-----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, WWuqweLYcH9+f3MzqbxjicDVIKZHnDZ1St4BJa3ZaMT14nGiqC3lm/HPcR9gvOdR IIqU0/07TcLa0+BNQrB/iQ== 0000931731-96-000142.txt : 19960627 0000931731-96-000142.hdr.sgml : 19960627 ACCESSION NUMBER: 0000931731-96-000142 CONFORMED SUBMISSION TYPE: 10-K/A CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960626 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECIALIZED HEALTH PRODUCTS INTERNATIONAL INC CENTRAL INDEX KEY: 0000790228 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 930945003 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-26694 FILM NUMBER: 00000000 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/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ FORM 10-K/A (Amendment No. 1) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 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 incorporation) no.) 655 East Medical Drive, (801) 578-3580 Bountiful, Utah 84010 (Address of principal executive (Registrant's telephone number, offices) 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. [x] The aggregate market value of voting stock held by non- affiliates of the registrant at March 26, 1996, was $78,023,231. On that date, there were 8,566,653 outstanding shares of the registrant's common stock. 2 Item 6. Selected Financial Data. The following data have been derived from the Company's consolidated financial statements that have been audited by KPMG Peat Marwick LLP, independent auditors. 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 herein:
Period Ended (1) Nov. 19, Dec. 31, Dec. 1993 1994 31, (incept 1995 ion) to Dec. 31 , 1993 Statement of Operations Data: Sales $ _ 33,256 447,844 Cost of sales _ 21,669 294,171 ------------------------------------ Gross profit _ 11,587 153,673 Expenses: Research and development _ 290,950 804,639 Selling, general and 3,450 620,022 2,133,021 administrative Write off of operating assets _ _ 255,072 ------------------------------------ Total expenses 3,450 910,972 3,192,732 ------------------------------------ Operating loss (3,450) (899,385)(3,039,059) Net other income (expense) _ (7,563) 119,570 ------------------------------------ Net loss (3,450) (906,948)(2,919,489) Dividends on preference stock _ (16,780) (11,389) ------------------------------------ Net loss attributable to common $ (3,450) (923,728)(2,930,878) stockholders ===================================== Net loss per common share $ _ (.75) (.69) ===================================== Weighted average number of shares used for net loss per share 1,170,000 1,224,074 4,269,131 computation (2) ===================================== Balance Sheet Data (at period end): Working capital $ (12,150) (287,723) 4,194,568 Total assets 16,550 656,865 5,950,728 Long-term debt, less current _ 458,333 _ maturities Total stockholders equity (2,150) (355,878) 5,369,805 (deficit) __________________________________________________________ Notes: (1) Excludes Specialized Health Products International, Inc. (formerly, Russco, Inc.) which had no operations prior to the acquisition on July 28, 1995 wherein the Company acquired Specialized Health Products, Inc. (the "Acquisition"), and is immaterial. (2) 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 share amount.
3 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 the Company and SHP, on a consolidated basis, except where the context clearly indicates to the contrary. Prior to the Acquisition wherein the Company acquired SHP (See note 1 to the consolidated financial statements) the Company had no operations. Overview From its inception, the Company has incurred losses from operations. As of December 31, 1995, the Company had cumulative net losses totaling $3,858,056. To date, the Company's principal focus has been the design, development, testing, and evaluation of its Safety Cradle(R) sharps containers, SafetyStrip(TM) lancet, ExtreSafe(TM) medical needle technology, intravenous flow gauge system, 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. In 1994, the Company had limited sales of its sharps containers due, in part, to the fact the molds used to produce the sharps containers had not been completed and come on line. Certain of the Company's Safety Cradle(R) sharps container molds were completed in the first half of 1995, and additional Safety Cradle(R) sharps container molds were completed in the second half of 1995. As molds were completed, the Company's sales increased from $33,256 for 1994 to $447,844 for 1995. During the fourth quarter of 1995 the Company had sales of $5,503. The decrease in sales during the fourth quarter of 1995 was related to the Company's inability to use the molds during a good part of the fourth quarter of 1995 due to improvements that were being made to the molds. Said improvements were completed in the first quarter of 1996 and will affect sales during the first quarter of 1996. During the fourth quarter of 1995, the aggregate effect of year end adjustments, which relate to prior quarters, increased the net loss by approximately $457,000. These adjustments were primarily the result of a write off of operating assets and amounts capitalized as research and development and adjustments to consulting and expense reimbursement. The Company anticipates that commercial production of its SafetyStrip(TM) lancet, will commence in 1996. Provided the necessary FDA approvals are obtained, of which there is no assurance, the Company anticipates commercial production of the ExtreSafe(TM) catheter, ExtreSafe(TM) phlebotomy device and ExtreSafe(TM) syringe will commence in 1997. The Company's other ExtreSafe(TM) medical needle technology products, intravenous flow gauge and blood collection device are conceptual ideas in the research stage. No assurance can be given, however, that the Company will be able to adhere to these time frames or that such products will ever go to market. Years Ended December 31, 1995 and December 31, 1994 The Company had sales of $447,844 for the year ended December 31, 1995, and sales of $33,256 for the year ended December 31, 1994. These revenues were derived largely from the sale of sharps containers that were produced on a limited basis during 1994. Commercial manufacture and sale of additional sizes and versions of the Company's sharps containers were introduced in the third and fourth quarters of 1995. At present, the only product the Company is selling is its Safety Cradle(R) sharps container products. Moreover, during 1995 $418,509 or ninety- three percent of the Company's sales were through Moore Medical Corp., a non-exclusive distributor for the Safety Cradle(R) sharps container products. The Company does not have and has not had a distribution agreement with Moore Medical Corp. requiring Moore Medical Corp. to buy or sell any of the Company's products. The Company's trade accounts receivable were $350,718 at December 31, 1995, compared with $4,471 at December 31, 1994. Of the $350,718 amount, $348,266 was owed to the Company by a single distributor of the Company's sharps container products. The $348,266 was collected in full from the distributor on March 15, 1996. The Company believes the remaining trade accounts receivable owing as of December 31, 1995 are collectible. 4 Research and development expenses were $804,639 for the year ended December 31, 1995, compared with $290,950 for the year ended December 31, 1994. The Company's efforts in the year ended December 31, 1995, were focused on refining the design and molds for its Safety Cradle(R) sharps container products, and upon the design and development of its SafetyStrip(TM) and ExtreSafe(TM) medical needle technology, intravenous flow gauge system, and blood collection device. The Company's efforts in the year ended December 31, 1994, were focused on refining the design and producing molds for its Safety Cradle(R) sharps container products. General and administrative expenses were $2,133,021 for the year ended December 31, 1995, compared to $620,022 for the year ended December 31, 1994. The increased costs resulted largely from the following increases in expenditures. First, selling costs increased from $4,563 for the year ended December 31, 1994 to $360,694 for the year ended December 31, 1995. The increase in selling costs were primarily a result of an increase in the expenditures made by the Company to market and sell its Safety Cradle(R) sharps container products. Next, salaries and benefits increased from $201,328 for the year ended December 31, 1994 to $592,642 for the year ended December 31, 1995. The increase resulted primarily from the hiring of additional product development, sales and marketing personnel to support sales and commercialization of the Company's products as well as pay increases granted to certain of the Company's employees. Next, legal, accounting and other professional and consulting fees increased from $179,674 for the year ended December 31, 1994 to $548,034 for the year ended December 31, 1995. The increase in costs was primarily from accounting and legal expenses associated with the Acquisition, the filing of a Form S-1 registration statement, increased financing activities and expenses associated with litigation. Finally, travel and entertainment costs increased from $56,812 for the year ended December 31, 1994 to $182,989 for the year ended December 31, 1995. The increase resulted primarily from increased costs associated with financing, manufacturing, selling and marketing activities. Net other income was $119,570 for the year ended December 31, 1995, compared with net other expense of $7,563 for the year ended December 31, 1994. The other income for year ended December 31, 1995, relates primarily to interest earned on funds derived from the sale of the Company's equity securities in a private placement which closed in August 1995 wherein the Company raised gross proceeds of $8,602,500 (net proceeds of $7,519,060). Net other expense was $7,563 for the year ended December 31, 1994. The other expense relates to the accrued interest on certain notes payable and the interest on the Company's line of credit. Year Ended December 31, 1993 SHP was formed in November of 1993. SHP had no revenues from inception to December 31, 1993. The principal activity of SHP during this period was negotiation and acquisition of the certain intellectual property relating to the sharps containers. SHP had no research and development or financing expenses. The general and administrative expenses of SHP totaled $3,450, which were devoted largely to activities relating to the acquisition of the Sharp-Trap(R) patents, (See "Business") patent applications and related intellectual property. During the periods prior to November 1993, the Company (not including SHP) had no operations and its financial results were immaterial 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 borrowings and private placements of equity securities and debt. Through December 31, 1995, the Company had received net cash from financing activities approximately $9,100,000 through financing activities. The bulk of the proceeds from the Company's financing activities resulted from the sale of equity securities. As of December 31, 1995, the Company's liabilities totaled $580,923. All of these liabilities are current liabilities. The Company had working capital at the year ended December 31, 1995 of $4,194,568 and the Company used net cash in operating activities of $2,605,616 in 1995. 5 The Company has 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 Common Stock underlying such Warrants, 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. Prior to the Acquisitions, SHP issued to a nonaffiliated shareholder a warrant to purchase 45,000 shares of Common Stock at $1.67 per share. Said warrant was issued by SHP in exchange for cash. This warrant expires in 1996 and became an outstanding obligation of the Company, rather than of SHP, on July 28, 1995 (the date of the Acquisition). On September 1, 1995, the Company adopted a Company's non- qualified stock option plan ("NQSOP") wherein the Company is authorized to grant options to purchase up to 1,284,998 shares of Common Stock of the Company. Pursuant to the NQSOP, in September 1995, the Company granted stock options to purchase 1,151,810 shares of Common Stock, and in November , the Company issued stock options to purchase 20,000 shares of Common Stock. All of these stock options are immediately exercisable. These options expire in 2000. In addition to the options outstanding under the NQSOP, the Company also has 108,000 options outstanding that were issued under the SHP NQSOP and that became obligations of the Company pursuant to the terms of the Acquisition. The SHP NQSOP options allows the holders thereof to purchase 108,000 shares of the Company's common stock at $0.39 per share. In April 1996, 22,500 of options issued under the SHP NQSOP expired and 22,500 such options were exercised. The remaining 63,000 outstanding SHP NQSOP options expire in 2004. The Company also gave 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 expense arising from the obligation to issue or the issuance of the Earn- Out Shares and any income or expense 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 the payment of compensation to the recipients and will result in a charge to the earnings of the Company 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. 6 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 thought he 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. 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 expense 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. In October, 1995, the Company entered into an agreement with a third party to form a joint venture (the "Venture"), in the form of a corporation (Quantum Imaging Corporation) to develop an improved filmless digitized imaging system. For a fifty percent interest in the Venture (before dilution by financing investors), the Company is obligated to pay the Venture $15,000 per month for a twelve month period. The Company contributed total capital of $83,624 to the Venture during 1995. The Company's obligations to the Venture are cancelable upon thirty (30) days written notice or failure of the other Venture partner to meet requirements as specified in the Venture agreement. In the opinion of Company management, in order to be successful the Venture must raise between $3,000,000 and $6,000,000. The Company contributed total capital of $83,624 to the Venture during 1995. It is anticipated that at least one-third of the outstanding shares of the Venture will be sold to fund development through initial production of related filmless digitized imaging systems. No assurance can be given that the system will find profitable acceptance in the marketplace. See "Business _ Products Under Development." 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 SafetyStrip(TM) and ExtreSafe(TM) medical needle technology, intravenous flow gauge system, phlebotomy device and other products to commercial viability, the cost and effort needed to complete production of the Sharp-Trap(R) molds, the level of sales and marketing for the Safety Cradle(R) sharps containers, and the resources that will be expended in SHP's lawsuit against Mold Threads, Inc. t present, the Company has committed to spend $103,805 during fiscal 1996 on projects relating to the development and manufacture of its products. The Company believes that the funds described above and funds generated from the sale of its Safety Cradle(R) sharps container products, will be sufficient to support the Company's operations and planned capital expenditures at least through fiscal 1996. The Company's failure either to produce or sell sufficient quantities of Safety Cradle(R) sharps container products 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. Inflation The Company does not expect the impact of inflation on operations to be significant. Backlog There are no material backlog of unfilled orders of the Company's products. Future Results This document contains both historical facts and forward- looking statements. Any forward-looking statements involves 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. As a result, the Company's actual future operations could differ significantly from those discussed in the forward-looking statements. 7 PART III 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 $100,000 (determined as of December 31, 1995) (the "Named Executive Officers"). The tables include columns related to stock options. Summary Compensation Table. The following table provides certain summary information regarding compensation paid by the Company to the Named Executive Officers. The amounts set forth were paid by SHP for services rendered to SHP. The Company had no operations and paid no compensation to management prior to July 28, 1995, when the Company acquired SHP. On that date, the previous management of the company resigned and the current management, as described herein, assumed their present positions. SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards Restr Stock All Name and Other icted Optio LTIP Other Principal Salary Bonus Annual Stock ns/ Payou Compe Position Year ($)(1) ($)(2) Compens Awards SAR(#) ts($) nsation ation($) ($) ($) - ----------------------------------------------------------------------------- David A. 1993 --- --- --- --- --- --- --- Robinson, 1994 120,000 --- --- --- 90,000(4) --- --- President, 1995 193,590 25,000 --- 666,666(3) 300,000(5) --- 1,876 CEO, Chairman of the Board and Director Bradley C. 1993 --- --- --- --- --- --- --- Robinson, VP, 1994 89,128 --- --- --- 90,000(4) --- --- Operations 1995 148,590 25,000 --- 666,666(3) 300,000(5) --- 625 and Investor Relations and Director Dr. Gale H. 1993 --- --- --- --- --- --- --- Throne, VP 1994 16,958 --- --- --- 36,000(6) --- --- Product 1995 128,333 25,000 --- --- 57,000(5) --- 2,758 Development and Director _______________ (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 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 expense arising from the obligation to issue or the issuance of the Earn-Out Shares and any income or expense 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, 1995, the Company's common stock was trading at $8.63. 8 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 $8,000,000, then there will be issued that aggregate number of Earn-Out Shares calculated by subtracting the number of Earn-Out Shares previously issued or issuable based on the attainment of a lesser Adjusted PTNI in the same year (if any) from 2,000,000, provided that in no event will an aggregate of more than 2,000,000 Earn-Out Shares be issued. (4) These options were exercised on September 1, 1995 and were issued under the SHP NQSOP. (5) These options were issued pursuant to the NQSOP. (6) Options to purchase 18,000 shares of the Company's Common Stock were exercised on September 1, 1995 and options to purchase 18,000 shares of the Company's Common Stock become exercisable in July 1996. Said options were issued under the SHP NQSOP. (7) These amounts represent the amounts paid by the Company for term life insurance for the benefit of the Named Executive Officer. The related insurance policies have no cash surrender values.
Option Grants in Fiscal Year 1995. The following table sets forth certain information with respect to stock option grants during the year ended December 31, 1995 to Named Executive Officers. OPTION GRANTS IN LAST FISCAL YEAR (Adjusted to Reflect a Recapitalization of the Company's Common Stock)
Individual Grants Potential Number Percent Realizable of of Total Exerc Value at Shares Options ise Assumed Annual Underlyi Granted or Expira Rate of Stock ng to Base tion Price Options Employee Price Appreciation s in for Option Term Name Granted Fiscal Date 5% 10% (#) Year ($/Sh) David A. 300,000 25.6% 2.00 9/1/2000 $165,769 $366,306 Robinson Bradley C. 300,000 25.6% 2.00 9/1/2000 $165,769 $366,306 Robinson Dr. Gale H. 57,000 4.9% 2.00 9/1/2000 $ 31,496 $ 69,598 Thorne _______________ (1) These options were issued pursuant to the NQSOP and were exercisable on the date of grant.
9 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, 1995, 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 Value of Securities Unexercised Underlying In-the-Money Unexercised Options/SARs Shares Options/SARs at Fiscal Acquired Value at Fiscal Year-End($) Name On Realized Year-End($) Exercise ($) Exercisable/ Exercisable/ (#) Unexercisable Unexercisable(3) David A. 90,000 180,000 300,000(1) $2,100,000 Robinson Bradley C. 90,000 180,000 300,000(1) $2,100,000 Robinson Gale H. 18,000 36,000 57,000(1)/18,000(2) $675,000 Thorne _______________ (1) Options exercisable at $2.00 per share. (2) Options become exercisable in July, 1996 at an exercise price of $.39 per share. (3) The trading price of the Company's common stock on December 31, 1995 was $9.00 per share.
Compensation of Directors During 1994, the non-employee members of the Board of Directors 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 of Directors. The Company has made no other agreements regarding the compensation of non-executive members of the Board of Directors. 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 cease as of the date of termination; (vi) the Company will provide the Senior Executives with $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. 10 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 a non- qualified stock option plan for its officers, directors and key employees ("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 November 15, 1995, options to acquire an aggregate of 63,000 shares of Common Stock at $.39 per share were outstanding under the SHP NQSOP. Also, in February 1995 (prior to the Acquisition) SHP issued to Max Lewinsohn, a nonaffiliated shareholder of the Company, a warrant to purchase 45,000 shares of Common Stock at $1.67 per share. Said warrant were issued to Mr. Lewinsohn in consideration for funds paid to SHP. The options issued under the SHP NQSOP expire in 1999 and the warrant issued to Mr. Lewinsohn expires in 1996. 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 become outstanding obligations of the Company and the SHP NQSOP was terminated. As of April 15, 1996, options to acquire an aggregate of 1,171,810 shares of Common Stock at $2.00 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 Registrant as of April 1, 1996, for: (i) each person who is known by the Registrant to beneficially own more than 5 percent of the Registrant's common stock, (ii) each of the Registrant's directors, (iii) each of the Registrant's Named Executive Officers, and (iv) all directors and executive officers as a group. As of April 1, 1996 the Company had 8,589,153 shares of common stock outstanding. 11
Name and Shares Percentage of Address Beneficially Shares Position of Beneficial Owned(2) Beneficially Owner(1) Owned David A. 630,219 7% President, Chief Robinson(3) Executive Officer, Chairman of the Board and Director Bradley C. 630,219 7% Vice President, Robinson(3) Operations and Director Gale H. 149,700 2% Vice President, Thorne(4) Product Development and Director J. Clark 245,000 3% Vice President , Robinson(5) Chief Financial Officer, Treasurer, Secretary and Director Gary W. 86,000 1% Director Farnes(6) Robert R. 83,000 1% Director Walker(7) Executive 1,824,138 20% Officers and Directors as a Group (6 Persons) John T. 647,465 7% Clarke(8) 4 Butterworth Gardens Woodford, Essex, England Capital Growth International(9) 11601 Wilshire Boulevard, 1,915,500 18% 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 330,219 shares and stock options to purchase 300,000 shares for each of these two persons. Does not include 666,666 Earn-Out Shares for each of these two persons which shares have not vested. (4) Includes 63,000 shares, stock options to purchase 57,000 shares and Series A Warrants to purchase 27,000 shares. Also includes 2,700 shares that Mr. Thorne is deemed to beneficially own as a result of their being owned in joint tenancy with his spouse. Does not include stock options to purchase 18,000 shares that become exercisable in July, 1996. 12 (5) Includes 90,000 shares and stock options to purchase 75,000 shares. Also includes 50,000 shares and Series A Warrants to purchase 30,000 shares that Mr. Robinson is deemed to beneficially own as a result of their being owned by a controlled entity. (6) Includes 61,500 shares, stock options to purchase 20,000 shares and Series A Warrants to purchase 4,500 shares. (7) Includes stock options to purchase 20,000 shares. Also includes 63,000 shares of which Mr. Walker is deemed to be the beneficial owner as a result of their ownership by a trust of which he is a trustor. (8) Includes 231,362 shares, stock option to purchase 300,000 shares and Series A Warrants to purchase 21,000 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, 59,103 shares owned by his spouse, and 18,000 shares owned by a minor child, which he is deemed to beneficially own. Does not include 666,666 Earn-Out Shares which shares have not vested. (9) Includes 75,000 shares, stock options to purchase 20,000 shares, Series A Warrants to purchase 530,125 shares and Series B Warrants to purchase 1,290,375, of which 430,125 Series A Warrants are to be transferred to distributors that assisted Capital Growth in the private placement completed on August 18, 1995, and as to which Capital Growth disclaims beneficial ownership.
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 shareholders 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 shareholders 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. Stanley Hollander, a former director of the Company, is an officer and director of the corporate managing member of Capital Growth, which holds 75,000 shares of Common Stock 530,125 Series A Warrants, 1,290,375 Series B Warrants and options to purchase 20,000 shares of the Company's Common Stock. Capital Growth received the Common Stock, Series A Warrants and Series B Warrants, together with a gross fee of $860,251, as consideration for placement agent services rendered on behalf of the Company during 1995. F-1 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 31, 1994, and 1995 F-3 Consolidated Statements of Operations for the period from November 19, 1993 (date of inception) to December 31, 1993, and for the years ended December 31, 1994 and 1995 F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the period from November 19, 1993 (date of inception) to December 31, 1993, and for the years ended December 31, 1994 and 1995 F-5 Consolidated Statements of Cash Flows for the period from November 19, 1993 (date of inception) to December 31, 1993, and for the years ended December 31, 1994 and 1995 F-6 Notes to Consolidated Financial Statements F-8 F-2 Independent Auditors' Report The Board of Directors and Stockholders Specialized Health Products International, Inc.: We have audited the accompanying consolidated balance sheets of Specialized Health Products International, Inc. and subsidiary as of DecemberE31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended and for the period from November 19, 1993 (date of inception) to DecemberE31, 1993. 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 as of December 31, 1994 and 1995, and the results of their operations and their cash flows for the years then ended and for the period from November 19, 1993 (date of inception) to December 31, 1993, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Salt Lake City, Utah February 2, 1996 F-4 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. Consolidated Balance Sheets December 31, 1994 and 1995
Assets 1994 1995 Current assets: Cash and cash equivalents $ - 4,251,584 Trade Accounts receivable 4,471 350,718 Related party receivable (note 11) - 122,850 Inventories - 16,322 Prepaid expenses and other 5,436 34,017 ---------------------------- Total current assets 9,907 4,775,491 ---------------------------- Equipment and furnishings, net of accumulated depreciation of $1,753 in 1994 and 285,770 812,049 and $8,196 in 1995 (note 3) Other assets, net of accumulated amortization of $27,564 in 1994 and $90,314 in 1995 361,188 363,188 ---------------------------- $ 656,865 5,950,728 ============================ Liabilities and Stockholders' Equity (Deficit) Current liabilities: Bank overdraft $ 10,675 - Accounts payable 84,655 134,449 Accrued expenses 7,800 446,474 Due to stockholders (note 11) 194,500 - ---------------------------- Total current liabilities 297,630 580,923 Stockholder loans (note 4) 358,333 - Due to stockholders - long-term (note 11) 100,000 - ---------------------------- Total liabilities 755,963 580,923 ---------------------------- 9% cumulative redeemable preference stock, $1.50 par value. Authorized 250,000 shares; 256,780 - 160,000 shares issued and outstanding in 1994 1994 (liquidation value $256,780) (note 8) Stockholders' equity (deficit) (notes 6 and 7): Preferred stock, $.389 par value in 1994 and $.001 par value in 1995. Authorized 5,000,000 shares; 1,440,000 560,000 - shares issued and outstanding in 1994 (liquidation value $560,000) and no shares issued and outstanding as of December 31, 1995 Common stock, no par value in 1994 and $.02 par value in 1995. Authorized 50,000,000 shares;issued and 209,800 171,333 outstanding 1,363,500 shares in 1994 and 8,566,653 shares in 1995 Common stock subscriptions receivable (198,500) (259,500) (note 6) Additional paid-in capital - 9,316,028 Accumulated deficit (927,178) (3,858,056) ------------------------------ Total stockholders' equity (deficit) (355,878) 5,369,805 ------------------------------ Commitments and contingencies (notes 2, 5, 7, 10, and 12) $ 656,865 5,950,728 =============================== See accompanying notes to consolidated financial statements
F-4 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. Consolidated Statements of Operations For the period from November 19, 1993 (date of inception) to December 31, 1993, and for the years ended December 31, 1994 and 1995 1993 1994 1995 ------------------------------------ Sales $ - 33,256 447,844 Cost of sales - 21,669 294,171 Gross profit - 11,587 153,673 Expenses: Research and development - 290,950 804,639 Selling, general and administrative 3,450 620,022 2,133,021 Write off of operating assets - - 255,072 -------------------------------------- Total expenses 3,450 910,972 3,192,732 ------------------------------------- Operating loss (3,450) (899,385) (3,039,059) Other Income (expense): Interest income - 237 135,428 Interest expense - (7,800) (15,858) --------------------------------------- Total other income (expense) - (7,563) 119,570 --------------------------------------- Net loss (3,450) (906,948) (2,919,489) Dividends on preference stock - (16,780) (11,389) Net loss attributable to common $ (3,450) (923,728) (2,930,878) stockholders ======================================= Net loss per common share $ - (.75) (.69) ======================================= Weighted average number of shares used for net loss per share 1,170,000 1,224,074 4,269,131 computation ======================================= See accompanying notes to consolidated financial statements.
F-5 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. Consolidated Statements of Stockholders' Equity (Deficit) For the period from November 19, 1993 (date of inception) to December 31, 1993, and for the years ended December 31, 1994 and 1995
Common stock Addit Net stock subsc ional Accumu- holders' Preferred Stock Common Stock ription paid-in lated equity Shares Amount Shares Amount recei capital deficit (deficit) vable ----------------------------------------------------------------------------------------------- Issuance of common stock - - 1,170,000 1,300 - - - 1,300 for cash at inception Net Loss - - - - - - (3,450) (3,450) -------------------------------------------------------------------------------------------- Balances at - $ - 1,170,000 $ 1,300 - - (3,450) (2,150) December 31, 1993 Issuance of preferred 1,440,000 560,000 - - - - - 560,000 stock for cash Issuance of common stock for services - - 193,500 208,500 (198,500) - - 10,000 and stock subscription receivable Unpaid - - - - - - (16,780) (16,780) dividends on preference stock Net loss - - - - - - (906,948) (906,948) -------------------------------------------------------------------------------------------- Balances at 1,440,000 560,000 1,363,500 209,800 (198,500) - (927,178) (355,878) December 31, 1994 Issuance of preferred 362,403 604,001 - - - - - 604,001 stock for cash Cash received for stock - - - - 190,000 - - 190,000 subscriptions receivable Services provided for - - - - 8,500 - - 8,500 stock subscriptions receivable Unpaid dividends on preference - - - - - - (11,389) (11,389) stock Conversion of debt for common - - 346,500 385,000 - - - 385,000 stock (note 4) Issuance of additional common shares - - 90,000 180,000 - (180,000) - - to stockholders under antidilution provisions Business (1,802,403) (1,164,001) 2,102,403 (696,752) - 1,860,753 - - combination (note 1) Issuance of common stock - - 4,256,250 85,125 - 7,193,935 - 7,279,060 for cash net of expenses (note 7) Conversion of debt for common - - 50,000 1,000 - 99,000 - 100,000 stock (note 7) Issuance of common stock for subscription - - 70,000 1,400 (140,000) 138,600 - - receivable (note 7) Cash received for stock subscription receivable - - - - 90,000 Exercise of stock options for common - - 288,000 5,760 (209,000) 203,740 - - stock subscription receivable ---------------------------------------------------------------------------------------------- Balances at - $ - 8,566,653 $ 171,333 (259,500) 9,316,028 (3,858,056) 5,369,805 December 31, 1995 ============================================================================================== See accompanying notes to consolidated financial statements.
F-6 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. Consolidated Statements of Cash Flows For the period from November 19, 1993 (date of inception) to December 31, 1993, and for the years ended December 31, 1994 and 1995
1993 1994 1995 Cash flows from operating activities: Net loss $ (3,450) (906,948) (2,919,489) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization - 29,317 74,542 Common stock issued for services - 10,000 8,500 Loss on sale of equipment - - 1,291 Write off of operating assets - - 255,072 Changes in operating assets and liabilities: Increase in trade accounts receivable - (4,471) (346,247) Increase in prepaid expenses and other (146) (5,290) (28,581) assets Decrease (increase) in inventories (6,104) 6,104 (16,322) Increase in related party receivable - - (122,850) Increase in accounts payable and accrued - 92,455 488,468 expenses ------------------------------- Net cash used in operating activities (9,700) (778,833) (2,605,616) ------------------------------- Cash flows from investing activities: Proceeds from the sale of equipment - - 2,943 Capital expenditures - (287,523) (797,377) Payments to acquire patents and technology (10,000) (278,752) (64,750) Net cash used in investing activities (10,000) (566,275) (859,184) Cash flows from financing activities: Borrowings on due to stockholders - 194,500 - Payments on due to stockholders - - (194,500) Proceeds from issuance of stockholder loans 18,700 339,633 44,167 Payments on stockholder loans - - (17,500) Proceeds from issuance of common stock 1,300 - 7,279,060 Proceeds from issuance of preferred stock - 560,000 604,001 Proceeds from issuance of redeemable - 240,000 - preference stock Payments on redeemable preference stock and - - (268,169) dividends Proceeds (payments) on bank overdraft - 10,675 (10,675) Proceeds from stock subscriptions - - 280,000 receivable ----------------------------- Net cash provided by financing activities 20,000 1,344,808 7,716,384 ----------------------------- Net increase (decrease) in cash 300 (300) 4,251,584 Cash at beginning of year - 300 - ----------------------------- Cash at end of year $ 300 - 4,251,584 ============================== F-7 Supplemental Disclosure of Cash Flow Information Cash paid during the year for interest $ - - 15,858 Supplemental Disclosures of Noncash Investing and Financing Activities Dividends on redeemable preference stock $ - 16,780 11,389 Common stock issued for subscription - 198,500 349,500 receivable Conversion of stockholder loans and due to - - 485,000 stockholders to common stock Acquisition of purchased technology and patents for stockholder payable - 100,000 - See accompanying notes to consolidated financial statements.
F-8 SPECIALIZED HEALTH PRODUCTS INTERNATIONAL, INC. Notes to Consolidated Financial Statements For the period from November 19, 1993 (date of inception) to December 31, 1993, and for the years ended December 31, 1994 and 1995 (1)Summary of Significant Accounting Policies (a)Organization and Business Description Specialized Health Products, Inc. (Specialized Health) 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. Initial development has focused on products that limit or prevent the spread of blood-borne diseases. The Company has several products currently in the production or development stage. The sharps container is the only product which is currently in the production stage. This device is designed to provide means for disposing of sharps in order to reduce the potential for accidental needle sticks. The other two major product lines are the lancet and the needle withdrawal technology; both are in the development stage. The lancet device is designed to provide a nonreusable, safer, and less painful way of obtaining small blood samples from patients. The needle withdrawal technology is designed to automatically retract needles while providing permanent and safe containment of the needle. Specialized Health's activities since inception have principally consisted of obtaining financing, recruiting personnel, conducting research and development, developing products, and identifying and contracting with manufacturers. The Company conducts its operations primarily in the Continental United States. Specialized Health entered into a business combination in July 1995 with Russco, Inc. (Russco) wherein Specialized Health became a wholly-owned subsidiary of Russco and Russco's name was changed to Specialized Health Products International, Inc. (the Company). Russco was organized in February 1986 as a public blind pool 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 operations. At the closing of the business combination, (a) 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 (b) Russco issued 3,602,403 shares of its common stock for all of the issued and outstanding shares of Specialized Health's common stock and preferred stock. The business combination has been treated for accounting purposes as a "reverse merger" wherein Specialized Health has been shown as the acquiring company even though Russco issued its common shares to acquire Specialized Health because the stockholders of Specialized Health received the significant majority of the outstanding common stock of the Company and management of Specialized Health became the management of the Company. Because Russco had limited operations, the business combination has been 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 Specialized Health. Contemporaneously with the business combination, Specialized Health engaged in a private placement of securities wherein 4,376,250 shares of the Company's common stock were issued, net of offering costs, for consideration of $7,519,060, as more fully discussed in note 7. F-9 The accompanying consolidated financial statements subsequent to the business combination include the accounts of the Company and its wholly-owned subsidiary Specialized Health. All intercompany accounts and transactions have been eliminated in consolidation. Prior to the business combination Specialized Health had no subsidiary. (b)Cash and Cash Equivalents Cash and cash equivalents are comprised of a checking and money market account. The Company considers all investments with original maturities of three months or less to be cash equivalents. (c)Inventories Inventories which consist primarily of finished goods are stated at the lower of cost or market. Cost is determined using the first-in first-out method. (d) Other Assets The Company has included in other assets at December 31, 1994 and 1995, the cost of purchased technology and patents, and related patent costs amounting to $388,752 and $453,502, respectively, which is being amortized using the straight-line method over seven years. These assets include the following technologies: acquisitions from third parties include a catheter closure patent; lancet patent; the sharps container technology acquired from Sharp-Trap, Inc.; and an Automatic Needle Withdrawing and Securing System purchased from Gale H. Thorne, a director and employee. Management evaluates the recoverability of these costs on a periodic basis, based on sales of the product related to the technology, revenue trends, and projected cash flows based on estimates of future sales. (e)Equipment and Furnishings Equipment and furnishings are stated at cost and consist primarily of manufacturing molds and equipment, and office furniture and fixtures. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets which is 5 years with the exception of manufacturing equipment which is depreciated on the straight-line method over 7 years or the units-of-production method whichever is greater. (f) Revenue Recognition Revenues are recognized upon shipment of products. Sales recorded in the year ended DecemberE31, 1994, relate primarily to products received upon acquisition of technology and patents. F-10 (g) Research and Development Costs Research and development costs are expensed as incurred. (h)Income Taxes Income taxes are recorded using the asset and liability method for all periods presented in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (i)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 and reduce the net loss per share amount. (j)Reclassification Certain amounts in 1994 have been reclassified to conform with 1995 classifications. (k)Fair Value Disclosure At December 31, 1995, the book value of the CompanyOs financial instruments approximates fair value. (l)Use 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-11 (2)Investments In October 1995, the Company entered into an agreement with a third party to form a joint venture Quantum Imaging Corporation (Venture) to develop an improved filmless X-Ray system. For a fiftyEpercent interest in the Venture (before dilution by financing investors), the Company is obligated to pay to the Venture $15,000 a month, which is paid to the other Venture partner to perform research and development on the VentureOs behalf. Additionally, the Company is obligated to pay the general and administrative expenses of the Venture up to $15,000 per month. These obligations continue through September of 1996, and are cancelable only upon 30 days written notice and failure of the other Venture partner to meet requirements as specified in the Venture agreement. Unless this agreement is terminated, the Company is obligated at December 31, 1995 for a minimum of $135,000 and up to an additional $135,000 as general and administrative expenses are incurred by the Venture. In managementOs opinion, for the Venture to be successful, it must raise between $3,000,000 and $6,000,000. The Company contributed total capital of $83,624 to the joint venture during 1995, all of which the Company expensed and the Venture used to fund research and development and administrative expenses. Assets and liabilities as of December 31, 1995 were immaterial. (3) Equipment and Furnishings Equipment and furnishings consist of the following: 1994 1995 ------------------ Assembly and manufacturing equipment $ 750 33,605 Manufacturing molds 276,370 245,753 Office furnishings and fixtures 10,403 144,992 Construction-in-progress - 395,895 ------------------ 287,523 820,245 Less accumulated depreciation (1,753) (8,196) ------------------ $ 285,770 812,049 During 1995, operating assets comprised primarily of manufacturing molds totaling $255,072 were written off. The molds became obsolete due to design changes in the sharp container technology. F-12 (4)Stockholders' Loans During 1994 and 1995, prior to the business combination certain existing stockholders made direct loans to Specialized Health 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 $1.11Eper share on or before DecemberE31, 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)Leases The Company leases office space, equipment, and vehicles under noncancelable operating leases. Future minimum lease payments under these leases are as follows: Fiscal year ending December 31: 1996 $ 107,972 1997 93,132 1998 38,718 ----------- $ 239,822 Rent expense was $1,881 for the period from November 19, 1993 (date of inception) to December 31, 1993, $52,051 in 1994, and $67,091 in 1995. (6) Stock Options In 1995, the Company adopted a nonqualified stock option plan whereby it has reserved 1,284,998 shares of its common stock for issuance to officers, directors, and employees. At the time of adoption, the Company granted options to acquire 1,171,810 shares of common stock at $2.00 per share of which 1,117,000 vested immediately, and 54,810 vest at various times over the next three years. The options expire five years from date of grant. During 1994, the Board of Directors of Specialized Health approved a nonqualified stock option plan for its officers, directors, and employees and authorized 396,000 shares of common stock for issuance upon the exercise of options granted under this plan. 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. During 1994, options to acquire 396,000 common shares were granted at a price range of $.39 to $1.11 per share. No options were exercised or lapsed during 1994. On SeptemberE1, 1995, options to acquire 288,000 shares were exercised from which the Company received $209,500 in a common stock subscription receivable. All common stock subscription receivables are due within one year. The remaining 108,000 shares will become exercisable over the next eighteen months, have an option price of $.39 per share, and expire in 2004. F-13 (7)Preferred and Common Stock The Company has authorized 50,000,000 shares of common stock with $.02 par value and 5,000,000 shares of preferred stock with a par value of $.001 per share. In connection with the business combination discussed in note 1, Specialized Health 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. In addition, the Company issued 90,000 shares of common stock to non- affiliated shareholders existing at the time of the private placement under antidilutive provisions. Specialized Health and the Company engaged in a private placement of securities in JulyE1995, wherein 860.25 units were sold for $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 a common stock subscription receivable of $140,000. The private placement was completed contemporaneously with the business combination. In the private placement, the Company sold an aggregate of 4,301,250 shares of the Company's $.02Epar 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 under the Securities Act covering the issuance of the shares of common stock underlying such warrants 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. At December 31, 1995 the Company has a common stock subscription receivable amounting to $50,000 from the underwriter. The underwriter had a continuing relationship with the Company pursuant to which the underwriter was to provide financial advisory and investment banking services to the Company through July 1997. The Company was to pay the underwriter $4,000 per month for such services. Additionally, the underwriter had the right of first refusal to undertake any financings of the Company during this period. Subsequent to year end, the Company amended their agreement with the underwriter canceling the monthly service fees and the underwriters right of first refusal. The Company signed a new agreement with PaineWebber to act as its exclusive financial advisor and to assist in the development of strategic alliances. Also, during 1995 the Company issued a warrant to a nonaffiliated stockholder of the Company to purchase 45,000 shares of common stock at $1.67 per share. This warrant expires in 1996. F-14 Each preferred and common share of Specialized Health was converted into one common share of the Company in connection with the business combination. The Company has granted to a director and certain officers the right to receive up to an aggregate of 2,000,000 additional shares of common stock based upon the level of pre- tax consolidated net income (PTNI) for 1996, 1997, or 1998. If PTNI equals of exceeds $1,500,000, $5,000,000, or $8,000,000 in any of these years these 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 a charge to the earnings of the Company in the year or years the shares are earned, in an amount equal to the fair market value of the 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 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. (8)Redeemable Preference Stock Specialized Health 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 DecemberE31, 1994. Each redeemable preference share was entitled to a cumulative annual dividend of nineEpercent 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 and related dividends were paid in cash at the time of the business combination. F-15 (9)Income Taxes There was no income tax expense in 1993, 1994, and 1995, due to net operating losses. The difference between the expected tax benefit and the actual tax benefit is primarily attributable to the effect of start-up costs and net operating losses being offset by an increase in the Company's valuation allowance. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at DecemberE31, 1994 and December 31, 1995, are presented below: 1994 1995 Deferred tax assets: Organization costs $ 5,138 3,854 Start-up costs 1,030 720 Patent costs - 19,244 Net operating loss carryforwards 275,843 1,374,198 Accrued compensation 57,629 - Accrued vacation - 19,894 ---------------------- Total gross deferred tax assets 339,640 1,417,910 Less valuation allowance (339,579) (1,417,910) ---------------------- Net deferred tax assets 61 - Deferred tax liability - equipment, principally due to differences in 61 - depreciation ------------------------ Total gross deferred tax 61 - liability ------------------------ Net deferred tax liability $ - - ======================== The net change in the total valuation allowance for the years ended December 31, 1994 and 1995, was an increase of $338,292 and $1,078,331, respectively. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets will be recognized as an income tax benefit to be reported in the statement of operations. At December 31, 1995, the Company had total tax net operating losses of approximately $3,684,177, that can be carried forward to reduce federal income taxes. If not utilized, the tax loss carryforwards expire beginning in 2009. Under the rules of the Tax Reform Act of 1986, the Company has undergone a greater than 50Epercent change of ownership. Consequently, a certain amount of the Company's net operating loss carryforward 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-16 (10) Commitments and Contingencies The Company is party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that such matters will not have a material impact on the Company's financial position or results of operations. As a result of the acquisition of certain product rights and related patents the Company is required to pay a specified royalty on future sales of products related to these rights and patents. (11) Related Party Transactions Related party receivables at December 31, 1995 represent advances to certain related parties. During 1995 the Company paid to an entity, owned in part by a shareholder of the Company, $231,475 as reimbursement for expenses it expended on behalf of the Company and as consulting fees. Amounts due to stockholders in 1994 consisted of unpaid consulting expenses of $154,500 and a $40,000 note payable. The note payable was replaced subsequent to year-end with a line of credit from a commercial bank in the amount of $100,000 due November 1995 bearing interest at prime plus two percent. Long-term amounts due to a stockholder related to the acquisition of purchased technology, and are non-interest bearing. These amounts were repaid in 1995, and as of December 31, 1995 there were no remaining amounts due. (12) Business and Credit Concentrations During 1995, the CompanyOs revenues were solely from the sale of the sharps container of which $418,509 represented sales to a single distributor. At December 31, 1995, the Company had $348,266 of trade accounts receivable due from this customer for which payment was received subsequent to year- end. The Company currently buys all of its sharp containers, the CompanyOs only device in production, from one supplier. Although there are a limited number of manufacturers who could manufacture this device, management believes that other suppliers could provide similar services on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales. Additionally, the Company has a limited direct sales force and no third party agreements to distribute its products which may result in limited sales of the CompanyOs products. (13) Fourth Quarter Results During the fourth quarter, the aggregate effect of year end adjustments, which related to prior quarters, increased the net loss approximately $457,000. (14) Accounting Standards Issued Not Yet Adopted In March of 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of (FASB 121). The Company is required to adopt the provisions of this statement for years beginning after December 15, 1995. This statement requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The impact of FASB 121 is not expected to have a material affect on the Company. In October of 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (FASB 123). The Company is required to adopt the provisions of this statement for years beginning after December 15, 1995. This statement encourages all entities to adopt a fair value based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic-value method of accounting prescribed by APB opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in this statement had been applied. It is currently anticipated that the Company will continue to account for employee stock options or similar equity instruments in accordance with APB 25 and provide the disclosures required by FASB 123. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Specialized Health Products International, Inc. (Registrant) Date: April 23 1996 By /s/ David A. Robinson David A. Robinson President, Chief Executive Officer, Chairman of the Board and Director Pursuant to the requirements of the Securities Act of 1933, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature Title Date /s/ David A. Robinson President, Chief Executive April 23 Officer, Chairman of the Board 1996 David A. Robinson and Director (Principal Executive Officer) /s/ Bradley C. Director and Vice President April 23 Robinson 1996 Bradley C. Robinson /s/ J. Clark Director, Vice President, Chief April 23 Robinson Financial Officer and Secretary 1996 J. Clark Robinson (Principal Financial and Accounting Officer) /s/ Gale H. Director and Vice President April 23 Thorne 1996 Gale H. Thorne /s/ Robert R. Director April 23 Walker 1996 Robert R. Walker EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARCY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE YEAR ENDED ECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1995 DEC-31-1995 4,251,584 0 350,718 0 16,322 4,775,491 820,245 8,196 5,950,728 580,923 0 0 0 171,333 5,198,472 5,950,728 447,844 583,272 294,171 3,502,761 0 0 0 (2,930,878) 0 (2,930,878) 0 0 0 (2,930,878) (.69) (.69)
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