as provided in the certificate of designation for
such series, and (iii) no event of noncompliance has occurred.
The warrants may be exercised upon surrender of the certificate(s) therefor on
or prior to the expiration or the redemption date at the offices of Colonial
Stock Transfer Company, 544 E. 400 S. Suite 100, Salt Lake City, Utah 84111, our
warrant agent (the "Warrant Agent") with the subscription form on the reverse
side of the certificate(s) completed and executed as indicated, accomplished by
payment (in the form of a certified or cashier's check payable to "First
Scientific, Inc.") of the full exercise price for the number of warrants being
exercised.
The purchase agreement provides that the warrant holder may exercise by paying
for the underlying shares of common stock in cash or by means of a cashless
exercise, whereby, if applicable, the requisite number of shares of common stock
to be issued on such exercise would be reduced as if they had been sold and the
excess proceeds applied to cover the exercise price of the remaining shares of
common stock.
The warrants contain provisions that protect the holders thereof against
dissolution by adjustment of the exercise price per share and the number of
shares issuable upon exercise thereof upon the occurrence of certain events
including issuances of common stock (or options or securities convertible,
exchangeable or exercisable into common stock) at less than market value, stock
dividends, stock splits, mergers, sale of substantially all of our assets, and
for other extraordinary events; provided, however, that no such adjustment shall
be made upon, among other things (i) the issuance or exercise of options or
other securities under employee benefit plans (ii) the sale or exercise of
outstanding warrants, or (iii) the conversion of shares of our preferred stock
to common stock.
SELLING STOCKHOLDER
The shares being offered by Aspen Capital consist of shares of our common stock
that may be issued by us from time to time pursuant to conversions of the Series
B preferred stock. For additional information about the conversion feature of
the preferred stock, see "Financing Arrangement with Aspen Capital Resources,
LLC" and "Description of Securities." The address of the selling stockholder is
8989 S. Schofield Circle, Sandy, Utah 84093.
The following table provides information about the actual and potential
ownership of shares of our common stock by the selling stockholder upon actual
or hypothetical conversions of the Series A preferred stock and the Series B
preferred stock and the related warrants as of December 31, 2000, and the number
of such shares that may be resold
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under this prospectus. The number of shares of common stock issuable upon
conversion of the Series B preferred stock will vary according to the market
price at and immediately preceding the conversion date. Solely for purposes of
estimating the number of shares of common stock that would be issuable to the
selling stockholder as set forth in the table below, we and the selling
stockholder have assumed a hypothetical conversion of all of the outstanding
Series B preferred stock owned by the selling stockholder as of December 31,
2000, on which date the conversion price would have been $0.187 per share. The
actual conversion price and the number of shares issuable upon such conversion
could differ substantially and for purposes of the following table we have not
taken into consideration the 42% limitation in effect for conversion on or after
April 3, 2001, but on or before December 31, 2001. The following information is
not determinative of the selling stockholder's beneficial ownership of our
common stock pursuant to Rule 13d-3 or any other provision under the Securities
Exchange Act of 1934.
<TABLE>
<CAPTION>
Shares Beneficially Owned Number of Shares Shares Beneficially Owned
Stockholder Prior to Offering Being Offered After Offering(1)
Number Percent(2) Number Percent
-------------------------------- -------------- ------------ ------------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Aspen Capital Resources, LLC 21,534,212 (3) 48.3% 19,529,412 (4) (5) (5)
</TABLE>
(1) Assuming the sale by the selling stockholder of all of its shares of
common stock offered hereunder. There can be no assurance that any of the
shares of common stock offered hereby will be sold.
(2) The percentages set forth above have been computed assuming the number of
shares outstanding equals the sum of (a) 23,045,436, which is the number
of shares of common stock actually outstanding on December 31, 2000, and
(b) shares of common stock issuable upon conversion of the preferred stock
and the exercise of the warrants, without giving effect to the 42% maximum
conversion for the period April 3, 2001 through December 31, 2001.
(3) Includes 4,800 shares of common stock owned by the selling stockholder; up
to 19,529,412 shares of common stock representing the shares issuable by
us upon the conversion of the Series B preferred stock, assuming a
hypothetical conversion of all of the outstanding shares of Series B
preferred stock on December 31, 2000, and up to 2,000,000 shares of common
stock issuable upon exercise of the warrants, assuming a hypothetical
exercise of all 2,000,000 warrants. The actual number of shares of common
stock that will be issued to the selling stockholder in the event of
conversion pursuant to the purchase agreement will vary, and may vary
materially from the totals set forth.
(4) Includes up to 19,529,412 shares of common stock representing the shares
issuable by us upon the conversion of the Series B preferred stock,
assuming a hypothetical conversion of all of the outstanding shares of
Series B preferred stock as December 31, 2000. The actual number of shares
of common stock that will be issued to the selling stockholder in the
event of conversion pursuant to the purchase agreement will vary, and may
vary materially from the totals set forth.
(5) There can be no assurance that any of the shares of common stock will be
issued to the selling stockholder pursuant to the purchase agreement and
therefore that any of the shares offered hereby will be sold by the
selling stockholder.
PLAN OF DISTRIBUTION
To the extent required under the Securities Act, a supplemental prospectus will
be filed, disclosing (a) the name of any broker-dealers; (b) the number of
shares of common stock involved; (c) the price at which the common stock is to
be sold; (d) the commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable; (e) that such broker-dealers did not conduct
any investigation to verify the information set out or incorporated by reference
in this prospectus, as supplemented; and (f) other facts material to the
transaction.
We and the selling stockholder will be subject to applicable provisions of the
Exchange Act and the rules and regulations under it, including, without
limitation, Rule 10b-5 and, insofar as the selling stockholder is a distribution
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participant and we, under certain circumstances, may be a distribution
participant, Regulation M. All of the foregoing may affect the marketability of
the common stock.
We have been advised by Aspen Capital that it may sell the common stock from
time to time in transactions in the over-the-counter market on the NASD
Electronic Bulletin Board (or any exchange where the common stock is then
listed), in negotiated transactions, or otherwise, or by a combination of these
methods, at fixed prices which may be changed, at market prices at the time of
sale, at prices related to market prices or at negotiated prices. Aspen Capital
may effect these transactions by selling the common stock to or through
broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from Aspen Capital or the purchasers of the common
stock for whom the broker-dealer may act as an agent or to whom it may sell the
common stock as a principal, or both. The compensation to a particular
broker-dealer may be in excess of customary commissions.
Aspen Capital is an "underwriter" within the meaning of the Securities Act in
connection with the sale of the common stock offered hereby. Assuming that we
are in compliance with the conditions of the common stock purchase agreement,
Aspen Capital must accept puts of shares from us, subject to maximum aggregate
dollar amounts, during the term of the agreement. Broker-dealers who act in
connection with the sale of the common stock may also be deemed to be
underwriters. Profits on any resale of the common stock as a principal by such
broker-dealers and any commissions received by such broker-dealers may be deemed
to be underwriting discounts and commissions under the Securities Act. Any
broker-dealer participating in such transactions as agent may receive
commissions from Aspen Capital (and, if they act as agent for the purchaser of
our common stock, from such purchaser). Broker-dealers may agree with Aspen
Capital to sell a specified number of shares of our common stock at a stipulated
price per share, and, to the extent such a broker-dealer is unable to do so
acting as agent for Aspen Capital, to purchase as principal any unsold common
stock at the price required to fulfill the broker-dealer commitment to Aspen
Capital. Broker-dealers who acquire common stock as principal may thereafter
resell the common stock from time to time in transactions (which may involve
crosses and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such common stock
commissions computed as described above. The price at which the common shares
will be issued by us to Aspen Capital may fluctuate. See "Financing Arrangement
with Aspen Capital Resources, LLC."
The common stock offered hereby is being registered pursuant to our contractual
obligations, and we have agreed to pay the costs of registering the shares
hereunder.
LEGAL MATTERS
Durham Jones & Pinegar, Salt Lake City will pass upon certain legal matters with
respect to the shares of the common stock offered hereby.
EXPERTS
Hansen, Barnett & Maxwell, LLP, independent auditors, have audited, as set forth
in their report thereon appearing elsewhere herein, our financial statements as
of December 31, 1999 and 1998, and for the years then ended, that appear in this
prospectus. The financial statements referred to above are included in reliance
upon the reports by the auditors given upon their authority as experts in
accounting and auditing.
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<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Subsequent to the year ended December 31, 1999, on August 1, 2000, we appointed
Arthur Andersen LLP to replace Hansen Barnett & Maxwell as our independent
auditors for the fiscal year ended December 31, 2000.
The report of Hansen Barnett & Maxwell on our consolidated financial statements
for the year ended December 31, 1999 contained no adverse opinion or disclaimer
of opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principle.
The decision to engage Arthur Andersen as our independent auditors was approved
by our board of directors, and later approved by our shareholders at the Annual
Meeting of Shareholders held in 2000.
In connection with the audit for the year ended December 31, 1999, and through
August 1, 2000, we have had no disagreements with Hansen Barnett & Maxwell on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Hansen Barnett & Maxwell would have caused it to make
reference thereto in its report on the consolidated financial statements for
such year.
Through January 9, 2001, there have been no reportable events (as defined in
Item 304(a)(1)(v) of Regulation S- B).
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our certificate of incorporation provides that to the fullest extent permitted
by Delaware law, our directors shall not be liable for certain acts or breaches
of duty. The certificate of incorporation also contains provisions entitling the
officers and directors to indemnification to the fullest extent permitted by the
Delaware General Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers, and controlling persons under these
provisions of our certificate of incorporation and bylaws, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act with respect to the shares to be sold in this offering. This
prospectus does not contain all the information contained in the registration
statement. For further information with respect to us and the shares to be sold
in this offering, reference is made to the registration statement and the
exhibits and schedules filed with the registration statement. We have described
all material information for each contract, agreement or other document filed
with the registration statement in this prospectus. However, statements
contained in this prospectus as to the contents of any contract, agreement or
other document referred to are not necessarily complete. As a result, you should
refer to the copy of the contract, agreement or other document filed as an
exhibit to the registration statement for a complete description of the matter
involved.
You may read and copy all or any portion of the registration statement or any
reports, statements or other information that we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our SEC filings, including this
registration statement, are also available to you without charge from the SEC
Web site, which is located at http://www.sec.gov.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets - December 31, 1999 and 1998 F-2
Consolidated Statements of Operations for the Years Ended December 31,
1999 and 1998 and for the Cumulative Period from April 30,
1990 (Date of Inception) through
December 31, 1999 F-3
Consolidated Statements of Stockholders' Equity for the Cumulative
Period from April 30, 1990 (Date of Inception) through
December 31, 1997 and for the Years Ended December
31, 1998 and 1999 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999 and 1998, and for the Cumulative period from April 30,
1990 (Date of Inception) through December
31, 1999 F-6
Notes to Consolidated Financial Statements F-7
Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2000
and December 31, 1999 Q-1
Condensed Consolidated Statements of Operations and Comprehensive
Loss (Unaudited) for the Three and Nine Months Ended
September 30, 2000 and 1999 and for the Cumulative Period
from April 30, 1990
(Date of Inception) through September 30, 2000 Q-2
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 30, 2000 and 1999 and for the
Cumulative Period from April 30, 1990 (Date of Inception)
through September 30, 2000 Q-3
Notes to Condensed Consolidated Financial Statements (Unaudited) Q-4
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended December 31, 1999 PF-2
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Nine
Months Ended September 30, 2000 PF-3
Notes to Unaudited Pro Forma Condensed Consolidated Statements
of Operations PF-4
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any 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 (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he 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, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect to any claim
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
such action, suit or proceeding referred to in subsections (a) and (b) of
Section 145 or in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith; that the indemnification provided for
by Section 145 shall not be deemed exclusive of any other rights which the
indemnified party may be entitled; that indemnification provided by Section 145
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of such person's heirs, executors and administrators; and
empowers the corporation to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law or the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of the
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (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.
Article Seventh of our Certificate of Incorporation, as amended, provides
that "[a] director of the corporation shall not be personally liable for
monetary damages to the corporation or its stockholders for breach of any
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders; (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 derives an
improper personal benefit.
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ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered
hereby, all of which will be borne by the Company. All amounts shown are
estimates except the Securities and Exchange Commission registration fee.
Filing Fee - Securities and Exchange Commission $ 1,548.75
Legal fees and expenses of the Company 75,000.00
Accounting fees and expenses 45,000.00
Blue Sky fees and expenses 5,000.00
Printing expenses 2,500.00
Miscellaneous expenses $ 10,000.00
------------
Total Expenses $139,048.75
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Year Ended December 31, 2000
On May 16, 2000, the registrant entered into a private placement purchase
agreement with Aspen Capital Resources, LLC for the purchase of up to 4,000
shares of Series 2000-A Convertible preferred stock for net proceeds of
$3,600,000. The registrant also granted Aspen Capital warrants to purchase up to
2,000,000 shares of common stock in connection with the purchase agreement.
On December 29, 2000, the registrant entered into a subsequent agreement with
Aspen Capital pursuant to which Aspen Capital agreed to exchange each share of
its unconverted Series A preferred stock for one share of Series 2000-B
Convertible Preferred Stock.
The sale of the Series A Preferred Stock and the warrants and the exchange of
shares of Series A Preferred Stock for Series B Preferred Stock were undertaken
pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as
amended.
During the nine months ended September 30, 2000, the registrant sold 825,666
shares of common stock to accredited investors for $2,477,000 in cash, or $3.00
per share. These transactions were part of a private placement of common stock
to accredited investors pursuant to Rule 506 of Regulation D under the
Securities Act.
In each of these transactions between March and September 2000, the offer and
sale of the shares of common stock issued in connection with the private
placement were not registered under the Securities Act or under any state
securities "blue sky" laws in reliance upon exemptions from the registration
provisions of the Securities Act and those laws for transactions involving
non-public offers and sales of restricted securities to accredited investors.
All shares sold in these transactions are restricted securities and their resale
is subject to restrictions and limitations under applicable law. Certificates
evidencing the shares sold to these investors were marked with a restrictive
legend and each holder was required to execute a representation and warranty to
the effect that the shares were acquired for investment purposes and not with a
view to distribution or resale of the securities.
Year Ended December 31, 1999
On November 8, 1999, the registrant issued 40,000 shares of common stock to
Kinara Graphics, Inc. as compensation for creative services in developing and
presenting promotional and other materials regarding the registrant and its
products. The shares were valued at $70,000 or $1.75 per share, which the
parties agreed for purposes of the issuance was the fair market value of the
shares and the services for which they were issued. The shares were issued
without registration under the Securities Act in reliance upon the exemptions
from registration in Section 4(2) of the Act and Rule 506 of Regulation D
promulgated thereunder. Based on information provided by
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<PAGE>
the investor, the registrant has reason to believe that Kinara Graphics, Inc.,
through its representatives, is a sophisticated investor and possesses such
knowledge and experience in business and financial matters as to be able to
evaluate the merits and risks of an investment in the common stock.
On November 8, 1999, the registrant issued 10,000 shares of common stock to
Weldon and Maureen Phillips as compensation for marketing services performed for
the registrant during 1997 and 1998. The shares and the services were valued at
$10,000, which the parties agreed for purposes of the agreement was the fair
market value of the shares at the date the agreement was reached to accept
shares in lieu of cash. The shares were issued without registration in reliance
upon Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder. Based on information provided by the investor, the registrant has
reason to believe that Mr. and Mrs. Phillips, alone or with their
representatives and advisers, are sophisticated investors and possess such
knowledge and experience in business and financial matters as to be able to
evaluate the risks and merits of an investment in the common stock.
Year Ended December 31, 1998
During the year ended December 31, 1998, the registrant issued 8,798,080 shares
of its common stock in exchange for all of the issued and outstanding common
stock of Linco to 3 accredited and 7 non-accredited Linco shareholders in
reliance upon the exemptions from registration contained in Section 4(2) of the
Securities Act. Simultaneously, the registrant issued 5,201,920 shares of common
stock to Dr. Edward Walker, an officer and director of the registrant, in
reliance on Section 4(6) of the Securities Act in consideration for the
cancellation of a royalty agreement and for rights to technology relating to an
instant chemical skin sanitizer formulation.
The registrant also issued a total of 2,666,659 shares of common stock in a
private offering to 30 accredited and 8 non-accredited investors for $0.75 per
share. The purchase price was paid in cash or marketable securities or a
combination of cash and securities. In this offering the registrant relied upon
the exemptions from registration under Section 4(2) of the Securities Act. All
investors received a private placement memorandum that included disclosure about
the registrant, its financial results, its financial condition and business and
the risks of the investment. Investors also signed a subscription agreement that
included representations and warranties regarding the investor's intent and
status, including, among other things, representations that the investor was
acquiring the shares for its own account and not for resale, and that the
investor was experienced in financial matters and could bear the economic risk
of an investment in the common stock.
ITEM 27. EXHIBITS
Exhibit
Number Description
2.1 Agreement and Plan of Reorganization, dated August 10, 1998,
between the Registrant, Linco, Linco Acquisition Corp. and Edward
Walker(1)
2.2 Purchase Agreement dated as of March 15, 2000 among the
Registrant and David Wilich, Frank Wilich, Jr., Gene Dubois and
PureSoft Solutions, LLC, a New Hampshire limited liability
company. (7)
3.1 Articles of Incorporation(2)
3.2 Bylaws(2)
3.3 Amendment to Articles of Incorporation changing name to First
Scientific, Inc. and effecting a forward stock split.(1)
4.1 Certificate of Designation creating Series 2000-A Convertible
Preferred Stock (8)
4.2 Warrant Certificate for Series 2000-A Warrants (8)
4.3 Certificate of Designation creating Series 2000-B Convertible
Preferred Stock (9)
5 Opinion of Durham Jones & Pinegar, P.C.(11)
10.1 Non-qualified Stock Option Agreement with Jerral R. Pulley(3)
10.2 Non-qualified Stock Option Agreement with Peter Sundwall, M.D.(3)
10.3 1998 Stock Incentive Plan(4)
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10.4 Agreement with Weldon Phillips(5)
10.5 Employment Agreement with Randy Hales(5)
10.6 Consulting Agreement with Jerral R. Pulley(5)
10.7 Consulting Agreement with Pharmulations LLC (5)
10.8 Exclusive License and Supply Agreement with Convatec
(Confidential Testament Requested for Certain Portions) (6)
10.9 Employment Agreement with David Wilich (7)
10.10 Stock Options Agreement with David Wilich, Frank Wilich and Gene
Dubois.(6)
10.11 Purchase Agreement dated as of May 16, 2000 between the
Registrant and Aspen Capital Resources, LLC, a Utah limited
liability company(8)
10.12 Amendment Agreements dated November 13, 2000, between the
Registrant and Aspen Capital Resources, LLC (9)
10.13 Agreement dated as of December 29, 2000, between the Registrant
and Aspen Capital Resources, LLC (9)
10.14 Amended and Restated Consulting Agreement, dated December 29,
2000, between the Registrant and Pharmulations LLC (11)
10.15 Master Development Agreement, dated December 29, 2000, between
the Registrant and Pharmulations LLC (11)
23.1 Consent of Durham Jones & Pinegar, P.C., included in Exhibit 5.
23.2 Consent of Hansen Barnett & Maxwell (10)
-----------
(1) Incorporated by reference to the same-numbered exhibit to the Form
8-K filed with the Securities and Exchange Commission October 2,
1998, by First Scientific.
(2) Incorporated by reference to the same-numbered exhibit to the
Company's Registration Statement on Form 10-SB, file No. 0-24378.
(3) Incorporated by reference to the same-numbered exhibit to the Form
10-QSB filed with the Securities and Exchange Commission November 16,
1998.
(4) Incorporated by reference from Quarterly Report on Form 10-QSB, filed
on June 15, 1999.
(5) Incorporated by reference to the same numbered exhibit to the form
10-QSB filed November 16, 1999.
(6) Incorporated by reference from Amended Quarter Report on Form 10/QSB/A
filed on March 8, 2000.
(7) Incorporated by reference from Report on Form 8-K, filed on March 30,
2000.
(8) Incorporated by reference from Report on Form 8-K, filed on May 31,
2000.
(9) Incorporated by reference from Report on Form 8-K, filed on January
12, 2001.
(10) Filed herewith.
(11) To be filed subsequently.
ITEM 28. UNDERTAKINGS
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:
II-4
<PAGE>
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this 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
this Registration Statement. Notwithstanding the foregoing, any increase
or decrease in the volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and any
derivation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this Registration
Statement; provided, however, that paragraphs (1)(i) and (1)(ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by
the Company pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), that are
incorporated by reference in this Registration Statement.
(2) That, for the purposes of determining any liability under the
Securities Act, 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 the 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.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Corporation pursuant to the indemnification provisions described herein, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
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 Salt Lake City, State of Utah, on this 11th day of
January, 2001.
First Scientific, Inc.
By: /s/ Randall L. Hales
---------------------------------
Randall L. Hales
President, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated. Each person whose signature appears below hereby
authorizes Randall L. Hales and John L. Theler and each of them, with full power
of substitution, to execute in the name and on behalf of such person any
amendment (including any post-effective amendment) to this Registration
Statement (or any other registration statement for the same offering that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act) and
to file the same, with exhibits thereto, and other documents in connection
therewith, making such changes in this Registration Statement as the person(s)
so acting deems appropriate, and appoints each of such persons, each with full
power of substitution, attorney-in-fact to sign any amendment (including any
post-effective amendment) to this Registration Statement (or any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act) and to file the same, with
exhibits thereto, and other documents in connection therein.
Signature Title Date
/s/ Randall L. Hales
-------------------------- Chief Executive Officer, President, January 11, 2001
Randall L. Hales (Principal Executive Officer)
/s/ Bradley K. Andrews
-------------------------- Chief Operating Officer January 12, 2001
Bradley K. Andrews
/s/ John L. Theler
-------------------------- Chief Financial Officer January 11, 2001
John L. Theler (Principal Financial Officer and
Principal Accounting Officer)
/s/ Douglas R. Warren
-------------------------- Director January 11, 2001
Douglas R. Warren
/s/ Edward B. Walker, Ph.D.
-------------------------- Director January 12, 2001
Edward B. Walker, Ph.D.
/s/ Peter J. Sundwall, Jr., MD
-------------------------- Director January 10, 2001
Peter J. Sundwall, Jr., MD
/s/ Frank J. Wilich, Jr.
-------------------------- Director January 11, 2001
Frank J. Wilich, Jr.
/s/ Gary L. Crittenden
-------------------------- Director January 11, 2001
Gary L. Crittenden
II-6
<PAGE>
/s/ Dan C. Jorgensen
-------------------------- Director January 11, 2001
Dan C. Jorgensen
/s/ E. Todd Heiner
-------------------------- Director January 11, 2001
E. Todd Heiner
/s/ Frank A Cereska
-------------------------- Director January 11, 2001
Frank A Cereska
/s/ Joe K. Johnson
-------------------------- Director January ___, 2001
Joe K. Johnson
II-7
<PAGE>
EXHIBIT INDEX
5 Opinion of Durham Jones & Pinegar, P.C.*
23.1 Consent of Durham Jones & Pinegar, P.C., included in Exhibit 5.
23.2 Consent of Hansen Barnett & Maxwell
--------------------------
* To be filed subsequently.
II-8
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants...........................F-1
Consolidated Balance Sheets - December 31, 1999 and 1998.....................F-2
Consolidated Statements of Operations for the Years Ended December 31,
1999 and 1998 and for the Cumulative Period from April 30, 1990 (Date
of Inception) through
December 31, 1999.......................................................F-3
Consolidated Statements of Stockholders' Equity for the Cumulative Period
from April 30, 1990 (Date of Inception) through December 31, 1997 and
for the Years Ended December
31, 1998 and 1999......................................................F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999 and 1998, and for the Cumulative Period from April 30, 1990
(Date of Inception) through December
31, 1999................................................................F-6
Notes to Consolidated Financial Statements ..................................F-7
-------------------------------
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East 300 South, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Shareholders
First Scientific, Inc.
We have audited the accompanying consolidated balance sheets of First
Scientific, Inc. and Subsidiary, a development stage enterprise, as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended and for
the cumulative period from April 30, 1990 (date of inception) through December
31, 1999. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Scientific,
Inc. and Subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended and for the cumulative
period from April 30, 1990 (date of inception) through December 31, 1999, in
conformity with generally accepted accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 2, 2000
F-1
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------ ----------------
ASSETS
<S> <C> <C>
Current Assets
Cash $ 207,934 $ 1,286,299
Investment in securities available-for-sale 94,811 194,784
Trade receivables 94,933 614
Inventory 35,262 26,619
Prepaid expenses 46,551 29,356
------------------ ----------------
Total Current Assets 479,491 1,537,672
------------------ ----------------
Property and Equipment
Equipment 173,532 95,378
Leasehold improvements 10,229 --
Less: Accumulated depreciation (27,016) (2,982)
------------------ ----------------
Net Property and Equipment 156,745 92,396
------------------ ----------------
Notes Receivable - Related Party 7,000 --
Purchased Technology, Net 18,750 108,750
Long-Term Investments -- 50,000
Other Assets 34,883 --
------------------ ----------------
Total Assets $ 696,869 $ 1,788,818
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 123,352 $ 54,334
Customer deposits -- 33,750
Accrued liabilities 30,660 75,979
Capital lease obligation - current portion 8,850 2,070
Notes payable - related party -- 22,693
Note payable 19,590 --
------------------ ----------------
Total Current Liabilities 182,452 188,826
------------------ ----------------
Long-Term Capital Lease Obligation 14,197 4,784
Stockholders' Equity
Preferred stock - $0.001 par value; 1,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock - $0.001 par value; 50,000,000 shares authorized;
issued and outstanding: 1999 - 20,219,770 shares,
1998 - 20,169,770 shares 20,220 20,170
Additional paid-in capital 7,001,564 6,429,114
Unearned compensation (273,599) (84,056)
Deficit accumulated during the development stage (6,231,062) (4,762,745)
Unrealized loss on investment in securities (16,903) (7,275)
------------------ ----------------
Total Stockholders' Equity 500,220 1,595,208
------------------ ----------------
Total Liabilities and Stockholders' Equity $ 696,869 $ 1,788,818
================== ================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-2
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative from
April 30, 1990
For the Years Ended (Date of Inception)
December 31, Through
1999 1998 December 31, 1999
----------------- ----------------- ------------------
<S> <C> <C> <C>
Revenues from Services $ 194,947 $ -- $ 194,947
Product Sales 358,684 83,149 594,680
----------------- ----------------- ------------------
Total Sales 553,631 83,149 789,627
Cost of Sales 148,223 54,997 302,876
----------------- ----------------- ------------------
Gross Profit 405,408 28,152 486,751
----------------- ----------------- ------------------
Operating Expenses
General and administrative expense 1,666,555 550,449 2,503,887
Research and development expense 94,982 3,813,808 4,084,532
----------------- ----------------- ------------------
Total Operating Expenses 1,761,537 4,364,257 6,588,419
----------------- ----------------- ------------------
Loss from Operations (1,356,129) (4,336,105) (6,101,668)
Other Income and Expense
Realized loss on investment in securities (140,346) -- (140,346)
Interest income 32,643 14,682 47,325
Interest expense (4,485) (20,970) (98,254)
----------------- ----------------- ------------------
Loss Before Income Taxes (1,468,317) (4,342,393) (6,292,943)
Benefit from Income Taxes -- 61,881 61,881
-- ------ ------
Net Loss $ (1,468,317) $ (4,280,512) $ (6,231,062)
================= ================= ==================
Basic and Diluted Loss Per Common Share $ (0.07) $ (0.33) $ (0.55)
================= ================= ==================
Weighted Average Number of Shares Used
in Per-Share Calculation 20,182,373 12,800,937 11,332,280
================= ================= ==================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-3
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Receivable During the Other Total
Common Stock Paid-in From Development Comprehensive Stockholders'
Shares Amount Capital Shareholder Stage Loss Equity (Deficit)
---------- --------- ---------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - April 30, 1990 (Date
of Inception) -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss for the period from
April 30, 1990 (Date of
Inception) through December
31, 1997 -- -- -- -- (482,233) -- (482,233)
Issuance for receivable from
shareholder, April 30, 1990,
$0.00 per share 7,114,350 7,114 7,886 (15,000) -- -- --
Issuance for services:
April 30, 1990, $0.00
per share 2,371,450 2,371 2,629 -- -- -- 5,000
January 1993, $0.07
per share 284,574 285 19,070 -- -- -- 19,355
January 1995, $0.02
per share 2,371,450 2,371 47,629 -- -- -- 50,000
Issuance for cash:
October 7, 1993, $0.07
per share 514,605 515 34,485 -- -- -- 35,000
March 27, 1996, $0.12
per share 83,001 83 9,917 -- -- -- 10,000
October 10, 1996, $0.25
per share 99,601 100 24,900 -- -- -- 25,000
Set off notes receivable from
shareholders against loans
payable to shareholders,
December 31, 1993 -- -- -- 15,000 -- -- 15,000
Shares redeemed in exchange
for release of personal
guarantee of Company debt,
December 31, 1994,
$0.00 per share (2,371,450) (2,371) 2,371 -- -- -- --
---------- --------- ---------- ----------- ----------- ----------- -----------------
Balance - December 31, 1997 10,467,581 10,468 148,887 -- (482,233) -- (322,878)
-----------------
Net Loss -- -- -- -- (4,280,512) -- (4,280,512)
Unrealized loss on securities
available-for-sale -- -- -- -- -- (7,275) (7,275)
-----------------
Comprehensive Loss (4,287,787)
Stock redeemed in exchange for
release of personal guarantee
of Company debt and upon
execution of license and
royalty agreement, June 1,
1998, $0.00 per share (1,778,588) (1,779) 1,779 -- -- -- --
Issuance for cash:
May 7, 1998, $0.29
per share 21,343 21 6,229 -- -- -- 6,250
July 9, 1998, $0.34
per share 87,744 88 29,912 -- -- -- 30,000
September through
December 1998,
$0.75 per share 1,860,203 1,860 1,393,293 -- -- -- 1,395,153
Conversion of shareholder loans
and a liability for deferred
salaries, September 14, 1998
to capital without
issuance of additional shares -- -- 181,877 -- -- -- 181,877
</TABLE>
(Continued)
The accompanying notes are an integral part of
these financial statements.
F-4
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Receivable During the Other Total
Common Stock Paid-in From Development Comprehensive Stockholders'
Shares Amount Capital Shareholder Stage Loss Equity (Deficit)
---------- --------- ---------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance to acquire SPPS,
September 15, 1998, $0.00
per share 3,333,330 $ 3,333 $ (3,333) $ -- $ -- $ -- $ --
Issuance upon conversion of debt:
September 17, 1998,
$0.75 per share 66,667 67 49,933 -- -- -- 50,000
September 30, 1998,
$0.34 per share 169,781 170 57,880 -- -- -- 58,050
Issuance in exchange for
available-for-sale securities,
(less $48,460 deferred income
tax) September 17, and November
18, 1998, $0.75 per share
before tax 673,123 673 455,713 -- -- -- 456,386
Issuance for cancellation of
royalty agreement and
contribution of technology
(less $13,421 deferred income
tax) September 17, 1998, $0.75
per share 5,201,920 5,202 3,882,817 -- -- -- 3,888,019
Compensation related to grant
of stock options, September
17, 1998 -- -- 174,194 (174,194) -- -- --
Issuance for restricted equity
securities, November 18, 1998,
$0.75 per share 66,666 67 49,933 -- -- -- 50,000
Amortization of unearned
compensation -- -- -- 90,138 -- -- 90,138
---------- --------- ---------- ----------- ----------- ----------- -----------------
Balance - December 31, 1998 20,169,770 20,170 6,429,114 (84,056) (4,762,745) (7,275) 1,595,208
-----------------
Net Loss -- -- -- -- (1,468,317) -- (1,468,317)
Unrealized loss on securities
available-for-sale -- -- -- -- -- (149,974) (149,974)
Reclassification adjustment for
realized losses on securities
included in net loss -- -- -- -- -- 140,346 140,346
-----------------
Comprehensive Loss (1,477,945)
Issuance for Services:
April30, 1999; $1.00
per share 10,000 10 9,990 -- -- -- 10,000
September 30, 1999;
$1.75 per share 40,000 40 69,960 -- -- -- 70,000
Compensation related to grant
of stock options:
May 12, 1999 -- -- 62,500 (62,500) -- -- --
August 30, 1999 -- -- 220,000 (220,000) -- -- --
November 22, 1999 -- -- 210,000 (210,000) -- -- --
Amortization of unearned
compensation -- -- -- 302,957 -- -- 302,957
---------- --------- ---------- ----------- ----------- ----------- -----------------
Balance - December 31, 1999 20,219,770 $ 20,220 $7,001,564 $ (273,599) $(6,231,062) $ (16,903) $ 500,220
========== ========= ========== =========== =========== =========== =================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-5
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative from
April 30, 1990
For the Years Ended (Date of Inception)
December 31, Through
1999 1998 December 31, 1999
------------------ -------------- ------------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net loss $ (1,468,317) $(4,280,512) $ (6,231,062)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on investments in securities available-for-sale 140,346 -- 140,346
Depreciation and amortization 114,034 29,129 143,266
Common stock issued for services 50,000 -- 124,355
Common stock issued for purchased research
and development -- 3,766,440 3,766,440
Compensation from stock options granted 302,957 90,138 393,095
Deferred tax benefit -- (61,881) (61,881)
Changes in operating assets and liabilities:
Deposits (34,884) -- (34,884)
Accounts receivable (94,319) 7,811 (94,933)
Inventory (8,643) 3,262 (35,262)
Prepaid expenses 12,805 (26,422) (16,551)
Accounts payable 69,018 52,035 123,352
Accrued liabilities (45,321) 101,263 163,090
Customer deposits (33,750) 33,750 --
------------------ -------------- ------------------
Net Cash Used in Operating Activities (996,074) (284,987) (1,620,629)
------------------ -------------- ------------------
Cash Flows From Investing Activities
Cash paid for property and equipment (68,154) (86,940) (155,815)
Cash received from sale of securities available-for-sale -- 302,847 302,847
Cash paid for notes receivable - related party (7,000) -- (7,000)
------------------ -------------- ------------------
Net Cash Provided by (Used in) Investing Activities (75,154) 215,907 140,032
------------------ -------------- ------------------
Cash Flows From Financing Activities
Proceeds from borrowing 19,590 61,050 275,565
Principal payments on notes payable -- (117,338) (155,975)
Proceeds from loans from stockholders -- 19,930 158,934
Principal payments on loans from stockholders (22,693) (46,742) (86,500)
Principal payment under capital lease obligation (4,034) (862) (4,896)
Proceeds from issuance of common stock -- 1,431,403 1,501,403
------------------ -------------- ------------------
Net Cash Provided by Financing Activities (7,137) 1,347,441 1,688,531
------------------ -------------- ------------------
Net Increase (Decrease) in Cash (1,078,365) 1,278,361 207,934
Cash at Beginning of Period 1,286,299 7,938 --
------------------ -------------- ------------------
Cash at End of Period $ 207,934 $ 1,286,299 $ 207,934
================== ============== ==================
</TABLE>
Supplemental Cash Flow Information - See Note 10
The accompanying notes are an integral part of
these financial statements.
F-6
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business - On April 30, 1990, Linco Industries, Inc. (Linco) was
incorporated under the laws of the State of Utah. Linco developed, manufactured,
and distributed a linseed oil based soap on a very limited basis. More recently,
Linco developed and acquired two scientific formulations: a non-alcohol based
antibacterial sanitizing formulation that removes bacteria while moisturizing
the skin and a topical rash prevention and treatment formulation that cleanses
and moisturizes the skin for use with incontinent and other skin rash
situations. During the year ended December 31, 1999, a majority of the Company's
sales were from services related to validation testing for other companies in
order to verify their products are in compliance with FDA requirements.
Reorganization - On September 15, 1998, Linco entered into a reorganization
agreement with SPPS Financial Corporation ("SPPS"), a publicly held Delaware
corporation, whereby a newly-formed, wholly-owned subsidiary of SPPS was merged
into Linco. Under the terms of the agreement, the Linco shareholders exchanged
all of the 3,710 issued and outstanding shares of common stock of Linco for
8,798,080 shares of SPPS common stock. SPPS had no assets, liabilities or
operations and had 3,333,330 common shares outstanding at the date of the
agreement. The agreement has been accounted for as the reorganization of Linco,
with a related 2,371.45 -for-1 stock split, and the issuance of 3,333,330 common
shares to the SPPS shareholders. Those shares were recorded at zero. The
accompanying financial statements have been restated for all periods presented
for the effects of the stock split from the reorganization of Linco. In
connection with the reorganization, SPPS changed its name to First Scientific,
Inc. This reorganization was not deemed to be the acquisition of a business;
accordingly no pro forma information is presented.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts and transactions of Linco (now First Scientific
Corporation) for all periods presented and the accounts and transactions of
First Scientific, Inc. from September 15, 1998. Intercompany accounts and
transactions have been eliminated in consolidation. The consolidated entities
are collectively referred to herein as the "Company" or "First Scientific."
Development Stage Enterprise - Since inception, the Company has spent most of
its efforts in developing and marketing various products and is considered to be
in the development stage. It has not yet had sufficient sales to sustain
operations and has relied upon cash flows from financing activities (primarily
debt and equity issuances) to sustain operations.
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 in these financial statements
and accompanying notes. Actual results could differ from those estimates.
Financial Instruments - The amounts reported as cash, securities
available-for-sale, trade receivables, accounts payable, customer deposits,
accrued liabilities, and notes payable and capital lease obligation are
considered to be reasonable approximations of their fair values. The fair value
estimates presented herein were based on market information available to
management at the time of preparation of the financial statements.
F-7
<PAGE>
Concentration of Risk - The concentration of business with a small number of
customers subjects the Company to a concentration of risk such that the loss of
a customer could significantly effect revenues. Historically, the Company has
relied on sales to a small group of domestic customers but has not been limited
by geographic region.
During the year ended December 31, 1999, sales totaling of $202,656 and
$305,458, totaling $508,014 or 92% of sales were to the two respective
customers. During the year ended December 31, 1998, sales totaling $53,531 or
64% were to one different customer.
Investments --Investment in marketable equity securities were categorized as
available for sale at December 31, 1999 and 1998. Available-for-sale securities
are stated at fair value, with unrealized gains and losses, net of deferred
income taxes, reported as a component of accumulated other comprehensive loss.
Inventory - Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Property & Equipment - Property and equipment are stated at cost. Maintenance
and repairs of equipment are charged to operations and major improvements are
capitalized. Upon retirement, sale, or other disposition, the cost and
accumulated depreciation are eliminated from the accounts and gain or loss is
included in operations. Depreciation is computed using the straight-line method
over the estimated useful lives of the property and equipment, which are three
to seven years. Depreciation expense was $24,034 and $2,879 for the years ended
December 31, 1999 and 1998, respectively.
Sales Recognition - Sales are recognized upon shipment of products. Revenue from
services provided under contracts are recognized as the services are performed.
Customers' pre-payments are recorded as a liability pending completion and
shipment of the order.
Research and Development Expense - Current operations are charged with all
research and product development expenses.
Basic and Diluted Loss Per Share - Basic loss per common share is computed by
dividing net loss by the weighted-average number of common shares outstanding
during the period. Diluted loss per share is calculated to give effect to
potentially issuable common shares except during loss periods when those
potentially issuable common shares would decrease the loss per share. There were
2,205,000 and 1,315,000 potentially issuable common shares which were excluded
from the calculation of diluted loss per common share for the years ended
December 31, 1999 and 1998, respectively.
NOTE 2 - BUSINESS CONDITION
First Scientific has incurred losses from operations for the two years ended
December 31, 1999 and 1998 of $1,468,317 and $4,280,512, respectively, and has
accumulated deficits since inception in the amount of $6,231,062 through
December 31, 1999. First Scientific has had negative cash flows from operations
of $996,074 and $284,987 for the years ended December 31, 1999 and 1998 and
$1,620,629 since inception.
The Company's ability to move from the development stage is dependent upon its
ability to generate sufficient cash flow from operations to meet its obligations
on a timely basis, to obtain additional financing, and ultimately to attain
successful operations. Management believes it will be able to obtain sufficient
equity financing to continue marketing efforts and continue to expand Company
operations. During the year ended December 31, 1999 the Company completed
testing, completed brand promotional and collateral materials, and began
shipments of its products to new customers. Subsequent
F-8
<PAGE>
to December 31, 1999, First Scientific has issued stock for cash proceeds of
$1,475,000, and has entered into a letter of intent to acquire control of an
operating marketing and distribution enterprise. Although recent and potential
orders or the successful acquisition of operating subsidiaries are not assured,
management believes these recent orders, other similar potential sales, and
sales by acquired companies will provide sufficient cash flows to sustain
operations.
NOTE 3 - ACQUISITION OF TECHNOLOGY
In connection with the reorganization agreement with SPPS during 1998, the
Company issued 5,201,920 shares of common stock valued at $3,901,440, or $0.75
per share, to a director for the transfer of all rights and ownership of
technology relating to scientific formulations and the cancellation of the
Company's obligation under a royalty agreement relating to the use of the
technology. The value of the contributed technology was determined based upon
the fair value of common stock issued for cash following the reorganization with
SPPS. The scientific formulations were developed by the director and the Company
and the common shares were issued to fully transfer the director's interest in
the technology to the Company. The technology relates to two non-alcohol based
antibacterial sanitizing formulations that remove bacteria while moisturizing
the skin and a dimethicone-based topical rash prevention and treatment
formulation that cleanses and moisturizes the skin for treatment of skin rashes
caused by incontinence and other irritations. The technology was in process
except for one formulation valued at $135,000. The cost of the completed
technology was capitalized and is being amortized over a period of 18 months. In
process technology was valued at $3,766,440 and was charged to operations at the
date acquired. Amortization expense for the purchased technology for the years
ended December 31, 1999 and 1998 was $90,000 and $26,250, respectively.
NOTE 4-INVESTMENT IN SECURITIES AVAILABLE-FOR-SALE AND OTHER
COMPREHENSIVE LOSS
The Company has investments in marketable equity securities which are classified
as available-for-sale securities. During the year ended December 31, 1999,
equity securities which were previously restricted from resale, with a cost of
$50,000, were reclassified to securities available-for-sale when the restriction
of resale expired, and were transferred at their fair value of $50,000. The
market value of all available-for-sale securities held by the Company declined
during 1999 and, at September 30, 1999, management determined that the decline
was other-than-temporary. Accordingly, a write-down was recognized of $140,346
to adjust the carrying value of the available-for-sale securities to their
market value of $111,714. At December 31, 1999 and 1998 available-for-sale
securities consisted of the following:
December 31,
1999 1998
--------- ---------
Cost.........................................$ 111,714 $ 202,059
Gross unrealized losses...................... (16,903) (7,275)
--------- ---------
Estimated Fair Value.........................$ 94,811 $ 194,784
========= =========
NOTE 5 - RELATED PARTY TRANSACTIONS
Notes Payable to Related Parties - Since inception, the Company has partially
relied on funds advanced by shareholders to meet its obligations and fund its
development activities. These advances have been
F-9
<PAGE>
classified as related party notes payable and accrue interest at the rate of 10%
per year. Notes payable to related parties were none and $22,693 at December 31,
1999 and 1998, respectively. During September 1998, the shareholders converted
$90,000 of outstanding notes payable, together with accrued interest, to
additional paid-in capital.
Notes Receivable - Related Party - During November 1999, the Company loaned
$7,000 to an officer and shareholder in exchange for a note with an interest
rate of 9.5% per annum. The loan is to be reduced from 33% of any bonuses
payable to the officer.
NOTE 6 - NOTES PAYABLE
December 31,
Short-Term Notes Payable 1999 1998
---- ----
Note payable to a finance company,
interest at 12.75%, unsecured...........$ 19,590 $ --
Short-Term Advance -- During August 1998, an investor advanced $50,000 to the
Company to meet current expenses. During September 1998, the advance was
converted into 66,667 shares of common stock at $0.75 per share.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Consulting Agreements - Effective October 1, 1999, First Scientific entered into
a five-year consulting agreement with a shareholder and director to provide
scientific, product development and regulatory consulting to the Company. The
agreement automatically renews yearly unless either party elects not to extend
the agreement. Payments under the agreement are $8,000 monthly, which monthly
amount will increase by $1,000 each anniversary date. First Scientific also has
a consulting agreement with a director who provides marketing and sales
consulting to the Company. The one-year agreement is for $10,000 per month
through July 2000, and $7,500 thereafter.
Capital Leases - The Company leases various equipment under capital lease
agreements. Equipment under capital leases as of December 31, 1999 and 1998 was
as follows:
1999 1998
---------- --------
Equipment........................ $ 20,478 $ 7,716
Less accumulated depreciation.... (1,971) (750)
---------- --------
$ 18,507 $ 6,966
========= =======
The following is a schedule by year of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of December 31, 1999:
Year Ending December 31
2000...................................... $11,895
2001...................................... 11,014
2002...................................... 5,490
2003...................................... --
2004...................................... --
-------
Total minimum lease payments................... 28,399
Less amount representing executory costs 644
-------
Net minimum lease payments..................... 27,755
F-10
<PAGE>
Less amount representing interest.............. 4,708
-------
Present value of net minimum lease payments 23,047
Less current portion........................... 8,850
-------
Obligations Under Capital Leases - Long-Term $ 14,197
========
Operating Leases - The Company leases its office space, warehouse space and
storage space under operating leases. The office space lease is for a two-year
term, once the lease term is up, it is renewable on an annual basis, and
currently requires lease payments of $2,602 per month with annual escalations
equal to the lesser of the change in the consumer price index or 5%. The
warehouse space lease is a month to month lease. The storage space lease is for
a 14-month period with the full payment being paid in advance. Rent expense for
the years ended December 31, 1999 and 1998 was $42,229 and $20,571,
respectively.
Future minimum rental payments required under the operating leases described
above, as of December 31, 1999, are $22,102 during the year ending December 31,
2000.
Legal Action - An individual has filed a claim against the Company under the
terms of an agreement in principal allegedly made by the Linco founders in 1991,
which purported to promise shares of common stock if certain conditions were met
by the individual in representing the Company to potential customers. First
Scientific's management maintains that the 1991 agreement is no longer valid
because the conditions were not met in a reasonable time and because the
individual failed to fulfill other material terms. During the quarter ended
December 31, 1999, the Company filed an action for declaratory judgement that
the individual has no entitlement against the Company. In December 1999, the
individual responded that he had "fully performed" under the 1991 agreement. and
filed a counter-claim against the Linco founders and the Company. The action is
now only in the discovery phase. Management believes this claim should not
ultimately result in any potential liability to the Company based upon
sufficient defenses and also upon an indemnification agreement from the Linco
founders.
NOTE 8 - COMMON STOCK
On April 30, 1990, the Company issued 7,114,350 common shares in exchange for
promissory notes from shareholders in the amount of $15,000. Concurrently,
2,371,450 common shares, valued at $5,000 based upon the value of the promissory
notes, were issued for legal and accounting services. The founding shareholders
thereafter made loans to the Company to fund operations. On December 31, 1993,
the notes receivable from shareholders were set off against notes payable to the
shareholders.
On January 20, 1993, the Company issued 284,574 shares of common stock valued at
$19,355 in exchange for laboratory and technical services provided to the
Company. The shares were valued at $0.07 per share based upon the value of an
outside private placement on October 7, 1993 in which 514,605 common shares were
issued in exchange for cash in the amount of $35,000, or $0.07 per share.
During 1994, the Company redeemed 2,371,450 common shares in exchange for the
release by a bank of an original shareholder's personal guarantee of $75,000 in
notes payable. The shares were valued at zero. There were no unstated rights or
privileges in connection with this transaction. On January 20, 1995, the Company
issued 2,371,450 common shares for technical and director services, as well as
for compensation relating to a new shareholder's personal guarantee of notes
payable. The Company determined the fair value of the services provided to be
$50,000.
The Company issued 83,001 and 99,601 common shares to a private investor for
cash proceeds of $10,000 and $25,000, or $0.12 and $0.25 per share, on March 27,
and October 10, 1996, respectively. On May 7, 1998, an additional 21,343 common
shares were issued in a private placement for cash in the amount of $6,250.
F-11
<PAGE>
On June 1, 1998, the Company redeemed 1,778,588 common shares from an individual
who had served on the Board of Directors and had developed certain technology
for use by the Company, including the primary formulas used by the Company in
its products. The Company also obtained the release of the individual's personal
guarantee of Company debt. The common stock was also redeemed in exchange for
the release by the Company of any ownership claim it may have had to certain
technology. The technology was deemed worthless at that time and the common
stock had no significant value. The individual vacated his position on the board
of directors. Whether the transferred technology had any value was in question.
Accordingly, the shares redeemed were valued at zero and no gain was recognized
on the transfer of the technology. There were no unstated rights or privileges
associated with the redemption. In connection with the redemption, the Company
entered into a license and royalty agreement with the individual which provided
the Company with the use of the technology. The royalty agreement granted a 25%
gross profits interest in the products the Company sells which are based upon
the technology. The agreement also provided for a minimum annual royalty of
$60,000 regardless of the Company's sales volume.
Independent of the above redemption and because of the cash investment in common
stock by a third party, on September 15, 1998, in compliance with the third
party's request, the individual came back to being a member of the board of
directors, terminate the license and royalty agreement and transferred the
entire ownership of the technology to the Company, all in exchange for 5,201,920
common shares. The technology, and the shares issued, were valued at $3,888,019
net of deferred taxes of $13,421, or $0.75 per share as further described in
Note 2.
On July 9, 1998, the Company issued 87,744 shares of common stock to a private
investor for $30,000 in cash or $0.34 per share.
On September 15, 1998, for accounting purposes, the Company was deemed to have
issued 3,333,330 common shares, valued at $0, to the shareholders of SPPS in
connection with the reverse acquisition of SPPS. No assets were received nor
were any liabilities assumed in connection with this acquisition.
On September 14, 1998, related party notes payable together with accrued
interest in the amount of $90,000 and $91,877 of deferred salary were converted
into additional paid-in capital without the issuance of additional shares. No
unstated rights or privileges were granted in connection with these
contributions to capital.
In contemplation of the reorganization of the Company, an advance in the amount
of $50,000 was received from an investor on August 6, 1998 in order to meet
short-term expenses. The advance was converted into 66,667 shares of common
stock at $0.75 per share on September 17, 1998.
The Company issued 169,781 shares of common stock at $0.34 per share on
September 30, 1998 upon conversion of a $50,000 convertible note payable,
together with interest in the amount of $8,050. The note was convertible at the
rate on the date that an outside investment of more than $25,000 was received by
the Company. Such an outside investment occurred during July 1998 at $0.34 which
established the conversion price of the note. No beneficial conversion feature
is ascribed to the conversion because at the measurement date the rate per share
was not priced below market.
The Company issued 1,860,203 shares of common stock in a private placement
offering for cash proceeds of $1,395,153 or $0.75 per share from September
through December 1998.
On September 17, and November 18, 1998, the Company issued 403,796 and 269,327
shares of common stock in exchange for securities available-for-sale valued at
$254,387 net of deferred tax and $201,999, respectively. The shares were shares
issued at $0.75 per share before deferred income tax of $48,460. Additionally,
the Company issued 66,666 shares of common stock at $0.75 per share in exchange
for restricted securities valued at $50,000 on November 18, 1998.
On April 30, 1999 the Company agreed to issue 10,000 shares of common stock to
an individual for
F-12
<PAGE>
marketing services during 1997 and 1998. The Company awarded the individual an
exclusive distributorship in the Western United States for the Company's Fresh
Cleanse Brand to the professional health care market. The marketing services
were valued at $10,000 based upon the fair value of the common stock issued. The
fair value of the common stock was established by management based upon an
evaluation of the perceived performance of the Company to date. The shares were
issued on September 30, 1999.
On August 7, 1999, the Company agreed to issue 40,000 shares of common stock to
an outside service provider for their creative services in developing and
presenting promotional and other materials regarding First Scientific and its
products. The services were valued at $70,000, or $1.75 per share, based upon an
evaluation by management of the perceived fair value of the Company's common
stock on the date of the agreement.
F-13
<PAGE>
NOTE 9 - STOCK OPTIONS
On September 30, 1998, the Company granted stock options to two outside
directors to purchase a total of 1,050,000 shares of common stock at $0.75 per
share. The options vest according to a schedule over three years and expire
September 30, 2003. The options granted were valued at their fair value of
$174,194 on the grant date, which amount will be recognized by the Company as
the options vest.
The fair value of the options was determined by using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0.0%,
expected volatility of 0.0%, risk-free interest rate of 5.0% and expected life
of 5 years. The expected volatility was assumed to be 0.0% because, at the grant
date, the Company was a privately held enterprise and there was no market for
its common stock.
The Board of Directors approved the 1998 Stock Option Plan (the "Plan") during
December 1998, which authorized options to purchase 2,500,000 shares of common
stock. Options granted under the Plan generally expire 10 years from the date of
grant. Options to purchase 265,000 common shares were granted under the Plan on
December 31, 1998, with an exercise price of $0.75 per share.
During the year ended December 31, 1999, options to purchase 890,000 common
shares were granted under the 1998 Stock Option Plan to various employees.
A summary of the status of the Company's stock options as of December 31, 1999
and 1998 and changes during the years then ended are presented below:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,315,000 $ 0.75 -- $ --
Granted 890,000 0.99 1,315,000 0.75
---------- ----------------- ---------- -----------------
Outstanding at end of year 2,205,000 0.85 1,315,000 0.75
========== ================= ========== =================
Options exercisable at end of year 928,250 0.84 221,000 0.75
========== ================= ========== =================
Weighted-average fair value of
options granted during the year $ 1.54 $ 0.13
================= =================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- ----------------------------------------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices At 12/31/99 Contractual Life Exercise Price At 12/31/99 Exercise Price
--------------- --------------- ---------------------- ----------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C>
$0.75 - $1.25 2,205,000 7.3 years $0.85 928,250 $0.84
</TABLE>
F-14
<PAGE>
The Company measures compensation to employees under stock-based options and
plans using the intrinsic value method prescribed in Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations. Compensation for options to outside directors is measured using
the fair value method set forth under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation. Stock-based
compensation charged to operations was $241,021 and $61,936 for the year ended
December 31, 1999 from options granted to employees and to outside directors,
respectively. Stock-based compensation charged to operations was $0 and $90,138
for the year ended December 31, 1998 from options granted to employees and to
outside directors, respectively. Had compensation cost for the Company's options
granted to employees been determined based on the fair value at the grant dates
consistent with the alternative method set forth under Statement of Financial
Accounting Standards No. 123, net loss and loss per share would have increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Cumulative from April 30
(Date of Inception)
For the Years Ended December 31 through December 31,
1999 1998 1999
---------------------------------------- ---------------------- ----------------------- ----------------------------
Net Loss
<S> <C> <C> <C>
As reported $ (1,468,317) $ (4,280,512) $ (6,231,062)
Pro forma (1,631,892) (4,390,379) (6,504,504)
Basic and diluted loss per share
As reported $ (0.07) $ (0.33) $ (0.55)
Pro forma (0.08) (0.34) (0.57)
</TABLE>
NOTE 10 - CASH FLOW INFORMATION
Supplemental Cash Flow Information -- Interest was paid in the amount of $5,213
and $17,516 during the years ended December 31, 1999 and 1998, respectively.
Noncash Investing and Financing Activities -- During the year ended December 31,
1998, the Company deferred compensation to employees of $57,000. For the period
from April 30, 1990 through December 31, 1999, the Company deferred compensation
to employees in the amount of $83,877. During the year ended December 31, 1993,
the Company set off receivables from the stockholders in the amount of $15,000
against related party notes payable in the same amount.
An advance from an investor in the amount of $50,000 was converted into 66,667
shares of common stock on September 17, 1998. On September 14, 1998, accrued
expenses of $91,877 for deferred salaries and related party notes payable
together with accrued interest in the amount of $90,000 were converted into
additional paid-in capital without the issuance of additional shares. On
September 15, 1998, the Company issued 5,201,920 shares of common stock in
exchange for the rights to technology valued at $3,901,440 before tax and the
cancellation of a license and royalty agreement central to the Company's
F-15
<PAGE>
products. On September 15, 1998, for accounting purposes, the Company was deemed
to have issued 3,333,330 common shares, valued at $0, to the shareholders of
SPPS in connection with the reverse acquisition of SPPS. No assets were received
nor were any liabilities assumed in connection with this acquisition.
On September 30, 1998, the Company issued 169,781 common shares upon the
conversion of a $50,000 note payable together with accrued interest in the
amount of $8,050. During and September and December 1998, the Company issued
673,123 shares of common stock in exchange for $456,386 of securities
available-for-sale, net of deferred tax. During December 1998 the Company issued
66,666 shares of common stock in exchange for $50,000 of restricted equity
securities. During October 1998 the Company purchased computer equipment and
incurred a capital lease obligation in the amount of $7,716
During the year ended December 31, 1999, the Company acquired equipment valued
at $20,478 through a capital lease agreement . Also during the year ended
December 31, 1999, the Company issued 50,000 shares of common stock for services
valued at $80,000 of which $30,000 was recorded as a prepaid expense.
NOTE 11 - INCOME TAXES
The following presents the components of the net deferred tax asset at December
31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Purchased technology amortization....................................................... $ 6,994
Depreciation............................................................................ 8,803
Difference in fair value and tax basis of contributed securities........................ 89,762
------------
Total Deferred Tax Liabilities..................................................... 105,559
------------
Operating loss carry forwards........................................................... (689,993)
Unrealized loss on investment in securities available-for-sale.......................... (58,653)
------------
Total Deferred Tax Assets.......................................................... (748,646)
------------
Valuation allowance for deferred tax assets............................................. 643,087
------------
Net Deferred Tax Asset............................................................. $ --
============
</TABLE>
The valuation allowance for deferred tax assets increased by $545,906 and
$120,899 during the years ended December 31, 1999 and 1998, net of $185,206
reductions from deferred taxes on acquisitions during the year ended December
31, 1998. The valuation allowance included $6,305 and $2,713 at December 31,
1999 and 1998, respectively, for which subsequently recognized tax benefits will
be allocated to unrealized loss on investment in securities available-for-sale.
The Company has U.S. Federal net operating loss carry forwards of $1,849,846 at
December 31, 1999 which expire, if unused, in years 2013 through 2015. The
benefit from income taxes consisted of the following for the years ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
Deferred Tax Benefit
<S> <C> <C>
Federal.......................................................... $ -- $ 53,586
State............................................................ -- 8,295
---------- ----------
Benefit from Income Taxes............................................. $ -- $ 61,881
========== ==========
</TABLE>
F-16
<PAGE>
The following is a reconciliation of the income tax benefit computed at the
federal statutory tax rate with the provision for income taxes for the years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Income tax benefit at statutory rate (34%)............................ $ 499,228 $ 1,476,414
Non deductible expenses, primarily purchased
research and development .......................................... (1,776) (1,439,649)
Change in valuation allowance......................................... (545,906) (118,186)
State benefit, net of federal tax..................................... 48,454 143,302
---------- -----------
Benefit from Income Taxes............................................. $ -- $ 61,881
========== ===========
</TABLE>
NOTE 12 - SUBSEQUENT EVENTS
During the first quarter of 2000 the Company received cash proceeds in the
amount of $1,475,000 under the terms of a private placement offering and issued
491,666 investment units, or $3.00 per unit. Each investment unit consists of
one share of the Company's common stock and a warrant to purchase one-half share
of common stock at $5.00 per share. The warrants expire December 31, 2001.
During January 2000 the Company issued 155,000 non-qualified employee stock
options to purchase common shares at $1.75 per share. The options issued had an
intrinsic value of $1.25 per share on the date of the grant. Accordingly, the
Company will recognize compensation expense to the employees of $193,750 over
the three-year vesting period of the stock options.
F-17
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- -------------
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 2,702,510 $ 207,934
Available-for-sale marketable securities 10,997 94,811
Accounts receivable, net 183,411 94,933
Inventory 177,748 35,262
Prepaid expenses and other assets 70,585 46,551
---------------- --------------
Total Current Assets 3,145,251 479,491
---------------- --------------
Property and Equipment:
Equipment 550,917 173,532
Leasehold improvements 81,419 10,229
Less: Accumulated depreciation and amortization (75,396) (27,016)
--------------- --------------
Net Property and Equipment 556,940 156,745
---------------- --------------
Goodwill and Other Intangible Assets, net 1,149,292 18,750
---------------- -------------
Other Assets -- 34,883
--------------- -------------
Notes Receivable - Related Party 7,861 7,000
--------------- -------------
$ 4,859,344 $ 696,869
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Promissory note $ 100,000 $ --
Member interest purchase obligation 190,000 --
Capital lease obligation, current portion 15,100 8,850
Note payable -- 19,590
Accounts payable 367,776 123,352
Accrued liabilities 178,567 30,660
--------------- -------------
Total Current Liabilities 851,443 182,452
--------------- --------------
Capital Lease Obligation, net of current portion 32,871 14,197
--------------- --------------
Commitments and Contingencies (see note 7)
Stockholders' Equity:
Convertible redeemable preferred stock series 2000-A, $1,000 stated value
per share; 4,500 shares authorized; 4,000 shares outstanding in 2000
(aggregate liquidation preference
of $ 4,081,444) 3,681,444 --
Common stock, $0.001 par value; 50,000,000 shares authorized,
21,045,436 shares outstanding in 2000 and 20,219,770 shares
outstanding in 1999 21,045 20,220
Additional paid-in capital 12,978,783 7,001,564
Deficit accumulated during the development stage (12,608,497) (6,231,062)
Deferred compensation (97,745) (273,599)
Unrealized loss on investments in marketable securities -- (16,903)
--------------- -------------
Total Stockholders' Equity 3,975,030 500,220
--------------- -------------
$ 4,859,344 $ 696,869
=============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Q-1
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative. from
April 30, 1990
(Date of
For the Three Months For the Nine Months Inception)
Ended September 30, Ended September 30, Through
----------------------------- -------------------------------
2000 1999 2000 1999 September 30,
2000
--------------- ------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 226,489 $ 303,784 $ 383,108 $ 426,083 $ 1,172,735
Cost of Revenues 126,804 49,650 220,597 73,947 523,473
--------------- ------------- --------------- --------------- ------------------
Gross Profit 99,685 254,134 162,511 352,136 649,262
--------------- ------------- --------------- --------------- ------------------
Operating Expenses:
Selling, general and administrative 1,399,426 600,638 3,095,537 1,126,647 5,599,424
Research and development 97,046 25,983 218,834 42,091 4,303,366
--------------- ------------- --------------- --------------- ------------------
Total Operating Expenses 1,496,472 626,621 3,314,371 1,168,738 9,902,790
--------------- ------------- --------------- --------------- ------------------
Loss from Operations (1,396,787) (372,487) (3,151,860) (816,602) (9,253,528)
Other Income (Expense):
Interest income 38,094 6,993 61,044 28,163 108,369
Interest expense (6,221) (1,212) (18,995) (3,564) (117,248)
Realized loss on available-for-sale
marketable securities (25,530) (140,346) (100,717) (140,346) (241,064)
--------------- ------------- --------------- --------------- ------------------
Total Other Income (Expense), net 6,343 (134,565) (58,668) (115,747) (249,943)
--------------- ------------- --------------- --------------- ------------------
Loss before Income Taxes (1,390,444) (507,052) (3,210,528) (932,349) (9,503,471)
Income Tax Benefit -- -- -- -- 61,881
--------------- ------------- --------------- --------------- ------------------
Net Loss (1,390,444) (507,052) (3,210,528) (932,349) (9,441,590)
Preferred Stock Dividends 1,026,986 -- 3,166,907 -- 3,166,907
--------------- ------------- --------------- --------------- ------------------
Net Loss Attributable to Common Stockholders
$ (2,417,430) $ (507,052) $ (6,377,435) $ (932,349) $ (12,608,497)
=============== ============= =============== =============== ==================
Basic and Diluted Net Loss Per Common Share
$ (0.12) $ (0.03) $ (0.31) $ (0.05)
=============== ============= =============== ===============
Weighted Average Number of Common Shares
Outstanding 20,988,556 20,205,748 20,740,192 20,181,895
=============== ============= =============== ===============
Other Comprehensive Loss:
Net loss $ (1,390,444) $ (507,052) $ (3,210,528) $ (932,349) $ (9,441,590)
Unrealized holding loss on available for
sale marketable securities -- (4,857) -- (133,070) --
Losses included in net income -- 140,346 16,903 140,346 --
--------------- ------------- --------------- --------------- ------------------
Comprehensive Loss $ (1,390,444) $ (371,563) $ (3,193,622) $ (925,073) $ (9,441,590)
=============== ============= =============== =============== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Q-2
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative. from
April 30, 1990
For the Nine Months Ended (Date of Inception)
September 30,
Through
2000 1999 September 30, 2000
--------------------- ------------------ -------------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net loss $ (3,210,528) $ (932,349) $ (9,441,590)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on marketable securities 100,717 140,346 241,063
Depreciation and amortization 148,955 84,336 292,221
Loss on disposal of property and equipment 5,573 -- 5,573
Amortization of deferred compensation 329,657 158,470 722,752
Interest income on related-party note receivable (861) -- (861)
Common stock issued for services -- 80,000 124,355
Common stock issued for purchased research
and development -- -- 3,766,440
Deferred income tax benefit -- -- (61,881)
Changes in assets and liabilities, net of effects
of the acquisition of
PureSoft Solutions L.L.C.:
Accounts receivable, net (65,642) (261,175) (160,575)
Notes receivable (50,000) -- (50,000)
Inventory (123,684) (23,367) (158,946)
Prepaid expenses and other assets (24,035) (44,003) (40,586)
Other assets 34,884 -- --
Accounts payable 211,139 27,843 334,491
Accrued liabilities 47,462 (32,540) 210,552
--------------- -------------- ------------------
Net Cash Used In Operating Activities (2,596,363) (820,983) (4,216,992)
--------------- -------------- ------------------
Cash Flows From Investing Activities
Purchases of property and equipment (405,951) (53,716) (561,766)
Proceeds from sale of marketable securities -- -- 302,847
Acquisition of PureSoft Solutions L.L.C.,
net of cash acquired (202,422) -- (202,422)
Issuance of related-party notes receivable -- -- (7,000)
--------------- -------------- ------------------
Net Cash Used In Investing Activities (608,373) (53,716) (468,341)
--------------- -------------- ------------------
Cash Flows From Financing Activities
Proceeds from issuance of notes payable -- 4,336 275,565
Principal payments on notes payable (369,590) -- (525,565)
Proceeds from loans from stockholders -- -- 158,934
Principal payments on loans from stockholders -- (10,323) (86,500)
Principal payments on capital lease obligations (8,097) (2,947) (12,994)
Proceeds from the issuance of Series 2000-A
preferred stock 3,600,000 -- 3,600,000
Proceeds from issuance of common stock 2,476,999 -- 3,978,403
---------------- -------------- ------------------
Net Cash Provided By (Used In) Financing Activities 5,699,312 (8,934) 7,387,843
--------------- -------------- ------------------
Net Increase (Decrease) In Cash 2,494,576 (883,633) 2,702,510
Cash At Beginning Of The Period 207,934 1,286,299 --
--------------- -------------- ------------------
Cash At End Of The Period $ 2,702,510 $ 402,666 $ 2,702,510
================== ============== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Q-3
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative, from
April 30, 1990
(Date of Inception)
Nine Months Ended September 30, through
--------------------------------------
2000 1999 September 30, 2000
-------------------- ----------------- -------------------
Supplemental disclosure of cash flow information:
<S> <C> <C> <C>
Cash paid during the period for interest $ 18,739 $ 3,564 $ 116,994
Supplemental Schedule of Non-cash Investing and
Financing Activities:
Acquisition of PureSoft Solutions L.L.C.
Fair value of assets acquired 1,735,509 --
Liabilities assumed 183,730 --
Promissory note 450,000 --
Fair value of stock options issued 261,779 --
Member interest purchase obligation 190,000 --
Noncash preferred stock dividends 2,139,921 --
Equipment acquired through capital lease
obligations 33,021 8,063
Stock option grants at less than fair value 193,750 --
Stock option forfeitures 39,947 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Q-4
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The accompanying condensed consolidated financial
statements are unaudited. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The Company believes that the following disclosures are adequate to
make the information presented not misleading.
These condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) that, in the opinion of
management, are necessary to present fairly the financial position and results
of operations for the periods presented. These financial statements should be
read in conjunction with the Company's consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999.
Operating results for the three and nine months ended September 30, 2000, are
not necessarily indicative of the operating results to be expected for the year
ending December 31, 2000.
Net Loss Per Common Share--Basic and diluted net loss per common share are
calculated by dividing net loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding during the period.
At September 30, 2000 and 1999, there were outstanding common stock equivalents
to purchase 6,223,135 and 1,785,000 shares of common stock, respectively, that
were not included in the computation of diluted net loss per common share as
their effect would have been anti-dilutive, thereby decreasing the net loss per
common share.
Reclassifications - Certain reclassifications have been made in the prior period
condensed consolidated financial statements to conform with the current period
presentation.
NOTE 2-ACQUISITION OF PURESOFT SOLUTIONS L.L.C.
On March 15, 2000, the Company entered into an agreement (the "PureSoft
Agreement") to acquire 100% of the common stock of PureSoft Solutions L.L.C.
("PureSoft"), a New Hampshire limited liability company involved in the
manufacturing and distribution of health care products. As consideration for the
purchase, the Company agreed to pay $50,000 in cash, issue options to purchase
87,534 common shares at $0.01 per share and issue a $450,000 promissory note
bearing interest at 8.5% per year with a $300,000 payment due on June 15, 2000,
and quarterly payments of $50,000 thereafter through March 15, 2001. The
PureSoft Agreement also provides that the Company will, on April 1, 2001 and
April 1, 2002, issue additional shares of its common stock. The number of shares
to be issued is contingent upon the net income before income taxes of PureSoft,
and shall vary in proportion to any over- or under-achievements of established
performance milestones stated in the PureSoft Agreement, provided, however, that
the aggregate minimum number of shares have a market value of no less than
$190,000. In addition, the PureSoft Agreement required the Company to make
working capital advances of $300,000 to PureSoft on each of March 15, 2000, June
15, 2000, and August 15, 2000. All of the working capital advances were paid on
or before the respective due dates and the $50,000 quarterly payments have been
made on schedule.
The acquisition was accounted for as a purchase. The purchase price totaled
$1,551,779 and consisted of: (1) $50,000 paid in cash to the PureSoft owners;
(2) $600,000 paid in cash as working capital advances prior to the purchase; (3)
the $450,000 promissory note; (4) stock options with an estimated fair value of
$261,779 based on the Black-Scholes option-pricing model; and (5) $190,000
representing the minimum earn-out value of shares to be awarded. The contingent
shares which may be issued based upon PureSoft's achieving specific levels of
net income before income taxes will be recorded at the then fair value of the
shares issued and will, accordingly, affect the recorded amount of goodwill to
the extent the fair value of the shares issued exceeds $190,000.
Q-5
<PAGE>
The purchase price allocations to tangible assets included $447,578 of cash,
$22,836 of accounts receivable, $18,802 of inventory, and $14,911 of property
and equipment. The purchase price allocations to liabilities assumed included
$33,285 of accounts payable, $100,445 of accrued liabilities, and $50,000 of
related party notes payable. The excess of the purchase price over the estimated
fair value of the net assets acquired was $1,231,382 and was capitalized as
goodwill to be amortized over five years.
The following unaudited pro forma financial statement data presents the results
of operations of the Company as if the acquisition of PureSoft had occurred at
the beginning of each period. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of future results
or what would have occurred had the acquisitions been made at the beginning of
the applicable period.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------------
2000 1999
------------------ --------------------------
<S> <C> <C>
Revenues $ 432,955 $ 497,950
Net loss (3,442,728) (1,125,204)
Net loss attributable to common
stockholders (6,609,635) (1,125,204)
Basic and diluted net loss per
common share (0.32) (0.06)
</TABLE>
NOTE 3-AVAILABLE-FOR-SALE MARKETABLE SECURITIES
The Company has investments in marketable equity securities which are classified
as available-for-sale securities. During the nine months ended September 30,
2000, the market value of these securities declined and management determined
that the decline was other than temporary. Accordingly, a write-down of $100,717
was recorded to adjust the carrying value of the securities to market value.
NOTE 4-SERIES 2000-A CONVERTIBLE PREFERRED STOCK (See NOTE 8)
On May 16, 2000, the Company executed a securities purchase agreement (the
"Purchase Agreement") with Aspen Capital Resources, L.L.C. (the "Purchaser"),
whereby the Purchaser purchased 1,000 shares of Series 2000-A Convertible
Preferred Stock ("Series 2000-A Preferred Stock") from the Company for
$1,000,000, less a 10% placement fee payable to the Purchaser, and warrants
exercisable for the purchase of additional shares of Company common stock by the
Purchaser. The Purchase Agreement provided for the subsequent purchases of an
additional 3,000 shares of Series 2000-A Preferred Stock with accompanying
warrants for an aggregate purchase price of $3,000,000. The first two subsequent
closings were for $1,000,000 each and the last two for $500,000 each, all of the
foregoing being subject to a similar 10% placement fee to the Purchaser. As of
September 30, 2000, the Company had issued 4,000 shares of Series 2000-A
Preferred Stock in exchange for net proceeds of $3,600,000. The placement fee
was netted against the proceeds receivable under the Purchase Agreement.
Redemption - The Company may be requested to redeem all of the outstanding
shares of Series 2000-A Preferred Stock at a price equal to 125% of the stated
value per share, plus accrued and unpaid dividends and penalties, if any,
through the date of redemption if (i) an event of noncompliance as defined in
the Purchase Agreement occurs, or (ii) if, after the first date upon which the
Company's common stock is quoted in the NASDAQ Stock Market System or reported
on the National Association of Securities Dealers' ("NASD") OTC Bulletin Board,
the average of the closing quoted bid prices for the Company's common stock for
22 consecutive trading days, is less than or equal to $2.00 per share. If the
Company opts not to make the redemption payment when due, dividends will accrue
on all outstanding Series 2000-A Preferred Stock from and after the redemption
date at 21% per year until paid in full and the conversion price will be reduced
by $0.50 per share.
Q-6
<PAGE>
Under the Purchase Agreement, an event of noncompliance shall have occurred if
(i) the Company fails to pay on any dividend payment date the full amount of
dividends then accrued, (ii) the Company fails to make any redemption payment
which it is required to make, (iii) the Company breaches or otherwise fails to
perform or observe any material provision of the Purchase Agreement, and such
failure is not cured within 15 days after the occurrence thereof, (iv) any
representation or warranty contained in the Purchase Agreement or required to be
furnished to any holder is false or misleading in any material respect, (v) the
Company makes an assignment for the benefit of creditors or admits in writing
its inability to pay its debts generally as they become due, or an order,
judgment or decree is entered adjudicating the Company bankrupt or insolvent,
(vi) any material provision of the Purchase Agreement shall at any time for any
reason be declared to be null and void, (vii) (A) any registration statement
required to be filed by the Company and declared effective by the Securities and
Exchange Commission (the "SEC") pursuant to the Purchase Agreement shall not
become effective as provided in the Purchase Agreement or shall cease to be
effective, (B) the SEC shall issue any stop order suspending the effectiveness
under the Securities Act of any registration statement required to be filed by
the Company and declared effective by the SEC pursuant to the Purchase Agreement
or any state securities commission suspends the qualification of the securities
covered thereby for offering for sale in any jurisdiction, (C) any proceeding
for purposes of either (A) or (B) above is initiated, or (D) after September 18,
2000 the common stock is suspended from trading on or the price for the common
stock is not quoted or reported on the NASDAQ Stock Market System or the NASD's
OTC Bulletin Board, (viii) the Company at any time shall not have the required
number of reserved and available authorized but unissued shares of common stock,
or (ix) the occurrence of any material adverse change in the business, condition
(financial or otherwise), prospects, or results of operations of the Company
taken as a whole.
As of September 30, 2000, the Company's common stock was not listed and trading
on the NASDAQ Stock Market System or the NASD OTC Bulletin Board. The purchaser
has waived any penalty or event of non-compliance resulting from such event. The
Company's common stock began trading on the NASD's OTC Bulletin Board on October
26, 2000.
After May 16, 2001, the Company has the right to redeem all or some of the
outstanding shares of Series 2000-A Preferred Stock by paying 125% of the stated
value per share, plus accrued and unpaid dividends and penalties, if any,
through the date of redemption. However, the Company may not redeem any Series
2000-A Preferred Stock unless all dividends accrued on all of the outstanding
Series 2000-A Preferred Stock through the immediately preceding dividend payment
date have been paid in full. If the Company does not make the redemption payment
when due, dividends will accrue on all outstanding Series 2000-A Preferred Stock
from and after the redemption date at 21% until paid in full and the conversion
price will be reduced by $0.50 per share.
Conversion - Holders of Series 2000-A Preferred Stock have the right, but not
the obligation to convert the stated value and any accrued and unpaid dividends
thereon into shares of the Company's common stock by dividing the stated value
of such shares to be converted together with any accrued but unpaid dividends
thereon by the conversion price (the "Conversion Price"), which is 80% of the
average of the three lowest closing bid prices for the common stock quoted on
the NASDAQ Stock Market System or reported on the NASD's OTC Bulletin Board
during the 15 trading days preceding the conversion date, subject to a maximum
Conversion Price of $4.00 per share and a minimum Conversion Price of $2.00 per
share, subject to adjustment. As of September 30, 2000, no shares of Series
2000-A Preferred Stock had been converted into common stock. Upon the occurrence
of an event of noncompliance (see above), the minimum Conversion Price shall not
be subject to any limitations.
On or after November 16, 2001, the Company may require the holder of Series
2000-A Preferred Stock to convert all of the shares of Series 2000-A Preferred
Stock into shares of common stock by delivering to the holder 30-days prior
written notice of the exercise of this right.
During the nine months ended September 30, 2000, the Company recorded a
preferred stock dividend of $1,000,000 related to the 20% discount on the shares
of Series 2000-A Preferred Stock then convertible. Additionally, on August 17,
2000, the Company agreed to allow the holder of the Series 2000-A Preferred
Stock to convert up to $1,000,000 in stated value of Series 2000-A Preferred
Stock at a Conversion Price of $2.00 per share and recorded an additional
preferred stock dividend of $250,000 related to this reduction in the Conversion
Price.
Q-7
<PAGE>
Adjustment of the Conversion Price - If after May 16, 2000, the Company issues
or sells any shares of common stock or grants any rights or options to purchase
common stock or any stock or other securities convertible into or exchangeable
for common stock or issues or sells any convertible securities, and the value
per share for such common stock issuable is less than the fair market value per
share, the Conversion Price of the Series 2000-A Preferred Stock is reduced
according to a formula defined in the Purchase Agreement.
Registration Rights - On June 14, 2000, the Company filed a registration
statement to registration statement with the SEC to register or qualify under
applicable federal and state securities laws the resale by the Purchaser of (i)
all shares of common stock issuable upon conversion of the Series 2000-A
Preferred Shares, (ii) all of the shares of the common stock issuable upon
exercise of the related warrants, and (iii) all of the additional shares of
common stock issued or issuable to the Purchaser pursuant to the Purchase
Agreement. The registration statement was declared effective on July 7, 2000.
If such registration statement ceases to remain effective as provided in the
Purchase Agreement, the Company is required to issue to the Purchaser on such
date and on every date which is 30 days or a multiple thereof after such date,
until such registrations or qualifications shall become effective, additional
shares of common stock equal in number to 5% of the total number of shares of
common stock issued or issuable upon conversion of all issued and outstanding
Series 2000-A Preferred Shares and to cause the resale of all such additional
shares to be included in the registrations or qualifications.
Dividends - The holder of Series 2000-A Preferred Stock is entitled to receive
cumulative dividends equal to 8% per year and payable quarterly provided,
however, that if there is an event of noncompliance, as defined in the Purchase
Agreement, the holder of Series 2000-A Preferred Stock shall be entitled to
receive cumulative dividends equal to 21% per year. The holder of Series 2000-A
Preferred Stock at its option may elect to receive payment of dividends in cash
or in shares of the Company's common stock at the Conversion Price.
The Company has recorded $81,444 in Series 2000-A Preferred Stock dividends from
the date of issue through September 30, 2000. This is in addition to the
$1,250,000 of dividends related a beneficial conversion feature of the Series
2000-A Preferred Stock.
Warrants - The Purchase Agreement provides for the issuance of Series 2000-A
Warrants (the "Warrants") in connection with each closing of the purchase of
Series 2000-A Preferred Stock. Each Warrant entitles the holder to purchase one
share of common stock at an exercise price of $3.00 per share.
The number of Warrants ultimately issued by the Company will vary depending on
the Conversion Price of the Series 2000-A Preferred Stock. The Purchase
Agreement provides that the ultimate number of warrants shall be determined by
dividing the aggregate stated value of the shares of Series 2000-A Preferred
Stock by the Conversion Price determined as of the earlier of November 16, 2001,
the date on which the holder of the Warrants converts its shares of Series
2000-A Preferred Stock, or the date on which the shares of Series 2000-A
Preferred Stock are redeemed.
The Warrants are exercisable from June 1, 2001, or earlier upon the occurrence
of an event of default, as defined in the Warrants, or a change in control of
the Company, and may be exercised through May 16, 2004. The Warrants are not
subject to early redemption by the Company.
The Company recorded $1,835,463 in Series 2000-A Preferred Stock dividends
related to the potential issuance of the Warrants during the nine months ended
September 30, 2000. This is in addition to the $1,250,000 of dividends related
to a beneficial conversion feature and the $81,444 related to the 8% dividend
rate.
Voting Rights - Each share of Series 2000-A Preferred Stock issued and
outstanding shall have the number of votes equal to the number of shares of
common stock into which the share of Series 2000-A Preferred Stock is
convertible.
Reserved Shares - The Company is required to reserve shares of its common stock,
solely for the purpose of issuance upon the conversion of all outstanding Series
2000-A Preferred Stock.
Q-8
<PAGE>
NOTE 5-STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2000, the Company received cash
proceeds in the amount of $2,476,999 under the terms of a private placement
offering by issuing 825,666 investment units, at $3.00 per unit. Each investment
unit consists of one share of the Company's common stock and a warrant to
purchase one-half share of common stock at $4.50 per share. The warrants expire
on December 31, 2001.
NOTE 6-STOCK OPTIONS
During the nine months ended September 30, 2000, the Company granted 461,000
options under its 1998 Stock Option Plan. Of the options granted, 155,000
options have an exercise price of $1.75 per share and 306,000 options have an
exercise price of $3.00 per share. The options are exercisable as follows: 40%
on the date of grant and 60% over a two-year period from the date of grant. All
options granted during this period expire on the fifth anniversary of their
respective grant date. The Company recorded $193,750 of deferred compensation
related to options that have exercise prices below the fair market value on the
date of grant. Amortization of deferred compensation amounted to $85,858 and
$329,657 for the three months and nine months ended September 30, 2000,
respectively.
Additionally, the Company granted options to purchase 87,534 common shares at
$0.01 per share in connection with the acquisition of PureSoft. These options
are exercisable immediately and have no expiration date.
NOTE 7-COMMITMENTS AND CONTINGENCIES
Operating Lease - On March 1, 2000, the Company added additional office and
laboratory space and renegotiated the lease for its current office space. The
new lease is for a three-year term, is renewable on an annual basis, and
currently requires lease payments of $7,325 per month with annual escalations
equal to the lesser of the change in the consumer price index or 5%.
Capital Lease - On June 2, 2000, the Company entered into a capital lease
arrangement for telephone and computer equipment in the amount of $33,021. The
lease is for a five-year term and requires lease payments of $735 per month.
Legal Contingencies- An individual asserted a claim against the Company under
the terms of an agreement allegedly entered into in 1991, which purported to
promise shares of common stock of Linco Industries, Inc. ("Linco"), the
predecessor of the Company prior to its reorganization on September 15, 1998, if
certain conditions were met by the individual in representing Linco to potential
customers. Management believes that the alleged 1991 agreement is no longer
enforceable because the conditions were not met within a reasonable time and
because the individual failed to fulfill other material terms of the alleged
1991 agreement. Because of the claim, Linco's founders and the Company filed an
action for declaratory judgment seeking a determination that the individual has
no legal rights against the Company. The individual responded and filed a
counterclaim that he had "fully performed" under the 1991 agreement. The parties
are conducting discovery. Management believes that the individual's claim is
without merit and should not ultimately result in any liability to the Company
based on sufficient defenses and an indemnification obligation of Linco's
founders in favor of the Company.
NOTE 8-SUBSEQUENT EVENT-SERIES 2000-A PREFERRED STOCK
On November 13, 2000, the Company entered into an agreement (the "Modification
Agreement") with Aspen Capital Resources, L.L.C. (the "Purchaser"), whereby the
Purchaser and the Company agreed to modify certain terms of a securities
purchase agreement dated May 16, 2000 (the "Purchase Agreement") pursuant to
which the Purchaser purchased 4,000 shares of Series 2000-A convertible
Preferred Stock ("Series 2000-A Preferred Stock") from the Company for
$4,000,000, and warrants (the "Warrants") exercisable for the purchase of
additional shares of Company common stock by the purchaser. As modified, the
Purchase Agreement provides that the Company may be requested to redeem all of
the outstanding shares of Series 2000-A Preferred Stock at a price equal to 125%
of the stated value per share, plus accrued and unpaid dividends and penalties,
if any, through the date of redemption if (i) an event of noncompliance as
defined in the Purchase Agreement occurs; (ii) if, after January 31, 2001, the
average of the closing quoted bid prices for the Company's common stock for 22
consecutive trading days is less than or equal to $1.00 per share, or (iii) if
(A) the aggregate balance of the Company's cash and cash equivalent accounts is
less than $1,000,000 at any time after November 13, 2000 and on or before
January 31, 2001 and (B) at
Q-9
<PAGE>
any time thereafter, the average closing bid price for the Company's common
stock for the previous 22 consecutive trading days is less than or equal to
$1.00 per share. If the Company opts not to make the redemption payment when
due, dividends will accrue on all outstanding Series 2000-A Preferred Stock from
and after the redemption date at 21% per year until paid in full and the
conversion price will be reduced by $0.50 per share.
Under the terms of the Modification Agreement, the Company waived its right to
redeem after May 16, 2001 all or some of the outstanding shares of Series 2000-A
Preferred Stock by paying 125% of the stated value per share, plus accrued and
unpaid dividends and penalties, if any, through the date of redemption.
Further, as modified, the Purchase Agreement grants holders of Series 2000-A
Preferred Stock the right to convert the stated value and any accrued and unpaid
dividends thereon into shares of the Company's common stock by dividing the
stated value of such shares to be converted together with any accrued but unpaid
dividends thereon by the conversion price, which is 80% of the average of the
three lowest closing bid prices for the common stock quoted on the Nasdaq Stock
Market system or reported on the NASD's OTC Bulletin Board during the 15 trading
days preceding the conversion date, subject to a maximum conversion price of
$1.20 per share.
On June 14, 2000, the Company filed a registration statement with the SEC to
register or qualify under applicable federal and state securities laws the
resale by the Purchaser of (i) shares of common stock issuable upon conversion
of the Series 2000-A Preferred Shares, (ii) all of the shares of the common
stock issuable upon exercise of the related warrants, and (iii) all of the
additional shares of common stock issued or issuable to the Purchaser pursuant
to the Purchase Agreement. The registration statement was declared effective on
July 7, 2000. The Company has agreed to file an additional registration
statement covering additional shares issuable upon conversion of the Series
2000-A Preferred Shares as a result of reducing the maximum conversion price
from $4.00 to $1.20.
Finally, as modified, the Purchase Agreement provides for the issuance of
2,000,000 Warrants. Each Warrant entitles the holder to purchase one share of
common stock at an exercise price of $2.25 per share. The Warrants are
exercisable from November 1, 2001, or earlier upon the occurrence of an event
of default, as defined in the Warrants, or a change in control of the Company,
and may be exercised through May 16, 2004. The Warrants are not subject to early
redemption by the Company.
Q-10
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of
operations are based on the historical consolidated operations of First
Scientific, Inc. (the "Company") included elsewhere in this prospectus adjusted
to give effect to the acquisition of PureSoft Solutions L.L.C. ("PureSoft"). The
accompanying unaudited pro forma condensed consolidated statements of operations
should be read in conjunction with the financial statements, including notes
thereto, of these entities included elsewhere in this prospectus. The unaudited
pro forma condensed consolidated statements of operations have been prepared
using the purchase method of accounting and reflect the effect of the
acquisition as if it had occurred on February 10, 1999, the date of inception of
PureSoft.
The unaudited pro forma condensed consolidated statements of operations included
in this prospectus are for illustrative purposes only. Such information does not
purport to represent what the Company's results of operations actually would
have been had the acquisition in fact occurred when assumed, nor is it
indicative of actual or future operating results that may occur.
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
First Scientific PureSoft
------------------- --------------------
Year Ended Inception (February
10, 1999) Pro Forma
December 31, 1999 to December 31, 1999 Adjustments Pro Forma
------------------- -------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 553,631 $ 90,219 $ - $ 643,850
Cost of Revenues 148,223 38,896 - 187,119
----------------- -------------------- ----------- -----------
Gross Profit 405,408 51,323 - 456,731
Operating Expenses:
Selling, general and administrative 1,666,555 107,725 215,492 (a) 1,989,772
Research and development 94,982 - - 94,982
----------------- -------------------- ----------- -----------
Total Operating Expenses 1,761,537 107,725 215,492 2,084,754
Loss from Operations (1,356,129) (56,402) (215,492) (1,628,023)
Other Income (Expense):
Interest income 32,643 - - 32,643
Interest expense (4,485) (4,873) (15,938) (b) (25,296)
Realized loss on available-for-sale securities (140,346) - - (140,346)
----------------- -------------------- ----------- -----------
Total Other Income (Expense), net (112,188) (4,873) (15,938) (132,999)
Loss before Income Taxes (1,468,317) (61,275) (231,429) (1,761,021)
Income Tax Benefit - - - -
----------------- -------------------- ----------- -----------
Net Loss (1,468,317) (61,275) (231,429) (1,761,021)
Preferred Stock Dividends - - 778,863 (c) 778,863
----------------- -------------------- ----------- -----------
Net Loss Attributable to Common
Stockholders $ (1,468,317) $ (61,275) $ (1,020,292) $(2,549,884)
================= ==================== =========== ===========
Basic and Diluted Net Loss per Common
Share $ (0.07) $ (0.13)
================= ===========
Basic and Diluted Weighted Average
Common Shares Outstanding 20,182,373 20,975,957
================= ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated
financial statements
PF-2
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
First Scientific PureSoft
------------------ --------------------
Nine Months Ended January 1, 2000
September 30, 2000 to Date of Pro Forma
Acquisition Adjustments Pro Forma
----------------- -------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 383,108 $ 49,847 $ - $ 432,955
Cost of Revenues 220,597 32,584 - 253,181
----------------- -------------------- ----------- -----------
Gross Profit 162,511 17,263 - 179,774
Operating Expenses:
Selling, general and administrative 3,095,537 144,723 102,615 (a) 3,342,875
Research and development 218,834 - 218,834
----------------- -------------------- ----------- -----------
Total Operating Expenses 3,314,371 144,723 102,615 3,561,709
Loss from Operations (3,151,860) (127,460) (102,615) (3,381,935)
Other Income (Expense):
Interest income 61,044 - - 61,044
Interest expense (18,995) - (2,125) (b) (21,120)
Realized loss on available-for-sale securities (100,717) - - (100,717)
----------------- -------------------- ----------- -----------
Total Other Income (Expense), net (58,668) - (2,125) (60,793)
Net Loss (3,210,528) (127,460) (104,740) (3,442,728)
Preferred Stock Dividends 3,166,907 - 33,333 (c) 3,200,240
----------------- -------------------- ----------- -----------
Net Loss Attributable to Common
Stockholders $ (6,377,435) $ (127,460) $ (138,073) $(6,642,968)
================= ==================== =========== ===========
Basic and Diluted Net Loss per Common
Share $ (0.31) $ (0.32)
================= ===========
Basic and Diluted Weighted Average
Common Shares Outstanding 20,740,192 20,740,192
================= ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated
financial statements
PF-3
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Basis of Presentation
The unaudited pro forma condensed consolidated statements of operations are
based on adjustments to the historical consolidated statements of operations of
First Scientific, Inc. (the "Company") to give effect to the acquisition of
PureSoft Solutions L.L.C. ("PureSoft") assuming the acquisition was consummated
as of February 10, 1999, the date of inception of PureSoft. The unaudited pro
forma condensed consolidated statements of operations are not necessarily
indicative of results that would have occurred had the acquisition been
consummated as of February 10, 1999, the date of inception of PureSoft, or that
might be attained in the future. The pro forma condensed consolidated statements
of operations should be read in conjunction with the audited financial
statements, including notes thereto, of these entities and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
(2) Acquisition
On March 15, 2000, the Company entered into an agreement (the "PureSoft
Agreement") to acquire PureSoft, a New Hampshire limited liability company
involved in the manufacturing and distribution of health care products. As
consideration for the purchase, the Company agreed to pay $50,000 in cash, issue
options to purchase 87,534 common shares at $0.01 per share, and issue a
$450,000 promissory note bearing interest at 8.5% per year with a $300,000
payment due on June 15, 2000 and quarterly payments of $50,000 thereafter
through March 15, 2001. The PureSoft Agreement, as amended, also provides that
the Company will, on July 1, 2001, and July 1, 2002, issue additional shares of
its common stock. The number of shares to be issued is contingent upon the net
income before income taxes of PureSoft and shall vary in proportion to any over-
or under-achievements of established performance milestones stated in the
PureSoft Agreement, provided, however, that the aggregate minimum number of
shares have a market value of no less than $190,000. In addition, the PureSoft
Agreement required the Company to make working capital advances of $300,000 to
PureSoft on each of March 15, 2000, June 15, 2000, and August 15, 2000. All of
the working capital advances were paid on or before the respective due dates and
the $50,000 quarterly payments have been made on schedule. The acquisition was
consummated on June 2, 2000.
The purchase price totaled $1,551,779 and consisted of: (1) $50,000 paid in cash
to the PureSoft owners; (2) $600,000 paid in cash as working capital advances
prior to the purchase; (3) the $450,000 promissory note; (4) the estimated fair
value of the stock options of $261,779 based on the Black-Scholes option-pricing
model; and (5) $190,000 representing the minimum earn-out value of shares to be
awarded. The effect of the value of contingent shares in excess of $190,000,
which may be issued based upon PureSoft's achieving specific levels of net
income before income taxes, is not included in the accompanying unaudited pro
forma condensed consolidated statements of operations due to the inherent
uncertainty of the issuance of the contingent shares.
The purchase price allocations to tangible assets included $447,578 of cash,
$22,836 of accounts receivable, $18,802 of inventory, and $14,911 of property
and equipment. The purchase price allocations to liabilities assumed included
$33,285 of accounts payable, $100,445 of accrued liabilities, and $50,000 of
related party notes payable. The excess of the purchase price over the estimated
fair value of the net assets acquired was $1,231,382 and was capitalized as
goodwill to be amortized over a period of five years.
(3) Pro Forma Adjustments
(a) To reflect the amortization of goodwill related to the acquisition, which
is being amortized over a period of five years.
(b) To reflect the interest on the $450,000 promissory note at a rate of 8.5%
PF-4
<PAGE>
per year with a $300,000 payment due on 3 months from issuance date and
quarterly payments of $50,000 thereafter.
(c) To reflect the beneficial conversion features and dividends associated with
1,000 shares of the Company's Series 2000-A Convertible Preferred Stock
("Series A preferred stock"). In order to obtain funding for the
acquisition of PureSoft, the Company issued 1,000 shares of Series A
preferred stock and related warrants. The net proceeds of $900,000 were
allocated between the Series A preferred shares and the warrants based on
the relative fair value of each of the instruments. The value allocated to
the warrants resulted in a discount to the preferred stock and a preferred
stock dividend of $458,853. Additionally, the holders of the Series A
preferred stock had the right to convert the stated value of the shares and
any accrued and unpaid dividends thereon into shares of the Company's
common stock at a rate equal to 80% of the average of the three lowest
closing bid prices for the common stock during the 15 trading days
preceding the conversion date, subject to a maximum conversion price of
$4.00 per share and a minimum conversion price of $2.00 per share, subject
to adjustment. This 20% beneficial conversion feature resulted in a
preferred stock dividend of $250,000. Further, the holder of Series A
preferred stock was entitled to receive cumulative dividends at a rate
equal to 8% per year or $80,000.
PF-5
