U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2002
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[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________ to ___________
Commission file number 000-30885
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Retractable Technologies, Inc.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Texas 75-2599762
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
511 Lobo Lane
Little Elm, Texas 75068-0009
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(Address of Principal Executive Offices)
(972) 294-1010
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address, and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ______ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 20,312,600 shares of Common
Stock, no par value, issued and outstanding on August 12, 2002.
Transitional Small Business Disclosure Format (check one): Yes No X
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 11
OR PLAN OF OPERATION
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
June 30, 2002 December 31, 2001
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(unaudited)
ASSETS
Cash and cash equivalents $ 820,234 $ 1,220,244
Accounts receivable, net 3,166,761 1,585,024
Inventories, net 3,226,969 3,218,786
Other current assets 243,149 245,555
------------ ------------
Total current assets 7,457,113 6,269,609
Property, plant, and equipment, net 11,168,622 11,740,464
Intangible assets and deferred charges, net 447,579 530,378
------------ ------------
Total assets $ 19,073,314 $ 18,540,451
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 3,356,915 $ 4,005,816
Current portion of long-term debt 912,556 686,402
Accrued compensation 344,356 399,149
Marketing fees payable 2,241,823 2,429,175
Accrued royalties 92,500 1,019,050
Provision for product recall and recovery 642,618 -
Other accrued liabilities 222,721 259,184
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Total current liabilities 7,813,489 8,798,776
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Long-term debt, net of current maturities 5,371,715 9,579,053
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Stockholders' equity
Preferred Stock $1 par value
Class A 1,061,500 1,101,500
Series I, Class B 259,400 261,900
Series II, Class B 431,000 431,000
Series III, Class B 155,745 158,245
Series IV, Class B 1,066,000 1,066,000
Series V, Class B 1,683,471 -
Additional paid-in capital 46,499,234 37,671,513
Accumulated deficit (45,268,240) (40,527,536)
------------ ------------
Total stockholders' equity 5,888,110 162,622
------------ ------------
Total liabilities and stockholders' equity $ 19,073,314 $ 18,540,451
============ ============
See accompanying notes to the condensed financial statements
3
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Three Months Six Months Six Months
ended ended ended ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales, net $ 4,867,634 $ 4,788,930 $ 8,983,997 $ 8,219,945
Cost of sales 3,856,649 3,149,316 6,530,118 6,001,848
Product recall and recovery 481,637 - 481,637 -
------------- ------------- ------------- -------------
Gross profit 529,348 1,639,614 1,972,242 2,218,097
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing 987,330 1,158,635 1,933,093 2,400,532
Research and development 71,071 179,131 164,572 524,186
General and administrative 885,948 1,175,867 1,999,227 2,188,186
Debt conversion expense 2,319,073 - 2,319,073 -
------------- ------------- ------------- -------------
Total operating expenses 4,263,422 2,513,633 6,415,965 5,112,904
------------- ------------- ------------- -------------
Loss from operations (3,734,074) (874,019) (4,443,723) (2,894,807)
Interest income 1,888 9,060 4,777 37,265
Interest expense (139,219) (119,785) (301,760) (240,056)
------------- ------------- ------------- -------------
Net loss (3,871,405) (984,744) (4,740,706) (3,097,598)
------------- ------------- ------------- -------------
Preferred Stock dividend requirements (498,434) (517,997) (977,163) (1,046,966)
------------- ------------- ------------- -------------
Net loss applicable to common shareholders $ (4,369,839) $ (1,502,741) $ (5,717,869) $ (4,144,564)
============= ============= ============= =============
Net loss per share (basic and diluted) $ (0.22) $ (0.08) $ (0.28) $ (0.21)
============= ============= ============= =============
Weighted average common shares outstanding 20,303,433 19,523,725 20,286,350 19,444,788
============= ============= ============= =============
See accompanying notes to the condensed financial statements
4
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Six Months
ended ended
June 30, 2002 June 30, 2001
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (4,740,706) $ (3,097,598)
Adjustments to reconcile net loss to net cash
provided by (used by) operating activities:
Depreciation and amortization 726,797 513,598
Capitalized interest (12,732) (144,868)
Waiver of vacation pay (100,936) -
Debt conversion expense 2,319,073
Changes in assets and liabilities
(Increase) decrease in inventories (8,183) (1,839,921)
(Increase) decrease in accounts and note receivable (1,581,737) 835,246
(Increase) decrease in other current assets (52,882) (255,027)
Increase (decrease) in accounts payable 1,685,198 889,636
Increase (decrease) in marketing fees payable (187,352) 247,262
Increase (decrease) in other accrued liabilities 389,111 1,239,962
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Net cash used by operating activities (1,564,349) (1,611,710)
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Cash flows from investing activities
Purchase of property, plant, and equipment (57,052) (552,377)
Acquisition of patents, trademarks, licenses and intangibles (2,372) (11,389)
------------- -------------
Net cash used by investing activities (59,424) (563,766)
------------- -------------
Cash flows from financing activities
Repayments of long-term debt and notes payable (301,899) (264,707)
Proceeds from exercise of stock options - 1,500
Stock subscriptions held in escrow - 2,850
Proceeds from sale of preferred stock 1,554,600 -
Offering expense for Series V stock (28,938) -
------------- -------------
Net cash provided (used) by financing activities 1,223,763 (260,357)
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Net (decrease) increase in cash (400,010) (2,435,833)
Cash and cash equivalents at:
Beginning of period 1,220,244 3,727,682
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End of period $ 820,234 $ 1,291,849
============= =============
Supplemental schedule of cash flow information:
Interest paid $ 293,518 $ 144,055
Supplemental schedule of noncash financing activities:
Forgiveness of royalties by an officer $ 1,500,000
Conversion of accounts payable into preferred stock $ 1,500,000
Conversion of long-term debt into preferred stock $ 3,679,284
See accompanying notes to the condensed financial statements
5
RETRACTABLE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS OF THE COMPANY, BASIS OF PRESENTATION, AND RECENT DEVELOPMENTS
Business of the Company
Retractable Technologies, Inc. (the "Company") was incorporated in Texas on May
9, 1994, to design, develop, manufacture, and market safety syringes and other
safety medical products for the healthcare profession. The Company began to
develop its manufacturing operations in 1995. The Company's manufacturing and
administrative facilities are located in Little Elm, Texas. The Company's
primary products are the VanishPoint(R) syringe in 1cc, 3cc, 5cc, and 10cc sizes
and blood collection tube holders. The Company has conducted clinical
evaluations and worked with national distributors to encourage healthcare
facilities to transition from the use of standard syringes to the VanishPoint(R)
syringe. Preliminary shipments, which commenced in February 1997, included
syringes for hospital product evaluations as well as for sale in clinics and
other healthcare settings.
Basis of presentation
The accompanying condensed financial statements are unaudited and, in the
opinion of management, reflect all adjustments that are necessary for a fair
presentation of the financial position and results of operations for the periods
presented. All of such adjustments are of a normal and recurring nature. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the entire year. The condensed financial
statements should be read in conjunction with the financial statement
disclosures contained in the Company's audited financial statements for the year
ended December 31, 2001.
Recent developments
In the second quarter of 2002, the Company entered into a contract with Double
Dove, the leading syringe manufacturer in the People's Republic of China, to
manufacture our syringes for worldwide distribution. Double Dove will supply the
syringes at an average unit cost of $0.085.
As of June 30, 2002, the Company recorded an expense of $481,637 related to a
recall and recovery of certain lots of its blood collection tube holders. The
Company found that, in limited lots, upon testing, some blood collection tube
holders retracted prior to activation. The premature retraction occurred during
use as well as during shipping and handling. The Company has addressed the
premature retraction through the manufacturing and design process.
2. LIQUIDITY
The Company has been successful in raising funds through private equity
financing totaling approximately $50 million over the last six and one-half
years. However, the Company has incurred substantial losses and negative cash
flows from operations in every fiscal period since inception. For the years
ended December 31, 2001, 2000, and 1999, the Company incurred a loss from
operations of approximately $6.7 million, $10.4 million, and $8.2 million,
respectively. For the six months ended June 30, 2002, the Company incurred a
loss from operations of approximately $4.4 million. For the years ended
December 31, 2001, 2000, and 1999, the Company had negative cash flows from
operating activities of approximately $3.7 million, $8.6 million, and $6.8
million, respectively. For the six months ended June 30, 2002, the Company had
negative cash flows from operating activities of $1,564,349. As of June 30,
2002, and December 31, 2001 and 2000, the Company had accumulated deficits of
approximately $45.3 million, $40.5 million, and $33.3 million, respectively.
Management expects to reach a break-even operating point during the fourth
quarter of 2002. The Company has a high concentration of sales with one
significant customer. Assuming continued access to the market, the Company plans
to devote significant resources to expansion of production capacity to meet
current and future expected increases in sales activity. Failure to generate
sufficient revenues or raise additional capital could have a material adverse
effect on the Company's ability to continue as a going concern and to achieve
its intended business objectives. In the event the Company cannot
6
generate sufficient revenues or raise additional capital, management has
committed to undertake actions to preserve liquidity, including, but not limited
to, eliminating research and development expenditures, deferral of royalty
payments to a Company officer, and salary reductions.
The Company obtained a loan agreement on November 12, 2001, whereby the lender
purchased the real estate note from 1st International Bank and provided a
construction loan of $1 million to build a 15,000 square foot warehouse. Upon
completion of the warehouse and assuming no defaults, the two loans would have
been consolidated into a 20-year loan. Furthermore, the same lender provided a
working capital loan of $2.5 million secured by certain equipment. This loan was
a five-year loan. The loans were guaranteed by Thomas J. Shaw and all
indebtedness (approximately $5 million if the $1,000,000 loan had been drawn
down on) would have been convertible into Common Stock of the Company at a rate
of one share per $7.00 of indebtedness.
Effective June 21, 2002 the $2,500,000 working capital loan was converted into
625,000 shares of Series V Convertible Preferred Stock ("Series V Stock") and
$1,179,284 of the real estate note was converted into 294,821 shares of Series V
Stock, leaving a principal balance of zero on the working capital loan and
$250,003 on the real estate note. Additionally, payments on the real estate note
are interest only until maturity in February 2005. The remaining balance of the
real estate note remained convertible into Common Stock under the terms of the
original agreement. The Company also granted to the lender a stock option to
purchase 100,000 shares of Common Stock. The commitment for the construction
loan, which was never drawn on, was cancelled by mutual agreement.
As previously stated, the original loan agreement for these two loans included a
provision to convert the loans into Common Stock of the Company at a rate of
$7.00 per share. The agreement was modified to be convertible into Series V
Stock at $4.00 per share. The remaining balance of the real estate note remained
convertible into Common Stock under the terms of the original agreement. As a
result of the modification and subsequent conversion of the loans to equity, the
Company issued 919,821 shares of Series V Stock. Since the Series V Stock can be
immediately convertible to Common Stock, the additional shares have been valued
at the market price at the time of the conversion and recorded as debt
conversion expense of $1,821,246. The remaining debt conversion expense consists
of $440,000 for stock option expense issued in connection with the conversion
and $57,827 attributable to the write-off of unamortized debt expense. Both the
expense of additional shares of stock issued and the stock option expense were
increases to additional paid-in capital.
Additionally, the Company eliminated $1,500,000 of accounts payable as of June
21, 2002, through the issuance of 375,000 shares of Series V Stock. Subsequent
to June 30, 2002, the Company eliminated an additional $50,000 in accounts
payable through the issuance of 12,500 shares of Common Stock.
On January 18, 2002, Thomas J. Shaw and his wife, Suzanne M. August, forgave
$1,000,000 of the royalties payable under a licensing agreement. It was recorded
in the first quarter of 2002 as a capital contribution. On June 21, 2002, Thomas
J. Shaw and his wife, Suzanne M. August, forgave an additional $500,000 of the
royalties payable under the licensing agreement. It was recorded in the second
quarter of 2002 as a capital contribution.
Subsequent to June 30, 2002, the Company raised $431,000 in equity capital.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ significantly from those estimates.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include
unrestricted cash and investments with original maturities of three months or
less.
7
Inventories
Inventories are valued at the lower of cost or market, with cost being
determined using a standard cost method, which approximates average cost.
Provision is made for any excess or obsolete inventories.
Property, plant, and equipment
Property, plant, and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to operations as incurred. Cost includes major
expenditures for improvements and replacements which extend useful lives or
increase capacity and interest cost associated with significant capital
additions. For the six months ended June 30, 2002 and 2001, the Company
capitalized interest of $12,732 and $144,868, respectively. Gains or losses from
property disposals are included in income.
Depreciation and amortization are calculated using the straight-line method over
the following useful lives:
Production equipment 3 to 13 years
Office furniture and equipment 3 to 10 years
Building 39 years
Building improvements 15 years
Automobiles 7 years
Long-lived assets
When events or changes in circumstances indicate that the carrying amount of
long-lived assets may not be recoverable, the Company will review the net
realizable value of the long-lived assets through an assessment of the estimated
future cash flows related to such assets. In the event that assets are found to
be carried at amounts which are in excess of estimated gross future cash flows,
the assets will be adjusted for impairment to a level commensurate with a
discounted cash flow analysis of the underlying assets.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
Intangible assets and deferred charges
Intangible assets are stated at cost and consist primarily of patents, a license
agreement granting exclusive rights to use patented technology, and trademarks
which are amortized using the straight-line method over 17 years. Other
intangible assets consist of deferred charges for loan origination fees, which
are amortized over the life of the debt.
Financial instruments
The fair market value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The Company
believes that the fair value of financial instruments approximate their recorded
values.
Concentrations of credit risk
The Company's financial instruments exposed to concentrations of credit risk
consist primarily of cash, cash equivalents, and accounts receivable. Cash
balances, which may exceed the federally insured limits, are maintained in
financial institutions; however, management believes the institutions are of
high credit quality. The majority of accounts receivable are due from companies
which are well-established entities. As a consequence, management considers any
exposure from concentrations of credit risks to be limited. The Company has a
high concentration of sales with one significant customer. Sales to this
customer were $4,617,900 and $5,734,850 for the six months ended June 30, 2002
and 2001, respectively.
8
Revenue recognition
Revenue is recognized for sales to distributors when title and risk of ownership
passes to the distributor, generally upon shipment. Revenue is recorded on the
basis of sales price to distributors. Revenues on sales to distributors are
recorded net of contractual pricing allowances. Revenue for shipments directly
to end-users is recognized when title and risk of ownership passes from the
Company. Any product shipped or distributed for evaluation purposes is expensed.
Marketing fees
The Company pays certain distributors marketing fees for services provided by
distributors. These services include participation in promotional activities,
development of educational and promotional materials, representation at trade
shows, clinical demonstrations, inservicing and training, and tracking reports
detailing the placement of the Company's products to end-users. Marketing fees
are accrued at the time of the sale of product to the distributor. These fees
are paid after the distributor provides the Company a tracking report of product
sales to end-users. These costs are included in sales and marketing expense in
the Statements of Operations.
Income taxes
The Company provides for deferred income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires an asset and liability approach for financial
accounting and reporting for income taxes based on the tax effects of
differences between the financial statement and tax bases of assets and
liabilities, based on enacted rates expected to be in effect when such basis
differences reverse in future periods. Deferred tax assets are periodically
reviewed for reliability. Valuation allowances are recorded when realizability
of deferred tax assets is not likely.
Earnings per share
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," which establishes standards for computing and presenting
earnings per share. Basic earnings per share is computed by dividing net
earnings for the period (adjusted for any cumulative preferred dividends for the
period) by the weighted average number of common shares outstanding during the
period. The weighted average number of shares outstanding was 20,303,433 and
19,523,725 for the quarters ended June 30, 2002, and 2001, respectively. The
weighted average number of common shares outstanding for the six months ended
June 30, 2002, and 2001, were 20,286,350 and 19,444,788 respectively. The
Company's potentially dilutive common stock equivalents, including warrants,
options, and convertible debt, are all antidilutive as the Company is in a loss
position. Accordingly, basic loss per share is equal to diluted loss per share
and is presented on the same line for income statement presentation. Cumulative
preferred dividends of $498,434 and $517,997 have been added to net losses for
the quarters ended June 30, 2002, and 2001, respectively, to arrive at net loss
per share. Cumulative preferred dividends for the six months ended June 30,
2002, and 2001, were $977,163 and $1,046,966 respectively.
Research and development costs
Research and development costs are expensed as incurred.
Stock-based compensation
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), which establishes accounting and reporting standards for stock-based
employee compensation plans. As permitted by SFAS 123, the Company has elected
not to adopt the fair value based method of accounting for stock-based employees
compensation and will account for such arrangements under Accounting Principles
Board Opinion No. 25. Accordingly, compensation cost for stock options issued to
directors, officers, and employees is measured as the excess, if any, of the
fair market value of the Company's stock at the date of grant over the amount
the director, officer, or employee must pay to acquire the stock. Employee
expense is recognized ratably from the date of the grant over the vesting period
of the option. The
9
Company accounts for stock options issued to nonemployees in accordance with
SFAS 123. Nonemployees' expense is recognized based upon the shorter of the
contract period or vesting period as applicable.
Recent pronouncements
On July 29, 2001, the Financial Accounting Standards Board ("FASB") issued a
Statement of Financial Accounting Standards No. 141 "Business Combinations"
("FAS 141") and Statement 142 "Goodwill and Other Intangible Assets" ("FAS
142"). FAS 141 primarily addresses the accounting for the cost of an acquired
business. FAS 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. FAS 141 is effective for all business
combinations after June 30, 2001. FAS 142 is effective for fiscal years
beginning after December 15, 2001.
On October 3, 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 supercedes FAS
121 and provides guidance on the accounting for the impairment or disposal of
long-lived assets. FAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("FAS 145"). FAS 145 rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." FAS 145 also rescinds FASB Statement
No. 44, "Accounting for Intangible Assets of Motor Carriers." FAS 145 amends
FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. FAS 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Provisions
of FAS 145 are generally effective for fiscal years beginning after,
transactions occurring after, and financial statements issued after May 15,
2002, as specified in FAS 145.
We have adopted FAS 141, 142, 144, and 145 with no material impact to the
financial statements.
4. INDEBTEDNESS
In February 2002, the Company renewed its note payable of $500,000 to 1st
International for a one-year term.
As of June 21, 2002, the Company entered into an agreement whereby $3,679,284 of
long-term debt was converted into 919,821 shares of Series V Stock and
additional consideration of an option to purchase 100,000 shares of Common Stock
at $1 per share, exercisable immediately.
At June 30, 2002, the Company has classified the $5,000,000 note payable to
Abbott as long-term debt based on the stated maturity of the debt, as well as
the Company's interpretation of certain definitional terms in the Credit
Agreement. Abbott notified the Company on June 12, 2002, of its belief the
Company was in default with certain debt to equity ratios in the Credit
Agreement. On June 26, June 28, and July 1, 2002, Abbott demanded payment of the
note payable. The Company disputes Abbott's interpretation of the language in
the Credit Agreement and disputes Abbott's asserted defaults under the Credit
Agreement. In any event, the Company believes its actions with regard to removal
of long-term debt, conversion of accounts payable to equity, sales of Series V
Class B Convertible Preferred Stock, and forgiveness of royalties by Mr. Shaw
and his wife, have placed the Company in compliance, with Abbott's
interpretation, within the remedy period. Abbott has been notified of these
transactions and their effect on the debt to equity ratio and has since
delivered funds that it was holding in connection with the Credit Agreement. The
Company intends to continue its efforts to work with Abbott to resolve the
dispute over the indebtedness covenant and default provisions and to clarify the
definitions in the Credit Agreement.
There can be no assurance that we will be able to clarify the terms of the
Credit Agreement or that Abbott will refrain from asserting its rights under the
Credit Agreement, any of which would have a material adverse effect on our
results of operations and financial condition.
10
5. STOCKHOLDERS' EQUITY
The Company has authorized a total of 5,000,000 shares of its Class B
Convertible Preferred Stock which have been allocated among Series I, II, III,
IV, and V stock as of July 23, 2002, in the amounts of 259,400; 431,000;
155,745; 1,066,000; and 1,683,471 shares, respectively. Once preferred shares
are converted, they return to the status of authorized and unissued shares of
Class B Convertible Preferred Stock which are eligible for issuance under any
series. However, at no time may the Company have more than 5,000,000 total
shares of Class B Convertible Preferred Stock outstanding. As of July 23, 2002,
the Company had issued 1,683,471 shares of Series V Class B Convertible
Preferred Stock ("Series V Stock").
Series V Stock ranks senior to the Company's Common Stock with respect to
dividends and upon liquidation, dissolution, or winding up, but secondary to the
Company's Class A Convertible Preferred Stock; and Series I through IV, Class B
Convertible Preferred Stock. Holders of Series V Class B Stock will be entitled
to receive a cumulative annual dividend of $.32 per share, payable quarterly, if
declared by the board of directors. Holders of Series V Stock generally have no
voting rights.
Series V Stock is redeemable after two years from the date of issuance at the
option of the Company at a price of $4.40 per share plus all accrued and unpaid
dividends. Each share of Series V Stock may, at the option of the stockholder
any time subsequent to issuance be converted into Common Stock at a rate of one
share of Common Stock for each share of Series V Stock. In the event of
voluntary or involuntary liquidation, dissolution or winding up of the Company,
holders of Series V Stock then outstanding are entitled to receive liquidating
distributions of $4.40 per share, plus accrued and unpaid dividends.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENT WARNING
Certain statements included by reference in this Form 10-QSB containing the
words "believes," "anticipates," "intends," "expects," and similar such words
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act. Any forward-looking statements involve known
and unknown risks, uncertainties, and other factors that may cause actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the impact
of dramatic increases in demand, our ability to quickly increase our capacity in
the event of a dramatic increase in demand, our ability to access the market,
our ability to continue to finance research and development as well as
operations and expansion of production through equity and debt financing, as
well as sales, and the increased interest of larger market players in providing
safety needle devices. Given these uncertainties, undue reliance should not be
placed on forward-looking statements.
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. Our
actual future results could differ materially from our historical results of
operations and those discussed in the forward-looking statements. Variances have
been rounded for ease of reading. All period references are to the periods ended
June 30, 2002, or June 30, 2001.
Comparison of Three Months Ended
June 30, 2002, and June 30, 2001
Net sales were $4,867,634 and $4,788,930 for the three months ended June
30, 2002 and 2001, respectively. The increase of $78,704, was due to an increase
in sales of 1cc and 3cc syringes of $497,000 or 12.7 percent offset by a
decrease in sales of 5cc and 10cc syringes of $377,000 or 51.9 percent, and a
decrease in sales of the blood collection tube holders of $41,000 or 25.3
percent. Sales to Abbott as a percentage of units sold declined
11
from 54.5 percent to 45.95 percent of total units sold. Sales to
Abbott decreased about 15.3 percent whereas sales to other distributors
increased 28.1 percent. No other distributor accounted for more than 10 percent
of units sold.
Cost of sales increased from $3,149,316 in 2001 to $3,856,649 in 2002, an
increase of $707,333 or 22.5 percent. Material costs increased $666,000,
somewhat offset by a decrease in direct labor of $153,000 due to improved
operating efficiencies. Depreciation increased $50,000 due to the 1cc assembly
equipment. Royalty expense increased $16,000 due to increased gross revenues.
Cost saving measures such as reduction of overtime, production bonuses, and
consulting, as well as reduced repairs and maintenance expense, accounted for
the remaining improvements in costs.
As of June 30, 2002, the Company recorded an expense of $481,637 related to
a recall and recovery of certain lots of its blood collection tube holders. The
Company found that, in limited lots, upon testing, some blood collection tube
holders retracted prior to activiation. The premature retraction occurred during
use as well as during shipping and handling. The Company has addressed the
premature retraction through the manufacturing and design process.
Gross margins decreased from $1,639,614 in 2001 to $529,348 in 2002, a
decrease of $1,110,266. Gross margin as a percentage of net sales were 32.4
percent and 10.8 percent for the three months ended June 30, 2001 and 2002,
respectively.
Research and development costs decreased from $179,131 in 2001 to $71,071
in 2002, a reduction of $108,060. The reduction is principally due to a decrease
in labor costs of $28,000 attributable to unfilled vacancies and transfer of
some functions to manufacturing. Additional reductions include $8,000 in
experimental parts expense related to the 1cc syringe and consulting costs of
$71,000.
Sales and marketing expense decreased from $1,158,635 in 2001 to $987,330
in 2002, a decrease of $171,305 or 14.8 percent. $62,000 of the decrease is
principally due to marketing fees attributable to Abbott due to lower sales
volumes to Abbott. Travel and entertainment declined $45,000. Trade show
expenses decreased $23,000 and freight was down $13,000.
General and administrative costs decreased from $1,175,867 in 2001 to
$885,948 in 2002, a decrease of $289,919 or 24.7 percent. Decreases in labor
costs of $92,000, accounting fees of $32,000, gain of $40,000 on the sale of
equipment, and legal expenses of $158,670 account for most of the decrease.
Debt conversion expense consists of $1,821,246 for Series V Stock issued in
excess of the original conversion term of the real estate note and working
capital loan, $440,000 for stock options issued in connection with the
conversion, and $57,827 of unamortized debt expenses. See Note 2, Liquidity, for
a more detailed discussion.
Net interest expense increased $26,606 principally due to higher loan
balances.
Preferred stock dividend requirements were $498,434 for 2002 compared to
$517,997 in 2001, a decrease of $19,563. The decrease is due to reduction in the
outstanding preferred stock as a result of conversion to common stock.
Net loss per share increased from $0.08 per share in 2001 to $0.22 per
share in 2002, due principally to the $0.11 per share of debt conversion expense
and $0.02 per share of product recall and recovery expense.
Comparison of Six Months Ended
June 30, 2002, and June 30, 2001
Net sales were $8,983,997 and $8,219,945 for the six months ended June 30,
2002, and 2001, respectively. The increase of $764,052 was due to an increase in
sales of 1cc and 3cc syringes of $2,084,000 or 33.9 percent offset by a decrease
in sales of 5cc and 10cc syringes of $688,775 or 61.1 percent, and a decrease in
sales of the blood collection tube holders of $631,000 or 66.2 percent. Sales to
Abbott as a percentage of units sold declined from 63.1 percent to 48.4 percent
of total units sold. Sales to Abbott decreased about 19.5 percent whereas sales
to other distributors increased 75.7 percent. No other distributor accounted for
more than 10 percent of units sold.
12
Cost of sales increased from $6,001,848 in 2001 to $6,530,118 in 2002, an
increase of $528,270 or 8.8 percent. Material costs increased $333,000 and
direct labor decreased $337,000 due to improved operating efficiencies.
Depreciation increased $157,000 due to the 1cc assembly equipment. Royalty
expense increased $85,000 due to increased gross revenues. Cost saving measures
such as reduction of overtime, production bonuses, and consulting, as well as
reduced repairs and maintenance expense, accounted for the remaining
improvements in costs.
As of June 30, 2002, the Company recorded an expense of $481,637 related to
a recall and recovery of certain lots of its blood collection tube holders. The
Company found that, in limited lots, upon testing, some blood collection tube
holders retracted prior to activation. The premature retraction occurred during
use as well as during shipping and handling. The Company has addressed the
premature retraction through the manufacturing and design process.
Gross margins decreased from $2,218,097 in 2001 to $1,972,242 in 2002, a
decrease of $245,855. Gross margin as a percentage of net sales were 27.0
percent and 22.0 percent for the six months ended June 30, 2001 and 2002,
respectively.
Research and development costs decreased from $524,186 in 2001 to $164,572
in 2002, a reduction of $359,614. The reduction is principally due to a decrease
in labor costs of $170,000 attributable to unfilled vacancies. Additional
reductions include $31,000 in experimental parts expense related to the 1cc
syringe and consulting costs of $128,000.
Sales and marketing expense decreased from $2,400,532 in 2001 to $1,933,093
in 2002, a decrease of $467,439 or 19.5 percent. $238,000 of the decrease is
principally due to marketing fees attributable to Abbott due to lower sales
volumes to Abbott. Travel and entertainment declined $86,000. Trade show
expenses decreased $24,000 and freight was down $17,000.
General and administrative costs decreased from $2,188,186 in 2001 to
$1,999,227 in 2002, a decrease of $188,959 or 8.6 percent. Labor costs decreased
by $153,000, accounting fees increased by $57,000, and legal expenses increased
by $121,000. The Company had a gain of $40,000 on the sale of equipment.
Net interest expense increased $94,192 principally due to higher loan
balances.
Preferred stock dividend requirements were $977,163 for 2002 compared to
$1,046,966 in 2001, a decrease of $69,803. The decrease is due to reduction in
the outstanding preferred stock as a result of conversion to common stock.
Net loss per share increased from $0.21 per share in 2001 to $0.28 per
share in 2002 due principally to $0.11 per share of debt conversion expense and
$0.02 per share of product recall and recovery expense.
Cash flow from operations improved from a negative $1,611,710 for the six
months ended June 30, 2001, to a negative $1,564,349 for the six months ended
June 30, 2002, an improvement of $47,361. The Company's net loss before
depreciation, capitalized interest, waiver of vacation pay and debt conversion
expense was reduced from $2.729 million to $1.809 million for the six months
ended June 30, 2001 and June 30, 2002, respectively. This improvement of
$920,000 was augmented by positive variances of $1.832 million in inventory.
These positive variances were mitigated by increases in accounts receivable of
$1.582 million for the six months ended June 30, 2002 compared to a decrease of
$835,000 for the same period last year. Changes in other current assets and
liabilities accounted for a negative $288,000 variance. Cash used in investing
activities decreased $504,342 due to limited capital expenditures in the current
period. Repayments of debt increased $37,192 over the same period last year.
SIGNIFICANT ACCOUNTING POLICIES
The Company considers the following to be its most significant accounting
policies. Careful consideration and Company review are given to these and all
accounting policies on a routine basis to ensure that they are accurately and
consistently applied.
13
Revenue Recognition
Revenue is recognized for sales to distributors when title and risk of
ownership passes to the distributor, generally upon shipment. Revenue is
recorded on the basis of sales price to distributors. Revenues on sales to
distributors are recorded net of contractual pricing allowances. Revenue for
shipments directly to end-users is recognized when title and risk of ownership
passes from the Company. Any product shipped or distributed for evaluation
purposes is expensed.
Marketing Fees
The Company pays its distributors marketing fees for services provided by
distributors. These services include participation in promotional activities,
development of educational and promotional materials, representation at trade
shows, clinical demonstrations, inservicing and training, and tracking reports
detailing the placement of the Company's products to end-users. Marketing fees
are accrued at the time of the sale of product to the distributor. These fees
are paid after the distributor provides the Company a tracking report of product
sales to end-users. These costs are included in sales and marketing expense in
the Statements of Operations.
Stock-Based Compensation
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which establishes accounting and reporting standards
for stock-based employee compensation plans. As permitted by FAS 123, the
Company has elected not to adopt the fair value based method of accounting for
stock-based employee compensation and will account for such arrangements under
Accounting Principles Board Opinion No. 25. Accordingly, compensation cost for
stock options issued to directors, officers, and employees is measured as the
excess, if any, of the fair market value of the Company's stock at the date of
grant over the amount the director, officer, or employee must pay to acquire the
stock. Employee expense is recognized ratably from the date of grant over the
vesting period of the option. The Company accounts for stock options issued to
nonemployees in accordance with FAS 123. Nonemployee expense is recognized based
upon the shorter of the contract period or vesting period, as applicable.
Recent Pronouncements
On July 29, 2001, the FASB issued a Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("FAS 141") and Statement 142
"Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141 primarily addresses
the accounting for the cost of an acquired business. FAS 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition. FAS 141 is effective for all business combinations after June 30,
2001. FAS 142 is effective for fiscal years beginning after December 15, 2001.
On October 3, 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 supercedes FAS
121 and provides guidance on the accounting for the impairment or disposal of
long-lived assets. FAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("FAS 145"). FAS 145 rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." FAS 145 also rescinds FASB Statement
No. 44, "Accounting for Intangible Assets of Motor Carriers." FAS 145 amends
FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. FAS 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Provisions
of FAS 145 are generally effective for fiscal years beginning after,
transactions occurring after, and financial statements issued after May 15,
2002, as specified in FAS 145.
We have adopted FAS 141, 142, 144 and 145 with no material impact to the
financial statements.
14
OTHER FINANCIAL MATTERS
Our Company does not engage in off balance sheet financing through
structured finance or special purpose entities or otherwise. Our Company
furthermore does not engage in related party or other kinds of transactions on
special terms other than those we have disclosed.
LIQUIDITY AND FUTURE CAPITAL REQUIREMENTS
The Company intends to raise additional equity capital in 2002 of up to
approximately $12 million. The Company has raised $7,164,884 in equity capital
as of August 14, 2002 from the sale of Series V Stock. There can be no
assurances that such efforts to raise equity capital will be successful. In the
event we are not successful in raising capital and we continue to have only
limited market access, the Company would take cost cutting measures to reduce
cash requirements. Such measures could result in reduction of units being
produced, reduction of workforce, reduction of salaries of officers and other
nonhourly employees, and deferral of royalty payments to Thomas J. Shaw. Thomas
J. Shaw and his wife, Suzanne M. August, did forego an additional $500,000 in
royalty payments in the second quarter of 2002.
We anticipate strengthening our capital structure over the next four years
by increasing capital through debt and equity offerings, improving
profitability, and participating in joint ventures or licensing arrangements,
where possible, to accelerate the manufacture and distribution of our products.
We believe we can achieve a break-even quarter by the end of 2002 utilizing our
existing equipment.
Provided we are able to access the markets, we anticipate producing
products at a rate in excess of 43 million syringes and 1 million blood
collection tube holders by the end of 2002. In the event we are unable to access
the market, we will reduce production accordingly
We expect to fund future expansion through a combination of debt, equity
offerings, and internally generated funds. Assuming we are able to access the
markets, capital needs are expected to require an additional $87 million over
the next five years for expansion of production discussed in greater detail in
"Material Commitments for Expenditures" below.
Internal Sources of Liquidity and Anticipated Trends in Sales
-------------------------------------------------------------
The increase in sales is primarily due to legislation mandating the use of
effective safety needles. The legislation requires the use of safe needle
devices to eliminate exposure to needlestick injuries. Employers must implement
written exposure control plans and involve frontline healthcare workers in the
selection of safe needle devices. In addition, the legislation requires
employers to create and maintain sharps injury logs containing detailed
information on the type, brand, and manufacturer of devices associated with such
injuries. The National Institute for Occupational Safety and Health ("NIOSH")
issued a safety alert calling on employers to adopt safer needles to reduce
needlestick injuries. OSHA issued a Compliance Directive, which instructs OSHA
inspectors to cite employers who fail to evaluate and buy safety needle devices.
The Service Employees International Union ("SEIU") has taken a proactive stance
with regard to promoting the use of automated retraction needle devices in
member hospitals and by participating in federal and state legislation protests.
Demand for safety products is increasing in the United States and
internationally. The desire to mandate safety engineered solutions to protect
healthcare workers heralds internationally. The European Union has accepted the
issue of needlestick safety as their top issue for healthcare worker safety.
Organized healthcare workers in the UK, France, Spain, Germany, and Italy are
currently proposing changes to their respective national purchasing agencies to
reflect a mandate for safety engineering controls for needlestick protection.
Additionally, a working document for a European Directive on the issue has been
completed. Our products have been implemented in clinics and hospitals in the
UK, France, and other selected European countries and have been demonstrated
throughout Europe at trade exhibitions and for selected distributors.
Sales increased 67.5 percent from 2000 to 2001. Abbott purchases comprised
52.9 percent and 47.2 percent of our unit sales in 2000 and 2001, respectively.
Sales to Abbott increased 50.7 percent from 2000 to 2001. Abbott distributes and
markets our products into the acute care market. Sales to Abbott as a percentage
of units sold declined from 54.5 percent to 45.9 percent of total units sold for
the three months ended June 30, 2001 and 2002, respectively. Sales to Abbott as
a percentage of units sold declined from 63.1 percent to 48.4 percent of total
units sold for the six months ended June 30, 2001 and 2002, respectively. Unit
sales to Abbott for the six months ended June 30, 2002, and 2001, were 9,528,000
units and 11,869,000 units, respectively. Unit sales to others were
approximately 10,157,000 and 6,934,000 for the six months ended June 30, 2002,
and 2001, respectively. This represents an increase of 46.5%. Sales to Abbott
decreased about 19.5 percent whereas sales to other distributors increased 75.7
percent. Sales to customers other than Abbott were 47.1 percent and 52.8 percent
of sales in 2000 and 2001, respectively. Unit sales to others were approximately
$10,157,000 and $6,934,000 for the six months ended June 30, 2002, and 2001,
respectively. This represents an increase of 46.5%. Sales to others increased
89.4 percent from 2000 to 2001. Sales to others consist primarily of sales into
the alternate care market. While the sales to Abbott are significant, recent
inconsistencies in Abbott's marketing efforts and timing of orders have made it
difficult to plan production requirements in an efficient and cost effective
manner.
15
On January 18, 2002, Thomas J. Shaw and his wife, Suzanne M. August,
forgave $1,000,000 of the royalties payable under a licensing agreement. It has
been recorded in the first quarter of 2002 as a capital contribution. An
additional $500,000 was forgiven and recorded as a capital contribution in the
second quarter of 2002.
External Sources of Liquidity
-----------------------------
We have obtained several loans over the past six years, which have,
together with proceeds from sales of equities, enabled us to pursue development
and production of our products.
In July 1996, we obtained a United States Small Business Administration
note payable to Texas Bank in the principal amount of $1,000,000, which matures
on July 1, 2003. The note is payable monthly at an annual interest rate of prime
plus 1.5 percent adjustable quarterly. The loan is collateralized by
manufacturing equipment and guaranteed by Thomas J. Shaw, our President and
Chief Executive Officer, and Suzanne M. August, his wife. This loan is in good
standing. We have agreed not to make any distribution upon our capital stock,
purchase any of our capital stock, or merge without prior written consent. Such
permission was obtained where necessary.
In April 1997, we obtained a loan from Legacy Bank of Texas (formerly Plano
Bank & Trust) in the principal amount of $710,000 at an interest rate of prime
plus 1 percent (adjustable daily) for reimbursement for the purchase of
equipment, which was scheduled to mature on July 10, 2004. The loan was
collateralized by certain machinery and equipment, a certificate of deposit in
the amount of $200,000, and restrictions on the transfer of certain patents.
This certificate of deposit was applied to the loan balance in 2000. The loan
was (continuously and without limit) guaranteed by Thomas J. Shaw, the President
and Chief Executive Officer. This loan was paid off in the third quarter of
2002.
In February 2000, we obtained two loans totaling $2 million through 1st
International Bank of Plano. The proceeds from these loans were used to pay off
a prior loan and also for working capital purposes. One of the loans,
representing $1,500,000 of the $2 million, is secured by a lien on the land,
building, and building improvements and matures on February 18, 2005. The
interest rate on this loan is prime plus 1 percent. As of November 12, 2001,
this loan was purchased by Katie Petroleum, and all except for approximately
$250,003 of the balance outstanding on this loan was settled in exchange for a
combination of Preferred Stock of the Company and an option for the purchase of
100,000 shares of Common Stock. Monthly payments are interest only until
maturity. This loan further provides in the event dividend arrearages exist, the
maturity date will be extended on a year to year basis. The remaining $500,000
loan from 1st International Bank of Plano is secured by our accounts receivable
and matured on February 18, 2002. This note was renewed for a one-year term in
March 2002. The interest rate on this loan is the prime rate, as defined in The
Wall Street Journal, plus 2 percent. Only interest is paid monthly. See Note 2,
LIQUIDITY. Both loans are guaranteed by a continuing guaranty by Thomas J. Shaw,
the President and Chief Executive Officer. The loans are in good standing.
On May 4, 2000, we entered into a National Marketing and Distribution
Agreement with Abbott for an initial five-year term. Pursuant to the Abbott
agreement, Abbott agreed to act as a nonexclusive marketer and distributor of
our 1cc, 3cc, 5cc, and 10cc syringes, blood collection tube holders, and small
tube adapters to acute care facilities in the United States. As part of the
consideration for the Abbott agreement, Abbott agreed to make periodic loans to
us prior to June 30, 2005, in increments of $1,000,000 in an aggregate amount of
up to $5,000,000 at an interest rate of prime plus 1 percent with any and all
amounts lent to be due and payable on June 30, 2005. Accounts receivable from
Abbott and contracts where Abbott is the account debtor secure any loans made.
Payments due to us from Abbott under the Abbott agreement and certain equipment
already owned by us also serve as collateral for the loans granted by Abbott. We
have borrowed $5 million under the Abbott agreement. Certain disputes have
arisen between us and Abbott in connection with the Credit Agreement, which are
described below. Pursuant to the Abbott agreement, we gave Abbott the right, at
its option, to convert any and all principal amounts owed into Common Stock at a
price of $10 per share. Abbott also holds registration rights with respect to
the shares of Common Stock issued upon conversion of any principal amount of the
loan. As part of the consideration paid to us
16
under the Abbott agreement, Abbott purchased $5 million of Series IV Stock under
the same terms and conditions as all other investors in the Series IV Stock
offering. At December 31, 2001, and June 30, 2002, the Company has classified
the note payable to Abbott as long-term debt based on the stated maturity of the
debt, as well as the Company's interpretation of certain definitional terms in
the Credit Agreement. Abbott notified the Company on June 12, 2002, of its
belief the Company was in default with a certain debt to equity ratio in the
Credit Agreement. On June 26, June 28, and July 1, 2002, Abbott demanded payment
of the note payable. The Company disputes Abbott's interpretation of the
language in the Credit Agreement and disputes Abbott's asserted defaults under
the Credit Agreement. In any event, the Company believes its actions with regard
to removal of long-term debt, conversion of accounts payable to equity, sales of
Series V Convertible Preferred Stock, and forgiveness of royalties by Mr. Shaw
and his wife, have placed the Company in compliance, with Abbott's
interpretation, within the remedy period. Abbott has been notified of these
transactions and their effect on the debt to equity ratio and has since
delivered funds that it was holding in connection with the Credit Agreement. The
Company intends to continue its efforts to work with Abbott to resolve the
dispute over the indebtedness covenant and default provisions and to clarify the
definitions in the Credit Agreement. This loan is otherwise in good standing.
There can be no assurance that we will be able to clarify the terms of the
Credit Agreement or that Abbott will refrain from asserting its rights under the
Credit Agreement, any of which would have a material adverse effect on our
results of operations and financial condition. See Note 4, INDEBTEDNESS.
We obtained $11,338,000 in 2000 from the sale of our Series IV Stock,
including the shares purchased by Abbott.
On November 12, 2001, we entered into a Loan Agreement (the "Loan
Agreement") with Katie Petroleum whereby Katie Petroleum agreed to: (1) purchase
our promissory note dated February 18, 2000, with an original principal amount
of $1,500,000 from 1st International Bank of Plano (the "FIB Note") (the FIB
Note had an unpaid principal balance of $1,429,287); (2) loan us a principal
amount of $2,500,000, to be used by us as working capital in our manufacturing
business (the "Working Capital Loan") (during the first year of the Working
Capital Loan only interest was payable; the principal and interest on the
Working Capital Loan were payable quarterly thereafter and it was scheduled to
mature on November 12, 2006; the Working Capital Loan was secured by certain
manufacturing machinery and equipment relating to the production of the 1cc
syringe); and (3) loan us an additional principal amount of $1,000,000 under a
construction loan for the purpose of building a warehouse facility (the
"Construction Loan"). There were no borrowings under the $1,000,000 Construction
Loan. The loans were also guaranteed by Thomas J. Shaw, the President and Chief
Executive Officer. The Loan Agreement contains a conversion feature which allows
Katie Petroleum, at its option, to exchange all or any part of the indebtedness
covered by the Loan Agreement into our authorized Common Stock. The exchange
ratio is set at one share of our Common Stock for each $7.00 of indebtedness
exchanged by Katie Petroleum. The interest rate on the Working Capital Loan was
the prime rate, as defined in the Wall Street Journal, plus one percent.
-------------------
Effective as of June 21, 2002, the Loan Agreement was modified by the execution
of a First Amendment to Loan Agreement and Loan Documents and a Note
Modification Agreement (the "Amended Loan Documents") as well as a Securities
Purchase Agreement effective June 21, 2002. Under the Amended Loan Documents,
Katie Petroleum agreed to the settlement and cancellation of the entire
$2,500,000 Working Capital Loan and partial settlement and cancellation of
$1,179,284 of the outstanding amount payable on the FIB Note in exchange for the
issuance of 919,821 shares of Series V Stock of the Company and an option for
the purchase of 100,000 shares of Common Stock at a price of $1 per share. The
terms of the FIB Note were modified by the Amended Loan Documents to provide for
monthly payments of accrued interest and a February 18, 2005, maturity date.
This loan further provides in the event dividend arrearages exist, the maturity
date will be extended on a year to year basis. The Amended Loan Documents also
terminate Katie Petroleum's commitment to make the $1,000,000 Construction Loan
(which was never drawn down upon). As a result of the agreement, the remaining
aggregate amount of indebtedness outstanding and convertible by Katie Petroleum
under the original Loan Agreement is $250,003.
Effective as of June 21, 2002, the Company eliminated $1,500,000 of
accounts payable through the sale of 375,000 shares of Series V Stock.
Subsequent to June 30, 2002, the Company eliminated an additional $50,000 in
accounts payable through the issuance of 12,500 shares of Common Stock.
We have raised $7,164,884 in equity capital of August 14, 2002, by the sale
of Series V Stock.
Contractual Obligations and Commercial Commitments
--------------------------------------------------
The following chart summarizes all of our material obligations and
commitments to make future payments under contracts such as debt and lease
agreements as of June 30, 2002:
17
--------------------------------------------------------------------------------------------------------------------
Payments Due by Period
--------------------------------------------------------------------------
January 1,
2003, January 1,
By through 2006, through After
Contractual Obligations December 31, December 31, December 31, December 31,
Total 2002 2005 2007 2007
----------------------------------------- ------------- -------------- -------------- --------------- --------------
Long-Term Debt $5,955,281 $102,789 $5,852,492 $ 0 $0
----------------------------------------- ------------- -------------- -------------- --------------- --------------
Capital Lease Obligations $ 328,990 100,151 222,703 6,136 $0
----------------------------------------- ------------- -------------- -------------- --------------- --------------
Total Contractual Cash Obligations $6,284,271 $202,940 $6,075,195 $6,136 $0
----------------------------------------- ------------- -------------- -------------- --------------- --------------
Material Commitments for Expenditures
-------------------------------------
We obtained $18 million in a combination of debt and equity financing in
2000. We obtained a $5 million Loan Agreement from Katie Petroleum in 2001 which
provided, among other things, $2.5 million in working capital. As of August 14,
2002, we have raised approximately $7,164,884 in equity capital through the sale
of equities. We anticipate no material capital expenditures in 2002. Future
expenditures will depend on our ability to penetrate the market and raise
capital.
Subject to our ability to penetrate the market and raise capital, we
anticipate capital expenditures in the amount of $87 million over the next five
years for the purpose of expanding capacity by adding equipment and additional
space (for 14 assembly lines for syringe production and 5 lines for blood
collection tube holder production), expanding the current building by an
additional 60,000 square feet, constructing a 15,000 square foot warehouse, and
constructing another facility for additional assembly, equipment, and
warehousing needs in order to meet our target production of syringes and blood
collection tube holders. We need this capital to fund equipment and facilities
expansion for additional 1cc, 3cc, and blood collection tube holders, as well as
equipment to manufacture 5cc and 10cc syringes. The equipment will include
machinery for assembly, packaging, and molds. This production target equates to
our obtaining 6 percent of the United States' prior estimated 6.6 billion-unit
syringe annual market and less than 1 percent of the world's prior estimate 24
billion-unit annual syringe market
PLAN OF OPERATION ASSUMING LIMITED ACCESS TO MARKETS
At the present time the Company intends to raise additional equity capital
up to approximately $12 million in 2002. The Company has raised $7,164,884 of
equity capital as of August 14, 2002. This included $1,935,600 in cash,
$3,679,284 in exchange for long-term debt, and $1,550,000 for exchange of
accounts payable. In the event we are not successful in raising capital and we
continue to have only limited market access, the Company would take cost cutting
measures to reduce cash requirements. Such measures could result in reduction of
units being produced, reduction of workforce, and reduction of salaries of
officers and other nonhourly employees and deferral of royalty payments to
Thomas J. Shaw. Thomas J. Shaw and his wife, Suzanne M. August, also forgave
$500,000 in royalties during the second quarter of 2002.
18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 29, 2001, we filed a lawsuit in the United States District Court
for the Eastern District of Texas, Texarkana Division styled Retractable
Technologies, Inc. v. Becton Dickinson & Company, Tyco International (U.S.),
Inc., Tyco Healthcare Group, L.P., Novation, L.L.C., VHA, Inc., Premier, Inc.,
and Premier Purchasing Partners, L.P. Cause No. 501CV036. We allege violations
of state and federal antitrust acts, tortious interference with prospective
business relationships, business disparagement, and common law conspiracy. We
are seeking the following damages: an injunction enjoining each defendant from
continuing the unlawful conduct alleged and from entering into any other
combination, conspiracy, or agreement having similar purposes or effect and for
actual damages, punitive damages, treble damages, costs of suit including
reasonable attorneys' fees, pre-judgment and post-judgment interest at the
maximum possible rate, and such other relief as we may be entitled. The federal
court case is currently scheduled for a January 7, 2003, trial. We are still
assessing the true extent of damages actually incurred by us as a result of the
defendants' monopolistic activities. We are in the process of researching such
damage amounts and cannot state them with certainty at this time.
We are not a party to any other material legal proceeding.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company is obligated, under a loan made by Texas Bank, not to make any
distribution upon our capital stock, purchase any of our capital stock, or merge
without prior written consent. Such permission was obtained where necessary.
On June 21, 2002, the authorized number of shares of Series V Stock of the
Company was increased by resolution of the Board of Directors to not more than
3,097,855 shares. Holders of existing shares of Class A and Class B convertible
preferred shares are not affected by the authorization of this additional series
of Class B stock as all shares of this series are subordinate to the Class A and
Series I through IV Class B convertible preferred stock.
On June 21, 2002, we sold 919,821 shares of Series V Stock and a
non-qualified option for the purchase of 100,000 shares of Common Stock of the
Company at an exercise price of $1 per share to Katie Petroleum in exchange for
the settlement and cancellation of debt in the amount of $3,679,284 pursuant to
Regulation D under the Securities Act of 1933, as amended. The option is
exercisable immediately.
In 2002, we sold 387,500 shares of Series V Stock pursuant to Regulation D
under the Securities Act of 1933, as amended, to accredited investor vendors of
the Company in exchange for the cancellation and settlement of $1,550,000 in
accounts payable amounts owed by the Company at a rate of $4.00 in value of
accounts payable amounts due per share.
As of August 14, 2002, we sold 1,791,221 shares of Series V Class B Stock
at $4.00 per share to 18 accredited investors and 6 nonaccredited investors
pursuant to Regulation D under the Securities Act of 1933, as amended, for an
aggregate amount of $1,935,600 in cash. We did not pay any commissions on these
sales.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Abbott notified the Company on June 12, 2002, of its belief the Company was
in default with a certain debt to equity ratio in the Credit Agreement. On June
26, June 28, and July 1, 2002, Abbott demanded payment of the note payable. The
Company disputes Abbott's interpretation of the language in the Credit Agreement
and disputes Abbott's asserted defaults under the Credit Agreement. In any
event, the Company believes its actions with regard to removal of long-term
debt, conversion of accounts payable to equity, sales of Series V Stock, and
forgiveness of royalties by Mr. Shaw and his wife, have placed the Company in
compliance, with Abbott's interpretation, within the remedy period. Abbott has
been notified of these transactions and their effect on the debt to equity ratio
and has since delivered funds that it was holding in connection with the Credit
Agreement. The Company intends to continue its efforts to work with Abbott to
resolve the dispute over the indebtedness covenant and default provisions and to
clarify the definitions in the Credit Agreement.
There can be no assurance that we will be able to clarify the terms of the
Credit Agreement or that Abbott will refrain from asserting its rights under the
Credit Agreement, any of which would have a material adverse effect on our
results of operations and financial condition.
Series A Convertible Preferred Stock
As of the date of this filing, $339,825 in dividends is in arrears.
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Series I Class B Convertible Preferred Stock
As of the date of this filing, $2,370,318 in dividends is in arrears.
Series II Class B Convertible Preferred Stock
As of the date of this filing, $3,847,003 in dividends is in arrears.
Series III Class B Convertible Preferred Stock
As of the date of this filing, $2,215,718 in dividends is in arrears.
Series IV Class B Convertible Preferred Stock
As of the date of this filing, $2,333,498 in dividends is in arrears.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Description of Document
----------- -----------------------
3.1 Statement of Increase in Authorized Shares of Series V Class B
Convertible Preferred Stock of Retractable Technologies, Inc.
filed June 21, 2002
4.1 Sample Series V Class B Convertible Preferred Stock Certificate
10.1 Royalty Waiver Agreement entered into among Retractable
Technologies, Inc., Thomas J. Shaw, and Suzanne M. August
effective as of June 21, 2002
99 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350
(b) Reports on Form 8-K
On April 4, 2002, we filed a Form 8-K with an item 5 disclosure that we
issued a press release entitled "Retractable Technologies, Inc. Announces
Significant Revenue Increase for 2001."
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On April 11, 2002, we filed a Form 8-K with an item 5 disclosure that we
issued a press release entitled "Retractable Technologies, Inc. Hires
Halliburton Investor Relations to Implement Strategic Financial Communications
Program."
On April 19, 2002, we filed a Form 8-K with an item 5 disclosure that we
issued a press release entitled "Investrend Research Announces Investment
Opinion: Retractable Technologies `Strong Buy,' $11.00 12 Mo Target Issued by
Investrend Analyst Justin Canivet, CFA."
On May 1, 2002, we filed a Form 8-K with an item 5 disclosure that we
issued a press release entitled "Retractable Technologies' CEO Thomas J. Shaw
Applauds Senate Anti-Trust Hearing On Hospital Purchasing Cartels Urges Panel to
`Restore Free Market Competition to the Healthcare Industry'."
On May 10, 2002, we filed a Form 8-K with an item 5 disclosure that we
issued a press release entitled "Retractable Technologies, Inc. Announces Twenty
Percent Revenue Increase for Three Months Ended March 31, 2002."
On May 23, 2002, we filed a Form 8-K with an item 5 disclosure that we
issued a press release entitled "Centers for Disease Control Selects
VanishPoint(R) Safety Needle Devices for Anthrax Vaccine Study."
On May 31, 2002, we filed a Form 8-K with an item 9 disclosure that we
issued a letter to shareholders on May 31, 2002.
On June 25, 2002, we filed a Form 8-K with an item 5 disclosure that we
issued a press release entitled "Retractable Technologies Signs Agreement to
Produce VanishPoint Safety Syringes in China for Global Market."
On June 28, 2002, we filed a Form 8-K with an item 4 disclosure that we
changed our certifying accountant.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATE: August 14, 2002 RETRACTABLE TECHNOLOGIES, INC.
(Registrant)
BY: /s/ DOUGLAS W. COWAN
---------------------------------
DOUGLAS W. COWAN
CHIEF FINANCIAL OFFICER
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