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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
Retractable Technologies, Inc.
(Name of Small Business Issuer in Its Charter)
Texas 75-2599762
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Thomas J. Shaw
Chairman, President and Chief Executive Officer
511 Lobo Lane
Little Elm, Texas 75068-0009
(Address of Principal Executive Offices) (Zip Code)
(972) 294-1010
(Issuer's Telephone Number)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock
Preferred Stock
(Title of Class)
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TABLE OF CONTENTS
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Page No.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS............................................................... 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............................. 13
ITEM 3. DESCRIPTION OF PROPERTY............................................................... 19
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 20
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS......................... 21
ITEM 6. EXECUTIVE COMPENSATION................................................................ 26
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 30
ITEM 8. DESCRIPTION OF SECURITIES............................................................. 31
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND OTHER SHAREHOLDER
MATTERS............................................................................... 47
ITEM 2. LEGAL PROCEEDINGS..................................................................... 47
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS......................................... 47
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES............................................... 47
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS............................................. 49
PART F/S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998, AND REPORT OF INDEPENDENT
ACCOUNTANTS AND UNAUDITED FINANCIAL STATEMENTS AS OF MARCH 31, 2000 AND 1999.......... 51
PART III
ITEM 1. INDEX TO EXHIBITS..................................................................... 81
ITEM 2. DESCRIPTION OF EXHIBITS............................................................... 82
Signature Page................................................................................... 83
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PART I - FORM 10-SB
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
General Description
-------------------
Retractable Technologies, Inc., a Texas corporation (the "Company"),
designs, develops, manufactures, and markets innovative patented safety needle
devices for the healthcare industry. The Company's VanishPoint(R) products
utilize a unique friction ring mechanism patented by Thomas J. Shaw, Founder,
President, and Chief Executive Officer of the Company. VanishPoint(R) products
are designed specifically to prevent needlestick injuries and to prevent reuse.
The friction ring mechanism permits the automated retraction of the syringe
needle into the barrel of the syringe, directly from the patient, after delivery
of the medication is completed. The VanishPoint(R) blood collection tube holder
utilizes the friction ring mechanism to retract the needle after blood has been
drawn from the patient. Closure of an attached end cap causes the needle to
retract directly from the patient into the closed tube holder. Advantages of the
automated retraction products include protection from needlestick injuries,
prevention of cross contamination through reuse, and reduction of disposal and
other associated costs. The Company has an exclusive license for the patent
rights for all of its safety needle products. The Company's goal is to become a
leading provider of automated retraction safety devices.
Commercial production of the Company's 3cc VanishPoint(R) syringe began in
1997. Additional VanishPoint(R) products, which are patented, include 1cc
tuberculin, insulin, and allergy antigen syringes; 5cc and 10cc syringes; and a
blood collection tube holder and small tube adapter. 3cc syringes and blood
collection tube holders are being manufactured using automated assembly.
Commercial production of the blood collection tube holder began in the fourth
quarter of 1998. 5cc and 10cc syringes are being manufactured in lesser
quantities utilizing semi-automated equipment. Premarket approval has been
granted by the Food and Drug Administration ("FDA") for the 1cc, 3cc, 5cc, and
10cc syringes and the blood collection tube holder and small tube adapter.
Development of the Company
--------------------------
While owning and operating Checkmate Engineering, a sole proprietorship,
Mr. Shaw developed and patented the idea and early prototypes of the syringe
that were to become the VanishPoint(R) safety syringe. On May 9, 1994, the
Company was incorporated in Texas to design, develop, manufacture, and market
medical safety devices for the healthcare industry. In April 1995, Thomas J.
Shaw, who owned all 1,000 issued and outstanding shares of the common stock of
the Company, exchanged all 1,000 shares then outstanding for 14,000,000 shares
of common stock. In May 1996, Mr. Shaw transferred 2,800,000 shares of the
14,000,000 issued and outstanding common stock to Lillian E. Salerno, a Director
of the Company.
In 1996, the Company purchased assets and hired personnel from Checkmate
Engineering. The Company had limited production but no sales in 1996, but
focused its attention on general and administrative activities including
implementing Quality System Regulation, developing a human resource department,
and obtaining an application for an Order of Substantial Equivalence from the
FDA allowing the Company to manufacture and sell the 3cc VanishPoint(R) syringe.
In 1997, the Company began selling products to emergency medical service
centers, federal prison systems, homecare facilities, small hospitals, and VA
hospitals. During the second half of 1997, the Company took delivery of its 3cc
automated assembly equipment and began automated assembly. Production molds for
the 5cc and 10cc syringes and the blood collection tube holder were ordered in
1997. A prototype mold for the 1cc syringe was ordered and received in 1997.
Automated assembly equipment for the blood collection tube holder was ordered at
the end of 1997 and installed in July 1998. Commercial production of the blood
collection tube holder began in 1998. The Company received its ISO 9001
Certificate in July 1998, and the VanishPoint(R) syringe received its CE Mark
Certificate on July 31, 1998. The CE mark allows the Company to sell its
products in Europe. In 1999, the Company focused its development on improving
manufacturing processes and expanding product lines. In 1999, the Company
focused its development on improvement of manufacturing processes, continuation
of design and development of the manufacturing process for the 1cc syringe, and
conceptual design of additional safe needle products utilizing automated
retraction technology.
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On May 4, 2000, the Company signed a National Marketing and Distribution
Agreement ("Agreement") with Abbott Laboratories ("Abbott") for an initial five-
year term. Furthermore, Abbott and the Company have agreed to the formation of a
New Product Team, consisting of key personnel from both companies, that will
develop new safety products that incorporate the Company's patented, proprietary
technology.
The Company has not been involved in any bankruptcy or similar proceedings
and has not merged or consolidated a significant amount of assets other than in
the ordinary course of business except as discussed above.
BUSINESS OF ISSUER
Principal Products
------------------
The Company's products with pre-market approval by the FDA include 1cc
tuberculin, insulin, and allergy antigen VanishPoint(R) syringes; 3cc, 5cc, and
10cc VanishPoint(R) syringes; and the VanishPoint(R) blood collection tube
holder and small tube adapter. All of VanishPoint(R) products utilize a unique
friction ring mechanism patented by Thomas J. Shaw, Founder, President, and
Chief Executive Officer of the Company. This friction ring mechanism permits
the automated retraction of the syringe needle into the barrel of the syringe,
directly from the patient, after delivery of medication is completed. The
VanishPoint(R) blood collection tube holder utilizes the friction mechanism to
retract the needle after blood has been drawn from the patient. Closure of an
attached end cap causes the needle to retract directly from the patient into the
closed tube holder. Advantages of the automated retraction products include
protection from needlestick injuries, prevention of cross contamination through
reuse, and reduction of disposal and other associated costs. In October 1999,
the ECRI (formerly known as the Emergency Care Research Institute), a recognized
authority in evaluating medical devices, awarded the VanishPoint(R) syringe and
blood collection tube holder its highest possible rating. The VanishPoint(R)
blood collection tube holder received Risk and Insurance magazine's 1997 "Top of
the Line" Award for excellence.
The Company's 1cc VanishPoint(R) tuberculin, insulin, and allergy antigen
syringes will be produced in various needle lengths and gauges and packaging
styles. They are expected to be available in the second half of 2000. The 3cc
VanishPoint(R) syringe reached the market in the first quarter of 1997. It is
available in various needle lengths and gauges. The 5cc and 10cc VanishPoint(R)
syringes are being produced in various needle lengths and gauges and are
currently being sold in limited quantities. Sales of the VanishPoint(R) blood
collection tube holder and a small tube adapter for use with small sample
collection tubes began in the third quarter of 1998.
The manufacture and sale of medical devices entails an inherent risk of
liability in the event of product failure or claim of harm caused by the
product's operation. The Company believes that it has adequate product
liability insurance against any such claims. In March, 1998, the Journal of
Healthcare Safety, Compliance and Infection Control published a survey of 26
medical facilities having used a total of 86,000 3cc syringes, during which no
needlestick injuries from using the VanishPoint(R) syringes were reported.
Industry Overview
-----------------
The VanishPoint(R) syringe and needle device products are sold to and used
by organizational and individual healthcare providers (primarily in the United
States with limited sales outside the United States), which include, but are not
limited to, acute care hospitals, alternative care facilities, doctors' offices,
clinics, emergency centers, surgical centers, convalescent hospitals, VA
facilities, military organizations, public health facilities, and prisons.
Based on the most recent (1998) report from Theta Corporation ("Theta"), a
publisher of comprehensive market research reports on the medical device,
diagnostic, biotech, and pharmaceutical industries, the number of unit sales of
disposable hypodermic needles and syringes for 1997 was 6.6 billion in the
United States alone, with $1 billion in projected sales. According to Theta
estimates, 94 percent of the 1997 United States syringe market was made up of
standard syringes--at an average price of $.11 per unit, and 6 percent was
safety syringes--at an average price of $.30 per unit. Of the 6.6 billion
syringes sold in 1997, 4.3 billion were purchased by hospitals and 2.3 billion
were purchased by alternate care facilities. The alternate care market includes
1 billion units for retail customers--who use primarily
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1cc allergy antigen and insulin syringes, 600 million units for physicians'
offices--which use a mixture of all types of syringes, and 700 million units for
extended care facilities. According to market leader Becton Dickinson and
Company ("B-D"), approximately 20 percent of the United States market has
converted to safety-engineered products and, according to their projections, 85
percent of the market will be converted within the next few years. Theta
projections indicate that by 2001, 75 percent of syringes sold in the United
States will be safety syringes and 25 percent will be standard with estimated
pricing resulting in revenues of $1.35 billion.
Blood collection devices are used, most often by phlebotomists and
laboratory technicians, to collect samples of blood from patients for diagnostic
procedures. An evacuated vacuum tube used to contain the drawn blood is inserted
into the tube holder, which is a plastic device with a needle attached that is
designed for that purpose. Because the hollow-bore needles used for blood
collection are filled with patients' blood, and because insertion of the needle
into a patient's vein often requires several attempts, the ratio of needlestick
injuries to number of units used is higher for blood collection tube holders
than for syringes, and the risk of infection is greater. Consequently, some
blood collection tube holders now incorporate safety features similar to those
used in syringes. Industry resources indicate that annually there are 800
million medical procedures conducted to collect blood specimens. Based on
Theta's 1998 report, the number of unit sales of blood collection tubes for
1997 was 1.3 billion in the United States alone, with $170 million in projected
sales.
The syringe and needle device market is a market in transition. The nature
of the products comprising the market is changing from standard to safety
devices. The impetus for the change to safety devices is the risk that is
carried with each needlestick injury which includes the transmission of over 20
bloodborne pathogens, including the human immunodeficiency virus (HIV, which
causes AIDS), hepatitis B, and hepatitis C. Because of the occupational and
public health hazards posed by conventional disposable syringes, public health
policy makers and the following domestic organizations and government agencies
are involved, or are becoming involved, in the current effort to get more
effective safety needle products to healthcare workers:
The National Institute for Occupational Safety and Health ("NIOSH") issued
a safety alert calling on employers to adopt safer needles to reduce
needlestick injuries. The federal agency is a division of the Centers for
Disease Control and Prevention ("CDC"). In its alert, "Preventing
Needlestick Injuries in Health Care Settings," NIOSH provides the latest
scientific information available about the risk of needlestick injuries.
This alert adds momentum to the growing safety movement and supports the
rules issued by the Federal Occupational Safety and Health Administration
("OSHA"), on November 5, 1999.
OSHA issued a Compliance Directive which instructs OSHA inspectors to cite
employers who fail to evaluate and buy the safety needle devices available
on the market. The directive states that where engineering controls will
reduce employee exposure either by removing, eliminating, or isolating the
hazard, they must be used.
The Service Employees International Union ("SEIU") has taken a proactive
stance with regard to promoting the use of automated retraction needle
devices in member hospitals. Events, including introduction of state and
federal legislation protests by SEIU members at San Francisco General
Hospital, attest to the type of support from the community that the safety
products and VanishPoint(R) product line, in particular, attract. Members
of the SEIU have specifically requested VanishPoint(R) products in order to
make their members aware of the availability of VanishPoint(R) technology
and the need for it at other facilities with union membership. Unionized
healthcare workers provide healthcare staffing for 12.5 percent of United
States hospital facilities.
Under California's groundbreaking legislation, the California Occupational
Safety and Health Administration ("Cal OSHA") mandates healthcare employers
to provide their workers with safe needle devices. This action was taken in
response to events that transpired at San Francisco General Hospital and
pressure from the SEIU and various federal, state, and local elected
officials in California who demanded change. Representatives of the Company
served on the Advisory Committee for developing the amendments. California
was the first state to successfully pass legislation mandating the use of
safety needle products. The bill, signed into law by Governor Pete Wilson
on September 30, 1998, directed Cal OSHA to amend California's bloodborne
pathogens standard. Beginning July 1, 1999, this regulation requires the
use of needle products that effectively eliminate or reduce injury rates.
Employers are also required to create and
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maintain a log of all needlestick injuries by the type of device and the
manufacturer's brand. Noncompliance with this Cal OSHA standard can result
in misdemeanor and/or felony charges that carry penalties of up to three
years in prison and fines up to $250,000.
Fifteen states have now enacted safety needle laws. California, Tennessee,
Maryland, Texas, New Jersey, Ohio, West Virginia, Minnesota, Maine,
Georgia, New Hampshire, Iowa, Alaska, Connecticut, and Oklahoma have
enacted safety needle laws. In addition, numerous states have introduced
legislation containing language similar to that passed in California.
Federal legislation (House Bill 1899 and Senate Bill 1140) is pending with
bipartisan support and support from OSHA and the Secretary of Labor.
Marketing and Distribution
--------------------------
The vast majority of decisions relating to the purchase of medical supplies
are made by the purchaser representatives of the various healthcare
organizations rather than the end-users of the product (nurses, doctors, and
testing personnel). Furthermore, many of these organizations have entered into
agreements with group purchasing organizations ("GPOs") which contract for the
purchase of supplies on behalf of their member organizations in order to obtain
the lowest possible prices. The GPOs individually negotiate prices with
manufacturers of medical devices and supplies and thus their healthcare provider
members are only able to select their medical supplies and equipment from a list
of pre-negotiated suppliers. According to "The Role of Group Purchasing
Organizations in the US Health Care System," a report prepared by Muse &
Associates for the Health Industry Group Purchasing Association ("HIGPA"), the
potential hospital marketplace for medical/surgical equipment and supplies in
1998 and 1999 was $32.8 billion and $34.1 billion, respectively. HIGPA and
other industry representatives estimate that 80 percent of these hospital
expenditures were channeled through GPOs. There can be no assurance that future
GPO contracts will not continue to limit the Company's share of the market and
have a material adverse effect on the Company's long-term financial condition.
The reluctance to purchase products outside the GPO is due in part to the
exclusivity of the contract and the hospital administrators' concern about
losing manufacturers' rebates.
Accordingly, the Company attempts to market its products directly to the
individual end-users (nurses, doctors, and testing personnel) and their
purchaser representatives so that they request their GPOs add the Company's
products to their list of available products and also markets its products
directly to the GPOs themselves. The Company's products are available through
contracts with the following: Scripps; McKessonHBOC; Health Services Corporation
of America ("HSCA"); Kaiser Permanente; Premier Health Systems, Inc.; AmeriNet,
Inc.; InSource Health Services; Managed Healthcare Associates ("MHA")/MedEcon;
and Abbott. The Company also pursues General Services Administration ("GSA"),
VA, Federal Supply Schedule (FSS), and other federal government contracts for
the purchase of VanishPoint(R) products.
The Company distributes its products in the United States and its
territories through 6 general line and 27 specialty distributors. The Company
entered into an Agreement whereby Abbott agreed to act as a nonexclusive
marketer and distributor of the Company's 1cc, 3cc, 5cc, and 10cc syringes,
blood collection tube holders, and small tube adapters to acute care facilities.
The Agreement is for an initial five year term. The Company will continue to
utilize its current general line and specialty distributors in other market
segments, such as primary care, alternate care, and acute care facilities that
are not under agreements with Abbott.
The Company has developed a national direct marketing network in order to
market its products to end-users and their purchaser representatives made up of
approximately 20 representatives located in Texas, Georgia, California,
Missouri, Tennessee, New Jersey, and Arizona. The Company employs this marketing
force of product specialists and nurses strategically placed in order to take
full advantage of emerging legislation concerning safety products in healthcare.
The Company's marketers make calls on target markets and segments that are high
volume users of syringes and blood collection tube holders. The Company's
marketers penetrate all of the departments that affect the decision-making
process for safety products, including the purchasing agents. They also call on
alternate care sites and talk directly with the decision-makers of the facility.
In addition to the marketers, the Company employs a team of registered nurses
who educate healthcare providers and healthcare workers through accredited
continuing education units for in-service training, exhibits at related trade
shows, and publications of relevant articles in trade journals and magazines.
These nurses provide clinical support to customers. In addition to marketing
the Company's products, the network demonstrates the safety and cost
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effectiveness of the VanishPoint(R) automated retraction products to end-users.
The Company provides to healthcare facilities, through its own representatives
and Abbott's representatives, cost analysis software developed by Arthur
Andersen LLP which, after entry of data for their particular facility, provides
healthcare professionals an analysis of the cost savings provided by using
VanishPoint(R) syringes compared to the costs of standard syringes. The Company
has also developed user-friendly product evaluation kits, which allow smaller
facilities to conduct on-site clinical evaluations with the aid of off-site
company nursing coordinators. These kits allow the Company to familiarize and
educate a facility's healthcare workers regarding VanishPoint(R) products.
The Company has nonexclusive distribution agreements with various
organizations for the distribution of its products in: Western Europe, Africa,
Japan, Australia, Canada, Ireland, France, Germany, Switzerland, Belgium,
Netherlands, Luxembourg, Korea, South Africa, Tanzania, Uganda, Zimbabwe,
Botswana, Namibia, Mozambique, Angola, Zaire, Kenya, Nigeria, Mauritius, and
Madagascar. In addition, the Company has exclusive distribution agreements for
the distribution of its products in: the United Kingdom, Puerto Rico, Panama,
South Africa, Mexico, Korea, United States Virgin Islands, British Virgin
Islands, Antigua, Barbados, St. Martin, Cuba, Ireland, the Dominican Republic,
Saudi Arabia, Syria, Iraq, Turkey, Iran, Pakistan, Kuwait, Morocco, Algeria,
Tunisia, Egypt, Sudan, Afghanistan, Oman, Yemen, and the United Arab Emirates.
Sales to foreign markets are limited at this time, as the marketing efforts are
in their early stages. The total population of Western Europe exceeds 310
million, and the recognition for the urgency of safe needle devices in parts of
Europe has echoed the United States model. In France, England, Germany, and
Italy, organized healthcare worker unions have taken action to force hospitals
and government agencies to place safety as a priority. France has led Western
Europe in its recognition of safety and has implemented VanishPoint(R) blood
collection tube holders in several hospitals and clinical laboratories.
Key components of the Company's strategy to increase its market share are
to (a) continue marketing emphasis in states that have implemented safe needle
legislation; (b) promote legislation in other states and at the federal level;
(c) continue to add VA facilities, health departments, emergency medical
services, federal prisons, and home healthcare facilities as customers; (d)
educate healthcare providers, insurers, healthcare workers, government agencies,
government officials, and the general public on the reduction of risk and the
cost effectiveness afforded by the Company's VanishPoint(R) products; (e) supply
product through GPOs and Integrated Delivery Networks ("IDNs"); (f) explore
possibilities for future licensing agreements and joint venture agreements for
the manufacture and distribution of safety products in the United States and
abroad; (g) offer a full product line on existing FDA approved products; (h)
introduce new products; and (i) continue to increase international sales,
particularly in Europe, where safety legislation appears to be moving parallel
to the United States, with a one to two year lag time.
Several factors could materially affect the marketability of the Company's
products. Demand could be dramatically increased by current legislative efforts
encouraging the use of safety syringes. Demand could also be increased if the
Company were successful in the antitrust lawsuit it has filed against B-D. See
"Part II-Item 2-Legal Proceedings." Marketability of the Company's products
would depend, in part, on the Company's ability to meet a dramatic and sudden
increase in demand and on its ability to quickly find additional production
capacity through licensing agreements and joint ventures, the purchase of
appropriate facilities, or manufacturing and storage services. Currently, the
Company's capacity is approximately 60 percent utilized. The Company is
currently reviewing alternatives for increasing capacity.
Status of Publicly Announced New Products
-----------------------------------------
The Company has received FDA premarket approval for the 1cc tuberculin,
insulin, and allergy antigen syringes and anticipates producing them by the
latter part of 2000. Patents have been applied for and issued for the
application of automated retraction to dental syringes, winged IV's, and
catheter introducers. The Company anticipates seeking FDA premarket approval
and introducing these products in the future.
Competition
-----------
According to Theta's 1998 report, the leading manufacturers of hypodermic
syringes and blood collection products are B-D, with a market share of
approximately 71 percent; Sherwood/Davis & Geck Division of American Home
Products Company, which was acquired by Tyco International Ltd.
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("Sherwood"), with a market share of approximately 22 percent; and Terumo
Medical Corporation ("Terumo"), with a market share of approximately 7 percent.
Founded in 1897, B-D is headquartered in New Jersey with eight major
product lines in two segments of the healthcare industry: diagnostic systems and
medical supplies and devices. The medical device division accounts for
approximately 1.9 billion, or 56 percent, of B-D's estimated total fiscal 1999
sales. The injection systems segment accounts for 42 percent of B-D's fiscal
1999 device division sales. In its 1999 annual report, B-D states that safety
products comprise 20 percent of the United States market and projects that
within the next few years, 85 percent of the market will be converted to safety
devices. B-D currently manufactures the SafetyLok(TM), a syringe which utilizes
a tubular plastic sheath that must be manually slid over the needle after an
injection, and the SafetyGlide(TM), a syringe which utilizes a hinged lever to
cover the needle tip. B-D also manufactures a safety blood collection tube
holder that utilizes the SafetyLok(TM) sheath. B-D's "Vacutainer(R)" blood
collection tube holder is commonly used as industry jargon to refer to blood
collection tube holders in general.
Sherwood was one of five major acquisitions by Tyco International Ltd., a
company headquartered in Bermuda. Tyco sells four types of products: disposable
medical supplies, flow control products, electrical and electronic products, and
fire detection and security devices. Tyco also owns Kendall, the market leader
in medical gauze and a participant in the area of vascular therapy. Sherwood
manufactures the Monoject(R), a safety syringe that utilizes a sheath similar to
the B-D SafetyLok syringe, but currently does not manufacture a safety blood
collection tube holder.
Founded in 1974, Terumo was the first company to sell disposable syringes
in Japan. Today Terumo manufactures standard syringes and blood collection
tube holders, operates internationally, and has sales in some 120 countries.
Both B-D's and Sherwood's safety syringes require the use of two hands and
several extra steps to activate the tubular plastic shield which must be slid
and locked into place to protect the needle. In contrast, use of the
VanishPoint(R) syringe is identical to that of a standard syringe until the end
of an injection, when the automated retraction mechanism retracts the needle
directly from the patient safely into the barrel of the syringe. This allows the
second hand to remain safely out of harm's way.
B-D and Sherwood have greater financial resources, larger and more
established sales and marketing and distribution organizations, and greater
market influence, including the long-term contracts with GPOs described earlier.
These competitors may be able to use these resources to improve their products
through research or acquisitions or develop new products, which may compete more
effectively with the Company's products. There can be no assurance that the
Company's competitors will not succeed in developing or marketing products that
are technologically superior or more effective or commercially attractive than
any that are being developed by the Company. Based on the licensing agreement B-
D has entered into with Med-Design, it is possible that B-D may in the future
manufacture retractable needle products. Med-Design owns patent rights to
manufacture a line of retractable needle products.
In addition to B-D and Sherwood, there are companies that manufacture
needlestick injury prevention products that the Company's products will compete
against for market share. Among those companies are: Bio-Plexus, Inc. ("Bio-
Plexus"), Smiths Industries Medical Systems ("SIMS"), and New Medical
Technologies, Inc. ("NMT"). Bio-Plexus utilizes a recessed internal hollow blunt
safety technology where the internal blunt is advanced and locked into place
beyond the sharp outer tip of the needle. SIMS utilizes a patented sheath
whereupon completion of the procedure, the healthcare worker presses the sheath
against a hard surface to lock the needle into the sheath. NMT manufactures a
syringe that utilizes automated retraction of the used needle within the barrel
of the syringe. NMT currently manufactures and makes commercially available one
syringe size in limited needle lengths.
Other events that are having an impact on the Company's competitiveness
include class action lawsuits by healthcare workers and the Company's decision
to pursue its claims for damages against B-D and Sherwood. Class action suits
on behalf of healthcare workers have been filed in several states against B-D
and Sherwood. The success of such lawsuits could, obviously, be materially
beneficial to any company that provides a safer alternative technology to the
standard needle products, which cause as many as 800,000 reported needlestick
injuries each year. The Company has filed a lawsuit against B-D and Sherwood to
pursue a claim for damages for restraint-of-trade and anti-trust violations.
See "Part II-Item 2-Legal Proceedings."
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The Company's competitive strengths include that the VanishPoint(R) syringe
is the only safety syringe given the highest possible rating by ECRI. The
Company's blood collection tube holder is one of only two safety products given
the highest possible rating. The Company's products also have an advantage
because minimal training and changes to practitioners' normal routines are
required. Use of the Company's products also prevent unfortunate and improper
reuse. The Company's competitive position is strengthened by its agreements with
the following: Scripps; McKessonHBOC; HSCA; Kaiser Permanente; Premier Health
Systems, Inc.; AmeriNet, Inc.; InSource Health Services; MHA/MedEcon; and
Abbott.
The Company's competitive weaknesses include its current lack of market
(less than 1 percent), because two well-established companies control most of
the market. The Company is currently operating at a production rate of 24
million syringes and 8 million blood collection tube holders annually (less than
60 percent of capacity). The Company's competitive position is also weakened by
its higher initial price per unit and the method that providers use for making
purchasing decisions. The Company's products are initially more expensive.
However, the price per unit is competitive or even lower than the competition
once all the costs incurred during the life cycle of a syringe are considered.
Such life cycle costs include disposal costs, testing and treatment costs for
needlestick injuries, and treatment for contracted illnesses through needlestick
injuries.
Dependence Upon Key Suppliers
-----------------------------
The Company purchases most of its product components from single suppliers,
including needle cannulae, syringe lubricants, and needle adhesives and
packaging materials. There are multiple sources of the necessary supplies, and
the Company owns the molds, which are used to manufacture the plastic components
of its products. However, any changes in suppliers such as Magor Molds (mold
supplier), Sortimat (assembly machine supplier), Nissho (needle supplier),
Multivac (packaging supplier), and/or Sterigenics (sterilization company) could
disrupt production schedules. In addition, shortages may occur from some
suppliers, creating delays or reductions in product shipments, which could have
a material adverse effect on the Company's operating results. Further, delays in
filling orders could cause problems with customers, resulting in a permanent
loss in sales.
Dependence on Certain Customers
-------------------------------
Sales from the first half of fiscal 1999 to the second half increased 261
percent due to increased sales in California after its safe needle law went into
effect. Sales to end-users over the period from July 1999 through March 2000
indicate that 70 percent of units sold were in California, with over 1/3 of
those sales made to Kaiser Permanente. Quintiles Laboratories Limited in
Georgia made up 18 percent of the unit sales for the same period. The Company
anticipates that Abbott will account for the majority of sales of the Company's
products to acute care end-user facilities in 2000. The Company maintains
distribution agreements to serve its nonacute care end-user facilities.
The Company's current significant acute care and nonacute care end-user
facilities include: Scripps Healthcare System, Riverside Memorial Hospital,
Mississippi Department of Health, and California Department of Health.
Manufacturing
--------------
The Company currently manufactures its 3cc, 5cc, and 10cc VanishPoint(R)
syringes and the VanishPoint(R) blood collection tube holder and small tube
adapter in a controlled environment in Little Elm, Texas. The Company recently
signed an agreement with NYPRO Precision Assemblies, a California corporation,
to provide subassembly services for the 5cc and 10cc syringes. The Company has
also outsourced molding of its blood collection tube holder parts to Anura
Plastics Engineering Corporation ("APEC"), also a California company. The size
of the facility in Little Elm, Texas, is 22,500 square feet, with 18,000 square
feet dedicated to production. The facility was designed to be modular so that,
as new product lines are added or duplicate production lines are built, it can
be expanded to house this new equipment. Assembly of the 3cc syringe uses a
fully automated process, developed by a leading equipment manufacturer, with a
manufacturing capacity of approximately 3 1/2 million units per month. The
automated blood collection tube holder assembly has the manufacturing capacity
of approximately 1 million units per month.
9
<PAGE>
All components of the Company's products, except needles, can be produced
at its Little Elm manufacturing facility. Currently, in order to increase
production capacity, the Company is outsourcing some of the molding and assembly
processes. Technologically advanced molding machines from a leading
manufacturer, using a combination of hot-runner and cold-runner molds, produce
the molded parts for VanishPoint(R) products. The needles used in VanishPoint(R)
products are purchased from one of the world's larger suppliers. The retraction
springs are wound in-house using a high-grade stainless steel spring wire. All
parts have been tested for biocompatibility and radiation tolerance. After
automated assembly, products are sealed in blister packages, boxed and sent out
for sterilization at one of two outside radiation facilities. The Company's
packaging equipment was manufactured by a leading packaging machine
manufacturer. The Company also has an automated assembly process for
manufacturing its blood collection tube holders.
The Company has limited experience in manufacturing the VanishPoint(R)
product line in commercial quantities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel, compliance with FDA regulations, and the need
for further FDA premarket approval of new manufacturing processes. Difficulties
encountered by the Company in manufacturing scaleup could have a material
adverse effect on its business, financial condition, and results of operations.
Production Capacity
-------------------
The Company is currently operating at a production rate of 24 million
syringes and 8 million blood collection tube holders annually (less than 60
percent of capacity). Currently, market demand for safety outpaces the Company's
production capacity. The Company is currently reviewing methods to increase
capacity which include: joint ventures with manufacturers of medical equipment,
the expansion of the Company's current manufacturing facility, short-term mobile
buildings to hold inventory, and the outsourcing of production and subassembly
of subcomponents. The Company has executed an agreement with NYPRO Precision
Assemblies, Inc., a California corporation, for the provision of subassembly
services for components of the 5cc and 10cc syringes, which will enable the
Company to increase its current manufacturing capacity. The Company is
considering licensing and/or sublicensing of its patents, as well as joint
ventures, and buying additional space for domestic production. The Company's
current facilities have been augmented by an outsourcing agreement with APEC
which provides the Company with additional molding capacity for parts and
warehousing space in California. Long-term plans include ordering additional
assembly equipment and building an additional manufacturing facility.
Patents and Proprietary Rights
------------------------------
Thomas J. Shaw and the Company entered into a Technology License Agreement
dated effective as of the 23/rd/ day of June, 1995, whereby Mr. Shaw granted the
Company "... a worldwide exclusive license and right under the 'Licensed
Patents' and 'Information,' to manufacture, market, sell and distribute
'Licensed Products' and 'Improvements' without right to sublicense and subject
to such nonexclusive rights as may be possessed by the Federal Government..."
The Company may enter into licensing arrangements with Mr. Shaw's written
approval of the terms and conditions of the licensing agreement. The Licensed
Products include all retractable syringes and retractable fluid sampling devices
and components thereof, assembled or unassembled, which comprise an invention
described in Licensed Patents, and improvements thereof including any and all
Products which employ the inventive concept disclosed or claimed in the Licensed
Patents. Licensed Patents were defined as patents then issued or thereafter
obtained under the Subject Matter of the Patent Properties and Improvements
whether the Improvements are made by Mr. Shaw, the Company, or both,
irrespective of the named inventors or the date when conceived or reduced to
practice during the term of the agreement. The Subject Matter was defined as
retractable syringe technology, including retractable fluid collection devices
otherwise known as blood samplers.
In exchange, the Company paid Mr. Shaw a $500,000 initial licensing fee
which was fully paid in 1997. Furthermore, the Company agreed to pay a 5 percent
royalty on gross sales after returned inventory based on the price to the end-
user or intermediary as appropriate. The license terminates upon the last to
expire of the patents specifically mentioned unless sooner terminated under
certain circumstances. The licensing fee and royalties have been paid in
accordance with this agreement.
10
<PAGE>
If the license is terminated within five years of execution, Mr. Shaw is
entitled to access to all trade secrets, documents, and information and is
permitted to use information to make sure the invention is made available to the
public. The Company has the right and obligation to obtain protection of the
invention and has full and complete control over prosecution of patent
properties. The license unilaterally changes to a nonexclusive license in the
event of a hostile takeover. Also, if Mr. Shaw involuntarily loses control of
the Company, the license becomes a nonexclusive license and a right to
information.
Foreign patent protection has been sought through the Patent Cooperation
Treaty, and patents have been filed for regional and national patent protection
in selective countries. These regional patents include Western Europe and
Africa. In addition, application has been made for national patents in selective
countries where the Company believes the VanishPoint(R) syringe can be utilized
most.
The Company holds 15 United States patents related to its automated
retraction technology, including patents for dental syringes, catheters, winged
IV sets, syringes, and blood collection tube holders. In addition, the Company
has 8 applications for patents currently pending.
The Company has also registered the following trade names and trademarks:
VanishPoint(R), RT with a circle mark, and the Spiral Logo used in packaging the
Company's products. The Company also has an application pending for trademark
protection for the color coded dots on the ends of its syringes.
There are currently no patent infringement claims pending against the
VanishPoint(R) retraction technology. The Company has decided, on the advice of
patent counsel, not to purchase patent insurance as it would require
inappropriate disclosure of information that is currently proprietary and
confidential.
Pursuant to the terms of a loan from Legacy Bank (formerly Plano Bank &
Trust) in the amount of $710,000, the Company has executed a negative pledge on
the sale of patents without prior written permission.
Reliance on Patents, Licenses, and Protection of Proprietary Technology
-----------------------------------------------------------------------
The Company's success will depend, in part, on its ability to protect its
intellectual property and maintain the proprietary nature of its technology
through a combination of patents and other intellectual property arrangements.
The Company believes these patents will be sufficient to protect the design of
its current and proposed products. Litigation, either to enforce the Company's
patent rights or defend from patent infringement suits, would be expensive and
would divert Company resources from other planned uses. Any adverse outcome in
such litigation could have an adverse effect on the Company. In addition, patent
applications filed in foreign countries and patents granted in such countries
are subject to laws which differ from those in the United States. Patent
protection in such countries may be different from patent protection provided by
United States laws and may not be favorable to the Company. There is no
assurance that the Company's program for patent protection, confidentiality, and
restricted access to its facilities and product specifications will be
sufficient to protect the Company's proprietary technology from all competitors.
Regulatory Status and Effect of Regulation
------------------------------------------
The Company and its products are regulated by the FDA. The syringe is a
Class II medical device which requires assurance by the manufacturer that the
device is safe and effective and that it meets certain performance standards.
The FDA issued its "Order of Substantial Equivalence" (i.e., granted the Company
permission to market its safety syringes) for the 3cc VanishPoint(R) syringe in
December 1995; for the 5cc and 10cc VanishPoint(R) syringes in May 1997; for the
1cc tuberculin syringe in November 1997; for the 1cc VanishPoint(R) insulin,
tuberculin, and allergy antigen syringes in February 1998; and for the
VanishPoint(R) blood collection tube holder and small tube adapter in August
1997.
In addition to premarket clearance, the Company must register with the FDA
on an annual basis and provide the FDA with a list of commercially distributed
products. Texas has similar registration requirements. The FDA is required to
inspect all medical device manufacturing facilities at least once every two
years to determine the extent to which they are complying with Quality System
Regulation. The most recent inspection occurred in April 2000, after which the
auditor determined No Action Indicated (NAI).
11
<PAGE>
The Company's quality system was certified for ISO 9001 compliance through
TUV Essen, a subsidiary of RWTUV Germany. The certification was deemed in
compliance with ISO 9001, EN ISO 9001, and EN46001 of the Medical Device
Directive. In addition, RWTUV certified the VanishPoint(R) product line for the
CE mark according to Annex II of the council directive 93/42/EEC of 1993
relating to medical device design, production, and final control. Since the
original certification in 1997, the Company has undergone annual surveillance
audits with no major noncompliances noted. The CE Mark authorizes the Company to
sell in 18 different countries. The Company has engaged a European regulatory
affairs company to be its authorized representative in Europe according to
Medical Device Directive 93/42/EEC. The Company is currently pursuing
registration with the Ministry of Health in additional countries in order to
sell products in those countries.
Government Funding of Research and Right to License
---------------------------------------------------
Thomas J. Shaw developed his initial version of a safety syringe with the
aid of grants by the National Institutes of Health. As a result, the federal
government has the right, where the public interest justifies it, to disperse
the technology to multiple manufacturers so that the safety syringe can be made
widely available to the public. However, the funding was only used to develop
and patent the syringe design as of 1991. That syringe was a bulkier, less
effective, and more expensive version of the current product. Accordingly and
on the advice of counsel, Management believes that the risk of the government
demanding manufacture of this inferior product is minimal.
Research and Development
-------------------------
The Company spent $266,029, $763,690, and $842,062 in fiscal 1997, 1998,
and 1999, respectively, on research and development, primarily on development of
prototype molds and manufacturing processes for the following products: 1cc
syringe, 5cc syringe, 10cc syringe, and a blood collection tube holder. The
Company's ongoing research and development activities are performed by an
internal research and development staff. This team of engineers has developed
automated line assembly for the syringe and blood collection tube holder and has
established processes to meet regulatory requirements. Pursuant to the Agreement
entered into between the Company and Abbott, by August 2, 2000, a New Product
Team, made up of no fewer than two representatives each from Abbott and the
Company, will be established for the purpose of developing new products
utilizing the automated retraction technology. Products currently in
development include the winged butterfly IV, the catheter introducer, and the
dental syringe. Possible future products include all needle medical devices to
which the automated retraction mechanism can be applied.
Environmental Compliance
------------------------
Management believes that the Company does not incur material costs in
connection with compliance with environmental laws. The Company's manufacturing
waste (predominantly made up of hard plastic materials) is sold to Penn Tex
Plastics, which recycles the materials.
Employees
---------
As of May 31, 2000, the Company had 152 full-time employees and four
independently contracted consultants. Of the 152 full-time employees,
approximately 6 persons were engaged in research and development activities, 69
persons were engaged in manufacturing and engineering, 27 persons were engaged
in quality assurance and regulatory affairs, 20 persons were engaged in sales
and marketing, 25 persons were engaged in general and administrative functions,
and 5 persons in facilities. No employees are covered by collective bargaining
agreements, and the Company believes it maintains good relations with its
employees. The Company is dependent upon a number of key Management and
technical personnel, and the loss of services of one or more key employees could
have a material adverse effect on the Company. The Company's President and Chief
Executive Officer, Thomas J. Shaw, has an employment contract for five years.
In addition to Mr. Shaw's employment contract, the Company has a one year
employment contract with Phillip Zweig, Director of Communications. The Company
has entered into 4 consulting agreements with independent contractors.
12
<PAGE>
REPORTS TO SECURITY HOLDERS
Until this Form 10-SB becomes effective, the Company is not a reporting
company as defined under the Securities Exchange Act of 1934. The Company has
provided the shareholders with annual statements of financial condition, audited
by independent public accountants, and an unaudited statement of financial
condition, along with a newsletter, each quarter. The Company began providing
quarterly reports in 1999. Prior to 1999, quarterly reports were available upon
request. Other information is sent to shareholders as noteworthy events occur.
The public may read and copy any materials filed with the United States
Securities and Exchange Commission ("SEC") at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC. The address of that site is (http://www.sec.gov).
--------------------
The Company's web page is currently under construction. The Internet address
for the Company is (http://www.vanishpoint.com/).
-----------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements included by reference in this Form 10-SB containing the
words "believes," "anticipates," "intends," "expects," and similar such words
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act. Any forward-looking statements involve known
and unknown risks, uncertainties, and other factors that may cause actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the impact
of dramatic increases in demand, the Company's ability to quickly increase its
capacity in the event of a dramatic increase in demand, the ability of the
Company to continue to finance research and development as well as operations
and expansion of production through equity and debt financing, as well as sales,
and the increased interest of larger market players in providing "safety needle
devices." Given these uncertainties, undue reliance should not be placed on
forward-looking statements.
OVERVIEW OF BUSINESS
The Company designs, develops, manufactures, and markets innovative
patented safety needle devices for the healthcare industry. VanishPoint(R)
products are designed specifically to prevent needlestick injuries and to
prevent reuse. The friction ring mechanism permits the automated retraction of
the syringe needle into the barrel of the syringe, directly from the patient,
after delivery of the medication is completed. The VanishPoint(R) blood
collection tube holder utilizes the friction ring mechanism to retract the
needle after blood has been drawn from the patient. Closure of an attached end
cap causes the needle to retract directly from the patient into the closed tube
holder. The Company's goal is to become a leading provider of automated
retraction safety devices.
In 1996, the Company purchased assets and hired personnel from Checkmate
Engineering. The Company had limited production but no sales in 1996, but
focused its attention on general and administrative activities including
implementing Quality System Regulation, developing a human resource department,
and obtaining an application for an Order of Substantial Equivalence from the
FDA allowing the Company to manufacture and sell the 3cc VanishPoint(R) syringe.
In 1997, the Company began selling products to emergency medical service
centers, federal prison systems, homecare facilities, small hospitals, and VA
hospitals. During the second half of 1997, the Company took delivery of its 3cc
automated assembly equipment and began automated assembly. Production molds for
the 5cc and 10cc syringes and the blood collection tube holder were ordered in
1997. A prototype mold for the 1cc syringe was ordered and received in 1997.
Automated assembly equipment for the blood collection tube holder was ordered at
the end of 1997 and installed in July 1998. Commercial production of the blood
collection tube holder began in 1998. The Company received its ISO 9001
Certificate in July 1998, and the VanishPoint(R) syringe received its CE Mark
Certificate on July 31, 1998. The CE mark allows the Company to sell its
products in Europe. In 1999, the Company focused its development on improving
manufacturing processes and expanding product lines. In 1999, the Company
focused its development on improvement of manufacturing processes, continuation
of design and development of the manufacturing process for the 1cc syringe, and
conceptual design of additional safe needle products utilizing automated
retraction technology.
13
<PAGE>
From its inception in 1994 through December 31, 1999, and March 31, 2000,
the Company has incurred cumulative losses from operations totaling $22,852,247
and $24,633,975, respectively.
DEVELOPMENT AND EXPANSION OF PRODUCT LINE
The Company's financial position over the past three years has been
materially affected by additions to its product line. In 1997, commercial
production of the 3cc syringe began, and the Company began selling its products
to emergency medical service centers, federal prison center facilities, home
care facilities, small hospitals, prisons, and VA hospitals. In 1998,
commercial production of the blood collection tube holder began. The Company
received its ISO 9001 Certificate in July 1998, which enabled it to become
eligible to receive its CE mark. The Company received its CE mark, allowing it
to market its products in Europe. Automated assembly equipment for production
of the blood collection tube holder was installed in July 1998. In 1999, sales
began to increase significantly and production continued to increase, due in
large part to the safe needle legislation in California. In 2000, the Company
anticipates manufacture and distribution of the 1cc VanishPoint(R) product line.
In addition, Abbott and the Company have agreed to the formation of a New
Product Team, consisting of key personnel from both companies, that will develop
new safety products that incorporate the Company's patented, proprietary
technology.
INCREASING MARKET DEMAND FOR SAFETY PRODUCTS
Demand for safety products is increasing in the United States and
internationally. NIOSH issued a safety alert calling on employers to adopt
safer needles to reduce needlestick injuries. OSHA issued a Compliance
Directive which instructs OSHA inspectors to cite employers who fail to evaluate
and buy safety needle devices. The SEIU has taken a proactive stance with
regard to promoting the use of automated retraction needle devices in member
hospitals and by participating in federal and state legislation protests. Due
to recent legislation, Cal OSHA mandates that healthcare employers provide their
workers with safe needle devices. In addition, 14 states have adopted, and more
than 20 states have introduced, legislation containing language similar to that
passed in California, and federal legislation is pending with support from OSHA
and the Secretary of Labor. The recognition for the urgency of safe needle
devices in parts of Europe and Africa has echoed the United States model. In
France, England, Germany, and Italy, organized healthcare worker unions have
taken action to force hospitals and government agencies to place safety as a
priority. France has led Western Europe in its recognition of safety and has
implemented VanishPoint(R) blood collection tube holders in several hospitals
and clinical laboratories.
EXTERNAL SOURCES OF INCOME
The Company has funded operations primarily from proceeds from private
placements and bank loans. The Company has been capitalized with approximately
$42,000,000 raised from five separate Private Placement Offerings. As of
September 30, 1995, the Company sold 5,000,000 shares of Class A Convertible
Preferred Stock at $1 per share, for an aggregate of $5,000,000. As of October
31, 1996, the Company sold 1,000,000 shares of Series I Class B Convertible
Preferred Stock at $5 per share for an aggregate of $5,000,000. As of January
31, 1998, the Company sold 1,000,000 shares of Series II Class B Convertible
Stock at $10 per share for an aggregate of $10,000,000. As of September 30,
1999, the Company sold 1,160,200 shares of Series III Class B Convertible
Preferred Stock at $10 per share for an aggregate of $11,602,000. Finally, as
of June 10, 2000, the Company sold 1,133,800 shares of Series IV Convertible
Preferred Stock at $10 per share for an aggregate of $11,338,000.
The Company obtained $1,200,000, $710,000, and $2,000,000 in 1996, 1997,
and 2000, respectively, from bank loans. Additionally, the Company received a
Small Business Administration loan of $1,000,000 in 1996 to pay for portions of
automated assembly equipment, multi-cavity molds, and other equipment.
MANUFACTURING IMPROVEMENTS
The Company has constructed a 22,500 square foot facility which houses its
manufacturing operations and corporate headquarters. Sales and marketing
operations are located in Lewisville, Texas. The Company is producing 3cc
syringes and blood collection tube holders using automated assembly equipment.
The 5cc and 10cc syringes are assembled by a semiautomated process. Some
assembly and
14
<PAGE>
molding has been outsourced to increase production capacity. Automated
equipment for the 1cc syringe is ordered, and delivery is expected in the
second half of 2000.
SELECTED FINANCIAL DATA
The following selected financial data for fiscal years ended December
31, 1999 and 1998, are derived from audited financial statements of the
Company, which were audited by independent public accountants. The
following selected data for the three months ended March 31, 2000 and 1999,
are derived from unaudited financial statements of the Company. The data
should be read in conjunction with the audited financial statements and
selected notes attached as an exhibit and the following discussion of
results of operations.
<TABLE>
<CAPTION>
Year Ended December 31
---------------------- Cumulative
3 Months Ended 3 Months Ended from Incep-
March 31, 2000 March 31, 1999 tion (May 9,
1999 1998 (Unaudited) (Unaudited) 1994)
---- ---- ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Sales $ 3,375,158 $ 845,559 $ 827,819 $ 254,987 $ 5,310,851
Cost of sales 2,331,070 765,448 644,700 206,256 4,215,365
----------- ----------- ----------- ----------- ------------
Gross profit (deficit) 1,044,088 80,111 183,119 48,731 1,095,486
----------- ----------- ----------- ----------- ------------
Operating Expenses
Preproduction manufacturing 1,837,830 1,004,828 450,612 391,345 5,907,813
Sales and marketing 3,742,779 1,539,822 705,262 547,180 7,753,214
Research and development 842,062 763,690 136,253 277,588 2,462,380
General and administrative 2,863,989 2,419,821 667,514 771,152 9,475,446
----------- ----------- ----------- ----------- ------------
Total operating expenses 9,286,660 5,728,161 1,959,641 1,987,265 25,598,853
----------- ----------- ----------- ----------- ------------
Loss from operations (8,242,572) (5,648,050) (1,776,522) (1,938,534) (24,503,367)
Net interest income (expense) 9,064 (56,038) (5,206) (14,993) (130,608)
----------- ----------- ----------- ----------- ------------
Net Loss $(8,233,508) $(5,704,088) $(1,781,728) $(1,953,527) $(24,633,975)
=========== =========== =========== =========== ============
Dividends $ - $ - $ - $ - $ -
</TABLE>
RESULTS OF OPERATIONS
The following discussion contains trend information and other forward-
looking statements that involve a number of risks and uncertainties. The
Company's actual future results could differ materially from its historical
results of operations and those discussed in the forward-looking
statements. All period references are to the Company's fiscal year ended
December 1999 or 1998 or periods ended March 31, 2000 and 1999.
In 1996, the Company purchased assets and hired personnel from
Checkmate Engineering. The Company had limited production but no sales in
1996, but focused its attention on general and administrative activities
including implementing Quality System Regulation, developing a human
resource department, and obtaining an application for an Order of
Substantial Equivalence from the FDA allowing the Company to manufacture
and sell the 3cc VanishPoint(R) syringe. In 1997, the Company began selling
products to emergency medical service centers, federal prison systems,
homecare facilities, small hospitals, and VA hospitals. During the second
half of 1997, the Company took delivery of its 3cc automated assembly
equipment and began automated assembly. Production molds for the 5cc and
10cc syringes and the blood collection tube holder were ordered in 1997. A
prototype mold for the 1cc syringe was ordered and received in 1997.
Automated assembly equipment for the blood collection tube holder was
ordered at the end of 1997 and installed in July 1998. Commercial
production of the blood collection tube holder began in 1998. The Company
received its ISO 9001 Certificate in July 1998, and the
15
<PAGE>
VanishPoint(R) syringe received its CE Mark Certificate on July 31, 1998. The CE
mark allows the Company to sell its products in Europe. In 1999, the Company
focused its development on improving manufacturing processes and expanding
product lines. In 1999, the Company focused its development on improvement of
manufacturing processes, continuation of design and development of the
manufacturing process for the 1cc syringe, and conceptual design of additional
safe needle products utilizing automated retraction technology.
In May 2000, the Company entered into an Agreement with Abbott. As part of
the consideration for the Agreement, Abbott agreed to make periodic loans prior
to June 30, 2005 to the Company in increments of $1,000,000 in an aggregate
amount of up to $5,000,000 at an interest rate of prime plus 1% with any and all
amounts loaned to be due and payable on June 30, 2005. Any loans made are
secured by accounts receivables and contracts where Abbott is the account
debtor, payments due to Abbott under the Agreement, and certain equipment
already owned by the Company.
Comparison of Period Ended
March 31, 2000, and Period Ended March 31, 1999
Net sales were $827,819 and $254,987 for the three months ended March 31,
2000, and March 31, 1999, respectively. This increase of 225 percent is due to
the continuing impact of safe needle legislation, particularly in California.
Costs of sales increased from $206,256 to $644,700, principally due to
increased unit sales. Cost of sales as a percentage of revenue decreased from
81 percent to 78 percent.
Preproduction costs increased from $391,345 to $450,612. Preproduction
costs relative to the cost of sales decreased from 190 percent to 70 percent due
to continuing to shift from a preproduction environment to a manufacturing
environment.
Sales and marketing expense increased from $547,180 to $705,262, or
$158,035 from the first quarter of 1999 to the first quarter of 2000. The
increase is principally due to continuing the Company's marketing efforts in
California.
Research and development costs decreased as the Company neared the end of
its development stage.
Interest income decreased due to lower average outstanding cash balances.
Interest expense decreased as a result of more interest being capitalized
in the first quarter of 2000 compared to first quarter of 1999.
Comparison of Year Ended
December 31, 1999, and Year Ended December 31, 1998
Net sales were $3,375,158 and $845,559 for the years ended December 31,
1999, and December 31, 1998, respectively. The 300 percent increase in sales
was principally due to increased sales in California as a result of the safe
needle legislation.
Costs of sales increased from $765,448 in 1998 to $2,331,070 in 1999. As a
percentage of revenue, cost of sales decreased from 91 percent in 1998, to 69
percent in 1999. The improvement is due to increased operating efficiency and
continued allocation of certain manufacturing costs to preproduction and
research and development expensed during the development stage.
Preproduction costs increased from $1,004,828 to $1,837,830. Preproduction
costs relative to cost of sales decreased from 131 percent to 79 percent due to
a shift from a preproduction environment to a manufacturing environment.
Sales and marketing expenses increased 143 percent to $3,742,779 in 1999
from $1,539,822 in 1998 but decreased as a percentage of revenue from 182
percent to 111 percent. The increase in expenses is principally due to the
increased effort to market VanishPoint(R) products in California, including
retaining a marketing company that provided contract sales representatives to
supplement the marketing effort.
16
<PAGE>
Research and development costs increased as more resources were committed
to the 1cc syringe.
General and administrative costs increased 18 percent due to increases in
staffing, salaries, and consulting services, offset somewhat by decreases in
legal fees.
Interest income decreased due to lower average outstanding cash balances.
Interest expense decreased due to lower outstanding debt and more interest
being capitalized.
Comparison of Year Ended
December 31, 1998, and Year Ended December 31, 1997
Net sales were $845,559 and $262,315 for the years ended December 31, 1998,
and December 31, 1997, respectively. Shipments of the 3cc VanishPoint(R)
syringe began in February 1997, with 66 percent of the sales occurring during
the last four months of the year. Approximately 42 percent of 1998 sales were
blood collection tube holders to one customer. Sales of the 3cc VanishPoint(R)
syringe were at a comparable rate during 1998 as the last four months of 1997.
Costs of sales increased in 1998 as the cost of materials sold increased in
conjunction with the increase in unit sales and due to a greater allocation of
manufacturing costs to cost of sales from preproduction costs.
Preproduction manufacturing costs decreased $491,590 from 1997 to 1998,
because as operations shifted from a preproduction environment towards a
manufacturing environment, a higher portion of the manufacturing costs were
allocated to cost of sales. Also, in 1998, a significant amount of the
manufacturing costs were allocated to research and development because a
significant amount of manufacturing time was spent on development and refinement
of the production process.
Sales and marketing expenses increased 10 percent to $1,539,822 in 1998,
from $1,394,024 in 1997. The sales force was expanded in 1998, resulting in
additional salary and travel expense, in order to increase sales and product
awareness. These increases were partially offset by a reduction in sales and
marketing consulting expenses as the Company expanded its own workforce and by a
reduction in costs associated with developing marketing and advertising
materials.
Research and development costs increased $497,661 in 1998, to $763,690 from
$266,029 in 1997. This increase was due to the increase in time spent in the
manufacturing facility to further develop, refine, and validate the production
process using automated assembly equipment, so that the Company's products can
be produced efficiently while maintaining the Company's high standard for
quality.
General and administrative expenses increased 24 percent in 1998, to
$2,419,821 from $1,952,561 in 1997. The increase was primarily in salaries and
consulting services offset with decreases in legal fees and insurance.
Interest income increased due to higher average outstanding cash balances.
Interest expense decreased $118,595 due to an increase in the
capitalization of interest expense on construction in progress expenditures for
production equipment that the Company is having manufactured.
LIQUIDITY AND FUTURE CAPITAL REQUIREMENTS
Based on sales activity in fiscal 1999 and anticipated sales in fiscal
2000, the Company believes it will be able to sustain operations for its
existing products without additional financing. Management believes that the
Company will achieve its breakeven point in the year 2000. The Company believes
that the existing cash and cash equivalents and cash flow from operations will
be sufficient to meet the Company's presently anticipated working capital needs
through 2000. To the extent the Company uses all of its cash resources, the
Company will be required to obtain additional funds, if available, through
additional borrowing or equity financing. There can be no assurance that such
capital will be available on acceptable terms. If the Company is unable to
obtain sufficient financing, it may be unable to implement
17
<PAGE>
its long-term plan of operation. The Company anticipates strengthening its
capital structure over the next four years by increasing capital through debt
and equity offerings, improving profitability, and participating in joint
ventures or licensing arrangements, where possible, to accelerate the
manufacture and distribution of its products.
The Company currently produces at a rate of 24 million 3cc syringes and 8
million blood collection tube holders annually. In order to ramp up production
to meet the expected demand for safe needle devices, the Company has raised $18
million in debt and equity funds in 2000. The Agreement provided a credit line
of $5 million and $5 million of equity. The Company expects to fund future
expansion through a combination of debt, a public offering, and internally
generated funds. Capital needs are expected to require an additional $90
million over the next four years for expansion of production discussed in
greater detail in "Material Commitments for Expenditures."
Internal Sources of Liquidity and Anticipated Trends in Sales
-------------------------------------------------------------
Sales have increased each quarter except for the fourth quarter of fiscal
1998, which was partially due to an unusually large order in the third quarter
of 1998. When comparing sales in the first, second, and third quarters of
fiscal 1998 to those of fiscal 1999, they increased 170 percent, 280 percent,
and 150 percent, respectively. Sales for the fourth quarter of fiscal 1999 have
increased 1,730 percent over those for fourth quarter of fiscal 1998. The
increase in sales is primarily attributable to the California legislation
requiring safety needles and similar legislation which had been passed in
additional states. The Company expects this trend to continue because twenty
additional states have introduced similar legislation, and the federal
government is considering it as well. Also, as a result of the Abbott
Agreement, sales are expected to increase. Demand could also dramatically
increase in the event the Company is successful in its antitrust suit, but the
Company has not based any of its financing plans on a positive result from that
suit. See "Part II-Item 2-Legal Proceedings." The Company is also ramping up
its production and continuing to introduce new products. The Company
anticipates being able to sell all that it is able to produce.
External Sources of Liquidity
-----------------------------
The Company has obtained several loans over the past four years which have,
together with proceeds from sales of equities, enabled the Company to pursue
development and production of its products.
In January 1996, the Company obtained a loan from Western Bank & Trust in
the principal amount of $1,200,000 for the purpose of financing construction
improvements and the purchase of manufacturing equipment, which matures on
October 24, 2001. The loan actually consisted of two loans: one in the amount
of $800,000 and one in the amount of $400,000. The larger note carried interest
at a rate of prime as defined by The Wall Street Journal plus 1 percent
adjustable annually, while the smaller loan carried interest at a rate of CD
rate plus 2 percent. The loan was secured by land, building, and equipment and
by a certificate of deposit in the amount of $400,000 to be released upon
achievement of certain financial ratios (with interest payable at the
certificate of deposit rate plus 2 percent). This loan was guaranteed by Thomas
J. Shaw, the Company's President and Chief Executive Officer, and Suzanne M.
August, his wife. The loan was paid off in February 2000 with funds provided by
a loan from 1st International Bank.
In July 1996, the Company obtained a United States Small Business
Administration note payable to Texas Bank in the principal amount of $1,000,000,
which matures on July 1, 2003. The note is payable monthly at an annual
interest rate of prime plus 1.5 percent adjustable quarterly. The loan is
collateralized by manufacturing equipment and guaranteed by Thomas J. Shaw, the
Company's President and Chief Executive Officer, and Suzanne M. August, his
wife. This loan is in good standing. The Company has agreed not to make any
distribution upon its capital stock, purchase any of its capital stock, or merge
without prior written consent.
In April 1997, the Company obtained a loan from Legacy Bank of Texas
(formerly Plano Bank & Trust) in the principal amount of $710,000 at an interest
rate of prime plus 1 percent (adjustable daily) for reimbursement for the
purchase of equipment, which matures on July 10, 2004. The loan is
collateralized by certain machinery and equipment, a certificate of deposit in
the amount of $200,000, and restrictions on the transfer of certain patents.
The loan is (continuously and without limit) guaranteed by Thomas J. Shaw, the
President and Chief Executive Officer. This loan is in good standing.
18
<PAGE>
In February 2000, the Company obtained loans of $2 million through the 1st
International Bank. The proceeds from these loans were used to pay off the
Western Bank loan and also for working capital purposes. $1,500,000 of the loan
is secured by a lien on the land, building, and building improvements and
matures on February 18, 2005. The remaining $500,000 is secured by the
Company's accounts receivable and matures on February 18, 2001. Both loans are
guaranteed by a continuing guaranty by Thomas J. Shaw, the President and Chief
Executive Officer. The interest rate on both loans is the prime rate as defined
in The Wall Street Journal plus 1 percent. This loan is in good standing.
In May 2000, the Company entered into an Agreement with Abbott. As part of
the consideration for the Agreement, Abbott agreed to make periodic loans prior
to June 30, 2005, to the Company in increments of $1,000,000 in an aggregate
amount of up to $5,000,000 at an interest rate of prime plus 1 percent with any
and all amounts loaned to be due and payable on June 30, 2005. Any loans made
are secured by accounts receivables and contracts where Abbott is the account
debtor, payments due to Abbott under the Agreement, and certain equipment
already owned by the Company. The Company has not borrowed any funds under this
Agreement.
Material Commitments for Expenditures
-------------------------------------
The Company anticipates capital expenditures in the amount of $90 million
over the next four years for the purpose of expanding capacity by adding
equipment and additional space (for 18 assembly lines for syringe production and
5 lines for blood collection tube holder production), expanding the current
building by an additional 60,000 square feet, and constructing a second facility
for additional assembly, equipment, and warehousing needs in order to meet the
Company's target production of syringes and blood collection tube holders by
2003. The Company needs this capital to fund equipment and facilities expansion
for additional 1cc and 3cc syringes and blood collection tube holders, as well
as equipment to manufacture 5cc and 10cc syringes. This production target
equates to the Company's obtaining 6 percent of the United States' 6.6 billion-
unit syringe annual market and less than 1 percent of the world's 24 billion-
unit annual syringe market. The Company has obtained $18 million in a
combination of debt and equity financing and expects to raise $60 million
through equity financing. The Company anticipates other funding requirements to
be paid from debt or operations.
The Company anticipates expenditures of $6,000,000 and $12,000,000 in
fiscal 2000 and 2001, respectively, for building expansion and improvements.
Management anticipates $25,525,000; $26,825,000; and $15,100,000 in capital
expenditures for the manufacturing facility, equipment, and machinery in fiscal
2000, 2001, and 2002, respectively. The Company is planning to expand its
manufacturing capacity by expanding its existing facility in Little Elm, Texas,
by 60,000 square feet in 2000 (to house near term production and administrative
needs) and purchasing additional assembly equipment. The equipment will include
a 1cc printer, 1cc packaging machine, 5cc/10cc assembly equipment, blood
collection tube holder assembly equipment, and blood collection tube holder
molds. The Company also anticipates constructing a second facility for
additional assembly equipment and warehousing needs through 2003.
Currently, the Company is in the process of purchasing 1cc automated
production equipment and additional automated blood collection tube holder
equipment. The Company has increased capacity by outsourcing the molding of
certain sub-components of the Company's products. The Company has entered into
an agreement with APEC for the provision of additional molding capacity for both
parts and warehousing space in California. The Company is also pursuing
licensing agreements and/or joint venture agreements for the provision of
manufacturing services.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's 22,500 square foot headquarters is located on 35 acres, which
are owned by the Company, overlooking Lake Lewisville in Little Elm, Texas. The
building is a modular portion of a larger planned building for which the
engineering design has been finalized. This facility is in good condition and
houses the Company's administrative offices and manufacturing facility. The
Company's current expansion plans do not include going outside the 35 acres on
which the headquarters is located. Management anticipates that any future
development of facilities beyond that 35 acres will be in areas closer to the
east and west coast customer base. The land and building on which the
headquarters is located are the subject of a lien by 1st International Bank as
collateral on payment of a loan in the amount of $1,500,000.
19
<PAGE>
The Company also leases Suites 618, 620, and 622 S. Mill Street,
Lewisville, Texas, as well as storage stalls located at 102 E. Purnell,
Lewisville, Texas, from Mill Street Enterprises, a sole proprietorship owned by
Lillian E. Salerno. This lease is for 4,365 square feet of office space in good
condition. The storage facility is used to store office documents. The lease
is for five years commencing July 1, 1997, and ending June 30, 2002, at a
monthly rate of $1,900. An additional lease has been signed for 628 Mill Street
for a one-year period commencing April 1, 2000. The monthly rate is $1,000.
This property is used exclusively for general office and marketing purposes.
The Company does not hold any real estate or related securities for investment
purposes.
In the opinion of Management, all the properties and equipment are suitable
for their use and are adequately covered by an insurance policy which lists
Textron, Fleet Capital, Texas Bank, 1st International Bank, and Legacy Bank as
the payees.
The Company plans to expand the headquarters by 60,000 square feet in
fiscal 2000 at an approximate cost of $6,000,000 for additional manufacturing
space as well as office space. This expanded facility will be capable of
accommodating four syringe assembly lines and three blood collection tube holder
lines. In 2001, the Company anticipates building a 100,000 square foot facility
at an approximate cost of $12 million which will be utilized for manufacture of
the projected eight 3cc assembly lines, six 1cc assembly lines, two 5cc assembly
lines, two 10cc assembly lines, and five blood collection tube holder assembly
lines. Management plans to finance the expansion by raising $60 million through
a public offering and $10 million in debt.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's capital stock as of the date of this Form 10-SB
(excluding exercisable options) for (a) each person known by the Company to own
beneficially 5 percent or more of the voting capital stock, and (b) each
Director and Executive Officer of the Company who owns capital stock. Except
pursuant to applicable community property laws and except as otherwise
indicated, each shareholder identified in the table possesses sole voting and
investment power with respect to his or her shares.
20
<PAGE>
<TABLE>
<CAPTION>
Title of Class Name and Address of Amount and Nature Percent of
Beneficial Owner of Beneficial Owner Class/1/
-----------------------------------------------------------------------------------------------------------
Common Stock
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As a Group Officers and Directors 14,000,000 100%
511 Lobo Lane, P.O. Box 9
Little Elm, TX 75068-0009
As Individuals Thomas J. Shaw 11,200,000 80%
Lillian E. Salerno 2,800,000 20%
-----------------------------------------------------------------------------------------------------------
Class A Convertible
Preferred Stock
-----------------------------------------------------------------------------------------------------------
As a Group Officers and Directors 150,000 3%
511 Lobo Lane, P.O. Box 9
Little Elm, TX 75068-0009
As Individuals Jimmie Shiu 150,000 3%
-----------------------------------------------------------------------------------------------------------
Class B Convertible
Preferred Stock
-----------------------------------------------------------------------------------------------------------
As a Group Officers and Directors 96,700 2.3%
511 Lobo Lane, P.O. Box 9
Little Elm, TX 75068-0009
As Individuals Thomas J. Shaw 5,000 Less than 1%
Steven R. Wisner 2,500 Less than 1%
F. John Deuschle, III 25,700 Less than 1%
Jimmie Shiu 18,500 Less than 1%
John H. Wilson, III 5,000 Less than 1%
Marwan Saker 30,000 Less than 1%
</TABLE>
(1) The percentages of each class are based on 14,000,000 shares of common
stock, 5,000,000 shares of Class A Convertible Preferred Stock, and
4,294,000 shares of Class B Convertible Preferred Stock outstanding as of
the date of this filing.
There are no arrangements the operation of which would result in a change
in control of the Company.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The following table sets forth information concerning the Directors,
Executive Officers, and certain significant employees of the Company as of the
date of this filing. The Company's Board of Directors consists of nine members.
The Directors serve for three-year terms.
21
<PAGE>
<TABLE>
<CAPTION>
Term as
Name Age Position Director Expires
---- --- -------- ----------------
<S> <C> <C> <C>
Management
Thomas J. Shaw 49 Chairman, President, Chief Executive Officer, and Director 2000**
Steven R. Wisner 43 Executive Vice President, Engineering & Production and Director 2000
Lawrence G. Salerno 40 Director of Operations N/A
James A. Hoover 51 Production Manager N/A
Russell B. Kuhlman 45 Vice President, New Markets N/A
Kathryn M. Duesman 36 Director of Clinical Services N/A
Douglas W. Cowan 56 Chief Financial Officer, Treasurer, and Director 2000
Michele M. Larios 33 Director of Legal and Legislative Policy and Secretary N/A
Outside Directors
Lillian E. Salerno 39 Director 2000**
Jimmie Shiu, M.D. 66 Director 2000*
Clarence Zierhut 71 Director 2002**
John H. Wilson, III 57 Director 2000*
F. John Deuschle, III 33 Director 2000*
Marwan Saker 44 Director 2000
Significant Employees
Phillip L. Zweig 53 Communications Director N/A
Peter B. Hegi 26 Product Development Manager N/A
Judy Ni Zhu 41 Senior Research Design Engineer N/A
S. Kristie Haddox 29 Quality Assurance Manager N/A
Shelley K. Walley 46 Manager of Regulatory Affairs N/A
Stephen C. Bezner 49 Director of Accounting N/A
</TABLE>
* Elected under the terms of the Certificate of Designation, Preferences,
Rights and Limitations of Series A Convertible Preferred Stock of the
Company. The terms of these Directors will expire the earlier of the 2000
annual shareholders' meeting or upon payment of all dividends to the Class A
shareholders.
** Members of the Compensation and Benefits Committee
MANAGEMENT
Thomas J. Shaw, the Founder of the Company, has served as Chairman of the
--------------
Board, President, Chief Executive Officer, and as a Director since the Company's
inception. In addition to his duties overseeing the management of the Company,
he continues to lead the Company's design team in product development of other
medical safety devices that utilize his unique patented friction ring
technology. Mr. Shaw has 20 years of experience in industrial product design and
has developed several solutions to complicated mechanical engineering
challenges. He has been granted multiple patents and has additional patents
pending. Mr. Shaw received a Bachelor of Science in Civil Engineering from the
University of Arizona and a Master of Science in Accounting from the University
of North Texas.
Steven R. Wisner joined the Company in October 1999 as Executive Vice
----------------
President, Engineering and Production and as a Director. Mr. Wisner's
responsibilities include the management of engineering, production, regulatory
affairs, quality assurance, and human resources. Mr. Wisner has 23 years of
experience in product design and development. Before joining the Company, Mr.
Wisner was the Director of Operations for Flextronics International in
Richardson, Texas, from May 1998 to October 1999, where he had complete
responsibility for taking product ideas from the concept stage through full
design and into the manufacturing process. Mr. Wisner worked as Design Services
Manager at Altatron Technologies from August 1997 to May 1998, and as Director
of Engineering with Responsive Terminal Systems from 1984 to 1997. While
working at Texas Instruments from 1982 to 1984, Mr. Wisner was the team leader
of a product development that successfully integrated several thousand personal
computers into the worldwide Texas Instruments data network. As a project
leader with Mostek Corporation from 1980 to 1982, he oversaw the development of
automated manufacturing control systems for semiconductor assembly. Mr. Wisner
began his engineering career with Rockwell-Collins in 1977, where he was
involved in the design of flight navigation equipment, including the first GPS
(Global Positioning System). Mr. Wisner holds a Bachelor of Science in Computer
Engineering from Iowa State University.
Lawrence G. Salerno has served as Director of Operations for the Company
-------------------
since 1995 and is responsible for the manufacture of all VanishPoint(R)
products, as well as all product development and
22
<PAGE>
process development projects. Mr. Salerno is the Company's Management
Representative, assuring that the Quality Systems are established and
implemented according to ISO 9001, MDD, and FDA mandated standards. In addition,
he supervised all aspects of the construction of the Company's new facilities in
Little Elm, Texas. Prior to joining the Company, Mr. Salerno worked for
Checkmate Engineering from 1991 to 1995 and was responsible for engineering site
design and supervision of structural engineering products. Mr. Salerno is the
brother of Lillian E. Salerno.
James A. Hoover (who joined the Company in February 1996) is the Company's
---------------
Production Manager and is responsible for supervision of the production of
Company products. Mr. Hoover has also developed and implemented FDA required
procedures and has been involved in the FDA inspection process. Mr. Hoover
joined the Company after working for Sherwood for 26 years. During his tenure
with Sherwood, he gained hands-on experience in all aspects of the medical
device manufacturing process. Mr. Hoover began his career with Sherwood as a
materials handler and worked his way up through a series of positions with added
responsibilities to his final position there as Production Manager of Off-Line
Molding, Operating Room/Critical Care. In this capacity, he managed several
departments, ran several product lines, and hired and supervised over 200
employees. While at Sherwood, he also gained experience with one of the
country's first safety syringes, the Monoject(R).
Russell B. Kuhlman joined the Company in February 1997 and is the Company's
------------------
Vice President, New Markets. Mr. Kuhlman is responsible for developing new
markets and product training for the Company's sales organization, as well as
distribution. Mr. Kuhlman's efforts with the Company have resulted in bringing
onboard Specialty Distributors, influencing legislation, and educating
influential healthcare representatives about the benefits of the VanishPoint(R)
product line. Mr. Kuhlman is respected throughout the industry and is a main
contributor to the safety effort in this country. He has a sales background in
the medical service industry that includes his most recent work for Bio-Plexus
from 1994 to 1997, where he developed strategic marketing plans for new safety
products. Prior to his work there, Mr. Kuhlman worked as Director of Sales and
Marketing for Winfield Medical, Inc. from 1989 to 1994, where he launched
several new products, developed strategic sales territories, and was the trainer
for Sales and Regional Managers. Mr. Kuhlman also worked for Becton Dickinson
Vacutainer(R) Systems in the Houston Territory from 1980 to 1989, where he was
recognized as the National Sales Representative for the year 1987. Mr. Kuhlman
holds a Bachelor of Science in Finance from the University of Tennessee
Kathryn M. Duesman, joined the Company in 1996 as the Director of Clinical
------------------
Services and provides clinical expertise on existing VanishPoint(R) products as
well as those in development. She has been instrumental in developing training
and marketing materials. Ms. Duesman has also contributed to design
improvements in the existing product line as well as applying for patents on two
new products. Ms. Duesman is well recognized as one of the key authorities on
the prevention of needlestick injuries and has spoken and been published on this
issue. Many legislators and researchers rely upon her knowledge of the clinical
aspects of the technology. In 1996, Ms. Duesman served as a Registered Nurse
("RN") at Denton Community Hospital. From 1995 to part of 1996, Ms. Duesman
served as an RN at Pilot Point Home Health. From 1992 to 1995, Ms. Duesman
served as an RN for Denton Community Hospital. Ms. Duesman is a 1985 graduate
of Texas Woman's University with a Bachelor of Science in Nursing.
Douglas W. Cowan is the Company's Chief Financial Officer, Treasurer, and a
----------------
Director. He is responsible for the financial, accounting, and forecasting
functions of the Company. Prior to joining the Company in 1999, Mr. Cowan
served as a consultant to the Company and other companies from 1996 to 1999 on
various accounting and other business matters. Before becoming a consultant, he
served as the Chief Financial Officer of Wedge-Dialog Company, an oil field
services company, from 1995 to 1996. In addition, Mr. Cowan served in various
capacities, including Vice President and Controller at El Paso Natural Gas
Company, an interstate pipeline company. After leaving El Paso Natural Gas, Mr.
Cowan formed a public accounting practice that provided tax and accounting
services, as well as litigation support. Mr. Cowan has a Bachelor of Business
Administration from Texas Technological College. He is a CPA licensed in Texas.
Michele M. Larios joined the Company in February 1998 as an attorney, and
-----------------
now serves as the Director of Legal and Legislative Policy and as Secretary of
the Company. Ms. Larios is responsible for the legal and legislative functions
of the Company. In addition to working on legal matters for the Company and with
outside counsel, Ms. Larios works with legislators on pertinent issues and
relevant legislation. Prior to joining the Company, Ms. Larios served as the
Legal Analyst for Applied Risk Management from 1995 through 1997. Ms. Larios
received a Bachelor of Arts in Political Science from Saint Mary's College
23
<PAGE>
in Moraga, California, and a Juris Doctorate from Pepperdine University School
of Law in Malibu, California.
OUTSIDE DIRECTORS
Lillian E. Salerno has served on the Board of Directors since 1996. Ms.
------------------
Salerno began serving as a consultant to the Company effective June 1, 2000.
Her responsibilities include the development of foreign marketing, distribution,
and licensing agreements, principally in Europe. Previously, Ms. Salerno served
the Company since its inception in a variety of critical positions. She most
recently served as the Company's Executive Vice President, Sales and Marketing.
Prior to the Company's incorporation, Ms. Salerno was an attorney with a growing
private law practice while she served as a consultant, administrator of grants,
and legal consultant to Checkmate Engineering. Ms. Salerno assisted with the
start-up of the Company. Ms. Salerno received a Bachelor of Arts from the
University of Texas at Austin, a Master of Arts from the University of North
Texas, and a Juris Doctorate from Southern Methodist University School of Law.
Ms. Salerno is the sister of Lawrence G. Salerno.
Jimmie Shiu, M.D. has served on the Company's Board of Directors since
-----------------
1996. Prior to retirement in 1998, Dr. Shiu was in private practice as a Board
Certified Otolaryngologist at Presbyterian Hospital in Dallas for 31 years.
Although retired from private practice, Dr. Shiu continues to serve as a
clinical professor for the Department of Otolaryngology at the University of
Texas Southwestern Medical Center at Dallas. He has served on the Board of
Trustees of Presbyterian Healthcare Foundation of Dallas since 1996 and the
Board of Directors of MOTO1, Inc. since 1999. Dr. Shiu completed his
undergraduate work at Abilene Christian University and received his medical
degree from University of Texas Southwestern Medical Center at Dallas, Texas.
Clarence Zierhut has served on the Company's Board of Directors since April
----------------
1996. Since 1955, Mr. Zierhut has operated an industrial design firm, Zierhut
Design, that develops new products from concept through final prototypes.
During his professional career, Mr. Zierhut has created over 3,000 product
designs for more than 350 companies worldwide, in virtually every field of
manufacturing, and has won many international awards for design excellence. His
clients have included Johnson & Johnson, Abbott, Gould, and McDonnell Douglas.
He received a Bachelor of Arts from Art Center College of Design in Los Angeles,
California.
John H. Wilson, III has served on the Company's Board of Directors since
-------------------
November 1999. During his investment and banking career, Mr. Wilson has been
involved in the start-up and acquisition of multiple businesses focusing on
healthcare, including Provident Living Centers, International Hospital
Corporation, Genosys Biotechnologies, Inc., and Uro-Tech, Ltd. Mr. Wilson has
also served as a Director of First International Ltd., a merchant bank in
London, England, and a subsidiary of First International Bancshares, Inc. Mr.
Wilson has also served as a director for Capital Southwest Corp. from 1989 to
the present, Encore Wire Corporation from 1989 to 1992 and from 1994 to the
present, and for Palm Harbor Homes from 1994 to the present. Capital Southwest
Corp., Encore Wire Corporation, and Palm Harbor Homes are public companies
registered with the SEC. Since 1983, he has served as President of U.S. Equity
Corporation, a private venture capital firm, in Dallas, Texas. Mr. Wilson holds
a Bachelor of Business with a concentration in Finance and Economics from Baylor
University.
F. John Deuschle, III has served on the Company's Board of Directors since
---------------------
1999. Mr. Deuschle is a Managing Director and National Sales Manager, Fixed
Income Division, for HSBC Markets (USA) Inc. Prior to joining HSBC in 1997, Mr.
Deuschle served as a Senior Vice President, Fixed Income Sales from 1994 to 1997
for Nationsbanc Capital Markets. Previously, he served in Fixed Income and
Investment Banking for Lehman Brothers from 1989 to 1994. Mr. Deuschle holds a
Bachelor of Science in Financial Management from the University of Arkansas.
Marwan Saker joined the Company's Board of Directors in June 2000. Since
------------
1983, Mr. Saker has served as CEO of Sovana, Inc. As a representative for
United States companies seeking distribution, licensing, and franchising in the
Middle East, Europe, and North Africa, Mr. Saker was instrumental in developing
successful partnerships in more than 15 countries. He offices in Dallas, Texas.
SIGNIFICANT EMPLOYEES
Phillip L. Zweig joined the Company in December 1999 as Communications
----------------
Director. Mr. Zweig is a prize winning financial journalist who has worked as a
staff reporter at The American Banker, The
24
<PAGE>
Wall Street Journal, and Bloomberg Business News and other media organizations.
From 1993 to 1998, he served as Corporate Finance Editor at Business Week where
he wrote a major article on the Company. Before joining the Company, he worked
as a freelance financial writer and editorial consultant. His clients included
Andersen Consulting and Boston Consulting Group. Mr. Zweig received a Bachelor
of Arts in Behavioral Psychology from Hamilton College and a Master of Business
Administration from the Baruch College Graduate School of Business.
Peter B. Hegi joined the Company in August 1996 and is the Company's
-------------
Product Development Manager. His responsibilities include development of new
products from conception through production implementation supporting production
in the manufacturing of products and managing continual production improvement
efforts. This process includes design input and control, manufacturing
feasibility, and FDA premarket approval of the product. Product Development
also assists in continually improving existing devices. He has created product
and component specifications for the blood collection tube holder, 5cc syringe,
and 10cc syringe. Mr. Hegi is a 1996 Mechanical Engineering graduate of
Stanford University, where he was a member of Tau Beta Pi national engineering
honor society. His new product development responsibilities include
establishing device design requirements and controls, determining product
manufacturing feasibility, and assisting in the preparation of device
documentation for FDA 510(K) submission. He has been instrumental in the
development of the VanishPoint(R) blood collection tube holder and the 1cc, 3cc,
5cc, and 10cc VanishPoint(R) syringe product lines.
Judy Ni Zhu has served as a Senior Research Design Engineer since joining
-----------
the Company in 1995. Her primary focus is on new product development and
improvement of current products. Prior to joining the Company, Ms. Zhu worked
with Checkmate Engineering as a design engineer on the original 3cc syringe and
other SBIR grant projects. Ms. Zhu received her Bachelor of Science from
Northwest Polytechnic University in Xian, China, and her Master of Engineering
from University of Texas at Arlington. Ms. Zhu has been instrumental in design
modifications for the 3cc syringe, which have maximized both product reliability
and production efficiency. She also designed and developed a manual needle
assembly machine and an automatic lubricating and capping system for the 3cc
syringe and developed and assisted in the design of automated blood collection
tube holder assembly equipment. Ms. Zhu has collaborated with Ms. Duesman and
Mr. Shaw in the filing of several patent applications. Prior to joining
Checkmate Engineering in 1991, Ms. Zhu worked for Shenyang Airplane Corporation
in Shenyang, China, where she was responsible for airplane control system design
and its stress computation and analysis. Ms. Zhu also worked for Mactronix,
Inc. in Dallas, Texas, where she was responsible for the design, modification,
and production drawing of an automatic wafer transfer system.
S. Kristie Haddox joined the Company in July 1996 and is the Company's
-----------------
Quality Assurance Manager and responsible for QA testing, document control, and
validation. She formerly worked as Quality Assurance Validation Scientist at
Alcon Laboratories in Fort Worth, Texas, from 1995 to 1996. Ms. Haddox holds a
Bachelor of Science degree from Texas A&M University and is a member of the
American Society for Quality Control.
Shelley K. Walley joined the Company in April 1999 as the Company's Manager
-----------------
of Regulatory Affairs and is responsible for the Company's 510(K) submissions,
handling customer complaints, internal/external audits, training, and the
Corrective and Preventive Action system. Ms. Walley served in several
regulatory and quality capacities prior to joining the Company. She was the
Compliance Coordinator with Sandoz Agro, Inc. (formerly Zoecon Corporation) for
11 years from January 1985 to July 1995 and gained valuable experience working
with EPA and FDA to establish compliance with GMP and GLP guidelines for the
Company. Ms. Walley's experience as Senior Regulatory Specialist for almost
four years at Mentor (from July 1995 to April 1999), a Class III implantable
medical device company, furthered her regulatory knowledge in the medical device
arena. At Mentor, she provided regulatory guidance for submissions, validations
and audits, and worked closely with FDA, ISO, and third party investigations.
Ms. Walley majored in Business Management at East Texas State University and is
a Certified Quality Auditor.
Stephen C. Bezner joined the Company in March 2000 as the Director of
-----------------
Accounting. He is responsible for keeping personnel, systems, and procedures in
place to produce an orderly and timely accounting of all business activities.
Prior to his employment with the Company, Mr. Bezner served as Vice President
Finance for CBI Laboratories, a public subsidiary of Thermo Electron
Corporation, from 1992 to 2000. Mr. Bezner has 24 years' experience in
accounting management and cost accounting, all of
25
<PAGE>
which were for manufacturing operations of public companies. Previous employers
include Overhead Door Corporation and Texas Instruments. He has a Bachelor of
Science Degree from the University of Texas at Dallas.
COMMITTEE OF DIRECTORS
The Board of Directors has the following committee:
Committee Members
--------- -------
Compensation and Benefits Thomas J. Shaw--Chairman
Lillian E. Salerno
Clarence Zierhut
The Compensation and Benefits Committee recommends to the Board of Directors the
compensation of Officers and significant employees for the Company and the
granting of stock options.
FAMILY RELATIONSHIPS
There are no family relationships among the above persons except as set
forth above.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of the above persons or any business in which such person was an
executive officer have been involved in a bankruptcy petition, been subject to a
criminal proceeding (excluding traffic violations and other minor offenses),
been subject to any order enjoining or suspending their involvement in any type
of business, or been found to have violated a securities law.
DIRECTORSHIPS IN OTHER COMPANIES
No Directors hold directorships in reporting companies other than as set
forth above.
ITEM 6. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the total annual
compensation paid or accrued by the Company to or for the account of the Chief
Executive Officer and each other executive officer of the Company whose total
cash compensation exceeded $100,000 for any of the past three fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ------------------------
Awards Payout(s)
------------------------ ----------------------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Principal Compen- Award(s) Options/ Payouts Compen-
Position Year Salary($) Bonus($) sation($) ($) SARs (#) ($) sation ($)
------------------ ---- --------- --------- ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas J. Shaw, 1997 130,400 50,000 0 0 0 0 0
President and CEO 1998 125,000 0
1999 162,019 0
Lillian E. Salerno, 1997 88,846 50,000 0 0 0 0 0
Former Executive 1998 90,000 0
Vice President, 1999 143,461 0
Sales & Marketing
Edward S. Aarons, 1997 0 0 0 0 0 0 0
Former Director 1998 0 0
of Sales 1999 108,598 0
</TABLE>
In 1998, Mr. Shaw should have received a raise under the terms of his
Employment Agreement. However, the 1998 portion of his raise in the amount of
$12,019 was paid in 1999. Officers, Directors, and significant employees hold
options exercisable for the purchase of 49,000; 127,500; 221,200; and
26
<PAGE>
137,700 shares of common stock in the years 1999, 2000, 2001, and 2002,
respectively. To date, no options or long-term incentive plan awards have been
issued to Mr. Shaw or Ms. Salerno. Directors or former Directors were granted
options in 1999 as follows: Steven R. Wisner, 150,000; Douglas W. Cowan, 25,000;
Jimmie Shiu, 15,000; Clarence Zierhut, 1,000; John H. Wilson, III, 5,000; F.
John Deuschle, III, 5,000; and Joe Reeder, 25,000.
27
<PAGE>
Officers, Directors, and Significant Employees hold stock options for the
purchase of common stock exercisable as follows:
<TABLE>
<CAPTION>
Options Exercisable by Directors and Significant Employees
1999 Plan NQSOs 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
Steven R. Wisner 65,000 65,000
Lawrence G. Salerno 5,150
James A. Hoover 3,150
Kathryn M. Duesman 5,300
Douglas W. Cowan 2,500 2,500
Jimmie Shiu, M.D. 15,000
Clarence Zierhut 5,000
John H. Wilson, III 5,000
F. John Deuschle, III 5,000
Michele M. Larios 7,700
Phillip L. Zweig 20,000
----------------------------------------------------------
0 30,000 108,800 67,500 0
==========================================================
1999 Plan ISOs 1999 2000 2001 2002 2003
Steven R. Wisner 10,000 10,000
Lawrence G. Salerno 2,500 7,650
James A. Hoover 2,500 5,650
Russell B. Kuhlman 7,800 7,800
Kathryn M. Duesman 2,500 7,800
Douglas W. Cowan 10,000 10,000
Michele M. Larios 7,700
Peter B. Hegi 3,800 3,800
Judy Ni Zhu 3,350 3,350
S. Kristie Haddox 3,950 3,950
Shelley K. Walley 2,500 2,500
----------------------------------------------------------
0 0 48,900 70,200 0
==========================================================
1996 Plan NQSOs 1999 2000 2001 2002 2003
Steven R. Wisner 2,500
Lawrence G. Salerno 5,000 15,000
James A. Hoover 5,000 14,000
Russell B. Kuhlman 17,500
Kathryn M. Duesman 1,500 10,000
Jimmie Shiu, M.D. 15,000 15,000 15,000
Clarence Zierhut 10,000 5,000 1,000
Peter B. Hegi 1,500 7,000
Judy Ni Zhu 7,500 10,000
S. Kristie Haddox 1,500 4,000
----------------------------------------------------------
49,500 97,500 16,000 0 0
==========================================================
1996 Plan ISOs 1999 2000 2001 2002 2003
Lawrence G. Salerno 7,500
James A. Hoover 7,500
Kathryn M. Duesman 7,500
Michele M. Larios 10,000
Peter B. Hegi 5,000
Judy Ni Zhu 5,000
S. Kristie Haddox 5,000
----------------------------------------------------------
0 0 47,500 0 0
==========================================================
</TABLE>
28
<PAGE>
COMPENSATION OF DIRECTORS
The Company pays each nonemployee Director a meeting fee of $250 for each
Board meeting attended and has granted to each Director stock options of common
stock each year. No additional amounts are paid for committee participation or
special assignment.
EMPLOYMENT AGREEMENTS
There are no other employment agreements in place involving other Officers
or Directors of the Company, except as set forth below:
Thomas J. Shaw
--------------
The Company has a written employment agreement with Thomas J. Shaw, the
Company's President and Chief Executive Officer, for an initial period of three
years ending September 2002 with an automatic and continuous renewal for
consecutive two-year periods. The agreement is terminable either by the Company
or Thomas J. Shaw upon 30 days' written notice. The agreement provides for an
annual salary of at least $150,000 with a minimal salary increase annually equal
to the percentage increase in the Consumer Price Index during the previous
calendar year. Thomas J. Shaw's salary shall be reviewed by the Board of
Directors each January, which shall make such increases as it considers
appropriate. Thomas J. Shaw is also entitled to participate in all executive
bonuses as the Board of Directors, in its sole discretion, shall determine.
Under the Employment Agreement, the Company will also provide certain
fringe benefits, including, but not limited to, participation in pension plans,
profit-sharing plans, employee stock ownership plans, stock appreciation rights,
hospitalization and health insurance, disability and life insurance, paid
vacation, and sick leave. The Company also reimburses him for any reasonable
and necessary business expenses, including travel and entertainment expenses,
necessary to carry on his duties. Pursuant to the employment agreement, the
Company has agreed to indemnify Thomas J. Shaw for all legal expenses and
liabilities incurred with any proceeding involving him by reason of his being an
Officer or agent of the Company. The Company has further agreed to pay
reasonable attorney fees and expenses in the event that, in Thomas J. Shaw's
sole judgment, he needs to retain counsel or otherwise expend his personal funds
for his defense.
Thomas J. Shaw has agreed to a one-year noncompete, not to hire or attempt
to hire employees of the Company for one year and to not make known Company
customers or accounts or to call on or solicit Company accounts or customers in
the event of termination of his employment for one year unless the termination
is without cause or pursuant to a change of control of the Company. Furthermore,
Mr. Shaw has the right to resign in the event that there is a change in control
which is defined as a change in the majority of directors within any twelve
month period without 2/3 approval of the shares outstanding and entitled to
vote, or a merger where less than 50 percent of the outstanding stock survives
and a majority of the Board of Directors remains, or the sale of substantially
all of the assets of the Company, or any other person acquires more than 50
percent of the voting capital of the Company. Mr. Shaw retained the right to
participate in other businesses as long as they do not compete with the Company
and so long as he devotes the necessary working time to the Company.
Phillip L. Zweig
----------------
The Company entered into an employment agreement with Phillip L. Zweig, the
Company's Communications Director, dated December 22, 1999, which expires on
December 12, 2000. Mr. Zweig's duties include obtaining and authoring favorable
coverage of the Company and issues important to the Company in local and
national media outlets throughout the United States. Mr. Zweig also agreed not
to write articles about the Company for independent publications and shall not
provide any services relating to marketing strategy, healthcare policy,
publicity or media coverage, or any other services in the United States to any
manufacturer of needle products, healthcare group purchasing organizations, or
any individual or business entity that is in direct competition with the
business of the Company during his employment with the Company and for three
years hereafter. In exchange, the Company agreed to pay Mr. Zweig an annual
salary of $85,000 and to grant Mr. Zweig options for the purchase of 20,000
shares of the Company's common stock under the 1999 Stock Option Plan. The
Company also agreed to pay
29
<PAGE>
reasonable travel, entertainment, and related expenses as well as to provide Mr.
Zweig with standard benefits. Mr. Zweig shall be considered for bonuses on the
same terms as other management employees.
INDEPENDENT CONSULTING AGREEMENTS
Robert P. Stathopulos
---------------------
From the Company's inception to the present, Robert Stathopulos, a former
Director, has served as an independent consultant pursuant to an oral agreement
with the Company for the provision of advice regarding various matters,
including, but not limited to, Quality Assurance and Regulatory Affairs. The
Company has agreed to pay him $700 per day worked. Mr. Stathopulos currently
works every other week Monday through Friday afternoon. The Company has also
agreed to pay Mr. Stathopulos' expenses, which have varied between $650 to
$1,000 per week and are made up of business related travel expenses. This
consulting agreement is at will and has no termination date.
Lillian E. Salerno, d/b/a MediTrade International
-------------------------------------------------
The Company entered into a consulting agreement with Lillian E. Salerno,
d/b/a MediTrade International, a sole proprietorship, on June 1, 2000. The
contract is for a one year term and Ms. Salerno has agreed to establish contacts
with major European entities to develop marketing and distribution channels as
well as licensing agreements. Ms. Salerno will be paid $16,667 per month plus
up to $5,000 of business expenses incurred on behalf of the Company for the term
of the contract. In the event Ms. Salerno does establish a business
relationship which leads to a licensing agreement, she will be paid 5 percent of
the licensing fee as such fees are collected by the Company.
F. Simon Tolbert, Jr.
---------------------
The Company entered into a Consulting Agreement on February 28, 2000, with F.
Simon Tolbert, Jr. wherein Mr. Tolbert agreed to advise the Company regarding
public relations efforts and to assist the Company in establishing relationships
with foundations and public interest groups in exchange for $7,500 and a bonus
which is to be determined by the Company based on various factors, which is not
to exceed $260,000. The term of the Consulting Agreement ends July 1, 2000.
International Export and Consulting
-----------------------------------
The Company entered into a Consulting Agreement on March 15, 2000, with
International Export and Consulting where International Export and Consulting
agreed to advise the Company with respect to selection of an international
distribution network, potential strategic partners, and future licensing for
VanishPoint(R) technology in the Middle East. In exchange, the Company has
agreed to pay a consulting fee in the amount of $2,000 a month for ten months as
well as nonqualified stock options ("NQSOs") for 61,000 shares of the Company's
common stock at an exercise price of $10 per share. Marwan Saker, a principal in
International Export and Consulting, is a Director.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management believes that all of the transactions set forth below were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. There are no preset limits on payments to related
parties. Payments are made after services are provided.
Thomas J. Shaw, the Company's President and Chief Executive Officer who
beneficially owns 80 percent of the Company's common stock, was paid a licensing
fee of $500,000 (amortized over 17 years) from the Company for the exclusive
worldwide licensing rights to manufacture, market, sell, and distribute all the
retractable medical safety products. In addition, Mr. Shaw receives a 5 percent
gross royalty on all licensed products sold to customers over the life of the
technology licensing agreement. Mr. Shaw was paid a royalty of $110,197 and
$42,571 for 1999 and 1998, respectively. Mr. Shaw was paid $138,888 in
royalties from January 1, 2000, to the date of this filing. As of the date of
this filing, Mr. Shaw has been paid $236,247 as a royalty for the two years
ended June 1, 2000.
In September 1996, the Company purchased the 3cc prototype molds from
Thomas J. Shaw, d/b/a Checkmate Engineering, a sole proprietorship. The purchase
was financed by a note for the full
30
<PAGE>
purchase price of $108,252. The note provided for no interest for the first 305
days and, subsequently, interest at a rate of 12 percent per annum. Interest
expense related to this note was $1,400 and $5,258 for the years ended December
31, 1999 and 1998, respectively. The note was paid in full in 1999.
Lillian E. Salerno, a Director of the Company, d/b/a Mill Street
Enterprises ("Mill Street"), a sole proprietorship, leases offices at 618, 620,
and 622 S. Mill Street, in Lewisville, Texas, to the Company for its marketing
and sales department. The lease is for a five-year term commencing July 1, 1997,
and ending June 30, 2002, at an annual rental rate of $22,800. The Company also
has a lease for additional office space with Mill Street for one year commencing
April 1, 2000, at a rate of $1,000 per month. Lease payments for $15,800 have
been paid in 2000.
A former Director of the Company, Robert Stathopulos, was paid consulting
fees by the Company of $96,372 in 1999 and $69,259 in 2000 through the date of
this filing.
Douglas W. Cowan, a Director and Chief Financial Officer and Treasurer of
the Company, received $76,651 and $58,345 in 1998 and 1999, respectively, for
accounting and other consulting services prior to becoming a Director and
employee of the Company.
The Company paid $23,381 and $30,258 in 1999 and 1998, respectively, and
$10,537 has been paid in 2000, to family members of its Chief Executive Officer
for various consulting services.
ITEM 8. DESCRIPTION OF SECURITIES
As of the date of this filing, the Company's authorized capital consists of
100,000,000 shares of common stock, no par value, 5,000,000 shares of Class A
Convertible Preferred Stock, par value of $1 per share, and 5,000,000 shares of
Class B Convertible Preferred Stock, par value of $1 per share. No capital
stock carries preemptive rights. There are no provisions in the Restated
Articles of Incorporation and Amended and Restated Bylaws that would delay,
defer, or prevent a change in control of the Company other than provisions in
the Restated Articles of Incorporation that prohibit cumulative voting by
shareholders and provisions which provide that the Board of Directors shall
consist of two classes with one-half of each class elected every three years.
The Company serves as its own registrar and transfer agent. All of the
Company's outstanding shares of common and preferred stock are "restricted
securities" and, in the future, may be sold only upon compliance with the
Securities Act of 1933, as amended ("Securities Act"), or an exemption
therefrom.
COMMON STOCK
The Company is authorized to issue 100,000,000 shares of no par value
common stock (the "Common Stock"). As of the date of this filing, there are
14,000,000 shares of Common Stock issued and outstanding. Additionally,
1,000,000 shares are set aside under both the 1996 Stock Option Plans and
2,000,000 shares of Common Stock have been set aside under the 1999 Stock Option
Plan for employees, Directors, and other qualified individuals. These shares
are issuable upon the exercise of options. As of March 31, 2000, options for
the purchase of 146,605 shares of Common Stock are exercisable. Options for the
purchase of 437,655 shares of Common Stock become exercisable by December 31,
2000. No shares are held as treasury stock.
Shares of the Company's Common Stock have no conversion rights and no
restrictions on alienation and are fully paid and are not liable to further call
or assessment. Each share of the Company's Common Stock is entitled to share
ratably in any asset available for distribution to holders of its equity
securities upon liquidation of the Company, subject to the preference of the
holders of each class and series of the preferred stock. Pursuant to the
requirements of a loan from Texas Bank, the Company has agreed not to return
capital to the shareholders or redeem outstanding shares without the bank's
prior consent.
Voting Rights
-------------
All shares of the Company's Common Stock have equal voting rights and, when
validly issued and outstanding, have one vote per share on all matters to be
voted upon by stockholders. The holders of the Common Stock elect the Directors
subject to certain limited voting rights of the holders of the Class A
Convertible Preferred Shares and Series II Class B Convertible Preferred Shares
where dividends are in
31
<PAGE>
arrears for 12 consecutive quarters. See "Class A Convertible Preferred Stock"
and "Series II Class B Convertible Preferred Stock." Cumulative voting in the
election of Directors is not allowed.
Dividends
---------
Holders of the Company's Common Stock are entitled to receive dividends
when and if declared by the Company's Board of Directors out of funds available
therefor. The Company has not paid any dividends since its inception and
presently anticipates that all earnings, if any, will be retained for
development of the Company's business and that no dividends on its Common Stock
will be declared in the foreseeable future. Any future dividends will be subject
to the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, full payment of dividends on the Class A
Convertible Preferred Stock, and Series I, Series II, Series III, and Series IV
Class B Convertible Preferred Stock, the operating and financial condition of
the Company, its capital requirements, and its general business conditions.
CLASS A CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue not more than 5,000,000 shares of Class
A Convertible Preferred Stock at $1.00 par value and has 5,000,000 shares issued
and outstanding held by 131 shareholders. The Board of Directors of the Company
has the authority to divide the Class A Convertible Preferred Shares into series
and to set the relative rights and preferences among the series, within the
limitations provided by Article 2.13 of the Texas Business Corporation Act.
This summary is not intended to be complete and is subject to, and qualified in
its entirety by reference to, the Certificate of Designation, Preferences,
Rights, and Limitations of Series A Convertible Preferred Stock of the Company,
filed with the Secretary of the State of Texas, amending the Company's Articles
of Incorporation, and setting forth the rights, preferences, and limitations of
the Class A Convertible Preferred Stock, the form of which is attached hereto as
part of Exhibit 2.1.
Dividends
---------
Holders of shares of Class A Convertible Preferred Stock (the "Class A
Stock") will be entitled to receive, if, when, and as declared by the Board of
Directors out of funds legally available therefor, cumulative cash dividends of
$.12 per share per annum, payable quarterly, commencing September 1, 1995. If a
dividend upon any shares of Class A Stock is in arrears, no dividends may be
paid or declared and set aside for payment, or other distribution made upon the
Common Stock or any other stock of the Company ranking junior to the Class A
Stock as to dividends. In addition, no Common Stock or any other stock of the
Company ranking junior to the Class A Stock as to dividends, may be redeemed,
purchased, or otherwise acquired for any consideration by the Company except in
certain circumstances. As of April 15, 2000, $2,766,572 in dividends are in
arrears.
Voting Rights
-------------
Except as required by the laws of the State of Texas, the holders of the
Class A Stock are generally not entitled to vote. In the event dividends
payable on the Class A Stock shares shall be in arrears for 12 consecutive
quarterly dividend periods, the holders of the majority of the outstanding Class
A shares shall have the exclusive right (voting separately as a class with one
vote per Class A share) to elect one-third of the Board of Directors which
Directors shall serve until the next annual meeting or so long as such arrearage
shall continue. As of March 31, 1999, dividends to Class A shareholders were in
arrears for 12 consecutive dividend periods and accordingly, on October 4, 1999,
the Class A shareholders elected three (one-third) of the Directors to the Board
of Directors.
So long as any shares of Class A Stock remain outstanding, the Company
shall not, without the affirmative vote or consent of the holders of at least 51
percent of the shares of the Class A Stock outstanding at the time: (a)
authorize, create, issue, or increase the authorized or issued amount of any
class or series of stock ranking equal to or senior to the Class A Stock with
respect to payment of dividends or the distribution of assets on liquidation,
dissolution, or winding up of the Company; or (b) amend, alter, or repeal the
provisions of the Company's Articles of Incorporation, or of the rights of the
Class A Stock, so as to alter or change the powers, preferences, or special
rights of the shares of the Class A Stock so as to affect them adversely.
32
<PAGE>
Conversion Rights
-----------------
Each share of Class A Stock will be convertible at any time subsequent to
three years after issuance, at the option of the holder thereof into Common
Stock of the Company at a conversion rate of one share of Common Stock for each
share of Class A Stock. The conversion price is subject to adjustment in
certain events.
Redemption Provisions
---------------------
The Company prior to three years from the date of issuance may not redeem
the Class A Stock. On and after such date, the Class A Stock may be redeemed at
the option of the Company, in whole or in part, at any time and from time to
time, on at least 30 days' and not more than 60 days' written notice at the
redemption price of $1.70 per share, together with accrued and unpaid dividends
to the date fixed for redemption.
Liquidation Rights
------------------
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company, the holders of outstanding shares of Class A Stock
are entitled to receive liquidating distributions equivalent to $1.50 per share,
plus accrued and unpaid dividends to the date of distribution, out of the assets
of the Company available for distribution to stockholders, before any
distribution of assets is made to holders of Common Stock or any stock ranking
junior to the Class A Stock upon liquidation, dissolution, or winding up. If
upon any liquidation, dissolution, or winding up of the Company, the amounts
available for distribution with respect to the Class A Stock are not sufficient
to satisfy the full liquidation rights of the Class A Stock, the holders of the
Class A Stock will share ratably in any such distribution of assets.
Registration Rights
-------------------
Until six months after the last shares of the Class A Stock are redeemed,
retired, converted, or otherwise no longer outstanding, the Company will give
notice to the holders of the Class A Stock no less than 20 days before filing a
registration statement under the Securities Act (excluding registrations
pertaining to securities issuable pursuant to employee stock option or stock
purchase plans, or pursuant to the acquisition of a business). The Company will
also afford the holders of the Class A Stock the opportunity to have included in
any one, but not more than two registrations shares of Common Stock acquired
upon conversion of the Class A Stock. The Company is entitled to exclude the
shares of any holder from a maximum of one registration (on the advice of its
investment banking firm that inclusion would materially interfere with the
orderly sale of securities offered under such registration statement) so long as
no other holder's shares are included in the registration.
CLASS B CONVERTIBLE PREFERRED STOCK (SERIES I, II, III, AND IV)
The Company is authorized to issue 5,000,000 shares of Class B Convertible
Preferred Shares at $1 par value per share. The Board of Directors of the
Company has the authority to divide the Class B preferred shares into series and
to set the relative rights and preferences among the series, within the
limitations provided by Texas Business Corporation Act, Article 2.13. This
summary is not intended to be complete and is subject to, and qualified in its
entirety by, reference to the Certificates of Designation, Preferences, Rights,
and Limitations of Series I, II, III, and IV Class B Convertible Preferred Stock
of the Company, filed with the Secretary of the State of Texas, amending the
Company's Articles of Incorporation, and setting forth the rights, preferences,
and limitations of the Series I, II, III, and IV Class B Convertible Preferred
Stock, the forms of which are attached hereto as part of Exhibit 2.1.
SERIES I CLASS B CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue not more than 5,000,000 shares and has
1,000,000 shares outstanding held by 148 shareholders as of the date of this
filing. The Series I Class B Convertible Preferred Stock ranks senior to the
Company's Common Stock with respect to dividends and upon liquidation,
dissolution, or winding up, but secondary to the Company's 5,000,000 shares of
Class A Convertible Preferred Stock.
33
<PAGE>
Dividends
---------
Holders of shares of Series I Class B Convertible Preferred Stock (the
"Series I Stock") will be entitled to receive, if, when, and as declared by the
Board of Directors out of funds legally available therefor, cumulative cash
dividends of $.50 per share per annum, payable quarterly, commencing December
31, 1996. If a dividend upon any shares of Series I Stock is in arrears, no
dividends may be paid or declared and set aside for payment, or other
distribution made upon the Common Stock or any other stock of the Company
ranking junior to the Series I Stock as to dividends. In addition, no Common
Stock, or any other stock of the Company ranking junior to the Series I Stock as
to dividends, may be redeemed, purchased, or otherwise acquired for any
consideration by the Company except in certain circumstances. As of April 15,
2000, $1,780,163 in dividends were in arrears.
Voting Rights
-------------
Except as required by the laws of the State of Texas, the holders of the
Series I Stock are not entitled to vote.
So long as any shares of Series I Stock remain outstanding, the Company
shall not, without the affirmative vote or consent of the holders of at least 51
percent of the shares of the Series I Stock outstanding at the time: (a)
authorize, create, issue, or increase the authorized or issued amount of any
class or series of stock ranking equal to or senior to the Series I Stock with
respect to payment of dividends or the distribution of assets on liquidation,
dissolution, or winding up of the Company; or (b) amend, alter, or repeal the
provisions of the Company's Articles of Incorporation, or of the rights of the
Series I Stock so as to alter or change the powers, preferences, or special
rights of the shares of the Series I Stock so as to affect them adversely.
Conversion Rights
-----------------
Each share of Series I Stock will be convertible at any time subsequent to
three years after issuance, at the option of the holder thereof into Common
Stock of the Company at a conversion rate of one share of Common Stock for each
share of Series I Stock. The conversion price is subject to adjustment in
certain events.
Redemption Provisions
---------------------
The Company prior to three years from the date of issuance may not redeem
the Series I Stock. On and after such date, the Series I Stock may be redeemed
at the option of the Company, in whole or in part, at any time and from time to
time, on at least 30 days' and not more than 60 days' written notice, at the
redemption price of $7.50 per share, together with accrued and unpaid dividends
to the date fixed for redemption.
Liquidation Rights
------------------
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company, the holders of outstanding shares of Series I Stock
are entitled to receive liquidating distributions equivalent to $6.25 per share,
plus accrued and unpaid dividends to the date of distribution, out of the assets
of the Company available for distribution to stockholders, before any
distribution of assets is made to holders of Common Stock or any stock ranking
junior to the Series I Stock upon liquidation, dissolution, or winding up. If,
upon any liquidation, dissolution, or winding up of the Company, the amounts
available for distribution with respect to the Series I Stock are not sufficient
to satisfy the full liquidation rights of the Series I Stock, the holders of the
Series I Stock will share ratably in any such distribution of assets in
proportion to the full respective preferential amounts to which they are
entitled.
Registration Rights
-------------------
Until six months after the last shares of the Series I Stock are redeemed,
retired, converted, or otherwise no longer outstanding, the Company will give
notice to the holders of the Series I Stock no less than 20 days before filing a
registration statement under the Securities Act (excluding registrations
pertaining to securities issuable pursuant to employee stock option or stock
purchase plans, or pursuant to the acquisition of a business). The Company will
also afford the holders of the Series I Stock the
34
<PAGE>
opportunity to have included in any one, but not more than two registrations
shares of Common Stock acquired upon conversion of the Series I Stock. The
Company is entitled to exclude the shares of any holder from a maximum of one
registration (on the advice of its investment banking firm that inclusion would
materially interfere with the orderly sale of securities offered under such
registration statement) so long as no other holder's shares are included in the
registration.
SERIES II CLASS B CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue not more than 5,000,000 shares and has
1,000,000 shares outstanding held by 145 shareholders as of the date of this
filing. The Series II Class B Convertible Preferred Stock ranks senior to the
Company's Common Stock with respect to dividends and upon liquidation,
dissolution, or winding up, but secondary to the Company's 5,000,000 shares of
Class A Stock and Series I Stock.
Dividends
---------
Holders of shares of Series II Class B Convertible Preferred Stock (the
"Series II Stock") will be entitled to receive, if, when, and as declared by the
Board of Directors out of funds legally available therefor, cumulative cash
dividends of $1 per share per annum, payable quarterly, commencing December 31,
1997. If a dividend upon any shares of Series II Stock is in arrears, no
dividends may be paid or declared and set aside for payment, or other
distribution made upon the Common Stock or any other stock of the Company
ranking junior to the Series II Stock as to dividends. In addition, no Common
Stock, or any other stock of the Company ranking junior to the Series II Stock
as to dividends, may be redeemed, purchased, or otherwise acquired for any
consideration by the Company except in certain circumstances. As of April 15,
2000, $2,476,492 in dividends are in arrears.
Voting Rights
-------------
Except as required by the laws of the State of Texas, the holders of the
Series II Stock are generally not entitled to vote. In the event that dividends
payable on the Series II Stock shall be in arrears for 12 consecutive quarterly
dividend periods, the holders of a majority of the Series II Shares shall have
the exclusive right (voting separately as a class with one vote per share of
---------
Series II Stock) to elect one-third of the Board of Directors to serve until the
next annual meeting or so long as such arrearage shall continue.
So long as any shares of Series II Stock remain outstanding, the Company
shall not, without the affirmative vote or consent of the holders of at least 51
percent of the shares of the Series II Stock outstanding at the time: (a)
authorize, create, issue, or increase the authorized or issued amount of any
class or series of stock ranking equal to or senior to the Series II Stock with
respect to payment of dividends or the distribution of assets on liquidation,
dissolution, or winding up of the Company; or (b) amend, alter, or repeal the
provisions of the Company's Articles of Incorporation, or of the rights of the
Series II Stock so as to alter or change the powers, preferences, or special
rights of the shares of the Series II Stock so as to affect them adversely.
Conversion Rights
-----------------
Each share of Series II Stock will be convertible at any time subsequent to
three years after issuance, at the option of the holder thereof into Common
Stock of the Company at a conversion rate of one share of Common Stock for each
share of Series II Stock. The conversion price is subject to adjustment in
certain events.
In the event the Company files a registration statement, the holders of the
Series II Stock will have the opportunity to convert their shares prior to the
three-year holding period.
Redemption Provisions
---------------------
The Company, prior to three years from the date of issuance, may not redeem
the Series II Stock. On and after such date, the Series II Stock may be redeemed
at the option of the Company, in whole or in part, at any time and from time to
time, on at least 30 days' and not more than 60 days' written notice at
35
<PAGE>
the redemption price of $15 per share, together with accrued and unpaid
dividends to the date fixed for redemption.
In the event the Company files a registration statement, the Company may,
at its option, accelerate its redemption rights.
Liquidation Rights
------------------
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company, the holders of outstanding shares of Series II Stock
are entitled to receive liquidating distributions equivalent to $12.50 per
share, plus accrued and unpaid dividends to the date of distribution, out of the
assets of the Company available for distribution to stockholders, before any
distribution of assets is made to holders of Common Stock or any stock ranking
junior to the Series II Stock upon liquidation, dissolution, or winding up. If
upon any liquidation, dissolution, or winding up of the Company, the amounts
available for distribution with respect to the Series II Stock are not
sufficient to satisfy the full liquidation rights of the Series II Stock, the
holders of the Series II Stock will share ratably in any such distribution of
assets in proportion to the full respective preferential amounts to which they
are entitled.
Registration Rights
-------------------
Until six months after the last shares of the Series II Stock are redeemed,
retired, converted, or otherwise no longer outstanding, the Company will give
notice to the holders of the Series II Stock no less than 20 days before filing
a registration statement under the Securities Act (excluding registrations
pertaining to securities issuable pursuant to employee stock option or stock
purchase plans, or pursuant to the acquisition of a business). The Company will
also afford the holders of the Series II Stock the opportunity to have included
in any one, but not more than two registrations shares of Common Stock acquired
upon conversion of the Series II Stock. The Company is entitled to exclude the
shares of any holder from a maximum of one registration (on the advice of its
investment banking firm that inclusion would materially interfere with the
orderly sale of securities offered under such registration statement) so long as
no other holder's shares are included in the registration.
In the event the Company files a registration statement, the holders of the
Series II Stock will have the opportunity to convert their shares prior to the
three-year holding period, and the Company may, at its option, accelerate its
redemption rights.
SERIES III CLASS B CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue not more than 2,000,000 shares and has
1,160,200 shares outstanding held by 225 shareholders as of the date of this
filing. The Series III Class B Convertible Preferred Stock ranks senior to the
Company's Common Stock with respect to dividends and upon liquidation,
dissolution, or winding up, but secondary to the Company's 5,000,000 shares of
Class A Stock and Series I and II Stock.
Dividends
---------
Holders of shares of Series III Class B Convertible Preferred Stock (the
"Series III Stock") will be entitled to receive, if, when, and as declared by
the Board of Directors out of funds legally available therefor, cumulative cash
dividends of $1 per share per annum, payable quarterly, commencing December 31,
1998. If a dividend upon any shares of Series III Stock is in arrears, no
dividends may be paid or declared and set aside for payment, or other
distribution made upon the Common Stock or any other stock of the Company
ranking junior to the Series III Stock as to dividends. In addition, no Common
Stock or any other stock of the Company ranking junior to the Series III Stock
as to dividends, may be redeemed, purchased, or otherwise acquired for any
consideration by the Company except in certain circumstances. As of April 15,
2000, $1,230,804 in dividends are in arrears.
Voting Rights
-------------
Except as required by the laws of the State of Texas, the holders of the
Series III Stock are not entitled to vote.
36
<PAGE>
So long as any shares of Series III Stock remain outstanding, the Company
shall not, without the affirmative vote or consent of the holders of at least 51
percent of the shares of the Series III Stock outstanding at the time: (a)
authorize, create, issue, or increase the authorized or issued amount of any
class or series of stock ranking equal to or senior to the Series III Stock with
respect to payment of dividends or the distribution of assets on liquidation,
dissolution, or winding up of the Company; or (b) amend, alter, or repeal the
provisions of the Company's Articles of Incorporation, or of the rights of the
Series III Stock so as to alter or change the powers, preferences, or special
rights of the shares of the Series III Stock so as to affect them adversely.
Conversion Rights
-----------------
Each share of Series III Stock will be convertible at any time subsequent
to three years after issuance, at the option of the holder thereof into Common
Stock of the Company at a conversion rate of one share of Common Stock for each
share of Series III Stock. The conversion price is subject to adjustment in
certain events.
In the event the Company files a registration statement, the holders of the
Series III Stock will have the opportunity to convert their shares prior to the
three-year holding period. The Company may, at its option at any time within
180 days after the registration statement is deemed effective, demand the
conversion of the Series III Stock.
Redemption Provisions
---------------------
The Company, prior to three years from the date of issuance, may not redeem
the Series III Stock. On and after such date, the Series III Stock may be
redeemed at the option of the Company, in whole or in part, at any time and from
time to time, on at least 30 days' and not more than 60 days' written notice at
the redemption price of $15 per share, together with accrued and unpaid
dividends to the date fixed for redemption.
In the event the Company files a registration statement, the Company may,
at its option at any time within 180 days after the registration statement is
deemed effective, demand the conversion of the Series III Stock.
Liquidation Rights
------------------
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company, the holders of outstanding shares of Series III Stock
are entitled to receive liquidating distributions equivalent to $12.50 per
share, plus accrued and unpaid dividends to the date of distribution, out of the
assets of the Company available for distribution to stockholders, before any
distribution of assets is made to holders of Common Stock or any stock ranking
junior to the Series III Stock upon liquidation, dissolution, or winding up. If
upon any liquidation, dissolution, or winding up of the Company, the amounts
available for distribution with respect to the Series III Stock are not
sufficient to satisfy the full liquidation rights of the Series III Stock, the
holders of the Series III Stock will share ratably in any such distribution of
assets in proportion to the full respective preferential amounts to which they
are entitled.
Registration Rights
-------------------
Until six months after the last shares of the Series III Stock is redeemed,
retired, converted, or otherwise no longer outstanding, the Company will give
notice to the holders of the Series III Stock no less than 20 days before filing
a registration statement under the Securities Act (excluding registrations
pertaining to securities issuable pursuant to employee stock option or stock
purchase plans, or pursuant to the acquisition of a business). The Company will
also afford the holders of the Series III Stock the opportunity to have included
in any one, but not more than two registrations shares of Common Stock acquired
upon conversion of the Series III Stock. The Company is entitled to exclude the
shares of any holder from a maximum of one registration (if in its sole
discretion it decides that the inclusion of such shares will materially
interfere with the orderly sale of the securities being offered under such
registration statement) so long as no other holder's shares are included in the
registration.
In the event the Company files an initial registration statement, the
holders of the Series III Stock will have the opportunity to convert their
shares prior to the three-year holding period. The Company
37
<PAGE>
may, at its option at any time within 180 days after the registration statement
is deemed effective, demand the conversion of the Series III Stock.
SERIES IV CLASS B CONVERTIBLE PREFERRED STOCK
On December 10, 1999, the Company was authorized to issue not more than
1,300,000 shares and has 1,133,800 shares outstanding held by 28 shareholders as
of the date of this filing. The Series IV Class B Convertible Preferred Stock
ranks senior to the Company's Common Stock with respect to dividends and upon
liquidation, dissolution, or winding up, but secondary to the Company's
5,000,000 shares of Class A Stock and Series I, II, and III Stock.
Dividends
---------
Holders of shares of Series IV Class B Convertible Preferred Stock (the
"Series IV Stock") will be entitled to receive, if, when, and as declared by the
Board of Directors out of funds legally available therefor, cumulative cash
dividends of $1 per share per annum, payable quarterly, commencing December 31,
2000. If a dividend upon any shares of Series IV Stock is in arrears, no
dividends may be paid or declared and set aside for payment or other
distribution made upon the Common Stock or any other stock of the Company
ranking junior to the Series IV Stock as to dividends. In addition, no Common
Stock or any other stock of the Company ranking junior to the Series IV Stock as
to dividends may be redeemed, purchased, or otherwise acquired for any
consideration by the Company except in certain circumstances. As of April 15,
2000, $9,534 in dividends are in arrears.
Voting Rights
-------------
Except as required by the laws of the State of Texas, the holders of the
Series IV Stock are not entitled to vote.
So long as any shares of Series IV Stock remain outstanding, the Company
shall not, without the affirmative vote or consent of the holders of at least 51
percent of the shares of the Series IV Stock outstanding at the time: (a)
authorize, create, issue, or increase the authorized or issued amount of any
class or series of stock ranking equal to or senior to the Series IV Stock with
respect to payment of dividends or the distribution of assets on liquidation,
dissolution, or winding up of the Company; or (b) amend, alter, or repeal the
provisions of the Company's Articles of Incorporation, or of the rights of the
Series IV Stock so as to alter or change the powers, preferences, or special
rights of the shares of the Series IV Stock so as to affect them adversely.
Conversion Rights
-----------------
Each share of Series IV Stock will be convertible at any time subsequent to
three years after issuance, at the option of the holder thereof into Common
Stock of the Company at a conversion rate of one share of Common Stock for each
share of Series IV Stock. The conversion price is subject to adjustment in
certain events.
In the event that the Company files an initial registration statement, the
holders of Series IV Stock may convert their shares prior to the three-year
holding period. The Company may also, at its option any time within 180 days
after the registration statement is deemed effective, demand the conversion of
the Series IV Stock.
Redemption Provisions
---------------------
The Company, prior to three years from the date of issuance, may not redeem
the Series IV Stock. On and after such date, the Series IV Stock may be
redeemed at the option of the Company, in whole or in part, at any time and from
time to time, on at least 30 days' and not more than 60 days' written notice to
convert or redeem the shares, at the redemption price of $11 per share, together
with accrued and unpaid dividends to the date fixed for redemption.
In the event that the Company files an initial registration statement, the
Company may, at its option any time within 180 days after the registration
statement is deemed effective, demand the conversion of the Series IV Stock.
38
<PAGE>
Liquidation Rights
------------------
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company, the holders of outstanding shares of Series IV Stock
are entitled to receive liquidating distributions equivalent to $11 per share,
plus accrued and unpaid dividends to the date of distribution, out of the assets
of the Company available for distribution to stockholders, before any
distribution of assets is made to holders of Common Stock or any stock ranking
junior to the Series IV Stock upon liquidation, dissolution, or winding up. If
upon any liquidation, dissolution, or winding up of the Company, the amounts
available for distribution with respect to the Series IV Stock are not
sufficient to satisfy the full liquidation rights of the Series IV Stock, the
holders of the Series IV Stock will share ratably in any such distribution of
assets in proportion to the full respective preferential amounts to which they
are entitled.
Registration Rights
-------------------
Until six months after the last shares of the Series IV Stock are redeemed,
retired, converted, or otherwise no longer outstanding, the Company will give
notice to the holders of the Series IV Stock no less than 20 days before filing
a registration statement under the Securities Act (excluding registrations
pertaining to securities issuable pursuant to employee stock option or stock
purchase plans, or pursuant to the acquisition of a business). The Company will
also afford the holders of the Series IV Stock the opportunity to have included
in any one, but not more than two registrations shares of common stock acquired
upon conversion of the Series IV Stock. The Company is entitled to exclude the
shares of any holder from a maximum of one registration (if in its sole
discretion it decides that inclusion would materially interfere with the orderly
sale of securities offered under such registration statement) so long as no
other holder's shares are included in the registration.
In the event that the Company files an initial registration statement, the
holders of Series IV Stock may convert their shares prior to the three-year
holding period. The Company may also, at its option any time within 180 days
after the initial registration statement is deemed effective, demand the
conversion of the Series IV Stock.
OVERVIEW OF THE COMPANY'S 1999 STOCK OPTION PLAN
On September 14, 1999, the Board of Directors adopted the 1999 Stock Option
Plan effective as of July 1, 1999 (the "Plan" for purposes of this section
only). In order to qualify options under the Plan as incentive stock options
("ISOs"), the shareholders must approve the Plan on or before September 14,
2000. The shareholders approved the Plan on September 14, 1999. The Plan
provides for the granting of ISOs and NQSOs as defined in the Plan and
collectively referred to in this section only as "Awards." The purpose of the
Plan is to encourage stock ownership by the Company's key employees, to provide
an incentive for such employees to expand and improve the profitability of the
Company, and to assist the Company in attracting and retaining key personnel
through the grant of ISOs and NQSOs to purchase shares of common stock. The
following description is intended to be a summary of the Plan's principal terms
and is qualified in its entirety by reference to the complete text attached as
an exhibit to this Form 10-SB.
General
-------
The Plan authorizes the Compensation and Benefits Committee or, in the
absence of a committee, the Board of Directors to grant ISOs to key employees of
the Company and NQSOs to other employees, independent contractors, and
nonemployee directors. No directors have options vesting within 60 days of this
filing.
As of May 31, 2000, the Company had granted ISOs to purchase 492,550 shares
and NQSOs to purchase 217,550 shares to employees under the 1999 Stock Option
Plan. There were ISOs to purchase 103,800 shares and NQSOs to purchase 5,300
shares that were cancelled under the terms of the Plan. There were 33,500
employee NQSOs exercisable at the filing date. No ISOs were exercisable. The
exercise price for the ISOs is $10. The NQSOs have exercise prices from $1 to
$10. The Company granted NQSOs to purchase 182,500 shares to nonemployees, none
of which have been cancelled and none are exercisable at the date of the filing.
39
<PAGE>
Exercisable options under the 1999 Stock Option Plan are shown below:
<TABLE>
<CAPTION>
All Options, Including Officers and
Significant Employees 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
ISOs - - 163,925 204,250 20,575
Employee NQSOs 26,000 27,500 91,250 67,500 -
Nonemployee Directors NQSOs - 10,000 20,000 - -
Nonemployee NQSOs 57,500 64,998 30,002
------ ------ ------- ------- -
- ------
------
Total 26,000 95,000 340,173 301,752 20,575
====== ====== ======= ======= ======
<CAPTION>
Officers and significant employees 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
ISOs 0 0 48,900 70,200 0
Nonemployee Directors NQSOs 0 10,000 20,000 0 0
Employee NQSOs 0 20,000 88,800 67,500 0
------ ------ ------- ------- ------
Total 0 30,000 157,700 137,700 0
====== ====== ======= ======= ======
</TABLE>
A maximum of 2 million shares of common stock are reserved and available
for distribution pursuant to Awards granted under the Plan, subject to
adjustment to reflect a subdivision or consolidation of shares or any other
capital adjustment, payment of a stock dividend, or other increase or decrease
in such shares effected without consideration. Shares may be distributed under
the Plan, in whole or in part, from authorized and unissued shares or treasury
shares. The Compensation and Benefits Committee shall be responsible to the
Board of Directors for the operation of the Plan and shall make recommendations
to the Board of Directors with respect to participation in the Plan and with
respect to the terms, limitations, restrictions, conditions, and extent of that
participation. The interpretation and construction of a provision of the Plan
by the Compensation and Benefits Committee shall be final unless otherwise
determined by the Board of Directors. The Board of Directors, upon
recommendation by the Compensation and Benefits Committee or upon its own
action, may grant stock options. Options may not be exercised by tendering
outstanding shares except as permitted by the Compensation and Benefits
Committee, in its sole discretion.
Awards
------
Options granted under the Plan may be ISOs, as defined under and subject to
Section 422 of the Internal Revenue Code (the "Code"), or NQSOs.
The options will be exercisable at such times and subject to such terms and
conditions as the Board of Directors or the Compensation and Benefits Committee
may determine. All options must expire no later than ten years from the date of
grant in the case of ISOs held by a non-10 percent shareholder, no later than
five years from the date of grant in the case of a 10 percent shareholder, and
as determined by the Board of Directors/Compensation and Benefits Committee at
the date of grant in the case of NQSOs.
Generally, ISOs will terminate three months after termination of the
optionee's employment without cause and automatically upon termination for
cause, or one year following the termination of employment due to death or
permanent disability; provided, however, that options will expire prior to said
times if and at such time that the original option exercise term otherwise
expires. Generally, options may be exercised only to the extent exercisable on
the date of termination, death, or disability. Generally, NQSOs will terminate
automatically upon termination of the optionee's employment for cause and one
year following termination of employment due to death. Nonvested NQSOs are
forfeited upon termination of employment with or without cause, permanent
disability, or death; provided, however, that options will expire prior to said
times if and at such time that the original option exercise term otherwise
expires.
40
<PAGE>
The option price for any ISO will not be less than 100 percent of the fair
market value of the Company's Common Stock as of the date of grant. In the
event the optionee is a 10 percent shareholder, the price of the ISO shall be
110 percent of the fair market value of the common stock as of the date of
grant. In the event the optionee is not a 10 percent shareholder, the price of
the ISO shall be 100 percent of the fair market value of the Common Stock as of
the date of grant. The Board of Directors has set $10 as the fair market value
of the Company's Common Stock for ISOs granted to date. The option price for an
NQSO will be determined by the Board of Directors or Compensation and Benefits
Committee on the date of grant. The holder of an NQSO must, prior to issuance
of a stock certificate, remit to the Company the amount, if any, of any taxes
required to be withheld upon exercise of the NQSO.
The ISOs are not transferable except by will or the laws of descent and
distribution. NQSOs may not be transferred for a period of one year from the
date of grant to a nonaffiliate and may not be transferred for a period of two
years from the date of grant to affiliates.
Miscellaneous
-------------
The Plan may be amended or discontinued by the Board of Directors or the
Compensation and Benefits Committee provided that the Board of Directors may
not, without the approval of the stockholders: (a) except as expressly provided
in the Plan, increase the total number of shares reserved for the purposes of
the Plan, (b) decrease the option price of an ISO to less than the amounts
provided for in the Plan, and (c) extend the duration of the Plan. No
amendment, alteration, or discontinuation may impair the rights of an optionee
without his consent.
Under the Plan, the Board of Directors and Compensation and Benefits
Committee has wide discretion and flexibility, enabling it to administer the
Plan in the manner it determines to be in the best interest of the Company.
Thus, Awards may be granted in various combinations and sequences and may be
subject to various conditions, restrictions, and limitations at grant or upon
exercise or payment not inconsistent with the terms of the Plan. The Board of
Directors' and Compensation and Benefits Committee's determinations with respect
to which employees will receive Awards, and the form, amount and frequency, and
the terms and conditions thereof, need not be uniform as to similarly situated
persons. The designation of an employee to receive one form of an Award under
the Plan does not require the Board of Directors or Compensation and Benefits
Committee to designate or entitle such employee to receive any other form of
Award.
The Plan limits the number of ISOs that can be issued to key employees.
Other than limiting Awards to key employees, there are no restrictions on the
number of officers or other employees eligible to receive Awards or the Awards
that may be granted to one person. In addition, the Plan does not limit the
aggregate number of Awards that may be granted except that the number of shares
reserved for distribution under the Plan cannot exceed 2 million shares.
OVERVIEW OF THE 1996 INCENTIVE STOCK OPTION PLAN OF THE COMPANY
On January 30, 1996, the Board of Directors adopted the 1996 Incentive
Stock Option Plan of the Company (the "Plan" for purposes of this section only).
The shareholders of the Company adopted the Plan on April 26, 1996. The Plan
provides for the granting of ISOs as defined in the Plan and collectively
referred to in this section only as "Awards." The purpose of the Plan is to
encourage stock ownership by certain officers and key employees of the Company,
in attracting qualified personnel to the Company, and to provide additional
incentives for such employees to promote and contribute to the success of the
Company. The following description is intended to be a summary of the Plan's
principal terms and is qualified in its entirety by reference to the complete
text attached as an exhibit to this Form 10-SB.
General
-------
The Plan authorizes the Compensation and Benefits Committee to grant ISOs
to current, full-time employees. As of the date of this filing, ISOs for the
right to purchase 117,500 shares of the Company have been granted. As of the
date of this filing, 47,500 options granted to directors have vested. Stock
options, which were granted under the Plan but which do not meet certain
statutory requirements for ISOs, are classified as NQSOs.
As of May 31, 2000, the Company had granted ISOs for the purchase of
200,550 shares and NQSOs for the purchase of 357,955 shares to employees under
the 1996 Incentive Stock Option Plan.
41
<PAGE>
There were ISOs for the purchase of 83,050 shares and NQSOs for the purchase of
191,050 shares that were cancelled under the terms of the Plan. The exercise
price for the ISOs is $10. The NQSOs have exercise prices from $1 to $10. The
Company granted NQSOs for the purchase of 278,500 shares to nonemployees, 60,000
of which have expired.
Exercisable Options under the 1996 Incentive Stock Option Plan are as
follows:
<TABLE>
<CAPTION>
All Options, Including Officers and
Significant Employees 1999 2000 2001
<S> <C> <C> <C>
ISOs 0 7,750 109,750
NQSOs 46,605 133,300 0
------ ------- -------
46,605 141,050 109,750
====== ======= =======
Officers and significant employees
1999 2000 2001
ISOs 0 0 47,500
NQSOs 24,500 77,500 0
------ ------- -------
24,500 77,500 47,505
====== ======= =======
</TABLE>
Under the 1996 Incentive Stock Option Plan, a maximum of 800,000 shares of
Common Stock are reserved and available for distribution pursuant to Awards
granted under the Plan, subject to adjustment to reflect a subdivision or
consolidation of shares payment of a stock dividend on Common Stock or other
increase or decrease in such shares effected without consideration. If shares
subject to an Award granted under the Plan ceases to be subject to such Awards,
such share will again be available for distribution under the Plan. Shares may
be distributed under the Plan, in whole or in part, from authorized and unissued
shares. The Compensation and Benefits Committee shall be responsible to the
Board of Directors for the operation of the Plan and shall make recommendations
to the Board of Directors with respect to participation in the Plan and with
respect to the terms, limitations, restrictions, conditions, and extent of that
participation. The interpretation and construction of a provision of the Plan by
the Compensation and Benefits Committee shall be final unless otherwise
determined by the Board of Directors.
Awards
------
Options granted under the Plan shall be ISOs as defined under and subject
to Section 422 of the Code.
The options will be exercisable at such times and subject to such terms and
conditions as the Compensation and Benefits Committee may determine. In no
event shall an option be exercisable prior to three years from the date of grant
or after the expiration of ten years from the date of grant.
Generally, ISOs will terminate three months after termination of the
optionee's employment if termination is for a reason other than death or
disability. If termination is by disability, the Compensation and Benefits
Committee has the right to extend the exercise period for up to one year from
termination. If the termination is a result of death, the option may be
exercised within three months after death. Generally, options may be exercised
only to the extent exercisable on the date of termination, death, or disability.
The option price for any ISO will not be less than 100 percent of the fair
market value of the Company's Common Stock as of the date of grant. In the
event the optionee is a 10 percent shareholder, the price of the ISO shall be
110 percent of the fair market value of the Common Stock as of the date of
grant. In the event the optionee is not a 10 percent shareholder, the price of
the ISO shall be 100 percent of the fair market value of the Common Stock as of
the date of grant.
The options are not transferable except by will or the laws of descent and
distribution. In the event an optionee exercises his option and the Company
issues shares as a result of that exercise, no disposition of the resulting
shares by the optionee may be made within three years from the date of the grant
of the option or within one year after transfer of such shares to the optionee.
The Company shall not be required upon exercise of an option to issue or deliver
shares prior to completion of registration or
42
<PAGE>
other qualification under any state or federal law as the Company shall
determine to be desirable. In the event the optionee exercises his option and
receives a bona fide offer for all or a portion of the shares, he shall give the
Company the exclusive right and option within 15 days of the date of notice to
the Company to purchase the shares on the same terms. In the event of a
dissolution of the Company or a merger where the Company is not the surviving
entity, each option shall terminate but not before the Company gives 30 days'
notice of the optionee's right to exercise his option.
Miscellaneous
-------------
The Plan may be amended or discontinued by the Board of Directors or the
Compensation and Benefits Committee provided that they may not modify an
outstanding option so as to specify a lower price or accept the surrender of
outstanding options and authorize the granting of new options in substitution
thereof specifying a lower price. The Plan may be modified or amended by
affirmative vote of the majority of the common stock plus the affirmative vote
of all the remaining stock. No amendment, alteration, or discontinuation may
impair the rights of an optionee without his consent.
Under the Plan, the Compensation and Benefits Committee has wide discretion
and flexibility, enabling it to administer the Plan in the manner it determines
to be in the best interest of the Company. Thus, Awards may be granted in
various combinations and sequences and may be subject to various conditions,
restrictions, and limitations at grant or upon exercise or payment not
inconsistent with the terms of the Plan. The Compensation and Benefits
Committee's determinations, with respect to which employees will receive Awards,
and the form, amount and frequency, and the terms and conditions thereof, are
subject to wide discretion. The designation of an employee to receive one form
of an Award under the Plan does not require the Board of Directors or
Compensation and Benefits Committee to designate or entitle such employee to
receive any other form of Award.
The Plan does limit the employees eligible to receive Awards to certain
officers and key employees and contain limits on the number of shares which may
be subject to options which may be granted to any one person. However, the Plan
does not limit the aggregate number of Awards that may be granted except that
the number of shares reserved for distribution under the Plan cannot exceed
800,000 shares.
OVERVIEW OF THE COMPANY'S 1996 STOCK OPTION PLAN FOR DIRECTORS AND OTHER
INDIVIDUALS
On April 23, 1996, the Board of Directors adopted the Company's 1996 Stock
Option Plan for Directors and Other Individuals (the "Plan" for purposes of this
section only). The Plan provides for the granting of NQSOs as defined in the
Plan and collectively referred to in this section only as "Awards." The purpose
of the Plan is to encourage stock ownership by certain directors and other
individuals, in attracting qualified directors to the Company's Board of
Directors and to provide additional incentives for such directors to promote and
contribute to the success of the Company. The following description is intended
to be a summary of the Plan's principal terms and is qualified in its entirety
by reference to the complete text attached as an exhibit to this Form 10-SB.
General
-------
The Plan authorizes the Compensation and Benefits Committee to grant NQSOs
to members of the Company's current Board of Directors and other individuals who
have made a contribution toward the Company's success, who have served
continuously as a Director for not less than three years from grant, or who have
continuously provided services as a consultant, independent contractor, or
otherwise for not less than three years from grant and who before such option is
not the holder of more than 10 percent of the total combined voting power or
value of all classes of stock.
As of May 31, 2000, the Company granted 278,500 NQSOs to nonemployees,
60,000 of which have been cancelled. The prices ranged from $1 to $10.
Nonemployee directors NQSOs of 25,000, 20,000, and 16,000 vest in 1999, 2000,
and 2001, respectively. Nonemployee NQSOs of 49,000, 48,000, and 60,500 vest in
1999, 2000, and 2001, respectively.
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<PAGE>
Exercisable Options under the 1996 Stock Option Plan for Directors and
Other Individuals are as follows:
All Options, Including Officers and
Significant Employees 1999 2000 2001
Nonemployee Directors NQSOs 25,000 20,000 16,000
Nonemployee NQSOs 49,000 48,000 60,500
------ ------ ------
Total 74,000 68,000 76,500
====== ====== ======
Officers and significant employees 1999 2000 2001
Nonemployee Directors NQSOs 25,000 20,000 16,000
====== ====== ======
A maximum of 200,000 shares of common stock are reserved and available for
distribution pursuant to Awards granted under the Plan, subject to adjustment to
reflect a subdivision or consolidation of shares payment of a stock dividend on
common stock or other increase or decrease in such shares effected without
consideration. If shares subject to an Award granted under the Plan ceases to be
subject to such Awards, such share will again be available for distribution
under the Plan. Shares may be distributed under the Plan, in whole or in part,
from authorized and unissued shares. The Compensation and Benefits Committee
shall be responsible to the Board of Directors for the operation of the Plan and
shall make recommendations to the Board of Directors with respect to
participation in the Plan and with respect to the terms, limitations,
restrictions, conditions, and extent of that participation. The interpretation
and construction of a provision of the Plan by the Compensation and Benefits
Committee shall be final unless otherwise determined by the Board of Directors.
Awards
------
Options granted under the Plan shall be NQSOs.
The options will be exercisable at such times and subject to such terms and
conditions as the Compensation and Benefits Committee may determine. In no event
shall an option be exercisable prior to three years from the date of grant or
after the expiration of ten years from the date of grant.
Generally, the options will terminate three months after termination of the
optionee's service if termination is for a reason other than death or
disability. If termination is by disability, the Compensation and Benefits
Committee has the right to extend the exercise period for one year from
termination. If the termination is a result of death, the option may be
exercised within three months after death. Generally, options may be exercised
only to the extent exercisable on the date of termination, death, or disability.
The option price for any option will not be less than 100 percent of the
fair market value of the Company's Common Stock as of the date of grant. In the
event the optionee is a 10 percent shareholder, the price of the option shall be
110 percent of the fair market value of the Common Stock as of the date of
grant. In the event the optionee is not a 10 percent shareholder, the price of
the option shall be 100 percent of the fair market value of the Common Stock as
of the date of grant.
The NQSOs are not transferable except by will or the laws of descent and
distribution. In the event an optionee exercises his option and the Company
issues shares as a result of that exercise, no disposition of the resulting
shares by the optionee may be made within three years from the date of the grant
of the option. The Company shall not be required upon exercise of an option to
issue or deliver shares prior to completion of registration or other
qualification under any state or federal law as the Company shall determine to
be desirable. In the event the optionee exercises his option and receives a bona
fide offer for all or a portion of the shares, he shall give the Company the
exclusive right and option within 15 days of the date of notice to the Company
to purchase the shares on the same terms. In the event of a dissolution of the
Company or a merger where the Company is not the surviving entity, each option
shall terminate but not before the Company gives 30 days' notice of the
optionee's right to exercise his option.
44
<PAGE>
Miscellaneous
-------------
The Plan may be amended or discontinued by the Board of Directors or the
Compensation and Benefits Committee provided that it may not modify an
outstanding option so as to specify a lower price or accept the surrender of
outstanding options and authorize the granting of new options in substitution
thereof specifying a lower price. The Plan may be modified or amended by
affirmative vote of the majority of the Common Stock plus the affirmative vote
of all the remaining stock. No amendment, alteration, or discontinuation may
impair the rights of an optionee without his consent.
Under the Plan, the Compensation and Benefits Committee has wide discretion
and flexibility, enabling it to administer the Plan in the manner it determines
to be in the best interest of the Company. Thus, Awards may be granted in
various combinations and sequences and may be subject to various conditions,
restrictions, and limitations at grant or upon exercise or payment not
inconsistent with the terms of the Plan. The Compensation and Benefits
Committee's determinations with respect to which employees will receive Awards,
and the form, amount and frequency, and the terms and conditions thereof, are
subject to wide discretion. The designation of an employee to receive one form
of an Award under the Plan does not require the Board of Directors or
Compensation and Benefits Committee to designate or entitle such employee to
receive any other form of Award.
The Plan does not limit either the number of persons eligible to receive
Awards or the type or number of shares which may be subject to options or other
Awards which may be granted to any one person. In addition, the Plan does not
limit the aggregate number of Awards that may be granted except that the number
of shares reserved for distribution under the Plan cannot exceed 200,000 shares.
OPTION FOR CONVERSION OF LOAN PRINCIPAL INTO COMMON STOCK
Pursuant to the Agreement between the Company and Abbott, Abbott agreed to
make periodic loans to the Company prior to June 30, 2005, in increments of
$1,000,000 in an aggregate amount of up to $5,000,000. Pursuant to the
Agreement, the Company gave Abbott the right, at its option, to convert any and
all principal amounts owed into Common Stock of the Company at a price of $10
per share (adjustable for events affecting the number of outstanding shares of
Common Stock). Abbott also holds registration rights with respect to the shares
of Common Stock issued upon conversion of any principal amount loaned pursuant
to the Agreement. Subject to limitations contained in the Agreement and related
Registration Rights Agreement, these registration rights include the following:
. Any time after the Company becomes eligible to file a registration statement
on Form S-3, Abbott may require that the Company use its best efforts to
effect a registration of Abbott Common Stock acquired by conversion of any
principal amounts owed (the "Registerable Securities") only where Abbott
agrees to abide by the terms of the underwriting as agreed upon by the
underwriters and the Company. The right to request registration may not be
exercised more than three times. This right is subject to the ability of the
underwriters to limit the number of shares included in the offering in view
of market conditions.
. If the Company registers any common stock in a public offering for cash
whether as a primary or secondary offer or pursuant to registration rights
granted to other holders (not including a registration relating solely to
employee benefit plans on Form S-8 or registration on Form S-4 relating
solely to a transaction subject to Rule 145), Abbott is entitled to request
and the Company must take reasonable efforts to include the Registerable
Securities in the registration. This right is subject to the ability of the
underwriters to limit the number of shares included in the offering in view
of market conditions.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS
The following is a brief summary of the Company's understanding of the
principal anticipated federal income tax consequences of Awards made under the
Plans based upon the applicable provisions of the Code in effect on the date
hereof. This summary is not intended to be exhaustive and does not describe
foreign, state, or local tax consequences.
45
<PAGE>
Incentive Stock Options Generally
---------------------------------
An optionee will not realize taxable income at the time an ISO is granted
or exercised. Company Common Stock is issued to an optionee pursuant to the
exercise of an ISO, and if no disqualifying disposition of the shares is made by
the optionee within two years of the date of grant or within one year after
exercise of the option, then (a) any gain upon the subsequent sale of the shares
will be taxed to the optionee as a capital gain, and any loss sustained will be
a capital loss, and (b) no deduction will be allowed to the Company for federal
income tax purposes. The spread between the ISO price and the fair market value
of the shares at the time of exercise is a preference item for purposes of the
alternative minimum tax.
If an optionee disposes of shares acquired upon the exercise of an ISO
before the expiration of the holding periods described above, then generally (a)
the optionee will be taxed as if he had received compensation income in the year
of disposition in an amount equal to the excess, if any, of the fair market
value of the shares on the exercise date (or, if less, the amount realized on
value of the shares on the disposition of the shares) over the option price paid
for such shares, and (b) the Company will generally be entitled to a
corresponding deduction in that year. Any further gain or loss realized by the
participant will be taxed as short-term or long-term capital gain or loss, as
the case may be, and will not result in any deduction by the Company.
Exercise of an ISO may cause the optionee to incur alternative minimum tax
liability even if he has no taxable income from the exercise under general
income tax principles.
Stock acquired through exercise of an ISO must be held for more than 12
months to obtain long-term capital gains treatment.
All stock acquired pursuant to the exercise of an ISO is subject to the
holding period rules and disqualifying disposition rules described above.
Pursuant to the Plan, an ISO can only be exercised by payment of the
consideration in cash.
To the extent that the fair market value of the Company's Common Stock
(determined as of the date of grant) subject to ISOs exercisable for the first
time by an optionee during any calendar year exceeds $100,000, those options
will not be considered ISOs.
Nonqualified Stock Options Generally
------------------------------------
An optionee will generally not recognize taxable income at the time an NQSO
is granted, but taxable income will be realized, and the Company will generally
be entitled to a deduction, at the time of exercise of the NQSO. The amount of
income and the Company's deduction will be equal to the difference between the
fair market value of the shares on the date of exercise and the NQSO exercise
price. The income realized will be taxed to the optionee at the ordinary income
tax rates for federal income tax purposes. Withholding is required upon exercise
of an NQSO. On subsequent disposition of the shares acquired upon exercise of an
NQSO, capital gain or loss as determined under the normal capital asset holding
period rules will be realized in the amount of the difference between the
proceeds of sale and the fair market value of the shares on the date of
exercise.
Withholding Generally
---------------------
Under the Plans, a participant must pay the Company, no later than the date
on which an amount first becomes includable in the participant's gross income
for federal income tax purposes with respect to an Award, any taxes required to
be withheld with respect to such amount. Such withholding may generally not be
settled with shares that constitute part of the Award giving rise to the
withholding obligation unless the Compensation and Benefits Committee grants
special permission. Otherwise, withholding must be made in a manner that
provides cash to the Company. The amount of income recognized is not reduced by
the retention of the Company of shares issuable under an Award to satisfy
withholding obligations; the transaction is taxed as if the shares were sold.
46
<PAGE>
PART II - FORM 10-SB
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
There is no public trading market for the Company's Common Stock. The
Company's 14,000,000 shares of outstanding Common Stock are held by the
Company's Chief Executive Officer, Thomas J. Shaw, and Lillian E. Salerno, a
Director. As of May 31, 2000, 1,286,405 shares of Common Stock are subject to
outstanding options and 9,294,000 shares are reserved for issuance upon
conversion of both classes of preferred stock. 7,725 shares of Series IV Class B
Convertible Preferred Stock are reserved for issuance upon exercise of warrants.
The Company has not agreed to register any shares of Common Stock for public
sale except for those registration rights held by Abbott pursuant to the
Agreement and those contained in Certificates of Designation for certain
Convertible Preferred Stock as set forth in greater detail in Part I - Item 8 -
DESCRIPTION OF SECURITIES.
The Company has not declared or paid any dividends on its Common Stock
since its inception. The Company has no current plans to pay any cash dividends
on the Common Stock. The Company intends to retain all earnings, except those
required to be paid to the holders of the Preferred Stock which cannot at this
time be paid, to support the Company's operations and future growth. As of May
31, 2000, approximately $8,876,846 in dividends had accumulated on both classes
of Preferred Stock. The Company has reserved the right to issue 500,000 shares
of Class B Convertible Preferred Shares as a dividend. Pursuant to the
requirements of a loan from Texas Bank, the Company has agreed not to return
capital to the shareholders or redeem outstanding shares without the bank's
prior consent. Dividends on inferior series and classes of preferred stock are
prohibited until those owed to the superior classes and series are paid.
ITEM 2. LEGAL PROCEEDINGS
The Company filed a lawsuit on September 30, 1998, in the District Court of
Brazoria County in the 239/th/ Judicial District against B-D, Tyco International
(U.S.), Inc., VHA, Inc., The Community Hospital of Brazosport, Angleton-Danbury
General Hospital, and Sweeney Community Hospital. The Company is alleging an
antitrust conspiracy between the defendants whereby they contracted among
themselves and many other hospitals, doctors, and healthcare organizations in
order to exclude the Company from selling the safety syringes and to maintain
their own market share in violation of Texas Free Enterprise and Antitrust Act
("TFEAA"). The case is still in the discovery stage. The Company is not a party
to any other legal proceeding. As of the date of this filing, Angleton-Danbury
General Hospital has been dropped from the lawsuit. Premier, Inc., Novation,
LLC, and Premier Purchasing Partnerships have been added to the lawsuit.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no changes in or disagreements with the principal
independent accountants during the two most recent fiscal years.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following discussion outlines all securities sold by the Company for
cash or services rendered during the previous three years. Unless otherwise
described, all of the shares sold or granted were issued pursuant to the
authority granted by the private offering exemption outlined in Section 4(2) of
the Securities Act. None of the below mentioned "sales" were made to more than
35 nonaccredited investors and none were made with a view toward distribution.
All shares issued were restricted and contained either a Rule 144 or Regulation
S legend as appropriate.
In 1997, the Company issued ISOs for the purchase of 22,750 shares of
common stock and NQSOs for the purchase of 273,200 shares of common stock under
the 1996 Incentive Stock Option Plan. The Company issued NQSOs for the purchase
of 95,500 shares under the 1996 Stock Option Plan for Directors and Other
Individuals.
From May 10, 1997, to November 15, 1997, the Company, with the assistance
of Southwest Merchant Group, offered and sold pursuant to Rule 506 of the
Securities Act to 131 accredited and 14 nonaccredited investors 1,000,000 shares
of Series II Class B Convertible Preferred Stock at a price of $10
47
<PAGE>
per share for a total payment of $10,000,000. The Company entered into an
agreement with Southwest Merchant Group effective July 16, 1997, whereby
Southwest Merchant agreed to provide best efforts to sell up to 1,000,000 shares
of Series II Stock. In return the Company agreed to pay a combined financial
advisory, investment banking, and selling commission equal to 5 percent of the
value of the shares sold with an option to take, instead of cash, 2 1/2 percent
of the gross funds in warrants. Southwest Merchant Group was to receive two
warrants for each dollar of compensation owed to Southwest Merchant Group. Each
warrant gave Southwest Merchant Group the right to purchase 1/10 of a share of
Series IV Stock. $37,500 in compensation was paid to Southwest Merchant Group in
the form of cash. Southwest Merchant Group was issued 75,000 of Series IV Stock
for the purchase of 7,500 shares of Series IV Stock. No warrants have been
exercised and none have expired.
In 1998, the Company issued ISOs for the purchase of 177,800 shares of
Common Stock under the 1996 Incentive Stock Option Plan and NQSOs for the
purchase of 86,500 shares of Common Stock under the 1996 Stock Option Plan for
Directors and Other Individuals.
From July 10, 1998, to September 30, 1999, the Company, with the assistance
of Northstar, Asset Allocations Securities Corp., and Ameriprop Inc. ("broker
dealers"), offered and sold pursuant to Rule 506 of the Securities Act to 225
accredited and 21 nonaccredited investors 1,160,200 shares of Series III Stock
at a price of $10 per share for a total payment of $11,602,000. The Company
entered into an agreement with the broker dealers that, in exchange for the best
efforts of the broker to sell the shares, the brokers would be entitled to a
combined due diligence fee and selling commission equal to 7 percent of the
value of each share sold by the brokers. Northstar was paid $279,580, Asset
Allocations Securities Corp. was paid 247,450, and Ameriprop was paid $25,550.
In 1999 and in connection with an employment agreement, the Company issued
NQSOs for the purchase of 20,000 shares of the Company's Common Stock under the
1999 Stock Option Plan to Phillip Zweig. Half of the options vest on the
180/th/ day of the agreement (June 10, 2000) and the other half vest on the day
prior to the expiration of the agreement (December 11, 2000).
In 1999, the Company issued ISOs for the purchase of 451,400 shares and
NQSOs for the purchase of 362,550 shares of Common Stock of the Company under
the 1999 Stock Option Plan.
From January 11, 2000, to May 10, 2000, the Company, with the assistance of
Asset Allocations Securities Corp. and Northstar, offered and sold 1,138,800
shares of Series IV Stock to 25 accredited and 3 nonaccredited investors
pursuant to Rule 506 at a price of $10 per share for a total of $11,388,000.
Pursuant to individual Selling Agreements dated March 9, 2000, and March 1,
2000, respectively, warrants for the purchase of 75 and 150 shares of Series IV
Stock of the Company were issued to Asset Allocations Securities Corp. and
Northstar as partial commissions. Each warrant entitles the holder to purchase
one share of the Common Stock at an exercise price of $10 per share. Asset
Allocations Securities Corp. and Northstar received $1,750 and $3,500 in cash
commissions, respectively.
In 2000, the Company has issued ISOs for the purchase of 41,150 shares and
NQSOs for the purchase of 37,500 shares of Common Stock under the 1999 Stock
Option Plan.
In connection with a consulting agreement, the Company will issue NQSOs for
the purchase of up to 61,000 shares of the Company's Common Stock at an exercise
price of $10 per share to International Export and Consulting.
In March 2000, the Company entered into a letter agreement with New
Horizons International ("NHI") and Colebrand Limited whereby NHI and Colebrand
Limited would provide consulting services regarding marketing advice. In the
event they provide the Company with a contact that results in a proposed
investment in any amount up to $60 million which terms are acceptable to the
Company in its sole and absolute discretion, NHI will receive 5 percent of the
total amount of capital invested in cash, and Colebrand Limited will receive the
issuance of a number and type of securities equal to 2 1/2 percent of the total
number and type of securities issued and a warrant for the right to purchase up
to an amount of securities equal to 2 1/2 percent of the total number and type
of securities sold.
In May 2000, the Company entered into an Agreement with Abbott. Pursuant
to the Agreement, Abbott agreed to loan to the Company, in increments of
$1,000,000, an aggregate of up to $5,000,000 at an interest rate of prime plus
1% per year up to the maturity date of June 30, 2005. In consideration, the
Company agreed that any and all principal amounts borrowed could be converted
into Common Stock at
48
<PAGE>
a price of $10 per share. As of the date of this filing, the Company has not
borrowed any funds under this Agreement and no Common Stock has been issued.
Pursuant to a Selling Agreement entered into between the Company and
Northstar dated March 1, 2000, and in exchange for Northstar's assistance with
the offering of Series IV Stock, the Company will issue a warrant in the name of
Northstar for the purchase of 150 shares of the Series IV Stock of the Company
at $10 per share for each 100 shares sold by this broker in the private
placement offering in which it assisted. Northstar sold 2,500 shares of the
Series IV Stock and, accordingly, may purchase pursuant to exercise of this
warrant 75 shares of the Series IV Stock of the Company. The warrant expires on
March 15, 2002.
Pursuant to a Selling Agreement between the Company and Asset Allocations
Securities Corp. dated March 9, 2000, and in exchange for the assistance of this
broker with the offering of the Series IV Stock, the Company will issue a
warrant in the name of Asset Allocations Securities Corp. for the purchase of 75
shares of the Series IV Stock at $10 per share for each 100 shares sold by this
broker. Asset Allocations Securities Corp. sold 5,000 shares of the Series IV
Stock and, accordingly, may purchase pursuant to exercise of this warrant 150
shares of the Series IV Stock of the Company. The warrant expires on March 15,
2002.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification Under the Amended and Restated Bylaws
-----------------------------------------------------
The Company's Amended and Restated Bylaws provide that the Company shall
indemnify each of its Directors and Officers to the maximum extent allowed by
the Texas Business Corporation Act ("TBCA") for expenses incurred in proceedings
where the Officer or Director is a party by reason of holding his position as an
Officer or Director subject to not being found liable for negligence or
misconduct. Expenses incurred in anticipation of litigation or in settlement of
anticipated litigation are also covered. The TBCA permits such indemnification,
so long as such person acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Company. Such
indemnification may be made only upon a determination by the Board of Directors
that such indemnification is proper in the circumstances because the person to
be indemnified has met the applicable standard of conduct to permit
indemnification under the law. The Company is also permitted to advance to such
persons payment for their expenses incurred in defending a proceeding to which
indemnification might apply, provided the recipient provides an undertaking
agreeing to repay all such advanced amounts if it is ultimately determined that
he or she is not entitled to be indemnified. However, please see below
regarding limitations on indemnification for liabilities arising under the
Securities Act.
Indemnification by Contract
---------------------------
Pursuant to a Corporate Liability Policy issued by Executive Risk Specialty
Insurance Company which covers certain claims against covered persons occurring
after November 28, 1995, and certain claims against the Company occurring after
November 28, 1997, and which expires on November 28, 2000 (the "Policy"), the
Officers, Directors, and employees of the Company and the Company are insured
against certain loss liabilities and legal expenses. Generally, the Company and
"Insured Persons," as defined in the Policy, are insured against losses arising
out of employment practices and errors, omissions, misstatements, or breaches of
duty. They are also insured against legal expenses arising out of the covered
risks. The Policy limit is $1,000,000 subject to a reinstatement or request for
additional coverage of up to an additional $1,000,000 for an additional premium.
However, the Policy does not cover fines, taxes, punitive awards, or business
expenses incurred by reason of change in ownership by reason of a change in
legal status. Furthermore, the Policy does not cover losses or legal expenses
for tort claims (except those relating to employment practices), toxic torts,
derivative actions where the Company does not participate, or claims arising
under an express contract. The Policy covers patent and trademark defense
expenses up to $1,000,000 but does not cover claims alleging infringement.
Claims arising out of violations of various federal and state securities laws
are not covered except that the insurer is obligated to provide a quote for
additional coverage related to public offerings. The insured have no rights to
settle without permission of the carrier.
Pursuant to a written employment agreement with Thomas J. Shaw, the Company
has agreed to indemnify Thomas J. Shaw for all legal expenses and liabilities
incurred with any proceeding involving him by reason of his being an Officer or
agent of the Company. The Company has further agreed to pay
49
<PAGE>
reasonable attorney fees and expenses in the event that, in Thomas J. Shaw's
sole judgment, he needs to retain counsel or otherwise expend his personal funds
for his defense. However, please see below regarding limitations on
indemnification for liabilities arising under the Securities Act.
No Indemnification for Violations Regarding Capital Stock
---------------------------------------------------------
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, Officers, and Controlling Persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that, in the opinion of the SEC, 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 or Officer of
the Company in the successful defense of any action, suit, or proceeding) is
asserted by such Director or Officer 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 of whether such indemnification is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
50
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PART F/S FORM 10-SB
FINANCIAL STATEMENTS
RETRACTABLE TECHNOLOGIES, INC.
Texas
FINANCIAL STATEMENTS
AS OF
DECEMBER 31, 1999 AND 1998
AND
REPORT OF INDEPENDENT ACCOUNTANTS
AND
UNAUDITED FINANCIAL STATEMENTS
AS OF
MARCH 31, 2000 AND 1999
51
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1999 AND 1998
52
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
INDEX TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 54
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 55
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 and inception
(May 9, 1994) through December 31, 1999 56
Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997 57
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 and inception
(May 9, 1994) through December 31, 1999 58
Notes to Financial Statements 59-73
</TABLE>
53
<PAGE>
Report of Independent Accountants
To the Board of Directors and
the Stockholders of Retractable Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of Retractable Technologies,
Inc. (a development stage enterprise) at December 31, 1999 and 1998, and the
results of its operations, its changes in stockholders' equity and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. The financial statements of Retractable
Technologies, Inc. for the periods from May 9, 1994 (date of inception) to
December 31, 1996, were audited by other independent accountants whose reports
dated March 12, 1997 and June 30, 1998 expressed unqualified opinions on those
statements.
PricewaterhouseCoopers LLP
Dallas, Texas
June 1, 2000
54
<PAGE>
RETRACTABLE TECHNOLOGIES, INC
A Development Stage Enterprise
BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------- ---------------
ASSETS 1999 1998
------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 646,005 $ 1,627,863
Accounts receivable, net of allowance for doubtful accounts of
$10,972 and $0, respectively 599,424 100,728
Inventories 677,962 653,958
Other current assets 47,800 51,103
------------- ---------------
Total current assets 1,971,191 2,433,652
Property, plant and equipment, net 10,101,524 8,923,842
Restricted certificates of deposit 600,000 600,000
Intangible assets and deferred charges, net 536,014 554,757
------------- ---------------
Total assets $ 13,208,729 $ 12,512,251
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 844,165 $ 332,241
Current portion of long-term debt 463,329 431,743
Note payable to related party - 25,966
Accrued compensation 118,038 107,226
Other accrued liabilities 589,309 52,491
------------- ---------------
Total current liabilities 2,014,841 949,667
------------- ---------------
Long-term debt, net of current maturities 2,506,335 2,870,959
------------- ---------------
Stockholders' equity:
Preferred stock $1 par value:
Class A; authorized, issued and outstanding: 5,000,000 shares
(liquidation preference of $7,500,000) 5,000,000 5,000,000
Class B; authorized: 5,000,000 shares
Series I Class B; issued and outstanding:
1,000,000 shares, (liquidation preference of $6,250,000) 1,000,000 1,000,000
Series II Class B; issued and outstanding:
1,000,000 shares, (liquidation preference of $12,500,000) 1,000,000 1,000,000
Series III Class B; issued and outstanding:
1,160,200 and 301,800 shares, respectively (liquidation preference of
$14,502,500 and $3,772,500, respectively) 1,160,200 301,800
Common stock, no par value; authorized: 40,000,000 shares; issued and
outstanding: 14,000,000 shares 1,000 1,000
Additional paid-in capital 23,564,235 16,378,481
Unearned compensation (185,635) (370,917)
Deficit accumulated during the development stage (22,852,247) (14,618,739)
------------- ---------------
Total stockholders' equity 8,687,553 8,691,625
------------- ---------------
Total liabilities and stockholders' equity $ 13,208,729 $ 12,512,251
============= ===============
</TABLE>
See accompanying notes to the financial statements.
55
<PAGE>
RETRACTABLE TECHNOLOGIES, INC
A Development Stage Enterprise
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Cumulative
from
Years ended December 31, inception
--------------------------------------------------------
1999 1998 1997 (May 9, 1994)
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Sales, net $ 3,375,158 $ 845,559 $ 262,315 $ 4,483,032
Cost of sales 2,331,070 765,448 474,147 3,570,665
----------------- ------------------ ----------------- -----------------
Gross income (deficit) 1,044,088 80,111 (211,832) 912,367
----------------- ------------------ ----------------- -----------------
Operating expenses:
Preproduction manufacturing 1,837,830 1,004,828 1,496,418 5,457,201
Sales and marketing 3,742,779 1,539,822 1,394,024 7,047,952
Research and development 842,062 763,690 266,029 2,326,127
General and administrative 2,863,989 2,419,821 1,952,561 8,807,932
----------------- ------------------ ----------------- -----------------
Total operating expenses 9,286,660 5,728,161 5,109,032 23,639,212
----------------- ------------------ ----------------- -----------------
Loss from operations (8,242,572) (5,648,050) (5,320,864) (22,726,845)
Interest income 122,028 162,116 133,413 647,042
Interest expense, net (112,964) (218,154) (336,749) (772,444)
----------------- ------------------ ----------------- -----------------
Net loss incurred during
development stage $ (8,233,508) $ (5,704,088) $ (5,524,200) $ (22,852,247)
================= ================== ================ =================
</TABLE>
See accompanying notes to the financial statements.
56
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Series I Class B Series II Class B
---------------------------- ---------------------------- ------------------------
Shares Amount Shares Amount Shares Amount
------------- ------------- ------------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 5,000,000 $ 5,000,000 983,000 $ 983,000 $
Issued Preferred Series I Class B
9,000 shares, $1 par 9,000 9,000
Issued Preferred Series II Class B
945,700 shares, $1 par 945,700 945,700
Issuance of compensatory stock options
Recognition of stock option compensation
Collections of notes receivable
Reclassification of note receivable
to reflect collection
Net loss incurred during development stage
----------- ------------ ---------- ------------ ---------- -----------
Balance as of December 31, 1997 5,000,000 $ 5,000,000 992,000 $ 992,000 945,700 $ 945,700
----------- ------------ ---------- ------------ ---------- -----------
Issued Preferred Series I Class B
8,000 shares, $1 par 8,000 8,000
Issued Preferred Series II Class B
54,300 shares, $1 par 54,300 54,300
Issued Preferred Series III Class B
301,800 shares, $1 par (net of
commissions and other expenses
of $290,221)
Issuance of compensatory stock options
Recognition of stock option compensation
Terminations of stock options
Net loss incurred during development stage
----------- ------------ ---------- ------------ ---------- -----------
Balance as of December 31, 1998 5,000,000 $ 5,000,000 1,000,000 $ 1,000,000 1,000,000 $ 1,000,000
----------- ------------ ---------- ------------ ---------- -----------
Issued Preferred Series III Class B
858,400 shares, $1 par
Issuance of compensatory stock options
Recognition of stock option compensation
Terminations of stock options
Net loss incurred during development stage
----------- ------------ ---------- ------------ ---------- -----------
Balance as of December 31, 1999 5,000,000 $ 5,000,000 1,000,000 $ 1,000,000 1,000,000 $ 1,000,000
=========== ============ ========== ============ ========== ===========
<CAPTION>
Series III Class B Common
---------------------------- ----------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 $ 14,000,000 $ 1,000
Issued Preferred Series I Class B
9,000 shares, $1 par
Issued Preferred Series II Class B
945,700 shares, $1 par
Issuance of compensatory stock options
Recognition of stock option compensation
Collections of notes receivable
Reclassification of note receivable
to reflect collection
Net loss incurred during development stage
------------ ------------- ----------- ------------
Balance as of December 31, 1997 - $ - 14,000,000 $ 1,000
------------ ------------- ----------- ------------
Issued Preferred Series I Class B
8,000 shares, $1 par
Issued Preferred Series II Class B
54,300 shares, $1 par
Issued Preferred Series III Class B
301,800 shares, $1 par (net of
commissions and other expenses
of $290,221) 301,800 301,800
Issuance of compensatory stock options
Recognition of stock option compensation
Terminations of stock options
Net loss incurred during development stage
------------ ------------- ----------- ------------
Balance as of December 31, 1998 301,800 $ 301,800 14,000,000 $ 1,000
------------ ------------- ----------- ------------
Issued Preferred Series III Class B
858,400 shares, $1 par 858,400 858,400
Issuance of compensatory stock options
Recognition of stock option compensation
Terminations of stock options
Net loss incurred during development stage
------------ ------------- ----------- ------------
Balance as of December 31, 1999 1,160,200 $ 1,160,200 14,000,000 $ 1,000
============ ============= =========== ============
<CAPTION>
Deficit
Notes Accumulated
Receivable Additional During
from Paid-in Unearned Development
Stockholders Capital Compensation Stage Total
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 $ (257,500) $ 4,303,213 $ (287,290) $ (3,390,451) $ 6,351,972
Issued Preferred Series I Class B
9,000 shares, $1 par 36,000 45,000
Issued Preferred Series II Class B
945,700 shares, $1 par 8,436,300 9,382,000
Issuance of compensatory stock options 748,539 (748,539)
Recognition of stock option compensation 286,540 286,540
Collections of notes receivable 207,500 207,500
Reclassification of note receivable
to reflect collection 50,000 50,000
Net loss incurred during development stage (5,524,200) (5,524,200)
----------- ------------- ------------ ------------ -------------
Balance as of December 31, 1997 $ - $ 13,524,052 $ (749,289) $ (8,914,651) $ 10,798,812
----------- ------------- ------------ ------------ -------------
Issued Preferred Series I Class B
8,000 shares, $1 par 32,000 40,000
Issued Preferred Series II Class B
54,300 shares, $1 par 488,700 543,000
Issued Preferred Series III Class B
301,800 shares, $1 par (net of
commissions and other expenses
of $290,221) 2,425,979 2,727,779
Issuance of compensatory stock options 70,000 (70,000)
Recognition of stock option compensation 286,122 286,122
Terminations of stock options (162,250) 162,250
Net loss incurred during development stage (5,704,088) (5,704,088)
----------- ------------- ------------ ------------ -------------
Balance as of December 31, 1998 $ - $ 16,378,481 $ (370,917) $(14,618,739) $ 8,691,625
----------- ------------- ------------ ------------ -------------
Issued Preferred Series III Class B
858,400 shares, $1 par 7,266,914 8,125,314
Issuance of compensatory stock options 214,354 (214,354)
Recognition of stock option compensation 104,122 104,122
Terminations of stock options (295,514) 295,514
Net loss incurred during development stage (8,233,508) (8,233,508)
----------- ------------- ------------ ------------ -------------
Balance as of December 31, 1999 $ - $ 23,564,235 $ (185,635) $(22,852,247) $ 8,687,553
=========== ============= ============ ============ =============
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
RETRACTABLE TECHNOLOGIES, INC
A Development Stage Enterprise
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Years ended December 31, from inception
------------------------------------------------
1999 1998 1997 (May 9, 1994)
-------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss incurred during development stage $ (8,233,508) $ (5,704,088) $ (5,524,200) $ (22,852,247)
Depreciation and amortization 950,471 807,060 455,909 2,765,730
Provision for doubtful accounts 10,972 - - 10,972
Recognition of stock option compensation 104,122 286,122 286,540 760,707
Adjustments to reconcile net loss to net cash
used in operating activities:
Increase in inventories (24,004) (173,308) (308,188) (677,962)
(Increase) decrease in accounts and note
receivable (509,668) 6,320 (102,048) (610,396)
Increase in deferred charges - - - (25,931)
(Increase) decrease in other current assets 3,303 (34,603) (16,500) (47,800)
Increase (decrease) in accounts payable
and note payable to related party 485,958 (647,460) 738,725 780,699
Increase in other accrued liabilities 547,630 70,811 57,994 707,347
-------------- --------------- --------------- -----------------
Net cash used by operating activities (6,664,724) (5,389,146) (4,411,768) (19,188,881)
-------------- --------------- --------------- -----------------
Cash flows from investing activities
Purchase of property, plant and equipment (1,960,609) (1,179,547) (3,252,731) (11,445,793)
Acquisition of patents, trademarks and licenses (39,077) (45,095) - (182,595)
Purchase of restricted certificate of deposit - - (200,000) (600,000)
Organization costs paid - - (15,291) (20,851)
-------------- --------------- --------------- -----------------
Net cash used by investing activities (1,999,686) (1,224,642) (3,468,022) (12,249,239)
-------------- --------------- --------------- -----------------
Cash flows from financing activities
Borrowings under long-term debt and notes payable - 25,749 986,242 3,065,362
Repayments of long-term debt and notes payable (442,762) (438,000) (350,675) (1,297,830)
Proceeds from issuance of preferred stock 8,584,000 3,601,000 9,427,000 31,307,000
Proceeds from issuance of common stock - - - 1,000
Commissions and other expenses related to
preferred stock issuance (458,686) (290,221) - (748,907)
Collections of notes receivable from stockholders - - 257,500 257,500
Obligation under license agreement - - (56,175) (500,000)
-------------- --------------- --------------- -----------------
Net cash provided by financing activities 7,682,552 2,898,528 10,263,892 32,084,125
-------------- --------------- --------------- -----------------
Net increase (decrease) in cash (981,858) (3,715,260) 2,384,102 646,005
Cash and cash equivalents at:
Beginning of period 1,627,863 5,343,123 2,959,021 -
-------------- --------------- --------------- -----------------
End of period $ 646,005 $ 1,627,863 $ 5,343,123 $ 646,005
============== =============== =============== =================
Supplemental disclosures of cash flow
information:
Interest paid $ 281,905 $ 324,116 $ 321,887 $ 1,025,443
============== =============== =============== =================
Supplemental schedule of noncash financing
activities:
Preferred stock issued in exchange for notes
receivable $ - $ - $ - $ 257,500
============== =============== =============== =================
Offering costs to be settled with warrants $ - $ - $ 37,500 $ 37,500
============== =============== =============== =================
Acquisition of equipment through capital lease $ 109,724 $ 50,435 $ 380,485 $ 1,228,097
============== =============== =============== =================
</TABLE>
See accompanying notes to the financial statements.
58
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. BUSINESS OF THE COMPANY
Retractable Technologies, Inc. (the "Company") was incorporated in Texas on
May 9, 1994, to design, develop, manufacture and market safety syringes and
other safety medical products for the health care profession. The Company
began operations in 1995. The Company's manufacturing and administrative
facilities are located in Little Elm, Texas. The Company's primary
products are the VanishPoint(R) Syringe in the 3cc, 5cc and 10cc sizes and
Blood Collection Tube Holders. The Company has conducted preliminary
clinical evaluations and worked with national distributors to encourage
healthcare facilities to transition from the use of standard syringes to
the VanishPoint(R) Syringe. Preliminary shipments, which commenced in
February 1997, included syringes for hospital product evaluations as well
as for sale in clinics and other healthcare settings. The Company has been
considered a development stage enterprise for financial reporting purposes
as significant efforts have been devoted to financial planning, raising
capital, research and development, acquiring equipment, training personnel,
developing markets and starting up production. Coincident with the
agreement with Abbot Laboratories (see Note 11), effective May 4, 2000, the
Company completed its development stage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include
unrestricted cash and investments with original maturities of three months
or less.
Inventories
Inventories are valued at the lower of cost or market, with cost being
determined using a standard cost method, which approximates average cost.
Provision is made for any excess or obsolete inventories.
Property, plant and equipment
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to operations as incurred. Cost
includes major expenditures for improvements, and replacements which extend
useful lives or increase capacity and interest cost associated with
significant capital additions. For the years ended December 31, 1999 and
1998, the Company capitalized interest of approximately $169,000 and
$105,000, respectively, and none in fiscal year 1997. Gains or losses from
property disposals are included in income.
59
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Depreciation and amortization is calculated using the straight-line method
over the following useful lives:
Production equipment 7 to 10 years
Office furniture and equipment 3 to 10 years
Building 39 years
Building improvements 15 years
Automobiles 7 years
Long-lived assets
When events or changes in circumstances indicate that the carrying amount
of long-lived assets may not be recoverable, the Company will review the
net realizable value of the long-lived assets through an assessment of the
estimated future cash flows related to such assets. In the event that
assets are found to be carried at amounts which are in excess of estimated
gross future cash flows, the assets will be adjusted for impairment to a
level commensurate with a discounted cash flow analysis of the underlying
assets.
Restricted certificates of deposit
Investments in certificates of deposit are restricted in accordance with
the terms of certain notes payable.
Intangible assets and deferred charges
Intangible assets are stated at cost and consist primarily of patents, a
license agreement granting exclusive rights to use patented technology, and
trademarks which are amortized using the straight-line method over 17
years. Other intangible assets consist of deferred charges for loan
origination fees, which are amortized over the life of the debt (seven
years).
Financial instruments
The fair market value of financial instruments is determined by reference
to various market data and other valuation techniques as appropriate. The
Company believes that the fair value of financial instruments approximate
their recorded values.
Concentrations of credit risk
The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash, cash equivalents and accounts receivable.
Cash balances, which may exceed the federally insured limits, are
maintained in financial institutions; however, management believes the
institutions are of high credit quality. The majority of accounts
receivable are due from companies which are well-established entities. As a
consequence, management considers any exposure from concentrations of
credit risks to be limited.
60
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Revenue recognition
Revenue is recognized for sales to distributors when title and risk of
ownership passes to the distributor, generally upon shipment. Revenue is
recorded on the basis of sales price to distributors. Revenues on sales to
distributors for federal or GPO contracts are recorded net of contractual
pricing allowances to those end customers. Revenue for shipments directly
to end users is recognized when title and risk of ownership passes from the
Company.
Income taxes
The Company provides for deferred income taxes in accordance with Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires an asset and liability approach for
financial accounting and reporting for income taxes based on the tax
effects of differences between the financial statement and tax bases of
assets and liabilities, based on enacted rates expected to be in effect
when such basis differences reverse in future periods. Deferred tax assets
are periodically reviewed for reliability. Valuation allowances are
recorded when realizability of deferred tax assets is not likely.
Research and development costs
Research and development costs are expensed as incurred.
Stock-based compensation
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which establishes accounting and reporting
standards for stock-based employee compensation plans. As permitted by SFAS
123, the Company has elected not to adopt the fair value based method of
accounting for stock-based employee compensation and will account for such
arrangements under Accounting Principles Board Opinion No. 25. Accordingly,
compensation cost for stock options issued to directors, officers and
employees is measured as the excess, if any, of the fair market value of
the Company's stock at the date of grant over the amount the director,
officer or employee must pay to acquire the stock. Expense is recognized
ratably from the date of grant over the vesting period of the option.
Unearned compensation reflected in the Stockholders' Equity section of the
balance sheet is the portion of such compensation that has not been charged
to operations.
61
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. INVENTORIES
Inventories consist of the following
December 31,
---------------------------
1999 1998
--------- ---------
Raw materials $ 405,823 $ 348,053
Work in process 27,699 5,464
Finished goods 268,766 300,441
--------- ---------
702,288 653,958
Inventory reserve (24,326) -
--------- ---------
$ 677,962 $ 653,958
========= =========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
--------------------------
1999 1998
------------ ------------
Land $ 261,893 $ 261,893
Building and building improvements 1,767,185 1,752,115
Production equipment 7,719,979 6,692,236
Office furniture and equipment 596,058 464,945
Construction in progress 2,306,916 1,410,509
Automobiles 21,858 21,858
------------ -----------
12,673,889 10,603,556
Accumulated depreciation and amortization (2,572,365) (1,679,714)
------------ -----------
$ 10,101,524 $ 8,923,842
============ ===========
Acquisition costs of production equipment financed through capital leases
were $1,118,556 and $1,008,832 at December 31, 1999, and 1998 respectively.
Accumulated amortization on these leases was $358,552 and $255,852 at
December 31, 1999 and 1998, respectively.
Depreciation expense and capital lease amortization expense for the years
ended December 31, 1999, 1998 and 1997 was $892,651, $761,282 and $414,894,
respectively.
62
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. INTANGIBLE ASSETS AND DEFERRED CHARGES
Intangible assets and deferred charges consist of the following:
December 31,
-------------------------
1999 1998
----------- ------------
License agreement $ 500,000 $ 500,000
Trademarks and patents 182,590 143,513
Loan origination fees 25,938 25,938
Organization costs - 20,851
----------- ------------
708,528 690,302
Accumulated amortization (172,514) (135,545)
----------- ------------
$ 536,014 $ 554,757
----------- ------------
In 1995, the Company entered into the license agreement with an officer of
the Company for the exclusive right to manufacture, market and distribute
products utilizing automated retraction technology. This technology is the
subject of various patents and patent applications owned by the officer of
the Company. The initial licensing fee of $500,000 is being amortized over
17 years. The license agreement also provides for quarterly payments of a
5% royalty fee to the officer on gross sales. The royalty fee expense is
recognized in the period in which it is earned. Royalty fees of $194,247,
$46,098 and $9,284 are included in cost of sales for the years ended
December 31, 1999, 1998 and 1997, respectively.
Amortization expense for the years ended December 31, 1999, 1998 and 1997
was $57,820, $45,778 and $41,015, respectively.
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Small Business Administration note payable to Texas Bank for a maximum
of $1,000,000, all of which was drawn during 1997. Payable in monthly
principal and interest installments of approximately $16,000. Interest
at prime plus 1.5%; 10% on December 31, 1999; adjustable quarterly.
Matures on July 1, 2003. Collateralized by equipment. Guaranteed by an
officer. $ 569,630 $ 705,566
Notes payable to Western Bank and Trust. Interest adjustable annually on
October 24. Matures on October 24, 2001. Secured by land, building and
equipment, and by a certificate of deposit to be released upon
achievement of certain financial ratios. Guaranteed by an officer.
- Interest only payable until October 24, 1996; thereafter, monthly
principal and interest payments of approximately $8,000.
Interest at prime plus 1%; 9.5% on December 31, 1999. 750,789 767,960
- Interest payable monthly at Bank's certificate of deposit rate
plus 2%; 7% on December 31, 1999. 400,000 400,000
Note payable to Legacy Bank of Texas. Payable in monthly installments of
approximately $8,000 plus interest. Interest at prime plus 1%; 9.5% on
December 31, 1999; adjustable daily. Matures on July 10, 2004.
Collateralized by certain machinery and equipment, a certificate of
deposit of $200,000 and restrictions on the transfer of certain
patents. Covenants require the Company to achieve defined debt
coverage ratios or maintain a defined ratio of total liabilities to
total net worth. Guaranteed by an officer.
464,881 566,309
Note payable to First State Bank of Texas in monthly principal and
interest installments of approximately $400. Interest at 7.5%. Matures on
August 13, 2000. Collateralized by company vehicle. 3,333 8,119
Note payable to AFCO. Payable in monthly principal and interest installments
of approximately $2,000. Interest at 8.8%. Matures on May 28, 2000. 7,491 24,403
Capital lease obligations payable in monthly installments ranging from
approximately $500 to $10,000 through October, 2004. Interest at rates
from 9.98% to 14.18%. Collateralized by certain machinery and equipment.
Covenants require the Company to maintain a minimum net worth of
$3,750,000 and a defined ratio of total liabilities to total net worth.
Guaranteed by an officer. The Company is not in compliance with
obligations to deliver documents under this agreement. The lessor
has provided a waiver related to this noncompliance. 773,540 830,345
-------------- ---------------
2,969,664 3,302,702
Less: current portion (463,329) (431,743)
-------------- ---------------
$ 2,506,335 $ 2,870,959
============== ===============
</TABLE>
64
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Developmemtal Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The aggregate maturities of long-term debt as of December 31, 1999 are as
follows:
2000 $ 463,329
2001 1,572,041
2002 467,577
2003 373,358
2004 93,359
Thereafter -
-------------
Total $ 2,969,664
-------------
Subsequent to December 31, 1999, the Company obtained two new loans from 1st
International Bank totaling $2,000,000. Land, building and improvements
secure $1,500,000, and the remaining $500,000 is secured by accounts
receivable. The proceeds, along with a release of $400,000 of restricted
cash by Western Bank subsequent to December 31, 1999, were used to pay off
indebtedness to Western Bank. Remaining proceeds provided funds for
equipment and operating needs. The building loan matures on February 18,
2005 and the note secured by accounts receivable matures February 18, 2001.
7. INCOME TAXES
The provision for income taxes consists of the following:
December 31,
--------------------------------
1999 1998
-------------- ----------------
Current $ - $ -
Deferred benefit (2,932,189) (2,096,602)
Increase in valuation allowance 2,932,189 2,096,602
-------------- ----------------
$ - $ -
-------------- ----------------
The Company has net operating loss carryforwards of approximately
$24,129,273, and $15,600,527 at December 31, 1999 and 1998, respectively,
which will begin to expire in 2010. The Company has established a valuation
allowance to the extent of its deferred tax assets since presently it is more
likely than not that a tax benefit will not be realized prior to the
expiration of related carryforward periods.
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Developmemtal Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The provision for income taxes varies from the statutory income tax rate as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Income tax benefit at the U.S. federal statutory rate (35.0)% (35.0)%
Valuation allowance 35.6 36.8
Permanent differences 0.6 1.9
State income tax, net of federal benefits (2.7) (2.6)
Other 1.5 (1.1)
--------------- ---------------
Effective tax (benefit) provision rate - -
=============== ===============
</TABLE>
Temporary differences between the financial statement carrying amounts and
the tax basis of assets and liabilities that gave rise to significant
portions of deferred tax amounts related to the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Net operating loss carryforwards $ 9,084,478 $ 5,873,269
Property, plant and equipment (1,007,274) (714,913)
Deferred charges 142,155 159,883
Accrued expenses and reserves 54,213 23,144
--------------- ---------------
Net noncurrent deferred tax asset before valuation allowance 8,273,572 5,341,383
Valuation allowance (8,273,572) (5,341,383)
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
</TABLE>
8. STOCKHOLDERS' EQUITY
Preferred stock
The Company has two classes of preferred stock, Class A and Class B. The
Class B Preferred Stock has three series: Series I, Series II and Series III.
Subsequent to December 31, 1999, the Company began taking subscriptions for a
fourth series, Series IV Class B (see Note 11).
Class A
-------
The Company authorized 5,000,000 shares of $1 par value Class A Convertible
Preferred Stock ("Class A Stock") in April 1995. These shares were
outstanding at December 31, 1999 and 1998. Holders of Class A Stock are
entitled to receive a cumulative annual cash dividend of $.12 per share,
payable quarterly if declared by the board of directors. Holders of Class A
Stock generally have no voting rights until dividends are in arrears and
unpaid for twelve consecutive quarters. In such case, the holders of Class A
Stock have the right to elect one-third of the board of directors of the
Company. At December 31, 1999 and 1998, approximately $2,616,983 and
$2,016,983, respectively, of dividends which have not been declared were in
arrears. Accordingly, Class A shareholders elected three members to the
Board during 1999.
Class A Stock is redeemable after three years from the date of issuance at
the option of the Company at a price of $1.70 per share, plus all accrued and
unpaid dividends. Each share of Class A Preferred Stock may be converted to
one share of common stock after three years from the date of issuance at the
option of the shareholder. In the event of voluntary or involuntary
dissolution, liquidation or winding up of the Company, holders of Class A
Stock then outstanding are entitled to $1.50 per share plus all accrued and
unpaid dividends, prior to any distributions to holders of Class B preferred
stock or of common stock.
Class B
-------
The Company has authorized 5,000,000 shares of $1 par value Convertible
Preferred Stock which have been allocated among Series I, II, III and IV in
the amounts of 1,000,000, 1,000,000, 1,160,200 and 1,300,000 shares,
respectively. The remaining 539,800 authorized shares have not been assigned
a series.
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Series I Class B
----------------
There were 1,000,000 shares of $1 par value Series I Class B Convertible
Preferred Stock ("Series I Class B Stock") issued and outstanding at
December 31, 1999 and 1998. Holders of Series I Class B Stock are entitled
to receive a cumulative annual dividend of $.50 per share, payable
quarterly if declared by the board of directors. At December 31, 1999 and
1998 approximately $1,658,996 and $1,185,552, respectively, of dividends
which have not been declared were in arrears.
Series I Class B Stock is redeemable after three years from the date of
issuance at the option of the Company at a price of $7.50 per share, plus
all accrued and unpaid dividends. Each share of Series I Class B Stock may,
at the option of the stockholder, be converted to one share of common stock
after three years from the date of issuance or in the event the Company
files an initial registration statement under the Securities Act of 1933.
In the event of voluntary or involuntary dissolution, liquidation or
winding up of the Company, holders of Series I Class B Stock then
outstanding are entitled to $6.25 per share, plus all accrued and unpaid
dividends, after distribution obligations to Class A Stock have been
satisfied and prior to any distributions to holders of Series II Class B
Convertible Preferred Stock ("Series II Class B Stock"), Series III Class B
Convertible Preferred Stock ("Series III Class B Stock") or common stock.
Series II Class B
-----------------
There were 1,000,000 shares of $1 par value Series II Class B Stock issued
and outstanding at December 31, 1999 and 1998, respectively. Holders of
Series II Class B Stock are entitled to receive a cumulative annual
dividend of $1.00 per share, payable quarterly if declared by the board of
directors. Holders of Series II Class B Stock generally have no voting
rights until dividends are in arrears and unpaid for twelve consecutive
quarters. In such case, the holders of Series II Class B Stock have the
right to elect one-third of the board of directors of the Company. At
December 31, 1999 and 1998 approximately $2,227,177 and $1,256,981,
respectively, of dividends which have not been declared were in arrears.
Series II Class B Stock is redeemable after three years from the date of
issuance at the option of the Company at a price of $15.00 per share plus
all accrued and unpaid dividends. Each share of Series II Class B Stock
may, at the option of the stockholder, be converted to one share of common
stock after three years from the date of issuance or in the event the
Company files an initial registration statement under the Securities Act of
1933. In the event of voluntary or involuntary dissolution, liquidation or
winding up of the Company, holders of Series II Class B Stock then
outstanding are entitled to $12.50 per share, plus all accrued and unpaid
dividends, after distribution obligations to holders of Class A Stock and
Series I Class B Stock have been satisfied and prior to any distributions
to holders of Series III Class B Stock or common stock.
Series III Class B
------------------
There were 1,160,200 shares and 301,800 shares of $1 par value Series III
Class B Stock issued and outstanding at December 31, 1999 and 1998,
respectively. Holders of Series III Class B Stock are entitled to receive a
cumulative annual dividend of $1.00 per share, payable quarterly if
declared by the board of directors. At December 31, 1999 and 1998,
approximately $941,549 and $41,701, respectively, of dividends which have
not been declared were in arrears.
67
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Series III Class B Stock is redeemable after three years from the date of
issuance at the option of the Company at a price of $15.00 per share, plus
all accrued and unpaid dividends. Each share of Series III Class B Stock
may, at the option of the stockholder, be converted to one share of common
stock after three years from the date of issuance or in the event the
Company files an initial registration statement under the Securities Act of
1933. In the event of voluntary or involuntary dissolution, liquidation or
winding up of the Company, holders of Series III Class B Stock then
outstanding are entitled to $12.50 per share, plus all accrued and unpaid
dividends, after distribution obligations to Class A Stock, Series I Class
B Stock and Series II Class B Stock have been satisfied and prior to any
distributions to holders of common stock.
Series IV Class B
-----------------
On January 11, 2000, the Company issued a Private Placement Memorandum
offering up to 1,300,000 shares of its Series IV Class B Convertible
Preferred Stock ("Series IV Class B Stock") at $10 per share.
As of May 22, 2000, subscriptions for 1,133,800 shares of the Series IV
Class B Stock had been received.
Series IV Class B Stock ranks senior to the Company's common stock with
respect to dividends and upon liquidation, dissolution or winding up, but
secondary to the Company's Class A Stock; and Series I Class B, Series II
Class B and Series III Class B Stock. Holders of Series IV Class B Stock
will be entitled to receive a cumulative annual dividend of $1.00 per
share, payable quarterly, if declared by the board of directors. Holders of
Series IV Class B Stock generally have no voting rights.
68
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Series IV Class B Stock is redeemable after three years from the date of
issuance at the option of the Company at a price of $11.00 per share plus
all accrued and unpaid dividends. Each share of Series IV Class B Stock
may, at the option of the stockholder any time subsequent to three years
from date of issuance, be converted into common stock at a conversion price
of $10 per share, or in the event the Company files an initial registration
statement under the Securities Act of 1933.
In the event of voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of Series IV Class B Stock then
outstanding are entitled to receive liquidating distributions of $11.00 per
share, plus accrued and unpaid dividends.
Common stock
The Company is authorized to issue 40,000,000 shares of no par value common
stock, of which 14,000,000 shares are issued and outstanding at December
31, 1999 and 1998. Subsequent to December 31, 1999, the board of directors
approved an increase in the number of authorized shares to 100,000,000.
9. RELATED PARTY TRANSACTIONS
In September 1996, the Company purchased the 3cc prototype mold from
Checkmate Engineering, a sole proprietorship of an officer of the Company.
The purchase was financed by a note for the full purchase price of
$108,252. The note provided for no interest for the first 305 days and,
subsequently, for interest at a rate of 12% per annum. Interest expense
related to this note was $1,357, $5,258 and $4,092 for the years ended
December 31, 1999, 1998 and 1997, respectively. The balance of the note was
$25,966 as of December 31, 1998. The remaining balance on the note was paid
in full in 1999.
The Company has a lease with Mill Street Enterprises ("Mill Street"), a
sole proprietorship owned by a Board member, for sales and marketing
offices in Lewisville, Texas. During 1999, 1998 and 1997, the Company paid
$22,800 each year under this lease. The Company also has a lease with Mill
Street for additional office space for one year commencing April 1, 2000,
at a rate of $1,000 per month.
During 1999, 1998 and 1997, the Company paid $23,381, $30,258 and $49,615,
respectively, to family members of its chief executive officer for various
consulting services. During 1999, 1998 and 1997, the Company paid $96,372,
$127,921 and $77,430, respectively, to a former director for various
consulting services.
The Company has a license agreement with an officer of the Company. See
Note 5.
See Note 11 for related party subsequent event.
69
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Developmemtal Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. STOCK OPTIONS AND WARRANTS
Stock options
The Company has three stock option plans that provide for the granting of
stock options to officers, employees and other individuals. During 1999,
the Company approved the 1999 Stock Option Plan. The 1999 Plan is the only
plan with stock option awards available for grant and the Company has
reserved 2,000,000 shares of common stock for use upon the exercise of
options under this plan.
The Company also has shares outstanding under the 1996 Incentive Stock
Option Plan and the 1996 Stock Option Plan for Directors and Other
Individuals. All plans are administered and exercise prices at which
options are granted are determined by a committee appointed by the board of
directors. Shares exercised come from the Company's authorized but unissued
common stock. The options vest over periods up to three years from the date
of grant and generally expire ten years after the date of grant. All
options issued under the 1996 plans expire three months after termination
of employment or service to the Company. No options have been exercised
under these plans.
Director, officer and employee options
Pro forma information regarding net income is required by SFAS 123. This
information has been derived as if the Company had accounted for its
directors, officers and employee stock options under the fair value method
in accordance with SFAS 123. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1999,
1998 and 1997: no dividend yield; expected volatility of 0%; risk-free
interest rates of 5.9%, 5.4% and 6.4%, respectively; and expected lives of
5.3 years. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting periods.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ----------------------------- -----------------------------
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(8,233,508) $ (8,341,433) $ (5,704,088) $ (5,842,497) $ (5,524,200) $ (5,627,602)
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts as FAS 123 does not consider additional awards
anticipated in the future.
<PAGE>
RETRACTABLE TECHNOLOGIES, INC
A Development Stage Enterprise
NOTES OF FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A summary of director, officer and employee options granted and outstanding
under the Plans is presented below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1999 1998 1997
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 566,855 $ 6.01 460,305 $ 4.28 130,105 $ 1.53
Granted at prices in excess of
fair market value 735,450 10.00 177,800 10.00 22,750 10.00
Granted at prices below
fair market value 8,500 4.53 - - 345,700 5.00
Exercised - - - - - -
Forfeited (230,600) (7.72) (71,250) (4.78) (38,250) (4.90)
---------- ----------- --------- ----------- --------- ----------
Outstanding at end of period 1,080,205 $ 8.35 566,855 $ 6.01 460,305 $ 4.28
========== =========== ========= ========== ========== ==========
Exercisable at end of period 112,605 $ 3.35 - $ - - $ -
Weighted average fair value
of options granted during period $ .04 $ - $ 3.45
</TABLE>
The following table summarizes information about directors, officer and
employee options outstanding under the Plans at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Exercise Shares Contractual Shares
Prices Outstanding Life Exercisable
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
$ 1.00 77,780 6.32 77,780
$ 5.00 216,525 7.33 9,825
$ 10.00 785,900 9.30 25,000
</TABLE>
Compensation expense has been recognized for the years ended December 31,
1999, 1998 and 1997 in connection with options which were granted with exercise
prices less than the fair market value of the common stock of the Company on the
date of grant as determined by the board of directors.
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Non-employee options
Options were granted to non-employees during the years ended December 31 as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ---------- -------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 152,500 $ 6.91 67,000 $ 2.97 34,000 $ 1.00
Granted 70,000 10.00 86,500 10.00 33,000 5.00
Exercised - - - - - -
Forfeited (37,000) (8.92) (1,000) (10.00) - -
------- --------- ------- --------- ------ ---------
Outstanding at end of period 185,500 $ 7.68 152,500 $ 6.91 67,000 $ 2.97
======= ========= ======= ========= ====== =========
Exercisable at end of period 34,000 $ 1.00 - $ - - $ -
Weighted average fair value
of options granted during period $ 1.79 $ 1.71 $ 3.88
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997: no dividend yield;
expected volatility of 30%, 30% and 60%, respectively; risk-free interest
rates of 5.9%, 5.4% and 6.3%, respectively; and expected lives of 5.3
years, 5.3 years and 3 years, respectively. The expense related to these
grants is reflected in periods up to three years, in which services must be
completed, for these options to become exercisable. Unearned compensation
reflects the portion of the grant that has not yet been charged to
operations.
Warrants
The Company has an obligation to issue warrants in connection with the
underwriting of the Series II Class B Stock sales. Ten warrants entitle the
holder to purchase one share of common stock at an exercise price of $1.00
per warrant. The fair market value of the warrants was recorded as part of
the fees for the preferred stock offering.
72
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
11. SUBSEQUENT EVENTS
On May 4, 2000, the Company entered into four agreements with Abbott
Laboratories ("Abbott"): 1) National Marketing and Distribution Agreement;
2) Registration Rights Agreement; 3) Credit Agreement and 4) Security
Agreement. The National Marketing and Distribution Agreement provides that
Abbott will purchase and market the Company's Vanish Point(R) automated
retraction syringes and blood collection devices to its U.S. acute care
hospital customers. The agreement is for a five year term. The agreement
also calls for the establishment of a new product team comprised by key
personnel from both companies designed to concentrate on development of new
safety products that incorporate the Company's patented, proprietary
technology.
The Credit Agreement provides that Abbott will extend to the Company a
credit line in the amount of $5 million. Disbursement amounts shall be in
multiples of $1 million. Interest accrues at a rate of prime rate plus 1%
and is payable quarterly beginning June 30, 2001. The Credit Agreement also
provides that Abbott may, at its option, convert the note balance into
common stock at a specified conversion price. The loan matures on June 30,
2005. In connection with the Credit Agreement, the Security Agreement
grants Abbott a continuing security interest in certain of the Company's
assets.
The Registration Rights Agreement gives Abbott certain registration rights
if the conversion privilege in the Credit Agreement is exercised.
On April 7, 2000, the Company entered into a manufacturing agreement with
an unrelated party to outsource the assembly of its 5cc and 10cc syringes.
The agreement calls for the Company to purchase and consign machinery and
equipment to the unrelated party and provide training for its employees.
The Company is obligated under the agreement to purchase a minimum volume
of product from the unrelated party at mutually agreed upon prices. The
volume and price for the initial contract year ended April 30, 2001
resulted in a purchase commitment of $100,000 for the Company.
Effective June 1, 2000, the Company entered into a Consulting Agreement
("Agreement") with a Board member, formerly Executive Vice President of
Sales and Marketing, who is also related to an employee of the Company. The
Agreement is for a one-year term, renewable with consent of both parties,
whereby the Board member has agreed to establish contacts with major
European entities, approved by the Company, to develop marketing and
distribution channels as well as licensing agreements. The Agreement calls
for an annual payment of $200,000, payable in equal monthly installments
and an expense allowance of up to $5,000 for expenses incurred on behalf of
the Company. In the event a licensee contacted by the Board member is
signed with the Company, the Board member will receive 5% of licensing fees
collected by the Company.
See footnotes 6 and 8 for subsequent event activity related to debt and
equity, respectively.
73
<PAGE>
Retractable Technologies, Inc.
Statements of Operations
---------------------------------------------------------------------------
(Unaudited)
Three Months Three Months Cumulative
ended ended From Inception
March 31, 2000 March 31, 1999 (May 4, 1994)
-------------- -------------- --------------
Sales $ 827,819 $ 254,987 $ 5,310,851
Cost of sales 644,700 206,256 4,215,365
------------ ------------ -------------
Gross profit 183,119 48,731 1,095,486
------------ ------------ -------------
Operating expenses:
Preproduction
manufacturing 450,612 391,345 5,907,813
Sales and marketing 705,262 547,180 7,753,214
Research and development 136,253 277,588 2,462,380
General and administrative 667,514 771,152 9,475,446
------------ ------------ -------------
Total operating expenses 1,959,641 1,987,265 25,598,853
------------ ------------ -------------
Loss from operations (1,776,522) (1,938,534) (24,503,367)
Interest income 15,542 31,235 662,584
Interest expense (20,748) (46,228) (793,192)
------------ ------------ -------------
Net loss $(1,781,728) $(1,953,527) $(24,633,975)
============ ============ =============
74
<PAGE>
Retractable Technologies, Inc.
Balance Sheets
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1999 March 31,
2000
--------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 646,005 $ 1,024,987
Accounts receivable 599,424 354,504
Inventories 677,962 1,254,835
Other current assets 47,800 173,543
------------ ------------
Total current assets 1,971,191 2,807,869
Property, plant, and equipment, net $ 10,101,524 $ 9,993,454
Restricted cash 600,000 -
Intangible assets and deferred charges, net 536,014 562,709
------------ ------------
Total assets $ 13,208,729 $ 13,364,032
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 844,165 $ 537,556
Current portion of long-term debt 463,329 965,491
Accrued compensation 118,038 99,040
Other accrued liabilities 589,309 590,221
------------ ------------
Total current liabilities 2,014,841 2,192,308
------------ -----------
Long-term debt, net of current maturities 2,506,335 2,588,477
Stockholders' equity
Preferred Stock $1 par value
Class A 5,000,000 5,000,000
Series I, Class B 1,000,000 1,000,000
Series II, Class B 1,000,000 1,000,000
Series III, Class B 1,160,200 1,160,200
Series IV, Class B 161,500
Common stock 1,000 1,000
Additional paid-in capital 23,564,235 25,017,735
Unearned compensation (185,635) (123,213)
Deficit accumulated during the development stage (22,852,247) (24,633,975)
------------ ------------
Total stockholders' equity 8,687,553 8,583,247
------------ ------------
Total liabilities and stockholders' equity $ 13,208,729 $ 13,364,032
============ ============
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
Retractable Technologies, Inc.
Statements of Cash Flows
===================================================================================================================================
(Unaudited)
Three Months Three Months Cumulative
ended ended From Inception
March 31, 2000 March 31, 1999 (May 9, 1994)
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (1,781,728) $ (1,953,527) $ (24,633,975)
Depreciation and amortization 247,365 218,555 3,013,095
Provision for doubtful accounts - - 10,972
Recognition of stock option compensation 62,422 86,954 823,129
Adjustments to reconcile net loss to net
cash
provide by operating activities:
(Increase) decrease in inventories (576,873) 98,597 (1,254,835)
(Increase) decrease in accounts and
note receivable 244,920 (93,837) (26,950)
(Increase) decrease in deferred charges - - (25,931)
(Increase) decrease in other current
assets (125,743) (26,222) (173,543)
Increase (decrease) in accounts payable (306,609) (41,930) 474,090
Increase (decrease) in other accrued
liabilities (18,086) 114,620 350,735
-------------- -------------- --------------
Net cash used by operating activities (2,254,332) (1,596,790) (21,443,213)
-------------- -------------- --------------
Cash flows from investing activities
Purchase of property, plant, and
equipment (127,228) (559,849) (11,573,021)
Acquisition of patents, trademarks, and
licenses (38,763) (6,887) (221,358)
Sale (purchase) of restricted certificate of
deposit 600,000 - -
Stock subscriptions held in escrow - - (20,851)
-------------- -------------- --------------
Net cash used by investing activities 434,009 (566,736) (11,815,230)
-------------- -------------- --------------
Cash flows from financing activities
Borrowings under long-term debt and
notes payable 2,079,851 24,718 5,145,213
Repayments of long-term debt and notes
payable (1,495,546) (148,434) (2,793,376)
Proceeds from issuance of preferred
stock 1,615,000 3,137,000 32,922,000
Proceeds from issuance of common stock - - 1,000
Expenses related to preferred stock offerings (136,514) (748,907)
Collections of notes receivable from
stockholders - - 257,500
Obligation under license agreement - - (500,000)
-------------- -------------- --------------
Net cash provided (used) by financing
activities 2,199,305 2,876,770 34,283,430
-------------- -------------- --------------
Net increase (decrease) in cash 378,982 713,244 1,024,987
Cash and cash equivalents at:
Beginning of period 646,005 1,627,863 -
-------------- -------------- --------------
End of period $ 1,024,987 $ 2,341,107 $ 1,024,987
============== ============== ==============
</TABLE>
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
Retractable Technologies, Inc. (the "Company") was incorporated in Texas on
May 9, 1994, to design, develop, manufacture and market safety syringes and
other safety medical products for the health care profession. The Company began
operations in 1995. The Company's manufacturing and administrative facilities
are located in Little Elm, Texas. The Company's primary products are the
VanishPoint(R) Syringe in the 3cc, 5cc and 10cc sizes and Blood Collection Tube
Holders. The Company has conducted preliminary clinical evaluations and worked
with national distributors to encourage healthcare facilities to transition from
the use of standard syringes to the VanishPoint(R) Syringe. Preliminary
shipments, which commenced in February 1997, included syringes for hospital
product evaluations as well as for sale in clinics and other healthcare
settings. The Company has been considered a development stage enterprise for
financial reporting purposes as significant efforts have been devoted to
financial planning, raising capital, research and development, acquiring
equipment, training personnel, developing markets and starting up production.
Coincident with the agreement with Abbott Laboratories (see Note 5), effective
May 4, 2000, the Company completed its development stage.
Basis of Presentation
The accompanying condensed financial statements are unaudited and, in the
opinion of management, reflect all adjustments that are necessary for a fair
presentation of the financial position and results of operations for the periods
presented. All of such adjustments are of a normal and recurring nature. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the entire year. The condensed financial
statements should be read in conjunction with the financial statement
disclosures contained in the Company's audited financial statements for the year
ended December 31, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
unrestricted cash and investments with original maturities of three months or
less.
Inventories
Inventories are valued at the lower of cost or market, with cost being
determined using a standard cost method, which approximates average cost.
Provision is made for any excess or obsolete inventories.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to operations as incurred. Cost includes
major expenditures for improvements, and replacements which extend useful lives
or increase capacity and interest cost associated with significant capital
additions. For the three months ended March 31, 2000 and 1999, the Company
capitalized interest of $53,848 and $34,277 respectively. Gains or losses from
property disposals are included in income.
Depreciation and amortization is calculated using the straight-line method
over the following useful lives:
Production equipment 7 to 10 years
Office furniture and equipment 3 to 10 years
Building 39 years
Building improvements 15 years
Automobiles 7 years
77
<PAGE>
RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Long-lived Assets
When events or changes in circumstances indicate that the carrying amount
of long-lived assets may not be recoverable, the Company will review the net
realizable value of the long-lived assets through an assessment of the estimated
future cash flows related to such assets. In the event that assets are found to
be carried at amounts which are in excess of estimated gross future cash flows,
the assets will be adjusted for impairment to a level commensurate with a
discounted cash flow analysis of the underlying assets.
Intangible Assets and Deferred Charges
Intangible assets are stated at cost and consist primarily of patents, a
license agreement granting exclusive rights to use patented technology, and
trademarks which are amortized using the straight-line method over 17 years.
Other intangible assets consist of deferred charges for loan origination fees,
which are amortized over the life of the debt (seven years).
Financial Instruments
The fair market value of financial instruments is determined by reference
to various market data and other valuation techniques as appropriate. The
Company believes that the fair value of financial instruments approximate their
recorded values.
Concentrations of Credit Risk
The Company's financial instruments exposed to concentrations of credit
risk consist primarily of cash, cash equivalents and accounts receivable. Cash
balances, which may exceed the federally insured limits, are maintained in
financial institutions; however, management believes the institutions are of
high credit quality. The majority of accounts receivable are due from companies
which are well-established entities. As a consequence, management considers any
exposure from concentrations of credit risks to be limited.
Revenue Recognition
Revenue is recognized for sales to distributors when title and risk of
ownership passes to the distributor, generally upon shipment. Revenue is
recorded on the basis of sales price to distributors. Revenues on sales to
distributors for federal or GPO contracts are recorded net of contractual
pricing allowances to those end customers. Revenue for shipments directly to end
users is recognized when title and risk of ownership passes from the Company.
Income Taxes
The Company provides for deferred income taxes in accordance with Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires an asset and liability approach for financial
accounting and reporting for income taxes based on the tax effects of
differences between the financial statement and tax bases of assets and
liabilities, based on enacted rates expected to be in effect when such basis
differences reverse in future periods. Deferred tax assets are periodically
reviewed for reliability. Valuation allowances are recorded when realizability
of deferred tax assets is not likely.
Research and Development Costs
Research and development costs are expensed as incurred.
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RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Stock-Based Compensation
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123"), which establishes accounting and reporting standards
for stock-based employee compensation plans. As permitted by SFAS 123, the
Company has elected not to adopt the fair value based method of accounting for
stock-based employees compensation and will account for such arrangements under
Accounting Principles Board Opinion No. 25. Accordingly, compensation cost for
stock options issued to directors, officers, and employees is measured as the
excess, if any, of the fair market value of the Company's stock at the date of
grant over the amount the director, officer or employee must pay to acquire the
stock. Expense is recognized ratably from the date of grant over the vesting
period of the option. Unearned compensation reflected in the Stockholder's
Equity section of the balance sheet is the portion of such compensation that has
not been charged to operations.
3. LONG TERM DEBT
On February 18, 2000, the Company obtained two new loans from 1/st/
International Bank totaling $2,000,000. Land, building and improvements secured
$1,500,000, and the remaining $500,000 is secured by accounts receivable. The
proceeds, along with a release of $400,000 of restricted cash by Western Bank
subsequent to December 31, 1999, were used to pay off indebtedness to Western
Bank. Remaining proceeds provided funds for equipment and operating needs. The
building loan matures on February 18, 2005 and the note secured by accounts
receivable matures February 18, 2001.
4. STOCKHOLDERS EQUITY
On January 11, 2000, the Company issued a Private Placement Memorandum
offering up to 1,300,000 shares of its Series IV Class B Convertible Preferred
Stock ("Series IV, Class B Stock") at $10 per share.
As of May 22, 2000, subscriptions for 1,133,800 shares of the Series IV
Class B has been received.
Series IV Class B stock ranks senior to the Company's common stock with
respect to dividends and upon liquidation, dissolution or winding up, but
secondary to the Company's Class A Stock; and Series I Class B, Series II Class
B and Series III Class B dividend of $1.00 per share, payable quarterly, if
declared by the board of directors.
Holders of Series IV Class Stock generally have no voting rights. Series
IV Class B Stock is redeemable after three years from the date of issuance at
the option of the Company at a price of $11.00 per share plus all accrued and
unpaid dividends. Each share of Series IV Class B Stock may, at the option of
the stockholder any time subsequent to three years from date of issuance, be
converted into common stock at a conversion price of $10 per share, or in the
event the Company files an initial registration statement under the Securities
Act of 1933.
In the event of voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of Series IV Class B Stock then outstanding
are entitled to receive liquidating distributions of $11.00 per share, plus
accrued and unpaid dividends.
5. SUBSEQUENT EVENTS
On May 4, 2000, the Company entered into four agreements with Abbott
Laboratories ("Abbott"): 1) National Marketing and Distribution Agreement; 2)
Registration Rights Agreement; 3) Credit Agreement and 4) Security Agreement.
The National Marketing and Distribution Agreement provides that Abbott will
purchase and market the Company's VanishPoint(R)
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RETRACTABLE TECHNOLOGIES, INC.
A Development Stage Enterprise
CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
automated retraction syringes and blood collection devices to its U.S. acute
care hospital customers. The agreement is for a five year term. The agreement
also calls for the establishment of a new product team comprised by key
personnel from both companies designed to concentrate on development of new
safety products that incorporate the Company's patented, proprietary technology.
The Credit Agreement provides that Abbott will extend to the Company a
credit line in the amount of $5 million. Disbursement amounts shall be in
multiples of $1 million. Interest accrues at a rate of prime rate plus 1% and is
payable quarterly beginning June 30, 2001. The Credit Agreement also provides
that Abbott may, at its option, convert the note balance into common stock at a
specified conversion price. The loan matures on June 30, 2005. In connection
with the Credit Agreement, the Security Agreement grants Abbott a continuing
security interest in certain of the Company's assets.
The Registration Rights Agreement gives Abbott certain registration rights
if the conversion privilege in the Credit Agreement is exercised.
On April 7, 2000, the Company entered into a manufacturing agreement with an
unrelated party to outsource the assembly of its 5cc and 10cc syringes. The
agreement calls for the Company to purchase and consign machinery and equipment
to the unrelated party and provide training for its employees. The Company is
obligated under the agreement to purchase a minimum volume of product from the
unrelated party at mutually agreed upon prices. The volume and price for the
initial contract year ended April 30, 2001 resulted in a purchase commitment of
$100,000 for the Company.
Effective June 1, 2000, the Company entered into a Consulting Agreement
("Agreement") with a Board member, formerly Executive Vice President of Sales
and Marketing, who is also related to an employee of the Company. The Agreement
is for a one-year term, renewable with consent of both parties, whereby the
Board member has agreed to establish contacts with major European entities,
approved by the Company, to develop marketing and distribution channels as well
as licensing agreements. The Agreement calls for an annual payment of $200,000,
payable in equal monthly installments and an expense allowance of up to $5,000
for expenses incurred on behalf of the Company. In the event a licensee
contacted by the Board member is signed with the Company, the Board member will
receive 5% of licensing fees collected by the Company.
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PART III - FORM 10-SB
ITEM 1. INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
2.1 Restated Articles of Incorporation of the Company filed April 13,
2000
2.2 Amended and Restated Bylaws of the Company
3.1 Sample Common Stock certificate
3.2 See 2.1 - Exhibit A to Restated Articles of Incorporation of the
Company filed April 13, 2000 (Certificate of Designation,
Preferences, Rights and Limitations of Series A Convertible
Preferred Stock of the Company)
3.3 Sample Class A Convertible Preferred Stock Certificate
3.4 See 2.1 - See Exhibit B to Restated Articles of Incorporation of
the Company filed April 13, 2000 (Certificate of Designation,
Preferences, Rights, and Limitations of Class B Convertible
Preferred Stock of the Company)
3.5 Sample Series I Class B Convertible Preferred Stock Certificate
3.6 See 2.1 - Exhibit C to Restated Articles of Incorporation of the
Company filed April 13, 2000 (Certificate of Designation,
Preferences, Rights and Limitations of the Series II Class B
Convertible Preferred Stock of the Company)
3.7 Sample Series II Class B Convertible Preferred Stock Certificate
3.8 See 2.1 - Exhibit D to Restated Articles of Incorporation of the
Company filed April 13, 2000 (Certificate of Designation,
Preferences, Rights and Limitations of the Series III Class B
Convertible Preferred Stock of the Company)
3.9 Sample Series III Class B Convertible Preferred Stock Certificate
3.10 See 2.1 - Exhibit E to Restated Articles of Incorporation of the
Company filed April 13, 2000 (Certificate of Designation,
Preferences, Rights and Limitations of the Series IV Class B
Convertible Preferred Stock of the Company)
3.11 Sample Series IV Class B Convertible Preferred Stock Certificate
3.12 The Company's 1999 Stock Option Plan
3.13 1996 Incentive Stock Option Plan of the Company
3.14 1996 Stock Option Plan for Directors and Other Individuals
3.15 Letter Agreement with New Horizons International and Colebrand
Limited dated March 30, 2000
3.16 See 6.1 - National Marketing and Distribution Agreement between the
Company and Abbott Laboratories dated as of May 4, 2000 and
Registration Rights Agreement between the Company and Abbott
Laboratories dated as of May 4, 2000
3.17 Form of Southwest Merchant Group Warrant to Purchase 7,500 shares
of Series IV Class B Preferred Stock to be issued
3.18 Selling Agreement between the Company and Northstar dated March 1,
2000
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3.19 Selling Agreement between the Company and Asset Allocations
Securities Corp. dated March 9, 2000
6.1 National Marketing and Distribution Agreement between the Company
and Abbott Laboratories dated as of May 4, 2000 with exhibits
6.2 Contract Manufacturing Agreement Between the Company and Nypro
Precision Assemblies, Inc. dated as of April 7, 2000
6.3 Sample United States Distribution Agreement
6.4 Sample Foreign Distribution Agreement
6.5 Consulting Agreement between the Company and Lillian E. Salerno
dba/MediTrade International dated May 27, 2000
6.6 Employment Agreement between the Company and Thomas J. Shaw dated
as of September 28, 1999
6.7 Technology License Agreement between Thomas J. Shaw and the Company
dated the 23rd day of June 1995
6.8 Consulting Agreement by and between the Company and International
Export and Consulting dated March 15, 2000
12.1 Consent of Independent Accountants dated June 23, 2000
27 Financial Data Schedule
ITEM 2. DESCRIPTION OF EXHIBITS
Exhibits identified in the Index above are bound and included herewith.
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SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
Retractable Technologies, Inc. caused this registration statement to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: June 23, 2000 RETRACTABLE TECHNOLOGIES, INC.
(Registrant)
BY: /s/ Thomas S. Shaw
------------------------------------
THOMAS J. SHAW
CHAIRMAN, PRESIDENT, AND CHIEF
EXECUTIVE OFFICER
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