-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H1fNMqqLyX4THrWfCTLbHNgMB5hIDyDs++VKdurlYqkO77gruwXGXczBH94y/ySU SdPHEe+EFickEGYlcZH17g== 0000790228-97-000002.txt : 19970414 0000790228-97-000002.hdr.sgml : 19970414 ACCESSION NUMBER: 0000790228-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970411 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECIALIZED HEALTH PRODUCTS INTERNATIONAL INC CENTRAL INDEX KEY: 0000790228 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 930945003 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26694 FILM NUMBER: 97579152 BUSINESS ADDRESS: STREET 1: 655 EAST MEDICAL DRIVE CITY: BOUNTIFUL STATE: UT ZIP: 84010 BUSINESS PHONE: 8012983360 MAIL ADDRESS: STREET 1: 655 EAST MEDICAL DRIVE CITY: BOUNTIFUL STATE: UT ZIP: 84010 FORMER COMPANY: FORMER CONFORMED NAME: RUSSCO INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WARE HADLEY VENTURES INC DATE OF NAME CHANGE: 19910123 FORMER COMPANY: FORMER CONFORMED NAME: SANTIAM VENTURES INC DATE OF NAME CHANGE: 19900510 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Commission file number 0-26694 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 87-0431035 (State or other jurisdiction of (IRS employer identification no.) incorporation) 655 East Medical Drive, Bountiful, Utah 84010 (801) 578-3580 (Address of principal executive offices) (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.02 Par Value None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of voting stock held by non-affiliates of the registrant at March 31, 1997, was $26,396,127. On that date, there were 9,257,343 outstanding shares of the registrant's common stock. SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1996 PART I Item 1. Business .......................................................3 Item 2. Properties ....................................................15 Item 3. Legal Proceedings .............................................15 Item 4. Submission of Matters to a Vote of Security Holders ...........15 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .........................................17 Item 6. Selected Financial Data .......................................18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .........................19 Item 8. Financial Statements and Supplementary Data ...................24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .........................24 PART III Item 10. Directors and Executive Officers of Registrant ................24 Item 11. Executive Compensation ........................................26 Item 12. Security Ownership of Certain Beneficial Owners and Management ..............................................30 Item 13. Certain Relationships and Related Transactions ................31 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .........................................32 PART I Item 1. Business. General The Company is engaged principally in the development of cost-effective, disposable, proprietary health care products and systems designed to reduce the spread of disease and the incidence of accidental injury in the health care industry. The Company has created a portfolio of proprietary health care products that are in various stages of production, pre-production, development and research. At present, the Company is focusing its resources and activities principally on design and development of new products designed to minimize the risk of the spread of HIV/AIDS, hepatitis B and other blood-borne diseases through accidental needlesticks, the development of other medical products and the marketing of its current products used for the disposal of contaminated "sharps" (i.e., needles, syringes, blood collection systems, intravenous catheters, surgical blades, lancets, etc.). The Company's products include those being currently commercialized, those utilizing the ExtreSafe(TM) medical needle withdrawal technology and those relating to filmless digitized imaging technology. In December 1994, the Company introduced the first in its line of containers for the disposal of contaminated sharps. Additional sizes and versions of its Safety Cradle(R) sharps containers were released in the third and fourth quarters of 1995. The Company has also developed a safety lancet (the "ExtreSafe(TM) Lancet Strip"), a small hand-held device for penetrating the skin to obtain blood for analysis. Commercial production of the ExtreSafe(TM) Lancet Strip commenced in the first quarter of 1997. The Company is developing a line of products using the Company's ExtreSafe(TM) medical needle withdrawal technology (the "ExtreSafe(TM) Products"), which incorporates a system to allow a contaminated needle to be automatically retracted and immediately encapsulated without exposure to the health care worker. Products under development that incorporate the ExtreSafe(TM) medical needle withdrawal technology include ExtreSafe(TM) phlebotomy devices, ExtreSafe(TM) catheters and several different ExtreSafe(TM) syringe applications. The Company expects to introduce additional products using this technology. Prototypes of the Extresafe(TM) phlebotomy device, Extresafe(TM) catheters and Extresafe(TM) syringes have been completed. The Company has filed two 510(k) applications with the FDA relating to the Company's ExtreSafe(TM) medical needle withdrawal technology. The Company's safety intravenous flow gauge and blood collection devices are in the research stage. The Company has entered into a joint venture to design and produce an improved filmless digitized imaging technology to be used in the medical field (the "Imaging Products") which is in the research stage. A model has been produced to demonstrate the technology. Company Background The Company was incorporated in 1986 as Santian Ventures, Inc., a Utah corporation. Santian Ventures, Inc. was organized to engage in the business of acquiring assets and properties of any kind without regard to any specific type of business or industry. In 1989, the Company changed its name to Ware/Hadley Ventures, Inc. Subsequently, the Company's corporate domicile was changed to the State of Delaware, and its name was changed to Russco, Inc., effective December 20, 1990, by merger into a then newly created Delaware corporation. The Company had no operations until July 28, 1995. On that date the Company acquired Specialized Health Products, Inc., a Utah corporation ("SHP"), through a merger with a subsidiary of the Company (the "Acquisition"). The Company changed its name to "Specialized Health Products International, Inc." ("SHPI") and SHP became a wholly owned subsidiary of SHPI. The persons serving as officers and directors of SHP immediately prior to the consummation of the Acquisition were elected to the same offices with SHPI and retained their positions as directors and officers of SHP. In addition, the outstanding securities of SHP became outstanding securities of SHPI. Prior to the Acquisition, neither SHP nor any affiliate of SHP had an interest in Russco, Inc. Products Sharps Containers In January 1994, SHP acquired the Sharp-Trap(R) name and all technology developed by Sharp-Trap, Inc., a Michigan corporation, relating to a patented container entry system that was designed to reduce the risk of accidental needlesticks and exposure to contaminated instruments when disposing of them. At the time of SHP's purchase of the Sharp-Trap(R) technology, Sharp-Trap, Inc. was already manufacturing two sharps container product configurations, a 0.5 quart and a 1.5 quart (the "Sharp-Trap(R)" containers). Following additional research and discussions with medical product distributors and end users, SHP designed an improved line of Safety Cradle(R) sharps containers (the "Safety Cradle(R)") which retained the basic container closure technology and incorporated improvements to make them safer, higher quality, easier to use and less costly to manufacture than the Sharp-Trap(R) containers. The self-closing Safety Cradle(R) containers allow for disposal of sharps in a container that incorporates a self-closing sharps containment flap and incorporates both a temporary and a permanent locking mechanism. Especially adapted for alternate site use, SHP's line of Safety Cradle(R) sharps containers provides convenience and safety for home health care and other portable applications. In addition, each of SHP's sharps containers is designed to be used as a self-contained shipping container, used in the transport of unused medical products, which readily converts at the user's site into as a safe and efficacious sharps container. The Safety Cradle(R) sharps container's novel, single-molded-part lid fits three sizes of containers filling a broad spectrum of sharps containment applications, especially alternate site use which includes emergency vehicle, in-home and insurance testing. As each Safety Cradle(R) sharps container is formed from only two molded parts, unit manufacturing cost places SHP's sharps containers in a competitive position, while the special design for transportability permits the Safety Cradle(R) container to fill a unique market niche. These containers are made of polypropylene material. Becton Dickinson and Company ("BD") began distribution of the Safety Cradle(R) sharps containers in the first quarter of 1997, as part of BD's exclusive international marketing and distribution agreement with the Company. See "Marketing and Sales" for a description of the BD distribution agreement relating to the Company's Safety Cradle(R) sharps containers. The Safety Cradle(R) products can be used for a variety of purposes, including: Safety Cradle(R) Sharps Container - all three sizes will be used as Safety Cradle(R) sharps containers to contain and dispose of contaminated sharps. Transporter - all three sizes are designed to house new medical devices for shipping to the customer. Upon arrival at a customer site, each Safety Cradle(R) sharps container can be utilized as a sharps disposal container. Recycler - all three sizes are designed for use by medical product manufacturers as a secured container, so that discarded sharps may be shipped back to the manufacturer or to a sharps disposal facility for recycling. The ExtreSafe(TM) Lancet Strip Lancets are small devices used to penetrate the skin, usually a finger, to obtain a few drops of blood for analysis. Lancets are used by health care workers and can be self-administered by individuals, especially insulin users. The same safety concerns exist with the handling of lancets as with needles, because lancets become contaminated after they come into contact with blood. There are a number of lancets on the market today, the most common of which is a small "nail" type instrument which is pressed against the finger, and the "nail" penetrates the skin by hand pressure. Some lancets penetrate the skin with a blade, which generally produces better blood flow. The nail type lancet is often inserted into a spring loaded activation device, about the size of a large pen. The device is pressed against the skin of the patient's finger which is penetrated when the spring is triggered. After triggering, the activation device must be emptied and then reloaded with another lancet for use on the next patient. Existing activation devices may become contaminated by blood splattering when the finger is pierced. To help prevent contamination, activation devices should be sterilized or disposed of after each use. However, while these activation devices are intended to be used on multiple patients, they are not designed or intended to be sterilized thus increasing the risk of cross contamination. Company management believes its ExtreSafe(TM) Lancet Strip is easy to use and cannot be used more than once. The ExtreSafe(TM) Lancet Strip is provided in cartridge strips of six lancets per strip, a configuration that is patent protected. Lancets are used one at a time, by breaking off and discarding lancets immediately after use. A lancet strip is loaded into a convenient, low-cost, activation device which also provides a means for safely and conveniently triggering each lancet. After penetrating the skin, the blade automatically returns inside its housing and cannot be reused. The used blade, encased by its protective housing, is then broken off from the strip and appropriately discarded. Reloading the handle with another cartridge is a simple process. In the opinion of Company management, use of the ExtreSafe(TM) Lancet Strip will be easier and faster than use of existing lancets. This is an assumption by management, as no testing has been performed to verify management's belief. The blade of the Company's ExtreSafe(TM) Lancet Strip has a revolutionary design and its rotary spring motion drives the blade both outward to lance and inward for retraction. In the opinion of Company management, the ExtreSafe(TM) Lancet Strip's design makes it less painful than nail type lancets, although no formal comparison testing has been conducted. It is also noteworthy that part of the lancet in contact with the patient's skin prior to lancing is sterile until contaminated by use. Commercial production of the ExtreSafe(TM) Lancet Strip commenced in the first quarter of 1997, although automated equipment is not yet completed. Products Under Development ExtreSafe(TM) Phlebotomy Devices For certain blood tests it is necessary to draw blood from the patient for analysis. The present method for drawing blood involves the insertion of a needle, which is attached to a barrel, into a blood vessel and obtaining blood by way of vacuum pressure, most often into a small evacuated tube-like container, which is inserted into the barrel, commonly known as a Vacutainer(R) (the Vacutainer(R) is not a trademark of the Company). After blood is drawn, the needle is manually removed from the patient and, while continuing to attend to the patient, the Vacutainer(R), barrel and needle are often placed on a tray, bed, table or otherwise set aside. Afterward, the needle is usually unscrewed from the barrel and discarded into a sharps container, while the barrel is often used again with another patient which increases the risk of cross contamination. The Company's ExtreSafe(TM) phlebotomy devices provide a safer method. The device retracts the inserted needle into a safe housing quickly and automatically, minimizing the chance of an inadvertent stick by a contaminated needle. Retraction is initiated by a simple depression of a designated distortable portion of the housing assuring that there is no action directed toward or away from the patient which might affect the depth of needle penetration. The Company's ExtreSafe(TM) technology has a number of other applications, including ExtreSafe(TM) catheters and ExtreSafe(TM) syringes described hereafter. Prototypes of the ExtreSafe(TM) phlebotomy device have been completed. ExtreSafe(TM) Catheters Catheters are devices that are inserted into veins or other bodily passages to remove blood or other fluids. Contemporary catheter use has problems similar to those faced in drawing blood. Inserting a catheter involves a percutaneous needlestick followed by threading the catheter over the needle into a patient's vein or artery. This method can be unsafe in two respects. First, when the needle is pulled out of the catheter there is a discharge of blood which could contaminate the health care worker. Second, needlesticks occur when the needle is withdrawn from the catheter because, in most instances, the needle is temporarily left exposed while the patient is being attended to by the health care worker. Like the ExtreSafe(TM) phlebotomy device , the Company's ExtreSafe(TM) catheters retract a contaminated needle from a patient and enclose the needle in a safe housing when a health care worker depresses a portion of the housing at the time the needle is to be extracted from the patient and catheter. Further, in one version of the ExtreSafe(TM) catheter, a manually closeable portion of the catheter stem permits the catheter channel to be held closed until a connection is made to a medical line thereby restricting blood loss. Prototypes of ExtreSafe(TM) catheters have been completed. ExtreSafe(TM) Syringes Another area where there is significant risk of needlesticks is in syringe use. There are many different aspects of syringe use which range from integrated units which combine a filled syringe and attached needle for unit dose applications to syringe needles which are attached to separate syringes by leur-lock connectors. Generally, access to the needle for a medical procedure involves removing a needle cap just prior to performing the procedure. In the past, medical personnel attempted needle protection by replacing the needle cap after performing the procedure, but the volume of accidental needlesticks related to needle replacement resulted in the banning of such needle cap replacement. Medical personnel then began disposing of needles by carrying the exposed needles to sharps containers (normally found in the patient's room) and by providing needle/syringe apparatus having a shroud which can be extended over the exposed needle after the procedure. The ExtreSafe(TM) syringe provides an extendible needle which is retracted into a safe housing in a manner similar to the retraction of the ExtreSafe(TM) phlebotomy devices and catheter systems described above. Prototypes of the ExtreSafeTM syringes have been completed. Filmless Digitized Imaging Technology The procedure for taking a large area x-ray image having generally acceptable resolution and presenting the x-ray to the attending physician for interpretation, has changed little over the past forty years. The most common x-ray image today is taken by way of a film which requires development in a darkroom. The physician personally handles the x-ray, which is generally imprinted on a 14" x 17" film sheet. For record keeping purposes, hospitals usually retain x-ray images for at least six years. X-ray storage and retrieval is a costly problem for many medical facilities. While some filmless x-ray systems have been introduced recently, none fulfill necessary resolution requirements of commonly performed x-ray procedures. In October 1995, the Company entered into a joint venture with Zerbec, Inc., a Texas corporation, to develop, manufacture, distribute and market products and technologies using a patented solid state filmless digitized imaging technology through Quantum, a Utah corporation formed at that time. The filmless digitized imaging technology involves a method of directly producing an electrical signal from an image recorded on an x-ray plate. The signal is instantly digitized and stored on a CD-ROM and the same x-ray plate is then available for a later procedure. The filmless digitized imaging technology eliminates film as the x-ray image recording medium and enables x-ray films to be translated to a CD-ROM format to simplify their storage, retrieval and handling. The Company believes the filmless digitized imaging technology can revolutionize the way in which x-ray images are obtained, interpreted and stored, while also providing clearer images having high resolution that are more easily interpreted than x-ray films. Furthermore, the technology could represent a breakthrough in the use of x-ray facilities in mobile medical emergency units which has not been achieved to date because of the necessity for local chemical handling equipment associated with film processing. Under the terms of the joint venture agreement, Zerbec, Inc. and SHP formed Quantum Imaging Corporation, a Utah corporation ("Quantum"), to finish the development and commercialize the filmless digitized imaging technology. A prototype has been produced to demonstrate picture resolution compatible with breast cancer diagnosis. At present, SHP and Zerbec, Inc. are equal owners of Quantum. Pursuant to the terms of the joint venture agreement, Zerbec, Inc. assigned patented filmless digitized imaging technology to Quantum, and will provide ongoing support in the development and commercialization of the technology. SHP is obligated to contribute $15,000 to Quantum's research and development efforts in April and $10,000 in May. In addition, SHP is obligated to pay Quantum up to $15,000 per month for general and administrative expenses through June 1, 1997. For Quantum to be successful, the Company estimates that between $3,000,000 and $6,000,000 will have to be raised. It is anticipated that at least one third of the outstanding shares of Quantum will be sold to fund development of related filmless digitized imaging systems through initial production. In addition, if at least $3,000,000 in funding is not raised by June 1, 1997, then Zerbec, Inc. has the right to acquire two-thirds of SHP's interest in the Quantum for one dollar (the "Zerbec Option"). SHP is trying to negotiate an agreement with Zerbec, Inc. whereby SHP can acquire Zerbec Inc.'s interest in Quantum (the "Zerbec Acquisition") or an extension of the date at which the Zerbec Option can be exercised. There can be no assurance that SHP will be able to negotiate, on terms acceptable and/or favorable to SHP, an agreement relating to the Zerbec Acquisition or an extension of the date on which the Zerbec Option can be exercised. As a result, the Company's ownership interest may decrease as a result of the Company's inability to negotiate an agreement with Zerbec, Inc. and/or from dilution resulting from new financing. Company Strategy The Company's primary objective is to establish itself as a leading developer of safety medical products. The manufacture of these products will be subcontracted to reputable manufacturers. To achieve this objective, the Company's growth strategy is focused on the following four principal elements. o Capturing significant market share of the sharps container, lancet, phlebotomy device, IV catheter and syringe markets. o Broadening the Company's existing products lines and developing product lines to penetrate closely related markets. o Seeking additional market opportunities based on the Company's proprietary technology. o Developing marketing and distribution agreements with large medical product organizations. Sharps Containers Consistent with the Company's objective of selling its products through third party distributors, on August 26, 1996, the Company entered into an exclusive distribution agreement (the "Distribution Agreement") with BD relating to the Company's Safety Cradle(R) sharps container products. The Distribution Agreement grants BD an exclusive world-wide right to market and distribute the Company's Safety Cradle(R) sharps container products for an initial term of three years, which term may be extended by BD annually thereafter. During the term of the Distribution Agreement, marketing of the Company's Safety Cradle(R) sharps container products will be done exclusively through BD. See "Marketing and Sales" for a more detailed discussion of the distribution of the Company's Safety Cradle(R) sharps container products through BD. Extresafe(TM) Lancets The Company intends to distribute its Extresafe(TM) Lancets through third party distributors. The Company has entered into a distribution agreement National Clinical Supply for the distribution of Extresafe(TM) Lancets to blood banks and plasma collection centers in the United States and to the Canadian Red Cross. The Company intends to seek out additional third party distributors to market and sell Extresafe(TM) Lancets. Products in Development The Company's ExtreSafe(TM) phlebotomy devices, ExtreSafe(TM) catheters, ExtreSafe(TM) syringes, intravenous flow gauge, blood collection device, other ExtreSafe(TM) medical needle withdrawal technology products and the filmless digitized imaging technology are in various stages of research and/or development. The Company plans to continue development of each of these products/systems. The necessary production equipment and testing, however, must be completed before such products are brought to market. Future Market Opportunities The Company will seek to enter additional markets in situations where it believes that it can gain significant market share based on proprietary technology or by capitalizing on its sales channels for complementary products. There are a number of possible future applications for the Company's technology, but there can be no assurance that the Company will commence development of any such products. Marketing and Sales The Company currently plans to employ a limited number of sales and marketing personnel; however, the number will vary depending on the extent to which the Company contracts with third parties or forms strategic alliances with other parties to market and sell its products. The Company will seek third parties to market and distribute its products in the United States and selected foreign countries. The Company may enter into contracts, licensing agreements and joint ventures with such third parties whereby the Company would receive a licensing fee and/or royalty payment based on the licensee's revenues. The Company would likely enter into such licensing arrangements with several companies based on geographical regions and/or product types, but may enter into an exclusive arrangement with a single company having a major presence in most markets the Company seeks to penetrate. There can be no assurance that the Company will be able to enter into contracts, license agreements or joint ventures with third parties on terms acceptable to the Company. The Company intends to support the marketing of its products by, among other things, attending trade shows and advertising in industry publications. The Company intends to distribute samples of some or all of its products free of charge to various health care institutions and professionals in the United States and in selected foreign countries to introduce and attempt to create a demand for the products in the marketplace. Sharps Containers On August 26, 1996, the Company and BD entered into the Distribution Agreement. The Distribution Agreement grants BD an exclusive world-wide right to market and distribute the Company's Safety Cradle(R) sharps container products for an initial term of three years, which term may be extended by BD annually thereafter upon pricing terms to be negotiated in good faith. The Distribution Agreement provides that products may be sold, at BD's option, either under the Company's name or under BD's label. The products will, however, be imprinted with the Company's name. The first sales pursuant to the Distribution Agreement occurred in the first quarter of 1997, after the Company made modifications to the Safety Cradle(R) sharps container products as required by the Distribution Agreement and completed other items as required by the Distribution Agreement. The Distribution Agreement presents certain risks to the Company. These include, among other things (i) reliance on BD for the sale of the products, and therefore reliance on BD's marketing ability, marketing plans, creditworthiness and selling efforts; (ii) to the extent products are marketed under BD's label, goodwill associated with the products may inure to the benefit of BD rather than the Company; (iii) the Company has only limited protection from changes in manufacturing costs (other than raw materials costs) during the initial term of the Distribution Agreement; and (iv) if the Company is reliant on BD for all or substantially all of its sales, the Company may be restricted in its ability to effectively negotiate with BD concerning pricing or other terms upon extension of the initial three-year term of the Distribution Agreement by BD. Extresafe(TM) Lancets The Company has entered into a distribution agreement with National Clinical Supply for the distribution of Extresafe(TM) Lancets Strips. The distribution arrangement is limited to blood banks and plasma collection centers in the United States and to the Canadian Red Cross. The Company is seeking additional parties to market and distribute its Extresafe(TM) Lancets Strips upon terms that are favorable to the Company. Until the Company is able to enter into such distribution arrangement, the Company is currently attempting to market and sell the Extresafe(TM) Lancets Strips with its own limited sales force. Other Products The Company currently intends to market and sell its follow on products in the United States and selected foreign countries through third party manufacturers and distributors. The Company's plan for the distribution and sales of its products is to target major segments of the respective markets for those products, including, major hospital and institutional buying groups, pharmaceutical companies, distributors and wholesalers, and government and military agencies. The Company intends to market and distribute its products through one or more companies that have a major presence in these markets. On March 27, 1997, the Company entered into a letter of intent with BD which contemplates a license agreement related to the development, manufacture, distribution and commercialization of a product utilizing the Company's ExtreSafe(TM) technology. If a license agreement is consummated, the Company anticipates that BD will distribute at least one, and possibly several, of the Company's products utilizing the ExtreSafe(TM) technology on an exclusive basis. Under the terms of the letter of intent, BD would pay the Company $4 million in prepaid royalties and development fees in two equal payments which payments relate to the first product utilizing the ExtreSafe(TM) technology to be licensed to BD. The financial terms relating to additional products licensed to BD would be subject to negotiation. The first payment would be made within thirty days of execution of a license agreement and the second payment no later than March 1998. The proposal is subject to the satisfactory completion of a legal and business investigation and due diligence review of the Company's intellectual property portfolio by BD and the approval of the boards of directors of the Company and BD. The Company will not sell its ExtreSafe(TM) medical needle withdrawal technology for commercial use in the United States until regulatory approval is obtained. The Company must also comply with the laws and regulations of the various foreign countries in which the Company plans to sell its products. Certain foreign countries may only require the Company to submit evidence of the FDA's pre-market clearance of the relevant products prior to selling in such countries. However, some foreign countries may require additional testing and approval. See "Government Regulation." Industry Market Health care is one of the largest industries in the world and continues to grow. There is increasing demand in the health care market for products that are safer, more efficacious and cost-effective. The Company's products target segments of this market. While traditional, non-safety, products in the market segments which the Company seeks to address compete primarily on the basis of price, the Company expects to compete on the basis of health care worker safety, ease of use, reduced cost of disposal, patient comfort and compliance with OSHA regulations, but not on the basis of purchase price except to the extent it will be competitive with other safety devices. However, the Company believes that when all indirect costs (disposal of needles, and testing, treatment and workers compensation expense related to needlestick injuries) are considered, the Company's products will compete effectively both with "traditional" products and the safety products of the Company's competitors. Accidental Needlesticks Needles for hypodermic syringes, phlebotomy sets and intravenous catheters are used for introducing drugs and other fluids into the body and drawing blood and other fluids from the body. Among the applications for needles are the injection of drugs (hypodermic needles), the drawing of blood (phlebotomy sets) and the infusion of drugs and nutrients (catheters). There is an increasing awareness of the potential danger of infections and illness that result from accidental needlesticks and of the need for safer needle devices to reduce the number of accidental needlesticks that occur. Infections contracted as a result of accidental needlesticks are a major concern to health care institutions, health care workers, sanitation and environmental services workers and certain regulatory agencies. Accidental needlesticks may result in the spread of infectious diseases such as hepatitis B, HIV (which may lead to AIDS), diphtheria, gonorrhea, typhus, herpes, malaria, rocky mountain spotted fever, syphilis and tuberculosis. According to the American Hospital Association's (the "AHA") report dated December 1992, an estimated 800,000 occupational needlesticks occur nationwide each year. The number of reported needlesticks, however, is believed to be only a portion of the actual number of occurrences. The AHA report estimates that the direct costs (excluding costs such as time lost from work and other administrative activities) for medical evaluation and follow-up treatment after a single needlestick injury range from $200 to $1,200. While it is difficult to estimate the total costs associated with treating accidental needlestick injuries with any degree of confidence, Theta Corporation, in its Report No. 346 on Medical Needles and Syringes dated January 1994 (the "Theta Corporation Report"), estimates that the total cost associated with treating accidental needlesticks in the United States averages $3 billion each year. The AHA and other authorities have also stated that the benefits resulting from the prevention of accidental needlesticks (and of the resulting incidence of infection, illness, time lost from work and death) cannot be measured solely by savings in the costs of medical treatment. The possibility of health care workers becoming infected from contaminated needles has caused and continues to cause a great deal of concern in the health care field and the agencies regulating that area. OSHA has adopted regulations requiring employers to institute universal precautions to prevent contact with blood and other potentially infectious materials. OSHA's regulations also require employers to establish engineering controls (e.g., sharps disposal containers and self-sheathing needles) and safe work practices to insure compliance with these universal precautions. OSHA does not mandate specific technologies; rather, employers are permitted to choose the most appropriate and effective safety control devices to meet their specific institutional needs. According to OSHA guidelines, while employers do not have to institute the most sophisticated engineering controls, it is the employer's responsibility to evaluate the effectiveness of existing controls and evaluate the feasibility of instituting more advanced engineering controls. OSHA specifically prohibits the recapping, bending or removal of needles, unless there is no feasible alternative or if required for a specific medical procedure. The majority of health care workers' adverse exposures to blood are either product-mediated (e.g., needlesticks) or could be prevented by the use of appropriate products (e.g., sharps containers). Increasing pressure is mounting from the government and private sectors for the health care industry to develop medical devices that will provide a safer working environment for health care workers and their patients. The Company's products attempt to address the growing demand for medical devices that reduce the risk of accidental exposure to blood-borne diseases. Disposal of Sharps There is extensive everyday use of sharps by doctors, nurses and other health care workers who are in danger of accidental exposure to transmittable blood-borne diseases such as AIDS and hepatitis B. The most extensively used sharp is the medical needle. The Theta Corporation Report estimated that approximately five and one-half billion needles and syringes would be sold in the United States in 1996. Approximately every thirty nine seconds, about eight hundred thousand times a year, a health care worker is accidentally injured by a potentially contaminated needle. Based on source material from 1988 and 1989, it is estimated that every year as many as 12,000 health care workers become infected by accidental exposure to hepatitis B. OSHA mandates the use of special containers for sharps disposal purposes to reduce the incidence of accidental transmission of blood-borne diseases. OSHA requires that the design of sharps containers meet certain minimum standards of safety. It also makes recommendations with respect to the safe handling of needles. One of the most common causes of accidental needlesticks occurs when a worker tries to recap a needle. The most recent OSHA regulations require that needles not be recapped or purposely bent or broken. After they are used, disposable syringes, needles, and other sharp items should be placed in closeable, disposable, puncture-resistant containers that are leak proof on the sides and bottom and labeled according to OSHA guidelines. Facilities now being affected by current state and federal legislation regarding the disposal of biohazardous items include hospitals, laboratories, clinics, nursing homes, blood banks, physicians' offices and mortuaries. Stricter legislation may be introduced that relates to all environments where sharps can be found (e.g., homes, public facilities, etc.). In addition, some states have passed legislation and others are considering legislation relating to the disposal of sharps. Patents and Proprietary Rights The Company owns six United States patents and has other patent applications pending in the United States and in other countries which are directly applicable to the Company's Safety Cradle(R) sharps container products. The Company also owns two United States patents relating to its ExtreSafe(TM) Lancet Strip, and six United States patents and allowed patent applications relating to its ExtreSafe(TM) medical needle withdrawal technology. The Company has two additional United States patent applications pending relating to its ExtreSafe(TM) Lancet Strip. None of the above referenced patents expires before April 1, 2006. Quantum, an affiliate of the Company, owns three United States patents and has three Canadian patents relating to the filmless digitized imaging technology. These patents expire in May 2001, September 2002 and September 2005. The Company expects that additional patents will be applied for relating to the technology owned by Quantum. The future success of the Company may depend upon the strength of its intellectual property. The Company believes that the scope of its patents/patent applications is sufficiently broad to prevent competitors from introducing devices of similar novelty and design to compete with its current products and that such patents and patent applications are or will be valid and enforceable. This belief, however, may prove to be incorrect if such patents are challenged. In addition, patent applications filed in foreign countries and patents granted in such countries are subject to laws, rules and procedures which differ from those in the United States. Patent protection in such countries may be different from patent protection provided by U.S. laws and may not be as favorable to the Company. The Company plans to timely file international patents in all countries in which the Company is seeking market share. The Company is not aware of any patent infringement claims against the Company. Litigation to enforce patents issued to the Company, to protect proprietary information owned by the Company, or to defend the Company against claimed infringement of the rights of others, may occur. Such litigation would be costly and could divert the resources of the Company from other planned activities. There can be no assurance that the Company would be successful in any such litigation. The Company's policy is to seek patent protection for all developments, inventions and improvements that are patentable and which have potential value to the business of the Company and to protect as trade secrets other confidential and proprietary information. The Company intends to vigorously defend its intellectual property rights. Manufacturing The Company has designed and paid for the construction of various molds and machinery used to manufacture its Safety Cradle(R) sharps containers. The Company owns all molds used to manufacture its Safety Cradle(R) sharps containers. The Company contracts for the manufacture of its Safety Cradle(R) sharps containers from outside sources. Presently a single corporation is manufacturing the Company's Safety Cradle(R) sharps container products. In the past, polypropylene resin, the major plastic material used in the Company's Safety Cradle(R) sharps containers, has been in short supply for limited periods of time. While alternative manufacturers exist, changes in the Company's manufacturer or an unforeseen shortage in the supply of polypropylene could disrupt production schedules and could materially and adversely affect the Company. Final arrangements have been made for the manufacture of the ExtreSafe(TM) Lancet Strip. The Company has not contracted yet for the manufacture of the ExtreSafe(TM) phlebotomy devices, ExtreSafe(TM) catheters, ExtreSafe(TM) syringes, intravenous flow gauge, blood collection device, other ExtreSafe(TM) medical needle withdrawal technology products or filmless digitized imaging technology. The materials that the Company plans to use to produce these products are generally widely available. The Company does not anticipate difficulty in obtaining such materials. At present, there are a number of manufacturers that could produce lancet and needle retraction products and a number of suppliers could supply necessary parts. Competition The leading manufacturers in the sharps container market are Baxter International, Inc., Becton Dickinson and Company, Devon Industries, Inc. and Sage Products, Inc. There are also numerous smaller manufacturers. A variety of sharps disposal products have been introduced into the marketplace. Some of these disposal containers accommodate only the needle while others accommodate the needle, syringe and limited surgical instruments. The majority of the sharps containers on the market, however, allow contaminated instruments to fall out when inverted. Many of the products are unstable if not supported by wall supports or other apparatus. The Company believes its products are more stable, safer and more effective than competitively priced products on the market. In addition, there are no sharps disposable transporters or recycler/transporter type products on the market today. The leading manufacturers in the lancet market are Becton Dickinson and Company, Surgicutt, Inc., Miles, Inc., Diagnostic Corporation, Boehringer Mannheim, Inc., and Sherwood Medical Company, a subsidiary of American Home Products Corporation. There are also numerous smaller manufacturers. To the best of the Company's knowledge, there are no safety lancets on the market today that operate in a manner similar to the Company's ExtreSafe(TM) Lancet Strip. The leading manufacturers of standard needles are Becton Dickinson and Company, Sherwood Medical Company, Inc. and Terumo Medical Corporation of Japan. The Company is aware of no products on the market today that are comparable to the ExtreSafe(TM) needle withdrawal devices (i.e., that is transversely activated to automatically extract a contaminated needle and immediately retracts the needle into a safe housing). Applications for the Company's needle retraction technologies may also be found in phlebotomy devices, percutaneous catheter insertion, syringes, and other medical needle devices. While traditional, non-safety, products in the market segments which the Company seeks to address compete primarily on the basis of price, the Company expects to compete on the basis of health care worker safety, ease of use, reduced cost of disposal, patient comfort and compliance with OSHA regulations, but not on the basis of purchase price except with respect to comparable safety products. However, the Company believes that when all indirect costs (disposal of needles, testing, treatment and workers' compensation expense related to needlestick injuries) are considered, the Company's products will compete effectively both with "traditional" products and the safety products of the Company's competitors. It should be noted, however, that the health care products market is highly competitive. Many of the Company's competitors have longer operating histories and are substantially larger, better financed and better situated in the market than the Company. Acquisition of Technology/Research and Development The Company has devoted substantially all of its efforts to acquiring its health care products and research and development relating thereto. Research and development costs were $1,264,186, $804,639 and $290,950 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company plans to acquire additional technologies that it determines are appropriate to acquire. In addition, the Company plans to continue research and development on its current products. Government Regulation The Company and its products are regulated by the FDA, pursuant to various statutes, including the FD&C Act, as amended and supplemented by the Medical Device Amendments of 1976 (the "1976 Amendments") and the Safe Medical Devices Act of 1990. Pursuant to the 1976 Amendments, the FDA classifies medical devices intended for human use into three classes, Class I, Class II and Class III. The controls applied to the different classifications are those the FDA believes are necessary to provide reasonable assurance that a device is safe and effective. Class I devices are products not requiring pre-market notification which can be adequately regulated by the same types of controls the FDA has used on devices since the passage of the FD&C Act in 1938. These "general controls" include provisions related to labeling, producer registration, defect notification, records and reports and good manufacturing practices ("GMPs"). GMPs include implementation of quality assurance programs, written manufacturing specifications and processing procedures, written distribution procedures and record keeping requirements. Class II devices are products for which the general controls of Class I devices are deemed not sufficient to assure the safety and effectiveness of the device and require special controls. Special controls for Class II devices include performance standards, post-market surveillance, patient registries and the use of FDA guidelines. Standards may include both design and performance requirements. Class III devices have the most restrictive controls and require pre-market approval by the FDA. Generally, Class III devices are limited to life-sustaining, life-supporting or implantable devices. Section 510(k) of the FD&C Act requires individuals or companies manufacturing medical devices intended for human use to file a notice with the FDA at least ninety (90) days before introducing the product into the marketplace. The notice (a "510(k) Notification") must state the class in which the device is classified and the actions taken to comply with performance standards or pre-market approval which may be needed if the device is a Class II or Class III device, respectively. If the registrant states the device is unclassified, it must explain the basis for that determination. In some cases obtaining pre-market approval can take several years. Clearance pursuant to a 510(k) Notification can be obtained in much less time. In general, clearance of a 510(k) Notification for a Class II device may be obtained if the registrant can establish that the new device is "substantially equivalent" to another device of such Class that is already on the market. This requires the new device to have the same intended use as a legally marketed predicate device and have the same technological characteristics as the predicate device. If the technological characteristics are different, the new device can still be found to be "substantially equivalent" if information submitted by the applicant (including clinical data if requested) supports a finding that the new device is as safe and effective as a legally marketed device and does not raise questions of safety and efficacy that are different from the predicate device. The Company has a 510(k) Notification from the FDA that its Sharp Trap(R) sharps containers are substantially equivalent to legally marketed predicate devices. The Company's Safety Cradle(R) sharps containers are subject to the general controls of the FD&C Act and the additional controls applicable to Class II devices. The Company has received a second 510(k) Notification on its sharps containers which includes all areas of use for the Safety Cradle(TM) sharps container. OSHA also requires, in part, that sharps containers are closeable, disposable, puncture-resistant, leak proof on the sides and bottom and appropriately labeled. The Company's Safety Cradle(R) sharps containers are in compliance with present OSHA regulations. Future regulations, however, may be imposed which might have a material adverse effect on the Company and/or one or more of its products. The Company's ExtreSafe(TM) Lancet Strip is a Tier I Class I device. No pre-market approval or notification is required before the ExtreSafe(TM) Lancet Strip is sold. The Company must adhere to GMP regulations, however, in connection with its manufacture of the ExtreSafe(TM) Lancet Strip. The Company's follow-on products (i.e., ExtreSafe(TM) medical needle withdrawal technology, intravenous flow gauge and blood collection device) are still in the development stage. In March 1995, the FDA issued a draft guidance document on 510(k) Notifications for medical devices with sharps injury prevention features, a category that would cover most of the Company's ExtreSafe(TM) technology products. The draft guidance provisionally placed this category of products into Class II Tier 3 for purposes of 510(k) review, meaning that such products will be subject to the FDA's most comprehensive and rigorous review for 510(k) products. However, review under this classification is expedited. The draft guidance also states that in most cases, FDA will accept, in support of a 510(k) Notification, data from tests involving simulated use of such a product by health care professionals, although in some cases the agency might require actual clinical data. The Company expects its other follow-on products (i.e., intravenous flow gauge and blood collection device) to be Class II devices. The Company also expects that said follow-on products will not require pre-market approval applications but will be eligible for marketing clearance through the 510(k) Notifications procedure based upon their substantial equivalence to a previously marketed device or devices. Although the 510(k) pre-market clearance process is ordinarily simpler and faster than the pre-market approval application process, there can be no assurance that the Company will obtain 510(k) pre-market clearance to market its follow-on products, that the Company's follow-on products will be classified as set forth above, or that, in order to obtain 510(k) clearance, the Company will not be required to submit additional data or meet additional FDA requirements that may substantially delay the 510(k) delay sales and add to the Company's expenses. Moreover, such 510(k) pre-market clearance, if obtained, may be subject to conditions on the marketing or manufacturing of the corresponding follow-on products that may impede the Company's ability to market and/or manufacture such products. In addition to the requirements described above, the FD&C Act requires that all medical device manufacturers and distributors register with the FDA annually and provide the FDA with a list of those medical devices which they distribute commercially. The FD&C Act also requires that all manufacturers of medical devices comply with labeling requirements and manufacture devices in accordance with GMPs, which require that companies manufacture their products and maintain their documents in a prescribed manner with respect to manufacturing, testing, and quality control activities. The FDA's Medical Device Reporting regulation requires that companies provide information to the FDA on death or serious injuries alleged to have been associated with the use of their products, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. The FDA further requires that certain medical devices not cleared for marketing in the United States have FDA approval before they are exported. The Company is now a registered manufacturer with the FDA. The FDA inspects medical device manufacturers and distributors, and has broad authority to order recalls of medical devices, to seize noncomplying medical devices, to enjoin and/or to impose civil penalties on manufacturers and distributors marketing non-complying medical devices, and to criminally prosecute violators. In addition to laws and regulations enforced by the FDA and OSHA, the Company is subject to government regulations applicable to all businesses, including, among others, regulations related to occupational health and safety, workers' benefits and environmental protection. Distribution of the Company's products in countries other than the United States may be subject to regulations in those countries. There can be no assurance that the Company will be able to obtain the approvals necessary to market its phlebotomy device or any other product outside the United States. Seasonality of Business The Company's product sales are not subject to seasonal variations. Backlog There is no material backlog of unfilled orders of the Company's products. Employees As of March 31, 1997, the Company employed sixteen people, including eight research and development employees, two sales and marketing employees and six administrative employees. The Company expects to add to the number of employees, principally in the areas of sales and marketing and research and development. The planned increase in personnel is based primarily on expected increases in production and sales. The Company's employees are not represented by a labor union, and the Company believes its employee relations are good. Item 2. Properties. The Company's offices are located at 655 East Medical Drive, Bountiful, Utah, under terms of a lease with an unaffiliated lessor which expires in June 1998, with an annual rent of approximately $72,000. The lease covers approximately 5,200 square feet of space. Item 3. Legal Proceedings. None. Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting of stockholders on December 4, 1996, at which meeting certain members of the Company's Board of Directors (the "Board") were elected. The Company's Board is divided into three classes. One class of directors is elected at each annual meeting of stockholders for a three-year term. Each year a different class of directors is elected on a rotating basis. The terms of Gale H. Thorne and Bradley C. Robinson expire in 1997 and the terms of David A. Robinson and J. Clark Robinson expire in 1998. The terms of Gary W. Farnes and Robert R. Walker expire in 1999. Gary W. Farnes and Robert R. Walker, both of whom are currently directors of the Company, were nominated by the Board for election to the class whose terms expire at the 1999 annual meeting. The stockholders then elected Gary W. Farnes by a vote of 4,593,548 for and 6,782 withheld authority and elected Robert R. Walker by a vote of 4,593,548 for and 6,782 withheld authority. At the annual meeting the stockholders also voted to ratify the retention of Arthur Andersen LLP ("AA") as the Company's independent auditor by a vote of 4,600,330 shares for and 2,000 shares against. Prior to the Board's decision to retain AA on October 14, 1996, KPMG Peat Marwick LLP had acted as the Company's independent auditor. Finally, the stockholders voted to approve an amendment to the Company's Certificate of Incorporation that authorizes the Board to make, alter and repeal the Bylaws of the Company, subject to the power of the stockholders of the Company to alter or repeal any Bylaw whether adopted by them or otherwise. The proposal was approved by a vote of 4,570,091 shares for and 16,200 shares against. Thereafter, the Board made the following amendments to the Company's Bylaws: (i) Article III Section 4 was amended to provide that special meetings of the stockholders may be called at any time by the Board, the Chairman of the Board, the Chief Executive Officer or the President of the Company, but such special meetings may not be called by any other person or persons; (ii) Article IV Section 1 was amended to expand the number of authorized Board members to nine; and (iii) the Board eliminated Article IX Section 5 which provided that if any salary, commission, bonus, interest, rent, travel or entertainment expense is disallowed in whole or in part as a deductible expense by the Internal Revenue Service, then the employee recipient shall reimburse the Company to the full extent of the disallowance. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Dividend Policy To date, the Company has not paid dividends on its common stock. The payment of dividends, if any, in the future is within the discretion of the Board and will depend upon the Company's earnings, its capital requirements and financial condition, and other relevant factors. The Board does not intend to declare any dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in the Company's operations. Share Price History The Company's common stock (the "Common Stock") has been quoted on Nasdaq Small-Cap Market since October 1995 under the trading symbol "SHPI." From July 1995 through October 1995 the Common Stock was quoted on the NASD Over-the-Counter market. Prior to July 1995, 294,872 shares of Common Stock were effectively free trading, although no active trading market existed for the Company's Common Stock. On March 31, 1997, the reported high bid and low ask prices of the Common Stock were $3.50 and $3.186, respectively. The following table sets forth the high and low bid information of the Common Stock for the periods indicated. It should be understood that only 294,872 shares of Common Stock were available for trading from July 28, 1995 through July 19, 1996, and that such over the counter market quotations reflect inter-dealer prices without retail markup, markdown or commission, and the quotations may not reflect any actual market transactions in the Common Stock. Quarter Ended High Low 1995 September 30.......................... $5.25 $2.50 December 31 .......................... $11.75 $5.25 1996 March 31.............................. $12.50 $7.375 June 30............................... $11.75 $4.25 September 30.......................... $4.625 $2.375 December 31........................... $3.75 $2.50 1997 March 31 $3.688 $2.75 Holders of Record At March 31, 1997, there were 353 holders of record of the Company's Common Stock. Item 6. Selected Financial Data. The following data have been derived from the Company's consolidated financial statements. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the Financial Statements and related Notes appearing elsewhere in this Form 10-K:
Period Ended ------------------------------------------------------------------------- Nov. 19, 1993 Dec. 31, Dec. 31, Dec. 31, (inception) to 1996 1995 1994 Dec. 31, 1996 -------------- --------------- --------------- ---------------- Statement of Operations Data: Net sales...................................$ 74,563 $ 447,844 $ 33,256 $ 555,663 Cost of sales............................... 70,257 294,171 21,669 386,097 -------------- --------------- --------------- ---------------- Gross profit....................... 4,306 153,673 11,587 169,566 -------------- --------------- --------------- ---------------- Operating Expenses: Selling, general and administrative....... 2,901,434. 2,133,021 620,022 5,657,927 Research and development................. 1,264,186. 804,639 290,950 2,359,775 Write off of operating assets............ 72,363. 255,072 -- 327,435 -------------- --------------- --------------- ---------------- Total operating expenses............. 4,237,983. 3,192,732 910,972 8,345,137 -------------- --------------- --------------- ---------------- Operating loss....................... (4,233,677) (3,039,059) (899,385) (8,175,571) Net other income (expense).................... 140,289. 119,570 (7,563) 252,296 -------------- --------------- --------------- ---------------- Net loss............................. (4,093,388) (2,919,489) (906,948) (7,923,275) Dividends on preference stock -- (11,389) (16,780) (28,169) -------------- --------------- --------------- ---------------- Net loss attributable to common stockholders............................... $ (4,093,388) $ (2,930,878) $ (923,728) $ (7,951,444) ============== =============== =============== ================ Net loss per common share (1).................$ (.48) $ (.69) $ (.75) ============== =============== =============== Weighted average common shares outstanding (1).......................... 8,589,952 4,269,131 1,224,074 ============== =============== =============== Balance Sheet Data (at period end): Working capital (deficit).....................$ 30,754 $ 4,194,568 $ (287,723) Total assets................................... 1,848,839 5,950,728 656,865 Long-term debt, less current maturities........ -- -- 458,333 Total stockholders' equity (deficit)........... 1,513,217 5,369,805 (355,878)
(1) Net loss per common share is based on the weighted average number of common shares outstanding. Stock options and warrants, and preferred shares prior to conversion, are not included in the calculation because this inclusion would be anti-dilutive and reduce the net loss per common share. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. Wherever in this discussion the term "Company" is used, it should be understood to refer to SHPI and SHP, on a consolidated basis, except where the context clearly indicates to the contrary. Prior to the Acquisition, SHPI had no operations. Overview From its inception, the Company has incurred losses from operations. As of December 31, 1996, the Company had cumulative net losses totaling $7,951,444. To date, the Company's principal focus has been the design, development, testing, and evaluation of its Safety Cradle(R) sharps containers, ExtreSafe(TM) Lancet Strip, ExtreSafe(TM) medical needle withdrawal technology, intravenous flow gauge, blood collection device, and other products, and the design and development of its molds and production processes relating to its Safety Cradle(R) sharps containers. Financial Position The Company had $252,694 in cash and cash equivalents as of December 31, 1996. This represented a decrease of $3,998,890 from December 31, 1995. Working capital as of December 31, 1996, also decreased to $30,754 as compared to $4,194,568 at December 31, 1995. These decreases were largely due to the Company's net loss of $4,093,388 and $580,468 in capital expenditures during the year ended December 31, 1996. Years Ended December 31, 1996, 1995 and 1994 During the year ended December 31, 1996, the Company had sales of $74,563, compared with sales of $447,844 and $33,256 for the years ended December 31, 1995 and 1994, respectively. All sales relate to the Company's sharps container products which were the only product the Company was selling during said periods. Sales during the year ended December 31, 1996, were hampered because the Company entered into an agreement (the "Agreement") with BD on March 11, 1996, whereby BD was given the right to evaluate the Company's Safety Cradle(R) sharps container for a period of three months while BD and the Company considered entering into an exclusive marketing and distribution agreement. This Agreement prohibited the Company from entering into distributor agreements that would interfere with the Company executing an exclusive marketing and distribution agreement with BD upon expiration of the Agreement. The Agreement, therefore, limited sales of the Company's Safety Cradle(R) sharps container products in the second and third quarters of 1996. In addition, sales during the first and second quarters of 1996 were hampered due to improvements that were being made to the molds used to produce the Company's sharps container products. The improvements were completed in the first quarter of 1996. On August 26, 1996, the Company entered into an exclusive distribution agreement (the "Distribution Agreement") with BD relating to the Company's Safety Cradle(R) sharps container products. The Distribution Agreement grants BD an exclusive world-wide right to market and distribute the Company's Safety Cradle(R) sharps container products for an initial term of three years, which term may be extended by BD annually thereafter. The first sales pursuant to the Distribution Agreement occurred in the first quarter of 1997. Sales were delayed because the Distribution Agreement required the Company to receive a new 510(k) Notification relating to its Safety Cradle(R) sharps container products, make certain modifications to the containers and its manufacturer was required to meet certain BD standards before sales would begin (collectively, the "BD Modifications"). The BD Modifications were completed before year end. BD was then late in getting the Safety Cradle(R) sharps container products to its sales people and, as a result, sales of the products were delayed until March 1997. The Distribution Agreement provides that products may be sold, at BD's option, either under the Company's name or under BD's label. The products will, however, be imprinted with the Company's name. The sales price of the products to BD under the Distribution Agreement can be adjusted under certain circumstances for changes in raw material costs during the initial term of the Distribution Agreement. The Company is not required to distribute any future, unrelated products through BD. The Distribution Agreement presents certain risks to the Company. These include, among other things (i) reliance for sale of the products on BD, and therefore reliance on BD's marketing ability, marketing plans, credit-worthiness and selling efforts; (ii) if the products are marketed under BD's label, goodwill associated with the products may inure to the benefit of BD rather than the Company; (iii) the Company has only limited protection from changes in manufacturing costs (other than raw materials costs) during the initial term of the Distribution Agreement; and (iv) if the Company is reliant on BD for all or substantially all of its sales, the Company may be restricted in its ability to effectively negotiate with BD concerning pricing or other terms upon extension of the initial three-year term of the Distribution Agreement by BD. Research and development expenses were $1,264,186 for the year ended December 31, 1996, compared with $804,639 and $290,950 for the years ended December 31, 1995 and 1994, respectively. The Company's efforts in the year ended December 31, 1996, focused on making certain improvements to the Safety Cradle (R) sharps container products that were required by the Agreement and otherwise, finalizing the development of the ExtreSafe(TM) Lancet Strip, ExtreSafe(TM) medical needle withdrawal technology, intravenous flow gauge and blood collection device. The Company's efforts in the years ended December 31, 1995 and 1994, were focused on refining the design and molds for its Safety Cradle(R) sharps container products, and upon the design and development of its ExtreSafe(TM) Lancet Strip, ExtreSafe(TM) medical needle withdrawal technology, intravenous flow gauge and blood collection device. Research and development expenses during 1996 were limited because of funding constraints. Funding constraints also set back the anticipated dates on which the Company's products under development will be brought to market. It is anticipated that if the Company has adequate funding during 1997, research and development expenses will increase over 1996 levels. Selling, general and administrative expenses were $2,901,434 for the year ended December 31, 1996, compared to $2,133,021 and $620,022 for the years ended December 31, 1995 and 1994, respectively. The increased costs from period to period have resulted mainly from increases in the following expenditures. First, selling and consulting costs increased as a result of increased efforts to market and sell the Safety Cradle (R) sharps container products. Second, salaries and benefits increased as a result of hiring additional product development, sales and marketing personnel to support sales and commercialization of the Company's products as well as pay increases made to certain of the Company's employees. Third, consulting, legal and accounting fees increased as a result of the Company's entrance into the financial markets, the increased level of operational sophistication and of the Company's reporting obligations under applicable securities laws. Finally, travel and entertainment costs increased as a result of expenses associated with financing, manufacturing, selling, and marketing activities. Net other income was $140,289 for the year ended December 31, 1996, compared with net other income of $119,570 for the year ended December 31, 1995 and net other expense of $(7,563) for the year ended December 31, 1994. Most of the other income earned during 1996 and 1995 relates to interest earned on funds derived from the sale of the Company's equity securities in August 1995. Unless the Company generates additional cash through product sales or financing, the other income for 1997 will be substantially less than other income during 1996 and 1995. Liquidity and Capital Resources The Company's need for funds has increased from period to period as it has increased its research and development activities, expanded staff, and commenced the purchase and construction of molds and production equipment. To date the Company has financed its operations principally through private placements of equity securities and debt. Through December 31, 1996, the Company had received net proceeds of approximately $9,200,000 through financing activities. The bulk of the proceeds from the Company's financing activity resulted from the sale of equity securities. As of December 31, 1996, the Company's liabilities totaled $335,622. All of these liabilities are current liabilities. The Company had working capital as of December 31, 1996 of $30,754 and the Company used net cash in operating activities of $3,558,778 during 1996. At December 31, 1996, the Company had 3,110,875 Series A Warrants and 1,290,375 Series B Warrants outstanding which are exercisable for shares of Common Stock of the Company at a price of $3.00 per share in the case of Series A Warrants and $2.00 per share in the case of Series B Warrants, and expire on the earlier of (a) two years from the date of effectiveness of a registration statement under the Securities Act covering the issuance of the shares of Common Stock underlying such Warrants upon issuance by the Company or for resale of such stock by the holder, which period shall be extended day-for-day for any time that a prospectus meeting the requirements of the Securities Act is not available, or (b) the date specified in a notice of redemption from the Company (subject to the prior right of the holder to exercise the Warrants for at least 20 days following the date of such notice) in the event that the closing price of the Common Stock for any ten consecutive trading days preceding such notice exceeds $6.00 per share and subject to the availability of a current prospectus covering the underlying stock. Thus, the Company may accelerate the expiration of the Warrants in the event that the average market price of the Common Stock exceeds $6.00 per share, in which event the holders of the Warrants would be permitted to exercise the Warrants during a period of not less than 20 days following notice of such an event. The exercise of all the Series A and Series B Warrants would result in a gross cash inflow to the Company of $11,913,375. The Company presently intends to accelerate the expiration of the Warrants when and if such conditions are met. All of the Warrants are currently outstanding. There can be no assurance, however, that any of the Warrants will be exercised. On September 1, 1995, the Company adopted a non-qualified stock option plan ("NQSOP") wherein the Company is authorized to grant options to purchase up to 1,500,000 shares of Common Stock of the Company. All options are granted at exercise prices equal to the fair market value of the Company's common stock on the date of grant. The Company has granted stock options to purchase 1,491,000 shares of Common Stock under the NQSOP. In addition to the options outstanding under the NQSOP, the Company also has 40,500 options outstanding that were issued under the SHP non-qualified stock option plan ("SHP NQSOP") that became obligations of the Company pursuant to the terms of the Acquisition. The Company has provided certain officers and directors of the Company the opportunity to receive up to an aggregate of 2,000,000 shares of Common Stock (the "Earn-Out Shares"). Any issuance of Earn-Out Shares would be based upon the level of pre-tax consolidated net income, adjusted to exclude any charge arising from the obligation to issue or the issuance of the Earn-Out Shares and any income or charge associated with non-recurring or extraordinary items as determined in accordance with generally accepted accounting principles ("Adjusted PTNI"). The Company expects that the issuance of Earn-Out Shares will be deemed to be compensation to the recipients and will result in a charge to earnings in the year or years the Earn-Out Shares are earned, in an amount equal to the fair market value of the Earn-Out Shares. This charge to earnings could have a substantial negative impact on the earnings of the Company in the year or years in which the compensation expense is recognized. The effect of the charge to earnings associated with the issuance of Earn-Out Shares could place the Company in a net loss position for the relevant year, even though the Adjusted PTNI was at a level requiring the issuance of Earn-Out Shares. Because Earn-Out Shares are issuable based on the results of a single year, the Adjusted PTNI in a particular year could require the issuance of Earn-Out Shares even though the cumulative Adjusted PTNI for the three years 1996, 1997 and 1998, or any combination of those years, could reflect a lower amount of Adjusted PTNI that would not require the Company to issue such Earn-Out Shares or even a loss at the Adjusted PTNI line. There is no assurance that years subsequent to the year or years in which Earn-Out Shares are issued will produce the same level of Adjusted PTNI or will be profitable. The management of the Company may have the discretion to accelerate or defer certain transactions that could shift revenue or charges between years or otherwise affect the Adjusted PTNI in any year or years. The Company has agreed to file a registration statement under the Securities Act with respect to the Earn-Out Shares, when issued. The issuance of the Earn-Out Shares, or the perception that the issuance of such stock may occur, could adversely affect prevailing market prices for the Common Stock. The Company and Zerbec, Inc., as joint venturers, formed Quantum to develop, make and distribute an improved filmless digitized imaging system. Pursuant to the terms of the joint venture agreement, Zerbec, Inc. assigned patented filmless digitized imaging technology to Quantum, and will provide ongoing support in the development and commercialization of the technology. SHP has agreed to provide $15,000 in funding during April 1997 and $10,000 in May 1997, which funds shall be used to support the Quantum's research and development activities. In addition, SHP is obligated to pay Quantum up to $15,000 per month for general and administrative expenses through June 1, 1997. For Quantum to be successful, the Company estimates that between $3,000,000 and $6,000,000 will have to be raised. It is anticipated that at least one-third of the outstanding shares of Quantum will be sold to fund development through initial production of related filmless digitized imaging systems. In addition, if at least $3,000,000 in funding is not raised by June 1, 1997, then Zerbec, Inc. has the right to acquire two-thirds of SHP's interest in the Venture for one dollar (the "Zerbec Option"). SHP is trying to negotiate an agreement with Zerbec, Inc. whereby SHP can acquire Zerbec Inc.'s interest in Quantum (the "Zerbec Acquisition") or an extension of the date at which the Zerbec Option vests. There can be no assurance that SHP will be able to negotiate, on terms acceptable and/or favorable to SHP, an agreement relating to the Zerbec Acquisition or an extension of the date on which the Zerbec Option vests. As a result, the Company's ownership interest may decrease as a result the Company's inability to negotiate an agreement with Zerbec, Inc. and/or from dilution by a financing party. On January 10, 1997, David A. Robinson exercised his stock options to acquire 87,500 shares of the Company's common stock for $175,000. On March 27, 1997, the Company entered into a letter of intent with BD which contemplates a license agreement related to the development, manufacture, distribution and commercialization of a product utilizing the Company's ExtreSafe(TM) technology. If a license agreement is consummated, the Company anticipates that BD will distribute at least one, and possibly several, of the Company's products utilizing the ExtreSafe(TM) technology on an exclusive basis. Under the terms of the letter of intent, BD would pay the Company $4 million in prepaid royalties and development fees in two equal payments which payments relate to the first product utilizing the ExtreSafe(TM) technology to be licensed to BD. The financial terms relating to additional products licensed to BD would be subject to negotiation. The first payment would be made within thirty days of execution of a license agreement and the second payment no later than March 1998. The proposal is subject to the satisfactory completion of a legal and business investigation and due diligence review of the Company's intellectual property portfolio by BD and the approval of the boards of directors of the Company and BD. On March 31, 1997, the Company completed a private placement (the "Private Placement") wherein the Company raised $1,539,570 through offering of Units to certain accredited investors for forty-five dollars ($45) per Unit. Each Unit consisted of fifteen (15) shares of the Company's $.02 par value common stock and Series C Warrants to purchase five (5) shares of Common Stock at a price of $3.00 per share. The Series C Warrants will be exercisable upon issuance and expire two years from the date of effectiveness of a registration statement under the Securities Act of 1933 (the "Act") covering the resale of the shares of Common Stock underlying the Series C Warrants by the holder, which period shall be extended day-for-day for any time that a prospectus meeting the requirements of the Act is not available. The Company may accelerate the expiration of the Series C Warrants in the event that the average market price of the Company's Common Stock for 10 consecutive trading days exceeds $6.00 per share. In the event that the Company accelerates the expiration of the Series C Warrants, the holders of the Series C Warrants would be permitted to exercise the Series C Warrants during a period of not less than 20 days following notice of such event. The Company has agreed to file a registration statement covering the resale of the Common Stock and Common Stock underlying the Series C Warrants. The Company's working capital and other capital requirements during the next year or more will vary based upon a number of factors, including the cost to complete development and bring the ExtreSafe(TM) medical needle withdrawal technology, intravenous flow gauge blood collection device and other products to commercial viability, and the level of sales and marketing for the Safety Cradle(R) sharps containers and ExtreSafe(TM) Lancet Strip. The Company believes that the proceeds from the Private Placement, as well as sales generated from the Safety Cradle(R) sharps containers and ExtreSafe(TM) Lancet Strips will be sufficient to support the Company's operations and planned capital expenditures through 1997 if the Company slows the commercialization of its products in development and sales increase substantially. Management is planning, however, to raise additional funds through a public or private offering of securities so commercialization of its products under development is not further delayed. If sales do not begin to increase sufficiently during second and third quarters of 1997, the Company can and will cut operating costs and capital expenditures by focusing only on its sharps container, lancet products and other products that are or will shortly be ready to sell. The Company's failure, however, to produce or sell sufficient quantities of Safety Cradle(R) sharps container products and/or ExtreSafe(TM) Lancets, raise additional funds, or sufficiently cut the cost of operations and capital expenditures could materially and adversely affect the Company's cash flows. In addition, the Company's business plans may change or unforeseen events may occur which require the Company to raise additional funds. Notwithstanding the foregoing, management may deplete cash reserves by maintaining or increasing spending if management determines that additional funding is likely. Inflation The Company does not expect the impact of inflation on operations to be significant. Forward-Looking Statements When used in this Form 10-K or other filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized officer of the Company's executive officers, the words or phrases "would be", "will allow", "intends to", "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that forward-looking statements involve various risks and uncertainties, including but not limited to risk of product demand, market acceptance, economic conditions, competitive products and pricing, difficulties in product development, commercialization, and technology, and other risks. Furthermore, manufacturing delays may result from additional mold redesigns or delays may result from the failure to timely obtain FDA approval to sell future products. In addition, sales through BD or otherwise may not commence as anticipated due to delays by BD or otherwise. If and when such sales commence, the sales may not be as substantial as anticipated. As a result, the Company's actual results for future periods could differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statement. Item 8. Financial Statements and Supplementary Data See index to financial statements and financial statement schedules included herein as Item 14. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of Registrant. Set forth below is certain information concerning each of the directors and executive officers of the Company as of March 31, 1997:
With SHP and Name Age Position Company Since David A. Robinson (1) 53 President, Chief Executive Officer, Chairman of 1993 the Board and Director Bradley C. Robinson (1) 28 Vice President, Investor Relations, and Director 1993 Dr. Gale H. Thorne 64 Vice President, Product Development and Director 1994 J. Clark Robinson 54 Vice President, Chief Financial Officer, 1995 Secretary and Director Gary W. Farnes (2) 55 Director 1995 Robert R. Walker(2) 66 Director 1994 - ---------------
(1) Member of Executive Committee. (2) Member of Compensation Committee. David A. Robinson. Mr. Robinson is the President, Chief Executive Officer and Chairman of the Board of the Company. He has been a Director since November 1993. From November 1992 to November 1993, Mr. Robinson was President of EPC Products, Inc., a packaging company based in Bountiful, Utah. From 1981 to 1992, Mr. Robinson was President of Royce Photo/Graphics Supply, Inc., a distributor of photographic and graphic arts equipment and supplies based in Glendale, California. He holds a Masters degree in Business Administration and a Masters degree in Management Science from the University of Southern California. Mr. Robinson is the brother of J. Clark Robinson, Vice President, Chief Financial Officer, Secretary and a Director of the Company, and an uncle of Bradley C. Robinson, Vice President, Investor Relations, and a Director of the Company. Bradley C. Robinson. Mr. Robinson is the Vice President, Investor Relations, of the Company. He has been a Director since November 1993. From November 1992 to November 1993, Mr. Robinson was Vice President of EPC Products, Inc., a packaging company based in Bountiful, Utah. From 1990 to 1992, Mr. Robinson was employed by Cargo Link, a Salt Lake City, Utah, import-export broker. Mr. Robinson is the son of J. Clark Robinson, Vice President, Chief Financial Officer, Secretary and a Director of the Company, a nephew of David A. Robinson, President, Chief Executive Officer, and a Director of the Company, and a son-in-law of Gary W. Farnes, a Director of the Company. Gale H. Thorne. Dr. Thorne is the Vice President, Product Development, for the Company. He has been a Director since January 1995, and has held his present position as Vice President, Product Development, since October 1994. From 1993 to 1994, Dr. Thorne was a Vice President, Engineering, of Eneco, Inc., a Salt Lake City, Utah, corporation engaged in the business of developing cold-fusion products. During Dr. Thorne's tenure at Eneco, Inc. the company was engaged primarily in the business of prosecuting patent applications relating to the cold-fusion technology. From 1989 to 1993, Dr. Thorne was employed as a patent consultant and patent agent with Foster & Foster, a Salt Lake City intellectual property law firm. Dr. Thorne holds eighteen patents and has published numerous technical publications. He has been a technical consultant and a member of Board of the Small Business Innovation Program of the State of Utah. Dr. Thorne manages all the patent and product development work for the Company. He holds a Ph.D. in Biophysics from the University of Utah. J. Clark Robinson. Mr. Robinson became a Vice President, Chief Financial Officer, Secretary and Director of the Company in September 1995. From 1974 to the present, Mr. Robinson has been General Manager of Lagoon Corporation, which operates an amusement park in the Salt Lake City, Utah, area. At present, Mr. Robinson spends approximately one-half of his time working for the Company and one-half of his time working for Lagoon Corporation. Mr. Robinson has also been President of the International Association of Amusement Parks and Attractions, an international industry trade group. He holds a Masters degree in Business Administration from the University of Utah. Mr. Robinson is the brother of David A. Robinson, President, Chief Executive Officer and a Director of the Company, and the father of Bradley C. Robinson, Vice President, Investor Relations, and a Director of the Company. Gary W. Farnes. Mr. Farnes is a Director of the Company. He has been a Director since 1995 and is currently the Senior Executive Vice President of Holy Cross Health System, a multi-hospital health care system headquartered in South Bend, Indiana. From 1977 to 1995, Mr. Farnes was employed by Intermountain Health Care, a regional hospital company. At the time that Mr. Farnes left Intermountain Health Care, he held the position of Vice President, Hospital Division. He holds a Bachelors degree in Business and Psychology from Brigham Young University and a Masters degree in Business Administration from George Washington University. Mr. Farnes is the father-in-law of Bradley C. Robinson, Vice President, Investor Relations, of the Company. Robert R. Walker. Mr. Walker is a Director of the Company. Mr. Walker has been a Director since March 1994. He is currently self-employed as a consultant in the health care industry primarily in the area of start-up medical device companies. From 1976 to 1992, Mr. Walker was employed by IHC Affiliated Services Division of Intermountain Health Care, a regional hospital company, from which he retired as President of IHC Affiliated Services. He recently retired as the Chairman of the Board of AmeriNet, Inc., which is a national group purchasing organization for hospitals, clinics, detox/drug centers, emergency, nursing homes, private laboratories, psychiatric centers, rehabilitation facilities, surgical centers and institutions such as schools and prisons. Mr. Walker is a member of the American Hospital Association and the Hospital Financial Management Association. He holds a Bachelor of Science degree in Business Administration. Executive officers of the Company are elected by the Board on an annual basis and serve at the discretion of the Board. The Company's Board is divided into three classes. One class of directors is elected at each annual meeting of stockholders for a three-year term. Each year a different class of directors will be elected on a rotating basis. The terms of Gale H. Thorne and Brad C. Robinson will expire in 1997, the terms of David A. Robinson and J. Clark Robinson will expire in 1998 and the terms of Gary W. Farnes and Robert R. Walker will expire in 1999. The Board has an Executive Committee and Compensation Committee. The Executive Committee has the authority to act on various matters requiring Board action. The Compensation Committee makes decisions regarding salaries and other compensation. As part of its responsibilities, the Compensation Committee administers the Company's "NQSOP". Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officer, directors and persons who beneficially own more than 10% of the Company's Common Stock to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission ("SEC"). Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms filed by such persons. Based solely on the Company's review of such forms furnished to the Company and representations from certain reporting persons, the Company believes that all filing requirements applicable to the Company's executive officers, directors and more than 10% stockholders were complied with except that: (i) a Form 4 filed on behalf of John T. Clarke, a former director of the Company, was filed with the SEC on October 31, 1996, that reported a transaction occurring in August 1996; and (ii) a Form 4 and a Form 5 on behalf of Gale Thorne, a director of the Company, was filed on April 7, 1997, that reported transactions occurring in January 1997 and April 1996, respectively. Item 11. Executive Compensation. Included below are tables which set forth certain information concerning compensation paid by the Company to its Chief Executive Officer and all other executive officers with annual compensation in excess of $100,000 (determined as of December 31, 1996) (the "Named Executive Officers"). The tables include columns related to stock options. Summary Compensation Table. The following table provides certain summary information regarding compensation paid by the Company to the Named Executive Officers. The amounts set forth were paid by SHP for services rendered to SHP.
SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation Awards Restricted Stock All Other Name and Salary Bonus Other Annual Stock Options/ LTIP Compensation Principal Position Year ($)(1) ($)(2) Compensation($)(3) Awards ($) SAR(#) Payouts($) ($)(9) - --------------------- ------ -------- ------- ------------------ ----------- ---------- ----------- ------------ David A. Robinson, 1994 120,000 --- --- --- 90,000(5) --- --- President, CEO, Chairman 1995 193,590 25,000 --- 666,666(4) 300,000(7) --- 1,876 of the Board and 1996 240,000 --- 8,000 --- --- --- 5,906 Director Bradley C. Robinson, VP, 1994 89,128 --- --- --- 90,000(5) --- --- Operations and Investor 1995 148,590 25,000 --- 666,666(4) 300,000(6) --- 625 Relations and Director 1996 160,000 --- 5,033 --- --- --- 980 Dr. Gale H. Throne, VP 1994 16,958 --- --- --- 36,000(8) --- --- Product Development and 1995 128,333 25,000 --- --- 57,000(6) --- 2,758 Director 1996 150,000 --- 4,640 --- 40,000(6) --- 364 - -------------------
(1) All amounts paid to as salary were paid pursuant to the Company's obligations under employment contracts with the above referenced individuals. Said employment contracts were amended from time to time during the periods set forth above. The annual salaries of the Named Executive Officers for 1996, as set forth in their employment contracts, are $240,000 for Mr. David A. Robinson, $160,000 for Mr. Brad C. Robinson and $150,000 for Dr. Gale H. Thorne. (2) The cash bonuses were awarded by the Company in recognition of the recipients' contributions toward the successful Acquisition. (3) These amounts represent the amounts paid by the Company into the Company's 401(k) retirement plan for the benefit of the Named Executive Officer. (4) These are Earn-Out shares. David A. Robinson, Bradley C. Robinson and John T. Clarke, who are respectively the President, Chief Executive Officer, Chairman of the Board and a Director; a Vice President and Director; and a former Director of the Company have the opportunity to receive up to an aggregate of 2,000,000 additional shares of common stock. Any issuance of Earn-Out Shares would be based upon the level of pre-tax consolidated net income, adjusted to exclude any charge to income arising from the obligation to issue or the issuance of the Earn-Out Shares and any income or charge associated with non-recurring or extraordinary items as determined in accordance with generally accepted accounting principles ("Adjusted PTNI"). At the date the Earn-Out Shares agreement was adopted the value of the Common Stock was $2.00 per share. At December 31, 1996, the Company's common stock was trading at $3.56. The Earn-Out Shares have not vested. No dividends will be paid on the Earn-Out Shares unless and until they vest. The Earn-Out Shares will vest as follows. If Adjusted PTNI for 1996, 1997 or 1998 equals or exceeds $1,500,000, then an aggregate of 350,000 Earn-Out Share will be issued, but only one issuance of 350,000 Earn-Out Shares will be made based on the $1,500,000 level of Adjusted PTNI. If Adjusted PTNI for 1996, 1997 or 1998 equals or exceeds $5,000,000 then there will be issued that aggregate number of Earn-Out Shares calculated by subtracting the number of Earn-Out Shares previously issued or issuable based on the attainment of a lesser Adjusted PTNI in the same year (if any) from 1,100,000, provided that only one issuance of Earn-Out Shares will be made based on the $5,000,000 level of Adjusted PTNI. If Adjusted PTNI for 1996, 1997 and 1998 equals or exceeds $8,000,000, then there will be issued that aggregate number of Earn-Out Shares calculated by subtracting the number of Earn-Out Shares previously issued or issuable based on the attainment of a lesser Adjusted PTNI in the same year (if any) from 2,000,000, provided that in no event will an aggregate of more than 2,000,000 Earn-Out Shares be issued. (5) These options were exercised on September 1, 1995 and were issued under the SHP NQSOP (6) These options were issued pursuant to the NQSOP. (7) These options were issued pursuant to the NQSOP and 87,500 of these shares were exercised on January 10, 1997. (8) Options to purchase 18,000 shares of the Company's Common Stock were exercised on September 1, 1995. Said options were issued under the SHP NQSOP. (9) These amounts represent the amounts paid by the Company for term life insurance for the benefit of the Named Executive Officer. The related insurance policies have no cash surrender values. Option Grants in Fiscal Year 1996. The following table sets forth certain information with respect to stock option grants during the year ended December 31, 1996 to Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR Individual Grants ------------------------------------------------------------ Potential Realizable Number of Percent of Value at Assumed Annual Shares Total Options Exercise Rate of Stock Price Underlying Granted to or Base Appreciation for Option Options Employees in Price Expiration Term Name Granted (#) Fiscal Year ($/Sh) Date 5% 10% ---- ----------- ----------- ------ ---- ------------- ------------- David A. Robinson --- --- --- --- --- --- Bradley C. Robinson --- --- --- --- --- --- Dr. Gale H. Thorne 40,000(1) 33% $2.625 12/10/01 $29,010 $64,104 - --------------- (1) These options were issued pursuant to the NQSOP and vest on December 10, 1997. Option Exercises and Year-End Holdings. The following table sets forth certain information with respect to stock option exercises during the year ended December 31, 1996, and the number of shares of stock covered by both exercisable and unexercisable stock options held by each of the Named Executive Officers. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
Number of Securities Value of Unexercised Underlying In-the-Money Unexercised Options/SARs at Fiscal Options/SARs at Fiscal Year-End($) Shares Year-End($) Acquired On Value Exercisable/ Exercisable/ Name Exercise (#) Realized ($) Unexercisable Unexercisable(4) ---- ------------ ------------ ------------------ ---------------- David A. Robinson --- --- 300,000(1)/0 $468,900/$0 Bradley C. Robinson --- --- 300,000(2)/0 $468,900/$0 Gale H. Thorne --- --- 75,000(2)/40,000(3) $146,205/$37,520 - ---------------
(1) Options exercisable at $2.00 per share, of which options to acquire 87,500 shares of common stock were exercised on January 10, 1997. (2) Options exercisable at $2.00 per share. (3) 18,000 options currently exercisable at an exercise price of $.39 per share, 57,000 options currently exercisable at $2.00 per share and 40,000 options exercisable on December 10, 1997 at $2.625 per share. (4) The trading price of the Company's common stock on December 31, 1996 was $3.563 per share. Compensation of Directors During 1994, the non-employee members of the Board received a total of 9,000 shares of common stock as compensation for serving as directors of SHP. For 1995, the Company granted stock options under the NQSOP to purchase 20,000 shares of Common Stock for $2.00 per share to the non-executive members of the Board. During 1996, the Company granted stock options under the NQSOP to purchase 30,000 shares of Common Stock for $2.625 per share to the non-executive members of the Board. The Company has made no other agreements regarding the compensation of non-executive members of the Board. Directors of the Company who are also officers of the Company receive no additional compensation for their service as directors. All directors are entitled to reimbursement for reasonable expenses incurred in the performance of their duties as Board members. Employment and Indemnity Agreements On September 1, 1995, the Company entered into employment agreements with each of Mr. David A. Robinson, Mr. Bradley C. Robinson and Dr. Gale H. Thorne (collectively, the "Senior Executives"). The terms of these employment agreements provide that (i) Mr. David Robinson receive a salary of $240,000 per year, Dr. Gale Thorne receive a salary of $150,000 per year and Mr. Bradley Robinson receive a salary of $160,000 per year; (ii) the Senior Executives' employment agreements are for terms of three years, expiring on September 1, 1998; (iii) the Senior Executives are entitled to a reasonable car allowance; (iv) if the Senior Executives are terminated by reason of disability or for other than cause, the salary of such Senior Executives will continue for the full term of the agreement; (v) if a Senior Executive is terminated for cause, the salary of such Senior Executive ceases as of the date of termination; (vi) the Company will provide the Senior Executives with up to $1,000,000 of term life insurance while employed by the Company; and (vii) the Senior Executives shall keep all proprietary information relating to the business confidential both during and after the term of the agreements. The Company does not currently have employment agreements with any of its other executive officers or key employees. The Company has entered into Indemnity Agreements with each of its executive officers and directors pursuant to which the Company agrees to indemnify the officers and directors to the full extent permitted by law for any event or occurrence related to the service of the indemnitee as an officer or director of the Company that takes place prior to or after the execution of the agreement. The Indemnity Agreements obligate the Company to reimburse or advance expenses relating to any proceeding arising out of an indemnifiable event. Under these agreements, the officers and directors of the Company are presumed to have met the relevant standards of conduct required by Delaware law for indemnification. In the absence of the Indemnity Agreements, indemnification of these officers and directors may be discretionary in certain cases. Indemnification for Securities Act Liabilities The Delaware General Corporation Law authorizes, and the Company's Bylaws and Indemnity Agreements provide for, indemnification of the Company's directors and officers against claims, liabilities, amounts paid in settlement and expenses in a variety of circumstances. 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 Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Stock Options and Warrants During 1994, the Board of Directors of SHP approved the SHP NQSOP. The exercise price of the options is equivalent to the estimated fair market value of the stock as determined by the Board of Directors at the date of grant. The number of shares, terms and exercise period are determined by the Board of Directors on an option-by-option basis. As of March 31, 1997, options to acquire an aggregate of 40,500 shares of Common Stock at between $.39 and $1.11 per share were outstanding under the SHP NQSOP. The options issued under the SHP NQSOP expire in 1999. On September 1, 1995, the Company adopted the NQSOP. In addition, on the date of the Acquisition, all of the options issued under SHP's NQSOP became outstanding obligations of the Company and the SHP NQSOP was terminated. As of March 31, 1997, options to acquire an aggregate of 1,491,000 shares of Common Stock at between $2.00 and $2.625 per share had been granted and are presently outstanding, including the options granted to David A. Robinson, Bradley C. Robinson and Gale H. Thorne. Compensation Committee Interlocks and Insider Participation No executive officers of the Company serve on the Compensation Committee (or in a like capacity) for the Company or any other entity. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information with respect to the beneficial ownership of the common stock of the Company as of March 31, 1997, for: (i) each person who is known by the Company to beneficially own more than 5 percent of the Company's common stock, (ii) each of the Company's directors, (iii) each of the Company's Named Executive Officers, and (iv) all directors and executive officers as a group. As of March 28, 1997, the Company had 8,744,153 shares of common stock outstanding.
Name and Address Shares Beneficially Owned(2) Percentage of Shares of Beneficial Owner(1) Beneficially Owned Position David A. Robinson(3) 630,219 7% President, Chief Executive Officer Chairman of the Board and Director Bradley C. Robinson(4) 630,219 7% Vice President Investor Relations and Director Gale H. Thorne(5) 133,000 1% Vice President, Product Development and Director J. Clark Robinson(6) 237,000 3% Vice President , Chief Financial Officer, Treasurer, Secretary and Director Gary W. Farnes(7) 70,000 1% Director Robert R. Walker(8) 83,000 1% Director Executive Officers and 1,734,438 19% Directors as a Group (6 Persons) John T. Clarke(9) 665,306 7% Thatchetts Camp Road Gerrards Cross Buckinghamshire, England Capital Growth 938,040 10% International(10) 11601 Wilshire Boulevard, Suite 500 Los Angeles, CA 90025 - -------------------------- (1) Except where otherwise indicated, the address of the beneficial owner is deemed to be the same address as the Registrant. (2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting and investment power with respect to the securities. Shares of common stock subject to options or warrants currently exercisable, or exercisable within sixty (60) days, are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. (3) Includes 417,719 shares and stock options to purchase 212,500. Does not include the Earn-Out Shares. (4) Includes 330,219 shares and stock options to purchase 300,000. Does not include the Earn-Out Shares. (5) Includes 18,000 shares, stock options to purchase 75,000 shares and Series A Warrants to purchase 15,000 shares. Also includes 25,000 shares that Mr. Thorne is deemed to beneficially own through a trust. Does not include stock options to purchase 40,000 shares which options vest on December 10, 1997. (6) Includes 90,000 shares, stock options to purchase 75,000 shares. Also includes 45,000 shares and Series A Warrants to purchase 27,000 shares that Mr. Robinson is deemed to beneficially own though a trust. (7) Includes 50,000 shares and stock options to purchase 20,000 shares. Does not include stock options to purchase 30,000 shares which options vest on December 10, 1997. (8) Includes stock options to purchase 20,000 shares. Also includes 63,000 shares that Mr. Walker is deemed to beneficially own through a trust. Does not include stock options to purchase 30,000 shares which options vest on December 10, 1997. (9) Includes 163,000 shares, stock option to purchase 300,000 shares and Series A Warrants to purchase 3,000 shares. Also includes 18,000 shares that Mr. Clarke is deemed to beneficially own as a result of their being owned by a controlled entity, 123,465 shares, 18,000 Series A Warrants and 21,841 Series B Warrants owned by his spouse, and 18,000 shares owned by a minor child, which he is deemed to beneficially own. Does not include the Earn-Out Shares. (10) Includes 918,040 Series B Warrants and stock options to purchase 20,000 shares of Common Stock. The Registrant is not aware of any arrangements, the operation of which may at a subsequent date result in a change in control of the Registrant. Item 13. Certain Relationships and Related Transactions. In September 1994, (prior to the Acquisition), certain stockholders of SHP made direct loans to SHP in the amount of approximately $385,000 under a bridge loan agreement. Subscriptions under the bridge loan were offered proportionately to stockholders of SHP based on the number of shares held. The subscribers to the bridge loan were issued warrants permitting them to acquire up to an aggregate of 346,500 shares of common stock at $1.11 per share on or before December 31, 1995. These warrants were exercised in July 1995 in consideration for the conversion of this loan. The law firm of Blackburn & Stoll, LC does legal work for the Company. Eric L. Robinson, a member of the law firm of Blackburn & Stoll, LC, is the son of J. Clark Robinson, a director and chief financial officer of the Company, and brother of Bradley C. Robinson, a director and vice-president of the Company. Stanley Hollander, a former director of the Company, is an officer and director of the corporate managing member of Capital Growth, which is deemed to beneficially own 918,040 Series B Warrants and options to purchase 20,000 shares of the Company's Common Stock. Capital Growth received 75,000 shares of the Company's Common Stock, 530,125 Series A Warrants, 1,290,375 Series B Warrants, stock options to purchase 20,000 shares of the Company's Common Stock and a gross fee of $860,251, as consideration for placement agent services rendered on behalf of the Company during 1995. Mr. Gale Thorne, a director of the Company, is entitled to a royalty of two and one-half percent from the Company's gross revenue received from the sale of products utilizing the ExtreSafe(TM) medical needle withdrawal, blood collection device and intravenous flow gauge technologies (collectively, the "Products"). In addition, the Company is required by pay Mr. Thorne minimum royalties payments in an amount of not less than $435,000 over a six year period beginning in 1998. These royalties were granted in exchange for Mr. Thorne's assignment to the Company of intellectual property rights he owned prior to his involvement with the Company in 1994, which intellectual property rights relate to the Products. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements Listed on page F-1 of the Financial Statements. (2) Financial Statement Schedules None required. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the fourth quarter ended December 31, 1996. (c) Exhibits Listed on page 34 hereof. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. (Registrant) Date: April 7, 1997 By /s/ David A. Robinson ---------------------- --------------------------------- David A. Robinson President, Chief Executive Officer and Director Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ David A. Robinson President, Chief Executive Officer April 7, 1997 - ---------------------- and Director (Principal Executive David A. Robinson Officer) /s/ Bradley C. Robinson Director and Vice President April 7, 1997 - ------------------------ Bradley C. Robinson /s/ J. Clark Robinson Director, Vice President, Chief April 7, 1997 - ------------------------ Financial Officer and Secretary J. Clark Robinson (Principal Financial and Accounting Officer) /s/ Gale H. Thorne Director and Vice President April 7, 1997 - ------------------------ Gale H. Thorne /s/ Robert R. Walker Director April 7, 1997 - ------------------------ Robert R. Walker /s/ Gary W. Farnes Director April 7, 1997 - ------------------------ Gary W. Farnes EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT 3(i).1 Restated Certificate of Incorporation of the Company. (Incorporated by reference to Exhibit 3(i).1 of the Company's current report on Form 8-K, dated July 28, 1995) 3(i).2 Certificate of Amendment of Certificate of Incorporation of the Company. 3(i).3 Articles of Incorporation of Specialized Health Products, Inc. ("SHP") (Incorporated by reference to Exhibit 3(i).2 of the Company's Form 10-K, dated December 31, 1995) 3(i).4 Articles of Amendment of SHP (Incorporated by reference to Exhibit 3(i).3 of the Company's Form 10-K, dated December 31, 1995) 3(i).5 Plan and Articles of Merger of Russco Resources, Inc., into SHP (Incorporated by reference to Exhibit 3(i).1 to the Company's current report on Form 8-K, dated July 28, 1995) 3(ii).1 Amended and Restated Bylaws of the Company 3(ii).2 Bylaws of SHP (Incorporated by reference to Exhibit 3(ii).2 of the Company's Form 10-K, dated December 31, 1995) 4.1 Form of Series A Warrant Certificate (Incorporated by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K, dated December 31, 1995). 4.2 Form of Series B Warrant Certificate (Incorporated by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K, dated December 31, 1995). 10.1 Agreement and Plan of Reorganization dated as of June 23, 1995, among the Company, Russco Resources, Inc., Scott R. Jensen and Specialized Health Products, Inc. (Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K, dated July 28, 1995) 10.2 Placement Agreement between the Company, SHP and U.S. Sachem Financial Consultants, L.P., dated June 23, 1995 (Incorporated by reference to Exhibit 10.2 of the Company's Form 10-K, dated December 31, 1995) 10.3 Form of Employment Agreement with Executive Officers (Incorporated by reference to Exhibit 10.3 of the Company's Form 10-K, dated December 31, 1995) 10.4 Form of Indemnity Agreement with Executive Officers and Directors (Incorporated by reference to Exhibit 10.4 of the Company's Form 10-K, dated December 31, 1995) 10.5 Form of Confidentiality Agreement (Incorporated by reference to Exhibit 10.5 of the Company's Form 10-K, dated December 31, 1995) 10.6 Joint Venture Agreement between SHP and Zerbec, Inc., dated October 30, 1995 (Incorporated by reference to Exhibit 10.6 of the Company's Form 10-K, dated December 31, 1995) 10.7 Distribution Agreement between SHP and Becton, Dickinson and Company (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K, dated August 26, 1996) 21.1 Schedule of subsidiaries (Incorporated by reference to Exhibit 21.1 of the Company's Annual Report on Form 10-K, dated December 31, 1995). 27.1 Financial Data Schedule SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY (A Company in the Development Stage) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Public Accountants - Arthur Andersen LLP.............F-2 Independent Auditors' Report - KPMG Peat Marwick LLP.......................F-3 Consolidated Balance Sheets as of December 31, 1996 and 1995...............F-4 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 and for the Period from Inception to December 31, 1996......................................F-5 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1996, 1995 and 1994 and for the Period from Inception to December 31, 1996.......................F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 and for the Period from Inception to December 31, 1996......................................F-8 Notes to Consolidated Financial Statements.................................F-10 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Specialized Health Products International, Inc.: We have audited the accompanying consolidated balance sheet of Specialized Health Products International, Inc.(a Delaware corporation in the development stage) and subsidiary as of December 31, 1996, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year then ended and the related statements of operations, stockholders' equity (deficit) and cash flows for the period from inception (November 19, 1993) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the consolidated financial statements of Specialized Health Products International, Inc. and subsidiary for the period from inception to December 31, 1995. Such statements are included in the cumulative inception to December 31, 1996 totals of the statements of operations, stockholders' equity (deficit) and cash flows and reflect total net sales and net loss of 94% percent and 48% percent, respectively, of the related cumulative totals. Those statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to amounts for cumulative totals, is based solely upon the reports of the other auditors. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Specialized Health Products International, Inc. and subsidiary as of December 31, 1996, and the results of their operations and their cash flows for the year then ended, and for the period from inception to December 31, 1996, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced recurring losses from operations of $4,233,677, $3,039,059 and $899,385 and negative cash flows from operating activities of $3,558,778, $2,605,616 and $778,833 during the years ended December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996, the Company had an accumulated deficit of $7,951,444. Net sales declined to $74,563 during the year ended December 31, 1996 compared to net sales of $447,844 during the year ended December 31, 1995. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. ARTHUR ANDERSEN LLP Salt Lake City, Utah March 31, 1997 F-2 Independent Auditors' Report The Board of Directors and Stockholders Specialized Health Products International, Inc.: We have audited the accompanying consolidated balance sheet of Specialized Health Products International, Inc. and subsidiary (a company in the development stage) as of December 31, 1995, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 1995, and for the period from November 19, 1993 (date of inception) to December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Specialized Health Products International, Inc. and subsidiary (a company in the development stage) as of December 31, 1995, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1995, and for the period from November 19, 1993 (date of inception) to December 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Salt Lake City, Utah February 2, 1996 F-3 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY (A Company in the Development Stage) CONSOLIDATED BALANCE SHEETS ASSETS
December 31, 1996 1995 CURRENT ASSETS: Cash and cash equivalents $ 252,694 $ 4,251,584 Accounts receivable 1,159 350,718 Inventories 15,710 16,322 Prepaid expenses and other 96,813 34,017 Amounts due from related parties - 122,850 ----------- ----------- Total current assets 366,376 4,775,491 ----------- ----------- PROPERTY AND EQUIPMENT, at cost: Manufacturing molds 481,553 245,753 Office furnishings and fixtures 272,220 144,992 Assembly and manufacturing equipment 33,727 33,605 Construction-in-progress 564,502 395,895 ----------- ----------- 1,352,002 820,245 Less accumulated depreciation (165,025) (8,196) ----------- ----------- Net property and equipment 1,186,977 812,049 ----------- ----------- OTHER ASSETS, net 295,486 363,188 ----------- ----------- $ 1,848,839 $ 5,950,728 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 100,686 $ 134,449 Accrued liabilities 161,784 446,474 Amounts due to related parties 73,152 - ----------- --------- Total current liabilities 335,622 580,923 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 1,3,5,7,10 and 11) STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value; 5,000,000 shares authorized, no shares outstanding - - Common stock, $.02 par value; 50,000,000 shares authorized, 8,656,653 and 8,566,653 shares outstanding, respectively 173,133 171,333 Common stock subscriptions receivable (209,200) (259,500) Additional paid-in capital 9,540,928 9,316,028 Deferred consulting expense (40,200) - Deficit accumulated during the development stage (7,951,444) (3,858,056) ----------- ----------- Total stockholders' equity 1,513,217 5,369,805 ----------- ----------- $ 1,848,839 $ 5,950,728 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-4 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY (A Company in the Development Stage) CONSOLIDATED STATEMENTS OF OPERATIONS
Period from Inception to Year Ended December 31, December 31, 1996 1995 1994 1996 (Note 1) ----------- ----------- ----------- ------------- NET SALES $ 74,563 $ 447,844 $ 33,256 $ 555,663 COST OF SALES 70,257 294,171 21,669 386,097 ----------- ----------- ----------- ----------- Gross profit 4,306 153,673 11,587 169,566 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Selling, general and administrative 2,901,434 2,133,021 620,022 5,657,927 Research and development 1,264,186 804,639 290,950 2,359,775 Write-off of operating assets 72,363 255,072 - 327,435 ----------- ----------- ----------- ----------- Total operating expenses 4,237,983 3,192,732 910,972 8,345,137 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (4,233,677) (3,039,059) (899,385) (8,175,571) ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest income 108,701 135,428 237 244,366 Interest expense - (15,858) (7,800) (23,658) Other, net 31,588 - - 31,588 ----------- ----------- ----------- ----------- Net other income (expense) 140,289 119,570 (7,563) 252,296 ----------- ----------- ----------- ----------- NET LOSS (4,093,388) (2,919,489) (906,948) (7,923,275) LESS PREFERENCE STOCK DIVIDENDS - (11,389) (16,780) (28,169) ----------- ----------- ----------- ----------- NET LOSS APPLICABLE TO COMMON SHARES $(4,093,388) $(2,930,878) $ (923,728) $(7,951,444) =========== =========== =========== =========== NET LOSS PER COMMON SHARE $ (.48) $ (.69) $ (.75) =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,589,952 4,269,131 1,224,074 =========== =========== ===========
The accompanying notes to conslidated financial statements are an integral part of these consolidated statements. F-5 Page 1 of 2 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY (A Company in the Development Stage) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Sub- Additional Deferred Accum- Preferred Stock Common Stock scriptions Paid-In Consulting ulated Shares Amount Shares Amount Receivable Capital Expense Deficit Issuance of common stock for cash at inception - $ - 1,170,000 $ 1,300 $ - $ - $ - $ - Net loss - - - - - - - (3,450) --------- ---------- --------- -------- ---------- ---------- -------- --------- BALANCE as of December 31, 1993 - - 1,170,000 1,300 - - - (3,450) Issuance of preferred stock for cash 1,440,000 560,000 - - - - - - Issuance of common stock for services and stock subscriptions receivable - - 193,500 208,500 (198,500) - - - Unpaid dividends on preference stock - - - - - - - (16,780) Net loss - - - - - - - (906,948) --------- ---------- --------- -------- ---------- ---------- -------- --------- BALANCE as of December 31, 1994 1,440,000 560,000 1,363,500 209,800 (198,500) - - (927,178) Issuance of preferred stock for cash 362,403 604,001 - - - - - - Issuance of common stock for stock subscriptions receivable - - 70,000 1,400 (140,000) 138,600 - - Cash received for stock subscriptions receivable - - - - 280,000 - - - Services provided for stock subscriptions receivable - - - - 8,500 - - - Unpaid dividends on preference stock - - - - - - - (11,389) Exchange of debt for common stock - - 396,500 386,000 - 99,000 - -
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-6 Page 2 of 2 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY (A Company in the Development Stage) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Sub- Additional Deferred Accum- Preferred Stock Common Stock scriptions Paid-In Consulting ulated Shares Amount Shares Amount Receivable Capital Expense Deficit Issuance of common shares to stockholders under antidilution provisions - $ - 90,000 $180,000 $ - $ (180,000) $ - $ - Business combination (1,802,403) (1,164,001) 2,102,403 (696,752) - 1,860,753 - - Issuance of common stock for cash, net of expenses - - 4,256,250 85,125 - 7,193,935 - - Exercise of stock options for common stock subscriptions receivable - - 288,000 5,760 (209,500) 203,740 - - Net loss - - - - - - - (2,919,489) ---------- --------- ---------- -------- --------- ---------- -------- ---------- BALANCE as of December 31, 1995 - - 8,566,653 171,333 (259,500) 9,316,028 - (3,858,056) Cash received for stock subscriptions receivable - - - - 50,300 - - - Exercise of common stock options - - 45,000 900 - 16,650 - - Exercise of common stock warrants - - 45,000 900 - 74,250 - - Deferred consulting expense - - - - - 134,000 (40,200) - Net loss - - - - - - - (4,093,388) ---------- --------- ---------- -------- --------- ---------- --------- ----------- BALANCE as of December 31, 1996 - $ - 8,656,653 $173,133 $(209,200) $9,540,928 $ (40,200)$(7,951,444) ========== ========= ========== ======== ========= ========== ========= ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-7 Page 1 of 2 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY (A Company in the Development Stage) CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
Period from Inception to Year Ended December 31, December 31, 1996 1995 1994 1996 (Note 1) ----------- ----------- ---------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(4,093,388) $(2,919,489) $(906,948) $(7,923,275) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 203,523 74,542 29,317 307,382 Common stock issued for services - 8,500 10,000 18,500 Noncash consulting expense 93,800 - - 93,800 Loss on disposition of assets 72,363 256,363 - 328,726 Changes in operating assets and liabilities: Accounts receivable 349,559 (346,247) (4,471) (1,159) Inventories 612 (16,322) 6,104 (15,710) Prepaid expenses and other (62,796) (28,581) (5,290) (96,813) Amounts due from related parties 122,850 (122,850) - - Accounts payable (33,763) 49,794 92,455 108,486 Accrued liabilities (284,690) 438,674 - 153,984 Amounts due to related parties 73,152 - - 73,152 ----------- ----------- --------- ----------- Net cash used in operating activities (3,558,778) (2,605,616) (778,833) (6,952,927) ----------- ----------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (580,468) (794,434) (287,523) (1,662,425) Purchase of patents and technology (2,644) (64,750) (278,752) (356,146) ----------- ----------- --------- ----------- Net cash used in investing activities (583,112) (859,184) (566,275) (2,018,571) ----------- ----------- --------- -----------
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-8 Page 2 of 2 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY (A Company in the Development Stage) CONSOLIDATED STATEMENTS OF CASH FLOWS AND SUBSIDIARY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Increase (Decrease) in Cash and Cash Equivalents
Period from Inception to Year Ended December 31, December 31, 1996 1995 1994 1996 (Note 1) ----------- ----------- ---------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock $ 92,700 $7,279,060 $ - $7,373,060 Proceeds from stock subscriptions 50,300 280,000 - 330,300 Proceeds from issuance of preferred stock - 604,001 560,000 1,164,001 Proceeds from issuance of redeemable preference stock - - 240,000 240,000 Payments on redeemable preference stock and dividends - (268,169) - (268,169) Net (repayments) borrowings on stockholder loans - (167,833) 534,133 385,000 Bank overdraft - (10,675) 10,675 - ----------- ----------- ---------- -------- Net cash provided by financing activities 143,000 7,716,384 1,344,808 9,224,192 ----------- ---------- ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,998,890) 4,251,584 (300) 252,694 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 4,251,584 - 300 - ----------- ---------- ---------- -------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 252,694 $4,251,584 $ - $ 252,694 =========== ========== ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for interest $ - $ 15,858 $ 7,800 $ 23,658 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Dividends on redeemable preference stock - 11,389 16,780 28,169 Common stock issued for subscriptions receivable - 349,500 198,500 548,000 Conversion of stockholder loans and amounts due to stockholders to common stock - 485,000 - 485,000 Acquisition of technology and patents for stockholder payable - - 100,000 100,000
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-9 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. AND SUBSIDIARY (A Company in the Development Stage) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) NATURE OF OPERATIONS AND BUSINESS COMBINATION Nature of Operations Specialized Health Products International, Inc. ("SHPI") and its wholly owned subsidiary, Specialized Health Products, Inc. ("SHP") (collectively, the "Company") is a development stage company which is primarily engaged in developing cost-effective, disposable, proprietary healthcare products designed to limit or prevent the risk of accidental needle sticks which may cause the spread of blood-borne diseases such as HIV/AIDS and hepatitis B, and secondarily develops other products for use in the healthcare industry. The Company's activities since inception have focused on research and development of products, obtaining financing, recruiting personnel and identifying and contracting with manufacturers and distributors. The Company principally intends to use third parties to manufacture, market and distribute its products worldwide. The Company has a portfolio of proprietary, safety healthcare products that are in various stages of production, pre-production, development and research. The Company's earliest safety product line is its Safety Cradle(R) sharps container products designed to reduce the risk of accidental needle sticks and exposure to contaminated instruments when disposing of contaminated sharps. In August 1996, the Company entered into an exclusive distribution agreement (the "Distribution Agreement") with Becton Dickinson and Company ("BD") relating to the Company's sharps container products. The Distribution Agreement grants BD an exclusive worldwide right to market and distribute the Company's sharps container products for an initial term of three years. The first sales pursuant to the Distribution Agreement occurred in the first quarter of 1997. Other products near commercialization or under development include the Company's Extresafe(TM) Lancet Strip and a line of products using the Company's ExtreSafe(TM) medical needle withdrawal technology including safety phlebotomy devices, catheters and syringes. Manual production and sales of the Extresafe(TM) Lancet Strip began in the first quarter of 1997 and automated production is projected to commence later in 1997. Development Stage Presentation The Company is in the development stage and from its inception has incurred losses from operations. During the years ended December 31, 1996, 1995 and 1994, the Company experienced losses from operations of $4,233,677, $3,039,059 and $899,385, respectively, and negative cash flows from operating activities of $3,558,778, $2,605,616 and $778,833, respectively. As of December 31, 1996, the Company had an accumulated deficit of $7,951,444. Net sales declined to $74,563 during the year ended December 31, 1996 compared to net sales of $447,844 during the year ended December 31, 1995. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company's continued existence is dependent upon several factors including the Company's success in raising sufficient funding, bringing its products to commercialization, reducing costs and entering into favorable contracts with third-party manufacturers and distributors. As discussed in Note 11, on March 31, 1997, the Company closed a private placement offering wherein the Company raised approximately $1,539,000. The Company estimates that after the payment of existing obligations, it will have approximately $1,000,000 in remaining funds. The Company believes that these remaining funds from the private placement offering and sales generated from the Safety Cradle(R) sharps container and ExtreSafe(TM) Lancet Strip products will be sufficient to support the Company's operations through December 31, 1997. However, this would require the Company to slow the commercialization of its products in development and increase its sales of sharps containers and lancets substantially. F-10 The Company's operating plan includes seeking to raise additional funds through a public or private offering of securities in order for commercialization of its products under development to not be further delayed. Management is attempting to negotiate favorable agreements with third parties to assist in the development, financing, manufacturing and distribution of its products under development or near commercialization (see Note 11). In addition, management believes it has the ability to further cut certain operating costs. Nonetheless, the Company's inability to obtain additional funding, as required, could severely impair its business operations and there can be no assurance that the Company's operating plan will be successful. The Company is subject to special risk factors due to its development stage status that may impact its ability to become an operating enterprise. These risk factors include: a) The Company has experienced limited sales of its Safety Cradle(R) sharps containers and ExtreSafe(TM) Lancet Strip products, the Company's only commercialized products. Sales of Safety Cradle(R) sharps container through BD and sales of ExtreSafe(TM) Lancet Strip products did not commence until the first quarter of 1997. There is no assurance that other products will be commercially viable and no assurance can be given that the Company will have sufficient sales or a sufficient customer base to become profitable. The business prospects of the Company will be affected by expenses, operational difficulties and other factors frequently encountered in the development of a business enterprise in a competitive environment. b) The Company's need for capital during the next year or more will vary based upon a number of factors, including the rate at which demand for products expands, the level of sales and marketing activities for the Safety Cradle(R) sharps container and ExtreSafe(TM) Lancet Strip products and the level of effort needed to develop and commercialize other products utilizing the Company's ExtreSafe(TM) medical needle withdrawal technology. If additional funds are not successfully raised, the lack of additional funds will likely have a material adverse effect on the Company. c) The Company's Safety Cradle(R) sharps container and ExtreSafe(TM) Lancet Strip products are each produced by a single manufacturer. If one of the Company's manufacturers fails to perform its obligations in a timely and satisfactory manner or if there is a change in the Company's manufacturers, it could have a material adverse effect on the Company. There can be no assurance that the Company would be successful in replacing its current manufacturers on terms favorable to the Company. Likewise, there can be no assurance that the Company will be successful in finding additional manufacturers to manufacture its products on favorable terms should product demand increase. The Company, however, owns the molds and automated equipment which can be moved to different manufacturers. d) The Company is dependent on one distributor for the distribution of its Safety Cradle(R) sharps container products and anticipates that it will be dependent on third parties for the distribution of its ExtreSafe(TM) Lancet Strip and follow-on products. e) The Company uses polypropylene and other resins in the manufacture of its products. Prices are subject to fluctuations caused in part by changes in supply and demand. Significant increases in the prices of these resins could have a material adverse effect on the Company's ability to produce cost effective products. f) The Company operates in a very competitive market and there is no assurance that development of superior competing products and changes in technology will not eliminate the need for the Company's products. The introduction of F-11 competing products could adversely affect the Company's attempts to develop and market its products successfully. g) The Company's medical safety products may not be accepted by the market. Market acceptance of the Company's products will depend in large part upon the Company's ability to demonstrate the operational advantages, safety, efficacy, and cost-effectiveness of its products compared to competing products and its ability to distribute through major medical distributors. h) The Company's future success depends 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. Currently, the Company owns six Safety Cradle(R) related patents, two patents associated with its ExtreSafe(TM) Lancet Strip and six patents which protect its ExtreSafe(TM) needle withdrawal technology. There can be no assurance that the protection provided by patents will be broad enough to prevent competitors from introducing similar products or that such patents, if challenged, will be upheld by the courts of any jurisdiction. i) The sale of medical devices entails an inherent risk of liability in the event of product failure or claim of harm caused by product operation. There can be no assurance that the Company will not be subject to such claims, that any claims will be successfully defended or if the Company is found liable, that the claim will not exceed the limits of the Company's insurance. The Company currently maintains product liability insurance; however, there is no assurance that the Company will be able to maintain adequate product liability insurance on acceptable terms in the future. j) Regulation is a significant factor in the development and marketing of the Company's products and in the Company's ongoing manufacturing and research and development activities. The Company and its products are regulated, in part, by the Federal Food, Drug, and Cosmetic Act which is administered by the United States Food and Drug Administration. The process of obtaining required regulatory clearances or approvals for products can be time-consuming and expensive. k) The Company is highly-dependent upon the efforts and abilities of certain of its senior management personnel. The loss of any of these individuals could have a material adverse effect on the Company, its operations and its prospects. Business Combination SHP was organized November 19, 1993, with a commercial objective to develop, manufacture, and market safe, easy-to-use and cost-effective products for the health care industry. SHP entered into a business combination in July 1995 with Russco, Inc. ("Russco") wherein it became a wholly owned subsidiary of Russco and Russco's name was changed to Specialized Health Products International, Inc. Russco was organized in February 1986 as a public company to evaluate, structure, and complete a merger with, or acquisition of, any privately held business seeking to obtain the perceived advantages of being a publicly owned company. Russco had no significant operations and minimal capital with which to conduct its business. At the closing of the business combination, the 300,000 shares of Russco's common stock previously outstanding (as adjusted for a reverse stock split) remained outstanding as common stock of the Company and Russco issued 3,602,403 shares of its common stock for all of the issued and outstanding shares of SHP's common stock and preferred stock. The business combination was treated as a reverse merger for accounting purposes. SHP was shown as the acquiring company even though Russco issued its common shares to acquire SHP because the stockholders of SHP received the significant majority of the outstanding common stock of the Company. In addition, management of SHP became the management of F-12 the Company. Because Russco had limited operations, the business combination was accounted for as a purchase transaction with the net assets of Russco (which were insignificant) being recorded at their fair value at the date of closing and operating results of Russco prior to the business combination not being included with the historical operating results of SHP. Contemporaneously with the business combination, SHP engaged in a private placement of securities wherein 4,376,250 shares of the Company's common stock were issued for consideration of $7,519,060, net of offering costs, as more fully discussed in Note 7. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of SHPI and its wholly owned subsidiary, SHP. All material intercompany balances and transactions have been eliminated in consolidation. Pervasiveness of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents are comprised of a checking and money market account at a bank. The Company considers all investments with original maturities of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. Property and Equipment Property and equipment are stated at cost and consist primarily of manufacturing molds and equipment, office furniture and fixtures and construction-in-progress. Manufacturing molds and equipment are depreciated using the straight-line method over seven years or the units-of-production method, whichever is greater. All other property and equipment are depreciated using the straight-line method based on the estimated useful lives of the related assets which is five years. Maintenance and repairs are charged to expense as incurred and costs of improvements and betterments are capitalized. Upon disposal or sale, the related asset costs and accumulated depreciation are removed from the accounts and resulting gains or losses are reflected in current operations. Costs incurred in connection with the fabrication and construction of manufacturing molds and equipment are capitalized as construction-in-progress. No depreciation is recognized on these assets until they are placed in service. Other Assets Other assets consist primarily of purchased technology rights and patents, and related patent costs such as outside legal fees. These costs are being amortized on a straight-line basis over seven years. Accumulated amortization totaled approximately $155,400 and $90,300 at December 31, 1996 and 1995, respectively. Management evaluates the recoverability of these costs on a periodic basis, F-13 based on sales of the product related to the technology, existing or expected sales contracts, revenue trends and projected cash flows. Revenue Recognition Sales are recognized when the product is shipped to the customer. Research and Development Costs Research and development costs are expensed as incurred. Income Taxes The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents. Fair Value of Financial Instruments The book value of the Company's financial instruments approximates fair value. The estimated fair values have been determined using appropriate market information and valuation methodologies. Net Loss Per Common Share Net loss per common share is based on the weighted average number of common shares outstanding. Stock options, warrants and preferred shares prior to conversion are not included in the calculation because their inclusion would be antidilutive, thereby reducing the net loss per common share. Reclassifications Certain reclassifications have been made in the prior years' consolidated financial statements to conform to the current year presentation. (3) INVESTMENT In October 1995, the Company entered into a Joint Venture Agreement (the "Agreement") with Zerbec, Inc. ("Zerbec"), a Texas corporation. Under the terms of the Agreement, the Company and Zerbec formed Quantum Imaging Corporation (the "Venture"), a Utah corporation, to develop, manufacture, distribute and market products and technologies using a patented solid state filmless digitized imaging system. For a 50 percent interest in the Venture (before dilution by potential financing investors), the Company was obligated to pay the Venture $15,000 a month, which in turn was paid to Zerbec to perform research and development on the Venture's behalf through March 31, 1997. Additionally, the Company was obligated to pay the general and administrative expenses of the Venture up to $15,000 per month through March 31, 1997. In accordance with an oral amendment to the Agreement, the Company is obligated to contribute an additional $25,000 to the Venture through June 1, 1997. The Company will continue to pay the general and administrative expenses of the Venture up to $15,000 per month through June 1, 1997. For the Venture to be successful, the Company estimates that an additional $3 million to $6 million in funding will be required. In addition, if at least $3 million in funding is not raised by June 1, 1997, Zerbec has the right to F-14 acquire two-thirds of the Company's interest in the Venture for one dollar (the "Zerbec Option"). The Company is trying to negotiate an agreement with Zerbec whereby the Company can acquire Zerbec's interest in the Venture or an extension of the date on which the Zerbec Option vests. There can be no assurance that the Company will be able to negotiate an agreement with Zerbec to acquire its interest in the Venture or an extension of the date on which the Zerbec Option vests. The Company contributed total capital to the Venture of approximately $435,200 and $83,600 during 1996 and 1995, respectively, all of which the Company expensed and the Venture used to fund research and development and to cover administrative expenses. The Company accounts for the Venture using the equity method. Assets and liabilities of the Venture were insignificant as of December 31, 1996 and 1995. (4) STOCKHOLDER LOANS During 1995 and 1994, prior to the business combination, certain existing stockholders made direct loans to SHP aggregating $385,000 and bearing interest at ten percent under a bridge loan agreement. Subscriptions under the bridge loan agreement were offered proportionately to stockholders based on the number of shares held. The subscribers to the bridge loan agreement were issued a total of 346,500 warrants permitting them to acquire an equal number of shares of common stock at $1.11 per share on or before December 31, 1996. No value was ascribed to the warrants. In connection with the business combination discussed in Note 1, the 346,500 warrants were exercised through conversion of the outstanding loans. (5) COMMITMENTS AND CONTINGENCIES Lease Obligations The Company leases office space, equipment, and vehicles under noncancelable operating leases. The following summarizes future minimum lease payments under operating leases at December 31, 1996: Year Ending December 31, 1997 $109,960 1998 56,547 1999 17,614 -------- $184,121 ======== Rental expense for the years ended December 31, 1996, 1995 and 1994 totaled approximately $72,000, $67,100 and $52,100, respectively. Royalty Agreements In connection with acquiring technology rights and patents, the Company has entered into various royalty agreements. Generally, the agreements call for royalties to be paid based on various percentages of revenues generated from the related technologies or patents. F-15 In order to maintain certain licenses, the Company is obligated to pay future minimum royalties, which royalties may be used to satisfy percentage royalty requirements. The following summarizes future minimum royalties at December 31, 1996: Year Ending December 31, 1997 $ 20,000 1998 160,000 1999 100,000 2000 100,000 2001 100,000 Thereafter 100,000 -------- $580,000 ======== As the Company has not generated any revenue from licensed technology rights and patents at December 31, 1996, no royalties have been accrued or paid. (6) STOCK OPTIONS During 1994, the Board of Directors of SHP approved a nonqualified stock option plan (the "SHP Option Plan") for its officers, directors and employees, and authorized 396,000 shares of common stock for issuance. During 1994, options to acquire 396,000 common shares were granted at prices ranging from $.39 to $1.11 per share. The exercise prices of the options were equivalent to the estimated fair market value of the underlying stock as determined by SHP's Board of Directors at the dates of grant. No options were exercised or lapsed during 1994. On the date of the business combination, as discussed in Note 1, all of the options issued under the SHP Option Plan became outstanding obligations of the Company. On September 1, 1995, options to acquire 288,000 shares were exercised, primarily by directors and officers of the Company, from which the Company received $209,500 in common stock subscriptions receivable. All common stock subscriptions receivable are due upon demand. During 1996, options to acquire 45,000 shares were exercised at $.39 per share and 22,500 options were canceled. The remaining 40,500 options will become exercisable during 1997. Effective September 1, 1995, the Company's Board of Directors approved the adoption of the Specialized Health Products International, Inc. Stock Option Plan (the "Option Plan"). The Option Plan is a nonqualified stock option plan and is administered by the Compensation Committee (the "Committee") made up of nonemployee members of the Board of Directors. The Option Plan provides for the issuance of 1,500,000 shares of common stock to officers, directors, other key employees and consultants which number may be adjusted from time to time by the Committee. As of December 31, 1996, the Company had granted options to purchase 1,491,000 shares of common stock under the Option Plan. The options will be granted at not less than 100 percent of the fair market value of the underlying common stock on the date of grant. The options are exercisable for the period as defined by the Committee at the date granted; however, no stock option will be exercisable more than five years from the date of grant. The Company applies APB Opinion No. 25 ("APB 25") and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for stock options granted to officers, directors and other key employees as options were granted at the intrinsic fair market value. F-16 The Company recognized $93,800 of consulting expense during 1996 related to certain options granted to nonemployee consultants. Had compensation cost been determined based on the fair value at the grant date for awards under its plans consistent with the method prescribed by Statement of Financial Accounting Standards No. 123 ("SFAS 123"), the Company's net loss and net loss per common share would have been increased to the pro forma amounts indicated below:
1996 1995 ---------- ------- Net loss: As reported $4,093,388 $2,930,878 Pro forma 4,130,140 3,841,677 Net loss per common share: As reported .48 .69 Pro forma .48 .90
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. A summary of the status of the Company's plans as of December 31, 1996 and 1995, and changes during the years ended on those dates is presented below:
1996 1995 ----------------------- --------------- Wtd. Avg. Wtd. Avg. Exercise Exercise Shares Prices Shares Prices Outstanding at beginning of year 1,279,810 $1.95 396,000 $ .67 Granted 319,190 2.63 1,171,810 2.00 Exercised (45,000) .39 (288,000) .73 Forfeited (22,500) .39 - --------- -------- Outstanding at end of year 1,531,500 2.10 1,279,810 1.95 ========== ========== Exercisable at end of year 1,187,000 2.04 1,117,000 2.00 ========== ========== Weighted average fair value of options granted $ 1.24 $ .82 ========== ==========
The following table summarizes information about the stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ------------------------------------ --------------------- Number Wtd. Avg. Number Range of Outstanding Remaining Wtd. Avg. Exercisable Wtd. Avg. Exercise Prices at December Contractual Exercise at December Exercise 31, 1996 Life Price 31, 1996 Price ----------- ----------- --------- ----------- ------- $.39 to $1.11 40,500 2.5 years $ .71 - $ - 2.00 1,171,810 3.7 2.00 1,117,000 2.00 2.63 319,190 4.8 2.63 70,000 2.63 --------- --------- $.39 to $2.63 1,531,500 3.9 years $2.10 1,187,000 $2.04 ========= =========
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in both 1996 and 1995: risk-free interest rate of 5.95 percent; expected dividend yields of zero percent; expected lives of 2.3 years; expected volatility of 68 percent. F-17 (7) COMMON AND PREFERRED STOCK In connection with the business combination discussed in Note 1, SHP completed a 9 for 1 forward stock split of both its common and preferred stock. The number of common and preferred shares and per share amounts presented in the accompanying consolidated financial statements have been restated for the effect of this split. Each common and preferred share of SHP was converted into one common share of the Company. In addition, the Company issued 90,000 shares of common stock to non-affiliated stockholders existing at the time of the private placement under antidilutive provisions. The Company completed a private placement of securities in July 1995, wherein 860.25 units were sold at $10,000 per unit for total consideration, net of expenses, of $7,519,060. This consideration was comprised of $7,279,060 of cash, $100,000 of debt converted to common stock, and common stock subscriptions receivable of $140,000. Each unit consisted of 5,000 shares of the Company's common stock and Series A warrants to purchase an aggregate of 3,000 shares of common stock at $3.50 per share. The private placement was completed contemporaneously with the business combination. Through this private placement, the Company sold an aggregate of 4,301,250 shares of the Company's $.02 par value common stock and Series A warrants to purchase an aggregate of 2,580,750 shares of the Company's common stock at a price of $3.00 per share, exercisable for a period of two years from the date of effectiveness of a registration statement covering the issuance of the shares of common stock underlying the Series A warrants. For services provided in connection with the private placement of securities, the underwriter received a commission of $860,251 in cash, 75,000 shares of common stock, Series A warrants to purchase 530,125 shares of common stock for $3.00 per share, and Series B warrants to purchase 1,290,375 shares of common stock for $2.00 per share. The warrants expire on the earlier of (a) two years from the effective date of a registration statement covering the issuance of the shares of common stock underlying such warrants which two year period shall be extended day-for-day for any time that a registration statement is not available, or (b) the date specified in a notice of redemption from the Company in the event that the closing price of the common stock for any ten consecutive trading days preceding such notice exceeds $6.00 per share and subject to the availability of a current prospectus covering the underlying shares. The Company may redeem all or a portion of the warrants, in each case at $.001 per warrant upon at least 20 days prior written notice to the warrant holders. The warrants may only be redeemed if a current prospectus is available with respect to the issuance of shares of common stock upon the exercise thereof. During 1995, the Company issued warrants to a nonaffiliated stockholder of the Company to purchase 45,000 shares of common stock at $1.67 per share. The warrants were exercised in full during 1996. There were no other Series A or Series B warrants exercised during 1996 or 1995. The Company has granted to a former director and certain officers of the Company the right to receive up to an aggregate of 2,000,000 additional shares of common stock based upon the achievement of certain levels of pre-tax consolidated net income ("PTNI") for 1996, 1997 or 1998. If PTNI equals or exceeds $1,500,000, $5,000,000, or $8,000,000 in any of these years the individuals will receive an aggregate of 350,000, 1,100,000, or 2,000,000 common shares, respectively, less shares previously received, but no more than an aggregate of 2,000,000 shares. The Company expects that the issuance of such shares will be deemed to be the payment of compensation to the recipients and will result in an expense to the Company in the year or years the shares are earned, in an amount equal to the fair market value of the shares. This expense could have a substantial negative impact on the earnings of the Company in the year or years in which the compensation expense is recognized. F-18 The effect of the expense associated with the issuance of the shares could place the Company in a net loss position for the relevant year, even though the PTNI was at a level requiring the issuance of the shares. Because the shares are issuable based on the results of a single year, the PTNI in a particular year could require the issuance of shares even though the cumulative PTNI for the three years 1996, 1997, and 1998, or any combination of those years, could reflect a lower amount of PTNI that would not require the Company to issue such shares or even a pre-tax net loss. During 1996, the Company did not issue any shares of common stock under this arrangement as the Company did not meet the PTNI requirement. (8) REDEEMABLE PREFERENCE STOCK Prior to the business combination, SHP had authorized 250,000 shares of redeemable preference stock with a par value of $1.50 per share, of which 160,000 shares were issued and outstanding at December 31, 1994. Each redeemable preference share was entitled to a cumulative annual dividend of nine percent of the par value from the date of original issue. Dividends were payable when and as declared by the Board of Directors. The preference stock was redeemed and related dividends were paid in cash at the time of the business combination. (9) INCOME TAXES The Company recognized no income tax expense in 1996, 1995 and 1994, due to net operating losses. The Company did not record the expected tax benefit related to the net operating losses and other deferred tax assets as these assets are being offset by a valuation allowance. Significant components of the Company's deferred income tax assets and deferred income tax liabilities as of December 31, 1996 and 1995, are comprised of the following:
1996 1995 ---------- -------- Deferred income tax assets: Net operating loss carryforwards $2,803,220 $ 1,374,198 Equity loss in joint venture - 31,214 Accrued vacation 33,649 19,894 Patent costs 30,983 19,244 Other 8,257 4,574 ---------- ----------- Total gross deferred tax assets 2,876,109 1,449,124 Less valuation allowance (2,794,882) (1,449,124) ---------- ----------- Net deferred income tax assets 81,227 - Deferred income tax liability - Property and equipment (81,227) - ---------- --------- Net deferred income tax liability $ - $ - ========== =========
The net change in the total valuation allowance for the years ended December 31, 1996 and 1995, was an increase of $1,345,758 and $1,109,545, respectively. At December 31, 1996, the Company had total tax net operating losses of $7,515,335 that can be carried forward to reduce federal income taxes. If not utilized, the tax net operating loss carryforwards begin to expire in 2009. As defined in Section 382 of the Internal Revenue Code, the Company has undergone a greater than 50 percent ownership change. Consequently, a certain amount of the Company's tax net operating loss carryforwards available to offset future taxable income in any one year may be limited. The maximum amount of carryforwards available in a given year is limited to the product of the Company's value on the date of ownership change and the federal long-term tax-exempt rate, plus any limited carryforwards not utilized in prior years. F-19 (10) RELATED-PARTY TRANSACTIONS During 1996 and 1995, the Company advanced approximately $121,800 and $122,900 respectively, to a former director and stockholder of the Company. The advances are due on demand and are non-interest bearing. In addition, the Company paid to an entity, owned in part by this same former director and stockholder, approximately $203,100 and $231,500 during 1996 and 1995, respectively, for consulting and professional services rendered in behalf of the Company. As of December 31, 1996 and 1995, the net amount owed by and due the Company under these arrangements was approximately $73,200 and $122,850, respectively. The Company has entered into certain license agreements with a director and officer of the Company as a result of the acquisition of certain technology rights and patents. Under the terms of the agreements, the Company is obligated to pay minimum royalty payments totaling $435,000 over the next six years (see Note 5). (11) SUBSEQUENT EVENTS On March 31, 1997, the Company closed a private placement offering (the "Private Placement") wherein the Company raised approximately $1,539,500 through offering Units to certain accredited investors at $45 per Unit. Each Unit consists of 15 shares of the Company's common stock and Series C warrants to purchase five shares of the Company's common stock at a price of $3.00 per share. The Series C warrants are currently exercisable and expire two years from the date of effectiveness of a registration statement under the Securities Act of 1933 (the "Act") covering the resale of the shares of common stock underlying the Series C warrants by the holder, which period shall be extended day-for-day for any time that a prospectus meeting the requirements of the Act is not available. The Company may accelerate the expiration of the Series C warrants in the event that the average market price of the Company's common stock for ten consecutive trading days exceeds $6.00 per share. In the event that the Company accelerates the expiration of the Series C warrants, the holders of the Series C warrants would be permitted to exercise the Series C warrants during a period of not less than 20 days following notice of such event. Each investor was required to subscribe for a minimum of 400 Units ($18,000). On March 27, 1997, the Company entered into a letter of intent with Becton Dickinson and Company ("BD") which contemplates a license agreement related to the development, manufacture, distribution and commercialization of a product utilizing the Company's ExtreSafe(TM) technology. If a license agreement is consummated, the Company anticipates that BD will distribute at least one, and possibly several, of the Company's products utilizing the ExtreSafe(TM) technology on an exclusive basis. Under the terms of the letter of intent, BD would pay the Company $4 million in prepaid royalties and development fees in two equal payments. The first payment would be made within thirty days of execution of a license agreement and the second payment no later than March 1998. The proposal is subject to the satisfactory completion of a legal and business investigation and due diligence review of the Company's intellectual property portfolio by BD and the approval of the boards of directors of the Company and BD. F-20 EX-3.1.2 2 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. Specialized Health Products International, Inc., a corporation duly organized and existing under the General corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of the Corporation, resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation the Corporation be amended by restating "Article Eighth" thereto, to read in its entirety as follows: "AMENDMENT. Except as otherwise provided in this Certificate of Incorporation, the provisions of this Certificate of Incorporation may be amended by the affirmative vote of a majority of the shares entitled to vote on each such amendment. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors of the corporation is expressly authorized to make, alter and repeal the Bylaws of the corporation, subject to the power of the stockholders of the corporation to alter or repeal any Bylaw whether adopted by them or otherwise." SECOND: That thereafter, pursuant to resolution of its Board of Directors, at the annual meeting of the stockholders of the Corporation, duly called and held, upon notice in accordance with Section 222 of the General Corporation law of the state of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Corporation has caused this certificate to be signed by J. Clark Robinson, its authorized officer, this _____ day of December, 1996. By /s/ J. Clark Robinson -------------------------- Secretary EX-3.2.1 3 AMENDED AND RESTATED BYLAWS OF SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. ARTICLE I - OFFICES Section 1. Registered Office. The registered office of the Corporation in the State of Delaware shall be at 1013 Centre Road, Wilmington, Delaware 19805-1297. The registered agent in charge thereof shall be CSC Networks. Section 2. Other Offices. The Corporation may also have offices at such other places as the Board of Directors may from time to time appoint or the business of the Corporation may require. ARTICLE II - SEAL Section 1. Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". ARTICLE III - STOCKHOLDERS' MEETINGS Section 1. Place of Meetings. Meetings of stockholders shall be held at the registered office of the Corporation in this state or at such place, either within or without this state, as may be selected from time to time by the Board of Directors. Section 2. Annual Meetings. The annual meeting of the stockholders shall be held on such date as is determined by the Board of Directors for the purpose of electing directors and for the transaction of such other business as may properly be brought before the meeting. Section 3. Election Of Directors. Elections of the directors of the Corporation shall be by written ballot. Section 4. Special Meetings. Special meetings of the stockholders may be called at any time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President of the Corporation, but such special meetings may not be called by any other person or persons. At any time, upon written request of any person or persons who have duly called a special meeting, it shall be the duty of the Secretary to fix the date of the meeting, to be held not more than sixty days after receipt of the request, and to give due notice thereof. If the Secretary shall neglect or refuse to fix the date of the meeting and give notice thereof, the person or persons calling the meeting may do so. Business transacted at all special meetings shall be confined to the objects stated in the call and matters germane thereto, unless all stockholders entitled to vote are present and consent. Written notice of a special meeting of stockholders stating the time and place and object thereof, shall be given to each stockholder entitled to vote thereat at least ten days before such meeting, unless a greater period of notice is required by statute in a particular case. Section 5. Quorum. A majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares entitled to vote is represented at a meeting, a vote of one-third of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 6. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. All proxies shall be filed with the Secretary of the meeting before being voted upon. Section 7. Notice Of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. Section 8. Consent in Lieu of Meetings. Any action required to be taken at any annual or special meeting of stockholders of a Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 9. List of Stockholders. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. No share of stock upon which any installment is due and unpaid shall be voted at any meeting. The list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. ARTICLE IV - DIRECTORS Section 1. Powers; Number and Term of Office. The business and affairs of this Corporation shall be managed by its Board of Directors. The number of directors of the Corporation shall be fixed from time to time by these Bylaws, but in no event shall be less than three. Until these Bylaws are further amended, the number of directors shall be nine. The directors shall be divided into classes in the manner provided in the Certificate of Incorporation. The directors need not be residents of this state or stockholders in the Corporation. They shall be elected by the stockholders of the Corporation or in the case of a vacancy by remaining directors, and each director shall be elected until his successor shall be elected and shall qualify or until his earlier resignation or removal. Section 2. Regular Meetings. Regular meetings of the Board shall be held without notice other than this Bylaw immediately after, and at the same place as, the annual meeting of stockholders. The directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. Section 3. Special Meetings. Special Meetings of the Board may be called by the President or any director upon two day notice. The person or persons authorized to call special meetings of the directors may fix the place for holding any special meeting of the directors called by them. Section 4. Quorum. A majority of the total number of directors shall constitute a quorum for the transaction of business. Section 5. Consent In Lieu Of Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. The Board of Directors may hold its meetings, and have an office or offices, outside of this state. Section 6. Conference Telephone. One or more directors may participate in a meeting of the Board, of a committee of the Board or of the stockholders, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other; participation in this manner shall constitute presence in person at such meeting. Section 7. Compensation. Directors as such, shall not receive any stated salary for their services, but by resolution of the Board, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board PROVIDED, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 8. Removal. A director may be removed from office for cause only and, subject to such removal, death, resignation, retirement or disqualification, shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and qualified. ARTICLE V - OFFICERS Section 1. Officers. The executive officers of the Corporation shall be chosen by the directors and shall be a President, Secretary and Treasurer. The Board of Directors may also choose a Chairman, one or more Vice Presidents and such other officers as it shall deem necessary. Any number of offices may be held by the same person. Section 2. Salaries. Salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors. Section 3. Term Of Office. The officers of the Corporation shall hold office until his successor is elected or until his earlier resignation or removal. Any officer or agent elected or appointed by the Board may be removed by the Board of Directors whenever in its judgment the best interest of the Corporation will be served thereby. Section 4. President. The President shall be the chief executive officer of the Corporation; he shall preside at all meetings of the stockholders and directors; he shall have general and active management of the business of the Corporation, shall see that all orders and resolutions of the Board are carried into effect, subject, however, to the right of the directors to delegate any specific powers, except such as may be by statute exclusively conferred on the President, to any other officer or officers of the Corporation. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation. He shall be EX-OFFICIO a member of all committees, and shall have the general power and duties of supervision and management usually vested in the office of President of a corporation. Section 5. Secretary. The Secretary shall attend all sessions of the Board and all meetings of the stockholders and act as clerk thereof, and record all the votes of the Corporation and the minutes of all its transactions in a book to be kept for that purpose, and shall perform like duties for all committees of the Board of Directors when required. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, and under whose supervision he shall be. He shall keep in safe custody the corporate seal of the Corporation, and when authorized by the Board, affix the same to any instrument requiring it. Section 6. Treasurer. The Treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, and shall keep the moneys of the Corporation in a separate account to the credit of the Corporation. He shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and directors, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. ARTICLE VI - VACANCIES Section 1. Power to Fill Vacancies. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise, shall be filled by the Board of Directors. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. If at any time, by reason of death or resignation or other cause, the Corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of these Bylaws. Section 2. Resignations Effective at Future Date. When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective. ARTICLE VII - CORPORATE RECORDS Section 1. Inspection. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the Corporation's stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in this state or at its principal place of business. ARTICLE VIII - STOCK CERTIFICATES, DIVIDENDS, ETC. Section 1. Certificates. The stock certificates of the Corporation shall be numbered and registered in the share ledger and transfer books of the Corporation as they are issued. They shall bear the corporate seal and shall be signed by the President and Secretary of the Corporation. Section 2. Transfers. Transfers of shares shall be made on the books of the Corporation upon surrender of the certificates therefor, endorsed by the person named in the certificate or by attorney, lawfully constituted in writing. No transfer shall be made which is inconsistent with law. Section 3. Lost Certificate. The Corporation may issue a new certificate of stock in the place of any certificate theretofore signed by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 4. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. (c) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (d) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 5. Dividends. The Board of Directors may declare and pay dividends upon the outstanding shares of the Corporation, from time to time and to such extent as they deem advisable, in the manner and upon the terms and conditions provided by statute and the Certificate of Incorporation. Section 6. Reserves. Before payment of any dividend there may be set aside out of the net profits of the Corporation such sum or sums as the directors, from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interests of the Corporation, and the directors may abolish any such reserve in the manner in which it was created. ARTICLE IX - MISCELLANEOUS PROVISIONS Section 1. Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate. Section 2. Fiscal Year. The fiscal year shall begin on the first day of January. Section 3. Notice. Whenever written notice is required to be given to any person, it may be given to such person, either personally or by sending a copy thereof through the mail, or by telegram, charges prepaid, to his address appearing on the books of the Corporation, or supplied by him to the Corporation for the purpose of notice. If the notice is sent by mail or by telegraph, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office for transmission to such person. Such notice shall specify the place, day and hour of the meeting and, in the case of a special meeting of stockholders, the general nature of the business to be transacted. Section 4. Waiver Of Notice. Whenever any written notice is required by statute, or by the Certificate or the Bylaws of this Corporation a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Except in the case of a special meeting of stockholders, neither the business to be transacted at nor the purpose of the meeting need be specified in the waiver of notice of such meeting. Attendance of a person either in person or by proxy, at any meeting shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. Section 5. Resignations. Any director or other officer may resign at any time, such resignation to be in writing and to take effect from the time of its receipt by the Corporation, unless some time be fixed in the resignation and then from that date. The acceptance of a resignation shall not be required to make it effective. ARTICLE X - ANNUAL STATEMENT Section 1. Annual Statement. The President and the Board of Directors shall present at each annual meeting a full and complete statement of the business and affairs of the Corporation for the preceding year. Such statement shall be prepared and presented in whatever manner the Board of Directors shall deem advisable and need not be verified by a Certified Public Accountant. ARTICLE XI - INDEMNIFICATION AND INSURANCE Section 1. (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding") , by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition: provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. (b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of this Section is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard or conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard or conduct. (c) Non-Exclusivity of Rights. Notwithstanding any limitation to the contrary contained in sub-paragraphs (a) and (b) of this section, the Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (d) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. ARTICLE XII - AMENDMENTS Section 1. Amendment of Bylaws. These Bylaws may be amended or repealed by the vote of directors. EX-27 4
5 THIS SCHEDULE COTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN IS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 DEC-31-1996 252,694 0 1,159 0 15,710 366,376 1,352,002 165,025 1,848,839 335,622 0 0 0 173,133 1,340,084 1,848,839 74,563 74,563 70,257 70,257 4,237,983 0 0 (4,093,388) 0 (4,093,388) 0 0 0 (4,093,388) (.48) (.48)
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