10KSB 1 w10ksb3312001.txt FORM 10-KSB MARCH 31, 2001 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2001 OR _ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-17629 ADM TRONICS UNLIMITED, INC. (Name of Small Business Issuer in its Charter) Delaware 22-1896032 (State or Other Juris- (I.R.S. Employer Identifi- diction of Incorpora- cation Number) tion or Organization) 224-S Pegasus Avenue, Northvale, New Jersey 07647 (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number (201) 767-6040 Securities Registered under Section 12(b) of the Act: NONE Securities Registered under Section 12(g) of the Act: Common Stock, $.0005 par value 1 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 the filing requirements for at least the past 90 days: YES X NO ____ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10 KSB. X State issuer's revenues for its most recent fiscal year $1,944,853 State the aggregate market value of the voting stock held by non- affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days prior to the date of filing: Approximately $3,038,517 as of June 29, 2001 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 47,382,037 shares of Common Stock, $.0005 par value as of June 29, 2001 If the following documents are incorporated by reference, briefly describe them and identify the Part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933: Not Applicable Transitional Small Business Disclosure Format (check one): YES ____ NO X 2 SAFE HARBOR STATEMENT PURSUANT TO SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 Certain statements contained in the responses to Item 1 and Item 6 of this Annual Report such as statements concerning the Company's future capital requirements, the Company's ability to obtain the requisite information for filings with the FDA, the Company's ability to comply with the requirements of the FDA and other authorities and other statements contained herein regarding matters that are not historical facts are forward looking statements; actual results may differ materially from those projected in the forward looking statements, which statements involve risks and uncertainties, including but not limited to, the following: the Company's ability to obtain future financing; the uncertainties relating to the Company's products; and market conditions and other factors relating to the Company's business. Investors are also directed to the other risks discussed herein and in other documents filed by the Company with the Securities and Exchange Commission. Item 1. Description of Business ADM Tronics Unlimited, Inc. (the "Company"), was organized under the laws of the State of Delaware on November 24, 1969. Chemical Products for Industrial Use The Company develops, manufactures and sells chemical products to industrial users. Such products consist primarily of the following: 1. Water-based primers and adhesives; 2. Water-based coatings and resins for the printing and packaging industry; 3. Water-based chemical additives; and 4. Cosmetic, medical and related adhesives and formulations. Water-based primers and adhesives are chemical compounds used to bind different plastic films, metal foils and papers. Examples are the binding of polyethylene to polyester, nylon, vinyl, aluminum, paper and cellophane. The Company's products are similar in function to solvent-based primers that are widely used to bind plastic film, papers and foils. Solvent-based systems have come under criticism since they have been found to be highly pollutant, dangerous to health and generally caustic in nature. Based upon the Company's experience since 1969, including information furnished to the Company by certain of its customers, the Company believes that water-based systems have no known polluting effects and pose no known health hazards. There can, of course, be no assurance that any governmental restrictions will not be imposed on the Company's water-based products or that such products will be accepted as replacements for solvent based products. Coatings and resins for the printing industry are used to impart properties to the printed substrate. The Company's products can be used to coat printed material for glossy or aesthetic appeal 3 to make such material virtually impervious to certain types of grease and to impart other characteristics required or desired for various products and specifications. In 1999, the Company introduced a new coating technology for the paper industry designed for use in the manufacture of recyclable paper packaging. The new resin technology, trademarked Aqualene, consists of a series of environmentally safe, water-based coatings which can replace polyethylene in numerous packaging structures. Polyethylene is used extensively in paper packaging as a water and grease resistant layer and for sealing purposes. Although necessary for paper to be used in most packaging applications, polyethylene is non-recyclable when combined with paper. Therefore, polyethylene-coated paper must either be incinerated or buried in landfills. The Company's Aqualene coating technology has certain properties of polyethylene but breaks down in standard repulping equipment. Accordingly, Aqualene coated paper packages can be recycled into new paper products. The potential uses for Aqualene- coated paper include fast food wraps, folding cartons, pouch packaging, disposable cups and plates, ream wraps, bakery trays and many other applications. The Company has begun supplying trial samples of Aqualene to companies believed to be interested in exploring the possibility of eliminating polyethylene in their operations and producing recyclable paper stock. The Company has received initial trial orders for Aqualene but there can be no assurance that Aqualene will be commercially accepted. Certain of the Company's chemical additives are used to impart properties to inks and other chemical products used in the food packaging and printing industries. These additives are used for their ability to improve the performance of such products. During the Company's fiscal years ended March 31, 2001, 2000 and 1999, sales of chemical based products accounted for approximately 40%, 35% and 45% of operating revenues, respectively. No contract exists with any of the Company's customers which would obligate any customer to continue to purchase products from the Company. During the fiscal year ended March 31, 2001, no customer accounted for more than 10% of the Company's net sales of chemical products. The termination of business relations with any of the Company's significant customers would have a material adverse effect on the Company's business and the financial condition of the Company. The Company purchases the raw materials used in the manufacture of its chemical products from numerous sources. The Company believes that all necessary raw materials for its chemical products are readily available and will continue to be so in the foreseeable future. The Company has never had, nor does it anticipate experiencing, any shortages of such materials. The raw materials consist primarily of water, resins, elastomers and catalysts. 4 The Company generally maintains sufficient quantities of inventories of its chemical products to meet customer demands. When orders are received by the Company for its chemical products, the Company's customers require immediate shipment thereof. Accordingly, in order to satisfy its customers' needs, the Company has maintained an inventory ranging, in dollar amounts, from 15% to 30% of sales of chemical products in the form of either raw materials or finished goods. A majority of the Company's sales are distributed to customers directly from the Company's location. Customers place purchase orders with the Company and products are then shipped via common carrier truck delivery on an "FOB shipping point" basis. A portion of the sales are accomplished through distributors who place purchase orders with the Company for certain quantities of the Company's chemical products which are shipped by common carrier to their respective warehouses. These stocking distributors then ship product to the ultimate customer via common carrier from their inventory of the Company's products. None of the Company's chemical products are protected by patents, although the names of some of such products have been protected by trademarks. The Company does not believe that any such trademarks are material to its business. As of March 31, 2001, the dollar amount of backlog orders for the Company's chemical products believed by the Company to be firm, was not material. During the Company's fiscal years ended March 31, 2001 and 2000, the Company made no material expenditures with respect to company-sponsored research and development activities relating to its chemical business as determined in accordance with generally accepted accounting principles other than a portion of the regular salaries of its executive officers which may be allocated thereto. During such fiscal years the Company did not expend any funds on customer-sponsored research and development activities with respect thereto. Sonotron Technology Dr. Alfonso Di Mino, while employed by the Company, conceived and developed a technique pursuant to which a subject being treated is exposed to a corona discharge beam generated by combining audio and radio frequency waves (the "Sonotron Technology"). The Sonotron Technology is the subject of a United States Patent (the "Di Mino U.S. Patent") granted in 1987 to Dr. Di Mino entitled, "Corona Discharge Thermotherapy Technique." Dr. Di Mino assigned to the Company the Di Mino U.S. Patent without any consideration therefrom. There are no arrangements, understandings or agreements whereby Dr. Di Mino will be provided with any consideration in the future with respect to the Di Mino U.S. Patent. Foreign Patent applications bearing the same title and corresponding to the Di Mino U.S. Patent have been issued as follows: 5 European Patent Office - (United Kingdom, West Germany, France, Sweden, Switzerland, Italy and Holland). Canada, Brazil, Japan. A United States patent in connection with a product which appears to be similar to the Company's Sonotron Device was granted to a third party in early 1994. Patent counsel to the entity intending to utilize such patent has rendered a written opinion to the effect that such product does not infringe a patent held by the Company, and, further that a patent held by the Company would be found invalid by a court. Although, based upon the description of the third party's product in the opinion letter, the Company's patent counsel disagrees with such conclusion and believes that the third party's product infringes three patents held by the Company, there can be no assurance that any patent held by the Company will be determined by a court to be valid or to be infringed by the third party's product. In order for the Company to protect its ability to rely on any patent protection, the Company must identify, contain and prosecute infringement by others. Such efforts generally entail substantial legal and other costs. There can be no assurance that under such circumstances the Company would have the necessary financial resources to fully prosecute any such infringement. The Company has utilized the Sonotron Technology to develop Sonotron Devices which are designed to treat subjects suffering from the pain of inflammatory joint conditions. The Company commissioned the Instrumentation Systems Center of the University of Wisconsin-Madison (the "ISC") to monitor a study of the Sonotron Device which are for human application to evaluate its effect on the knee joint in subjects with osteoarthritis and inflammatory joint conditions. The purpose of the study was to gather data to submit to the United States Food and Drug Administration (the "FDA"). The study was conducted at five regional centers on 98 human subjects during 1987 and 1988. Data were analyzed by an analysis on non-parametric measures to compare the relative responses of the randomly assigned control and treated subjects. ISC, in a report dated July 18, 1988, found that two of the ten data sets showed a high probability that the subjects' assessment of pain one week after administration was reduced in the treated, relative to the untreated, subjects. ISC further found, with respect to two additional data sets, that certain other data suggested a trend of improvement one week after administration in the treated, relative to the untreated, subjects, but with lower probability. None of the 98 subjects in the study reported adverse reactions to the administration of the Sonotron Technology which were deemed significant or long lasting. Similar results have been obtained in subsequent studies. The Company believes that the Sonotron Technology can be utilized to reduce lameness in both thoroughbred and standardbred horses. In this connection, the Company commissioned the School of Veterinary Medicine of the University of Wisconsin-Madison (the "SVM") to gather data which would confirm the effectiveness of the 6 Sonotron Device on horses. In a report dated December 10, 1987, the SVM concluded that the evidence from its experiments indicated that treatment with a Sonotron Device designed for veterinary use had a significant effect in reducing the level of lameness in ponies which had arthritis experimentally induced and as the degree of arthritic changes increased, the reduction in lameness was more dramatic and became statistically more significant. The SVM further found that there is statistical evidence that the therapy had a beneficial effect on the level of joint motion in the arthritic ponies and resulted in reduced joint swelling in ponies with severe arthritis. A significant reduction occurred in the degree of joint changes seen radiographically in the ponies with severe arthritis and in the milder cases of arthritis treated with low doses of the therapy. The SVM further reported that there were significant reductions in the severity of the growth of pathological lesions seen in ponies with mild arthritis which received low doses of therapy and that a trend appears to exist toward seeing reduced severity of lesions in ponies which had a severe degree of arthritis and were treated with a Sonotron Device designed for veterinary use. No differences in the degree of histopathological changes were noted between the treated ponies and the untreated ponies with mild or severe arthritis. The SVM did not arrive at any conclusions with respect to whether treatment with a Sonotron Device designed for veterinary use has a beneficial effect upon chronic degenerative joint disease in a horse and whether such treatment will be effective upon naturally occurring cases of equine degenerative joint disease. The Company has conducted tests utilizing Sonotron Devices designed for veterinary use on several race horses and has obtained results substantially as those of SVM. Significant further testing will be required to determine whether or not the administration of the Sonotron Technology to race horses will support the establishment of a viable market. The Company has granted to each of Sonotron Medical Systems, Inc. ("SMI") and VET Sonotron Systems, Inc. ("VET") a royalty-free, worldwide, exclusive, irrevocable license to the Di Mino U.S. Patent, the foreign patent applications and the Sonotron Technology. The license granted to SMI permits SMI to manufacture, to have manufactured and to sell apparatus utilizing the Sonotron Technology exclusively in connection with human medical applications thereof (the "SMI License"). The SMI License provides that future improvements or discoveries relating to the Sonotron Technology, if any, which are made by Dr. Di Mino or any other officer or employee of the Company or any affiliates thereof, whether or not patentable, and applicable to human medical applications, are to be included in the SMI License. The license granted to VET is substantially identical in its terms to that of the SMI License, except that the use of the Sonotron Technology by VET is limited exclusively to veterinary applications. SMI and VET are majority owned subsidiaries of the Company. The Company acts as a sublicensee of SMI for the purpose of manufacturing Sonotron Devices. The Company has agreed to manufacture Sonotron Devices to be used for human medical 7 applications at the Company's cost plus ten percent. The FDA permits companies to begin to recoup certain expenses by charging others for use of medical machines, provided that the use of such machines does not constitute a commercial distribution thereof. Accordingly, the Company is permitted to maintain a clinic and treatment center utilizing Sonotron Devices, but may not advertise or otherwise promote Sonotron Devices as being safe and effective for their intended use. Since 1989, four clinics have operated at various times, none of which produced any significant revenues. In 1991, SMI appointed a Canadian company as its sole and exclusive distributor in Canada of the Sonotron Devices. Because the Canadian company was unable to obtain approval of the Quebec Association of Physicians and Surgeons in order for Sonotron Devices to be utilized in Quebec for the treatment of pain and decreased function associated with inflammatory diseases prior to a mutually agreed upon date, the Distribution Agreement between SMI and such company terminated. In 1992, SMI granted to Advent Medical Technology, Inc. ("AMT") the exclusive right to manage clinics in certain counties in Florida which, if opened, would utilize Sonotron Devices for human medical purposes. At such time, if any, that the FDA permits marketing of Sonotron Devices, AMT would have the right to purchase any such clinics from SMI and to be the exclusive distributor of Sonotron Devices within the eight counties. At the same time, VET granted to AMT the exclusive right to use, distribute or sublicense the use of Sonotron Devices designed for veterinary use solely for veterinary use in Florida. The response to Item 5 of the Company's Current Report on Form 8-K dated June 9, 1992 is hereby incorporated by reference. The Company does not believe that AMT has sufficient resources to manage any clinics. There can be no assurance that any such clinics which the Company may open will be successful or that the results of the treatment of human subjects with the Sonotron Devices will be favorable or will support the Company's application for clearance to market in the US from the FDA ("FDA Application"). The Company intends to use data obtained from clinics utilizing the Sonotron Device as well as additional data it may obtain from others in the Company's FDA Application, if filed. There can be no assurance that the Company will obtain sufficient data in the foreseeable future, if at all, to file an FDA Application or that any data theretofore or thereafter obtained by the Company will be satisfactory or will be sufficient to support the Company's FDA application. The Company does not intend to make any material changes to the Sonotron Devices nor have any such changes been made since the completion of the research and development. In the event that Sonotron Devices cannot be marketed pursuant to FDA clearance and the data obtained by the Company are not favorable or, for any other reason, the Company's FDA Application is not filed or, if filed, is not approved by the FDA, neither the Company nor SMI will be able to market the Sonotron Devices in the United States to others in connection with human 8 applications, other than for research purposes. Under such circumstances, it is probable that the Sonotron Devices will not be able to be marketed with respect to human applications thereof in many foreign countries. During the Company's fiscal years ended March 31, 2000 and 2001, other than the regular compensation paid by the Company to its executive officers, the Company did not spend any appreciable amounts on testing, application, clinical studies and some company- sponsored research and development activities in connection with the Sonotron Technology and other activities determined in accordance with generally accepted accounting principles. During each of such years no material amounts were spent on customer-sponsored research and development activities relating to the development of new products, services or techniques or the improvement of any of the foregoing. Dr. Di Mino has developed a device which utilizes the Sonotron Technology to non-invasively treat neural-cerebral conditions (the "NCCD Device"). The NCCD Device is a non-invasive electronic therapy device which is designed to emit certain radio and audio waves at prescribed power outputs to a patient's brain and spinal cord. Since 1997, the NCCD Device has been in the prototype stage. Limited initial preliminary tests on human subjects on a non- controlled basis appear to indicate that treatment with the NCCD Device has a beneficial effect on the symptoms related to certain neuro-cerebral disorders. The results ranged from minor improvement in certain limited symptoms to dramatic overall improvements. Based upon such results, subject to obtaining sufficient capital, the Company intends to conduct extensive controlled clinical studies of the NCCD Device. Testing involves applying radio and audio waves to the patients' spinal cords and cerebrum on a weekly basis for several weeks to small groups of patients having cerebral palsy, multiple sclerosis and Parkinson's Disease. In order to commercially exploit the NCCD Device, the Company must successfully conduct significant engineering and design work. Such work includes the design and manufacture of a pre-production model and the production of approximately 40 similar units for use in the proposed clinical studies. If the clinical studies establish the efficacy of the NCCD Device, the Company intends to seek FDA approval of the NCCD Device. The Company also plans to file applications for certain foreign and domestic patents in connection with the NCCD Device. There can be no assurance that any clinical studies of the NCCD Device will yield successful results or that FDA approval will be obtained. The Company believes that the cost of clinical studies and the engineering and design work will be approximately $2,000,000 and the completion of such studies will occur not earlier than December 31, 2002, if at all. Because the company does not presently have sufficient funds to complete such tests and studies, the Company has sought and will continue to seek financing for such purposes. There can be no assurance that the Company will be able to obtain such financing on terms not unfavorable to the Company, if at all. 9 During the fiscal year ended March 31, 2001, although sales of Sonotron Devices were not significant, one customer accounted for approximately 70% of those sales. Because the Company is seeking to increase future sales to that customer, the termination of business relations with that customer could have a material adverse effect on the Company's future business and the financial condition. As of March 31, 2001, the dollar amount of backlog orders for Sonotron Devices was not material. Aurex-3 Dr. Di Mino has developed an electronic device (the "Aurex-3") for the treatment of Tinnitus. Tinnitus is a human medical condition which manifests itself in a constant and annoying ringing in the ears. The Aurex-3 uses a probe that transmits a vibratory and audio signal. In February 1997, Dr. Di Mino filed a patent application for a United States patent with respect to the Tinnitus Device. Dr. Di Mino has advised the Company that any patents issued to him in connection with the Tinnitus Device will be assigned to the Company. Although significant testing of the Aurex-3 has not been conducted, pre-production and production prototypes were built and testing and marketing strategies have been developed. In May 1998, a Premarket Notification ("PMN") was filed by the Company with the FDA. In August 1998, the United States Patent Office issued a patent with respect to the Aurex-3 and the FDA notified the Company that the PMN was accepted. Accordingly, the Company may market the product in the United States for its intended indication, "The treatment and control of tinnitus." From August 1998 to November 1999 the Company finalized manufacturing plans for the Aurex-3. In July 1999 the Company began taking advance orders for Aurex-3 units from distributors and patients and began to deliver the units in November 1999. Sales of the Aurex-3 have not been material. There can be noassurance that the Company will receive significant orders for the Aurex-3 or that the Company will be able to manufacture the Aurex-3 in sufficient quantities. Contract Manufacturing Precision Assembly Corporation, a wholly-owned subsidiary of the Company ("PAC"), is a contract manufacturer of medical and electromedical devices. PAC's operations consist primarily of manufacturing such devices for unaffiliated third parties pursuant to plans and specifications furnished to PAC by such parties. Accordingly, PAC has no proprietary interest in such devices. PAC was acquired by the Company in December of 1997. During the fiscal year ended March 31, 2001, one customer accounted for approximately 85% of PAC's sales, which also represented approximately 39% of the Company's sales. The termination of business relations with such customer would have a material adverse effect on the Company's results of operations and financial condition. Reference is made to Note 10 of Notes to Consolidated Financial Statements. 10 SofPulse Device On May 27, 1998, the Company entered into an Asset Purchase Agreement (the "Agreement") with Electropharmacology, Inc. ("EPI") pursuant to which the Company agreed to purchase and EPI agreed to sell certain assets utilized by EPI in connection with EPI's SofPulse electromagnetic stimulation device marketed under the name MRT-SofPulse or SofPulse for use in treating pain and edema in post-operative soft tissue injuries (the "SofPulse Device"). The SofPulse Device was cleared for commercial marketing in January 1991 by the FDA pursuant to a PMN. The response to Item 5 of the Company's Current Report on Form 8-K dated May 27, 1998 is hereby incorporated by reference. The SofPulse Device broadcasts pulsed electromagnetic signals in the radio frequency range of 27.12 Mhz and is marketed as an adjunct in the palliative treatment of pain and edema associated with various medical conditions that involve soft tissue injury. The SofPulse Device is an easy to operate, non-invasive device that broadcasts signals which can be administered through clothing, casts and dressings. As a result, The SofPulse Device can be conveniently used immediately following trauma or surgery. To date, The SofPulse Device has been used by clinicians on medical conditions such as acute or chronic (non-healing or recalcitrant) skin ulcers, edema and pain resulting from trauma of hand and ankle, pain associated with sprains of the lower back, and pain and edema following reconstructive and plastic surgery. EPI's principal sources of revenue from the SofPulse Device had been rental fees charged to nursing homes and hospitals and sales to certain distributors and cosmetic surgeons. Only limited revenue from sales and rentals of the SofPulse Device have been generated which has achieved only limited market acceptance. As of July 8, 1998, EPI had placed SofPulse Devices under rental agreements at nursing homes. In 1997, EPI sold 79 new and refurbished SofPulse Devices and had varying numbers of SofPulse Devices on rental at different times of the year. The Company's management believes that the SofPulse Device can be marketed to cosmetic surgeons, sports team trainers and physicians, pain clinics, physical rehabilitation centers and distributors or medical equipment rental companies who serve the home care market for the recovery of post-operative ambulatory patients. Expanding market penetration for the SofPulse Device is expected to require increased marketing efforts and cost-effective manufacturing in compliance with the current Good Manufacturing Practice ("CGMP") guidelines for the domestic market and additional regulations (such as ISO-9000 and CE-Mark) for international markets. EPI commenced production and marketing of the current SofPulse Model 912 in October 1993 replacing previous models designated 911 and MRT100. Since receiving the right to commercialize its device, EPI continued to improve certain features related to the reliability, safety and ease of use of its product including (i) design improvements that require less power to generate the intended electromagnetic field; (ii) reduction of weight of the Generator; 11 and (iii) reduction of magnetic interference. EPI received certification from the Canadian Standards Association (CSA) to market the SofPulse Device in Canada, and the Underwriter Laboratories, Inc. certification in the U.S. In May 1997, EPI entered into a strategic alliance agreement with National Patient Care Systems ("NPCS") of New Jersey (the "Strategic Alliance Agreement") whereby NPCS acquired control of EPI's then existing fleet of SofPulse Devices comprising about 540 units and the SofPulse rental business from EPI as well as certain rights to market SofPulse Device in selected clinical indications in the United States. Pursuant to the agreement, NPCS was to make certain monthly payments to EPI, be responsible for sales and marketing expenses relating to SofPulse rental, purchase a certain minimum number of new SofPulse Devices every month from EPI and pay certain royalties based on SofPulse rental revenues generated by NPCS. The Strategic Alliance Agreement was terminated in July 1997 as a consequence of the issuance by the Health Care Financing Administration ("HCFA") of a national policy of non-reimbursement by Medicare for all forms of electrotherapy for wound healing. EPI's rental revenues were materially adversely affected as a consequence of the HCFA policy. HCFA was enjoined from implementing this national policy under a ruling by a U.S. District Court in Massachusetts on November 18, 1997. Although the preliminary injunction reduced the rate of decline in EPI's rental revenue, no significant increase in rental usage of SofPulse by nursing homes has been experienced subsequent thereto. The company believes that such injunction is still in effect. Upon reacquisition of the fleet of SofPulse Devices and all rights granted to NPCS under the agreement, EPI initiated an effort to sell SofPulse Devices, especially refurbished SofPulse Devices that were no longer generating rental revenues, to surgeons and to nursing homes in order to generate revenues without increasing internal sales and marketing expenses. EPI sold 55 such refurbished units at an average price of about $7,000 per unit most of which were sold during the third and the fourth quarters of 1997. The Company intends to market the SofPulse Device to nursing homes and hospitals where substantial numbers of patients may benefit from the SofPulse treatment, to the home health care market where patients may continue the SofPulse treatment after being released from hospitals, and to surgeons in several subspecialties (maxillofacial, aesthetic, emergency and reconstructive) where the SofPulse Device may help in treating edema or pain and help patients to recover. The Company has entered into a distribution agreement with Mediq/PRN for a home rental program for post-operative patients that have undergone a plastic or cosmetic surgery procedure. The agreement requires Mediq to maintain an inventory of SofPulse units, which have been provided by and remain the property of the Company, at certain of its over 100 offices across the country. Mediq is responsible for delivering and picking up the units from patients and invoicing and collecting rental fees. The Company is responsible for providing the units to Mediq and providing technical support and clinical information. The agreement provides that the 12 Company will receive 55% of rental revenues and Mediq will retain 45%. To assist in marketing the home rental program to plastic surgeons, the Company has entered into a marketing agreement with Byron Medical of Arizona. Byron is responsible for promoting the use of the SofPulse to plastic and cosmetic surgeons throughout the United States by direct mail, trade shows and telemarketing. The Company has agreed to pay Byron a commission of 7.5% of rental revenues received from leads generated by Byron. In 2000 the Company entered into an agreement with surgery.com, Inc. pursuant to which surgery.com would promote the use of the Sofpulse to its member physicians who are primarily plastic and cosmetic surgeons. The Company has agreed to pay surgery.com a commission of 7.5% on rental revenues received from leads generated by surgery.com. Needle Eater In May 1999 the Company acquired certain assets related to the Needle-Eater, a patented device used to dispose of used syringes and other medical sharps. The Company acquired the worldwide rights to the patent covering the technology in the Needle-Eater product; an inventory of finished units and parts; the rights to trademarks; and, information needed to assist it in manufacturing the units. The Company paid $14,206 to the previous owner of the Needle-Eater, and issued options to purchase an aggregate of 500,000 shares of the Company's common stock at an exercise price of $.625 per share, all of which have expired. The Company also agreed to pay a consulting fee of $750 per month for 24 months and a royalty of 5% on gross sales of Needle-Eater products for the life of the patent as well as certain other compensation. Reference is made to Note 11 of Notes to Consolidated Financial Statements. Ultra-Violet Blood Irradiation The Company, through a wholly owned subsidiary, has engaged in biotechnology research concentrating its efforts in the development of a medical therapeutic technology to treat viral and bacterial infections in humans and animals. The technology utilizes a process, commonly referred to as UBI or Ultra-Violet Blood Irradiation, wherein a measured sample of blood is intravenously removed from a patient, exposed to a specific ultra-violet ("UV") light source, collected in a container and then returned to the patient, all in a closed system. The procedure is believed to assist in reducing infection by stimulating the patient's own immune system. The precursor to the technology is a process known as the Knott Technique for Blood Irradiation which was developed by Dr. Emmet K. Knott in 1938 ("The Knott Technique"). The Knott Technique was used extensively throughout the United States and in several foreign countries as a treatment for viral and bacterial infections in humans and animals. With the development and widespread use of antibiotic drugs during the late 1950s and early 1960s the Knott Technique fell out of favor. The Company believes that disfavor of the Knott Technique was primarily due to the complexity and time 13 required for intravenous removal of blood from a patient necessary to perform blood irradiation in comparison to the simplicity of oral and injectable administration of antibiotics. Even though practically supplanted by the universal use of antibiotics, the Knott Technique and derivations related thereto continued to be used by some physicians. In recent years, due to the advent of antibiotic resistant drugs and newly identified viral and bacterial infectious agents where no antibiotics exist, there has been a renewed interest in alternative methods of treatment. Accordingly, a revival of interest from physicians and patients in blood irradiation therapy has occurred. The device used in performing the Knott Technique, however, has not been manufactured since 1963 and can not now be manufactured in its original form due to certain restrictions on its electrical design and components. The Company is pursuing the development of a blood irradiation device with state-of-the-art design and components that it believes can perform the necessary functions of the Knott Technique on a safer, more economical and efficient basis. The Company's subsidiary has begun a private offering of its common stock. If the offering is successful, the proceeds will primarily be used to further develop the blood irradiation technology developed by the Company and prepare it for manufacturing and clearance to market in the U.S. and other countries. Depending upon the amount of the proceeds, additional capital may be needed to seek to accomplish those objectives. There can be no assurance that the offering will be successful or that the subsidiary can successfully manufacture the product or receive government approval to market the product anywhere in the world. Through March 31, 2001, the Company spent approximately $313,000 in research and development costs. Other Products The Company has developed several cosmetic and pharmaceutical products. The Company has not realized any significant revenues from such products and there can be no assurance that any such products will account for significant revenues or any profits in the future. Although the Company believes that its proposed products can be successfully marketed for over-the-counter use through one or more entities representing numerous retail pharmacies and otherwise, there can be no assurance that sales of such products will be material or that the Company will be able to derive any profits therefrom. Competition The manufacture, distribution and sale of medical devices and 14 equipment designed to relieve the suffering of pain is highly competitive and substantially all of the Company's competitors possess greater experience, financial resources, operating history and marketing capabilities than does the Company. The Company's chemical and contract manufacturing businesses are highly competitive and substantially all of the Company's competitors possess greater experience, financial resources, operating history and marketing capabilities than does the Company. The Company does not believe that there are one or more dominant competitors in such industry. There can be no assurance that the Company will be able to effectively compete with any or all of its competitors on the basis of price, service or otherwise. Although the company is not aware of any other products presently being marketed in the US that is substantially equivalent to the Sonotron Device, the Company competes with numerous other concerns that market devices that are utilized for the same or similar purposes. Diapulse Corporation of America, Inc. manufactures and markets devices that are substantially equivalent to the SofPulse Device. A number of other manufacturers, both domestic and foreign, and distributors market shortwave diathermy devices that produce deep tissue heat and that may be used for the treatment of certain of the medical conditions in which the SofPulse Device is also indicated. The SofPulse also faces competition from other forms of treatment such as hyperbaric oxygen chambers, thermal therapies and hydrotherapy. Other companies with substantially larger expertise and resources than that available to the Company may develop or market new products that directly compete with the SofPulse. In addition, other forms of treatment that compete with SofPulse treatment may achieve rapid acceptance in the medical community. Several other companies manufacture medical devices based on the principle of electromagnetic field technologies for applications in bone healing and spinal fusion, and may adapt their technologies or products to compete directly with the SofPulse. These companies include Orthologic Corp., Electro-Biology, Inc., a subsidiary of Biomet, Inc., Orthofix, Ltd., and Biomagnetics, Inc. The Company is also aware of other companies that manufacture and market thermal devices in the same target markets as the Company. Certain of these companies have significant product sales and have greater financial, technical, personnel and other resources than the Company. Also, universities and research organizations may actively engage in research and development to develop technologies or products that will compete with the SofPulse. The medical products market is characterized by rapidly changing technology that may result in product obsolescence or short product life cycles. The Company's ability to compete will be dependent on the Company's ability to continually enhance and improve its products and to develop successfully or acquire and 15 market new products. There can be no assurance that the Company will be able to compete successfully, that competitors will not develop technologies or products that render the Company's products obsolete or less marketable or that the Company will be able to enhance successfully its existing products or develop or acquire new products. Furthermore, there can be no assurance that other technologies or products that are functionally similar to those of the Company are not currently under development. The Company is not a significant factor with respect to any of the industries in which it is engaged. Government Regulation In March 1989, in response to a PMN filed by the Company with the FDA, the FDA notified the Company that the then current model of the Sonotron Device, under the FDA's standards, was not substantially equivalent to certain medical devices marketed in interstate commerce prior to May 28, 1976. In March 1991, a further PMN was filed with the FDA on behalf of the Company with respect to the then current model of the Sonotron Device which was subsequently voluntarily withdrawn by the Company. The FDA advised the Company that its determination with respect to the initial PMN was based upon (a) the new intended use of applying superficial heat at non- therapeutic temperatures for the treatment of osteoarthritis, and (b) new types of safety and effectiveness questions that are raised by the new technological characteristics of the Sonotron Devices when compared to certain devices marketed before May 28, 1976. In the event that Sonotron Devices cannot be marketed pursuant to a PMN, before Sonotron Devices can be marketed in the United States, the Company would be required to obtain a Pre-Market Approval ("PMA") before the Sonotron Devices can be marketed in the United States for commercial distribution in connection with human applications. There can be no assurance that any approval can be obtained from the FDA in the foreseeable future, if at all. The process of submitting a satisfactory PMA is significantly more expensive, complex and time consuming than the process of establishing "substantial equivalence" to a device marketed prior to 1976 pursuant to a PMN, and requires extensive research and clinical studies. Randomized, placebo-controlled, double-blind clinical studies may have to be performed under a clinical protocol with assurance of adherence to the protocol, informed consent from subjects enrolled in the study, approval of the Institutional Review Board at each of the centers where the study is being conducted, maintenance of required documentation, proper monitoring and recording of all data, and sufficient statistical evaluation to determine if the results of the treatment with the device are statistically significant in improving patient outcome compared to the patients who did not receive the treatment. Upon completion of these tasks, an applicant is required to assemble and submit to the FDA all relevant clinical, animal testing, manufacturing, laboratory specifications, and other information. The submission is reviewed at the FDA, which determines whether or not to accept the 16 application for filing. If accepted for filing, the application is further reviewed by the FDA and subsequently may be reviewed by an FDA scientific advisory panel comprised of physicians, statisticians and other qualified personnel. A public meeting may be held before the advisory panel in which the PMA application is reviewed and discussed. Upon completion of such process, the advisory panel issues a favorable or unfavorable recommendation to the FDA or recommends approval with conditions. The FDA is not bound by the opinion of the advisory panel. The FDA may conduct an inspection to determine whether the Company conforms with CGMP guidelines. If the FDA's evaluation is favorable, the FDA will subsequently publish a letter approving the PMA application for the device for a mutually agreed upon indication of use. Interested parties can file comments on the order and seek further FDA review. The PMA process may take several years and no assurance can be given concerning the ultimate outcome of PMA applications submitted by an applicant. The Company has been registered by the FDA as a Registered Medical Device Establishment. Such registration is renewable annually and although the Company does not believe that the registration will not be renewed annually by the FDA, there can be no assurance of such renewal. Any failure to obtain an annual renewal could be expected to have a material adverse effect on the Company. In January 1991, the FDA advised EPI of its determination to treat the MRT100, the first model of the SofPulse, as a class III device. The FDA retains the right to require the manufacturers of certain class III medical devices to submit a PMA in order to sell such devices or to promote such devices for specific indications. To the Company's knowledge, EPI has not been asked by the FDA to seek PMA for SofPulse; however, there can be no assurance that the Company will not be required to do so and that, if required, the Company will be able to comply with such requirement for SofPulse. In the event the Company proposes to market new medical devices, if developed or acquired, or adapt its current products for a new use, the FDA may require the Company to comply with PMN or PMA requirements to establish independently that a device is safe and effective for its intended use. After regulatory approvals are obtained, a marketed product and its manufacturer are subject to continuing regulatory regulations and review such as CGMP regulations and periodic compliance inspections by the FDA and state agencies. The Company may become subject to pre-approval inspections by the FDA prior to commercial manufacture of future products. The Company is required to register as a medical device manufacturer with the FDA and state agencies. Under CGMP regulations, the Company is subject to certain procedural and documentation requirements with respect to manufacturing and control activities. The Company's suppliers may be subject to periodic inspections by the FDA, as well as by state and foreign regulatory authorities. The Company believes its suppliers and manufacturer are in compliance in all material respects with all applicable local, state and federal regulations. 17 Failure to comply with CGMP regulations, or to satisfy FDA regulations or inspections, could subject the Company to civil remedies, including fines, injunctions, recalls or seizures, as well as potential sanctions, which could have a material adverse effect on the Company. The Company is also subject to various FDA regulations which govern or influence the research, testing, manufacture, safety, labeling, storage, record keeping, advertising and promotion of medical products. Sales of medical products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. There can be no assurance that the Company will be successful in maintaining necessary approvals to market the Sonotron Devices, or obtaining such approval for additional products that may be developed or acquired by the Company, in foreign markets. Third Party Reimbursement In the United States, health care providers, such as hospitals and physicians, that purchase or lease medical devices, generally rely on third-party payors, principally Medicare, Medicaid and private health insurance plans, including health maintenance organizations, to reimburse all or part of the cost of the treatment for which the medical device is being used. Successful commercialization of the Company's products will depend, in part, upon the availability of reimbursement for the cost of the treatment from third party health care payors such as Medicare, Medicaid and private health insurance plans, including health maintenance organizations. Such third party payors have increasingly challenged the price of medical products and services, which has and could continue to have a significant effect on the purchasing patterns of many health care providers. Several proposals have been made by federal and state government officials that may lead to health care reforms, including a government directed national health care system and health care cost-containment measures. The effect of changes in the health care system or method of reimbursement for the SofPulse Device or any other medical device which may be marketed by the Company in the United States cannot be determined by the Company. While third party payors generally make their own decisions regarding which medical procedures and services to cover, Medicaid and other third party payors may apply standards similar to Medicare's in determining whether to provide coverage for a particular procedure or service. The Medicare statute prohibits payment for any medical procedures or services that are not reasonable and necessary for the diagnosis or treatment of illness or injury. The HCFA, an agency within the Department of Health and Human Services that is responsible for administering the Medicare program, has interpreted this provision to prohibit Medicare coverage of procedures that, among other things, are not deemed safe and effective treatments for the conditions for which they are being 18 used, or which are still investigational. In July 1997, HCFA issued a memorandum implementing a national policy of non-reimbursement by Medicare for the use of any form of electrotherapy in wound healing. The SofPulse Device is included broadly in the category of products classified as electrotherapy products and although the SofPulse may not be promoted by the Company for wound healing, a number of clinicians at nursing homes have used it to treat edema and pain surrounding wounds. Although a United States District Court enjoined HCFA in November, 1997, from implementing this national policy and HCFA notified the fiscal intermediaries in February of 1998 not to abide by the July 1997 national policy memorandum, EPI did not realize an appreciable increase in its rental revenues subsequent to these events. Recently, Medicare reimbursement became subject to a prospective payment system that reimburses products that reduce the cost of patient care in specific medical conditions. Such a reimbursement system requires the demonstration that any such product actually reduces cost of patient care for reimbursement by Medicare. There is no assurance that the Company will be able to demonstrate such cost reduction that is expected to result from the use of SofPulse Devices or any other product. The Company is unable to predict what additional legislation or regulations, if any, may be enacted or adopted in the future relating to the reimbursement for SofPulse Devices or other products, including third party coverage and reimbursement, or what effect any such legislation or regulations may have on the Company. Further, significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third-party coverage will be available with respect to any of the Company's products in the future. Failure by physicians, hospitals, nursing homes and other users of the Company's products to obtain sufficient reimbursement for treatments using the Company's products will have a material adverse effect on the Company. Insurance The Company may be exposed to potential product liability claims by patients who use the Company's products. Therefore, the Company maintains a general liability insurance policy, which includes aggregate product liability coverage of $2,000,000. The Company believes that its present insurance coverage is adequate for the types of products currently marketed. There can be no assurance, however, that such insurance will be sufficient to cover potential claims or that the present level of coverage will be available in the future at a reasonable cost. Personnel On June 29, 2001, the Company employed 16 persons, three of which are executive officers of the Company. Three employees were employed by the Company on a part-time basis. 19 Item 2. Properties The Company leases approximately 16,000 square feet of combined office and warehouse space from an unaffiliated third party. PAC leases approximately 8,500 square feet from an unaffiliated third party. The leases expire in June, 2008 and February 2004, respectively. In April, 2001 substantially all of PAC's operations were incorporated into the Company's facility. The facility previously occupied by PAC is being offered for sublease through an independent exclusive commercial real estate broker. Item 3. Legal Proceedings On August 17, 2000, AA Northvale Medical Associates, Inc., a wholly-owned subsidiary of the Company filed a lawsuit in the Superior Court of New Jersey against GSM, Inc., Quantum Medical, Inc., Great Southern Medical and Gregory S. Mack claiming breach of a distribution agreement, seeking return of the subsidiary's medical devices under lease, demanding an accounting and payment of all amounts due to the subsidiary and damages and other matters. The distributor has counterclaimed, alleging breach of the distribution agreement seeking an unspecified amount of damages and other matters. The subsidiary is vigorously prosecuting the action seeking amounts it believes is due to the subsidiary and return of the medical devices. Management believes that all of the allegations of the counterclaims are without merit and can be successfully defended. On May 1, 2001, Charles Solomons, a former employee of Enviro-Pack Development Corporation, a wholly-owned subsidiary of the Company filed a lawsuit in Superior Court of New Jersey against the Company, Enviro-Pack Development Corp. and Thomas Petrie alleging breach of an oral employment contract. Management intends to vigorously defend this action, which they believe is without merit. Further, management intends to file a counterclaim for damages based on the employee's misrepresentations at the time of purchase of assets of a company in which the employee was a controlling employee and shareholder. The Company believes that the ultimate resolution of the foregoing matters will not have a material adverse impact on the Company's financial condition. Other than the foregoing, there are no material pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject or to the knowledge of the Company, any proceedings contemplated by governmental authorities. Reference is made to Note 8 of Notes to Consolidated Financial Statements. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 20 PART II Item 5. Market for Common Equity and Related Stockholder Matters I. (a) Market Information The Company's Common Stock is principally traded in the over-the-counter market. The following table sets forth the approximate range of high and low bid prices for the Company's Common Stock for the Company's fiscal quarters indicated in which such stock was regularly quoted rounded to the nearest cent. The Common Stock is quoted on the OTC Bulletin Board and quotations were obtained therefrom. All quotes reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Quarter Ended High Bid Low Bid June 30, 1999 .54 .40 September 30, 1999 .54 .30 December 31, 1999 .44 .23 March 31, 2000 .70 .30 June 30, 2000 .44 .23 September 30, 2000 .31 .20 December 30, 2000 .25 .09 March 31, 2001 .31 .13 (b) On June 26, 2001, the Company's Common Stock was held by approximately 1,487 holders of record. (c) Dividends The Company has never paid any cash dividends on its Common Stock and has no intention of paying cash dividends in the foreseeable future. The Company intends to retain any earnings it may realize to finance its future growth. II. In April 1999, the Company issued an option for the purchase of 500,000 shares of its Common Stock to SPS Medical Equipment Corporation at $.625 per share as part of the consideration for the acquisition of assets. No principal underwriters were involved. The Company claimed exemption from registration pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933, inasmuch as no public offering was involved. As of June 29, 2001 such option has expired without any having been exercised. 21 Item 6. Management's Discussion and Analysis or Plan of Operation Fiscal 2001 Compared to 2000 Revenues Sales were $1,780,201 in 2001 as compared to $2,698,597 in 2000 representing a decrease of $918,396 or 34%. The decrease was primarily the result of a decrease of over $752,000 in contract manufacturing revenues coupled with a decrease in chemical revenues. Other income of $164,652 in 2001 was $37,788 or 30% higher than other income of $126,864 in 2000. Gross Profit Gross profit of $896,269 in 2001 was $566,553 or 39% lower than the gross profit of $1,462,822 for 2000. Gross profit was 46% of revenues in 2001 as compared to 54% of revenues in 2000. The decrease in gross profit is the result of reduced revenues and the mix of product sales with increased sales of products having lower gross profit margins. Operating Loss Operating loss of $764,140 in 2001 was $192,322 greater than the operating loss of $571,818 in 2000. The increase in operating loss resulted from reduced revenues producing reduced gross profit. Selling, general and administrative expenses were reduced by $374,231 in 2001 as compared to 2000. Fiscal 2000 Compared to 1999 Revenues Sales were $2,698,597 in 2000 as compared to $2,098,997 in 1999 representing an increase of $599,600 or 29%. The increase was the result of revenues from a substantial manufacturing contract during the fiscal year. Other income of $126,864 in 2000 was $86,229 or 212% higher than other income of $40,635 in 1999 primarily due to a settlement received from an arbitration proceeding. Gross Profit Gross profit of $1,462,822 in 2000 was $45,337 or 3% higher than the gross profit of $1,417,485 for 1999. Gross profit was 54% of revenues in 2000 as compared to 68% of revenues in 1999. The decrease in gross profit is related to the product mix of sales with varying gross profit margins. Operating Loss Operating loss of $571,818 in 2000 was $174,259 less than the operating loss of $746,077 in 1999. The reduction in operating loss resulted from an increase in gross profit offset by a decrease in 22 selling, general and administrative expenses primarily from legal costs and expenses associated with an arbitration proceeding and the termination of various consulting agreements. Liquidity and Capital Resources At March 31, 2001 the Company had cash of $113,458 as compared to $322,208 at March 31, 2000. This decrease is the result of cash principally being used in financing activities. Operating Activities Cash used in operating activities of $27,619 was 91% less in 2001 as compared to $303,891 used in 2000. Sales of medical equipment held for sale or rent in 2001 accounted for the improvement in the reduction of cash used in operating activities as contrasted with the purchase of such equipment in fiscal 2000. Investing Activities Cash of $1,890 was provided by investing activities in 2001 due to cash received from repayments of loans by officer offset by purchases of property and equipment. Financing Activities In 2001 $183,021 of cash was used in financing activities. This was due to the repayment of notes payable of $333,021 offset by borrowings on notes payable of $150,000. The Company does not have any material sources of liquidity or unused sources of liquid assets. 23 Item 7. Financial Statements INDEPENDENT AUDITOR'S REPORT Board of Directors and Stockholders ADM Tronics Unlimited, Inc. Northvale, New Jersey We have audited the accompanying consolidated balance sheet of ADM Tronics Unlimited, Inc. and subsidiaries as of March 31, 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year ended March 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The accompanying consolidated statements of operations, stockholders' equity and cash flows of ADM Tronics Unlimited, Inc. and subsidiaries for the year ended March 31, 2000 were audited by other auditors whose report dated June 9, 2000 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 ADM Tronics Unlimited, Inc. and subsidiaries as of March 31, 2001, and the results of their operations and their cash flows for the year ended March 31, 2001, in conformity with generally accepted accounting principles. /s/Eichler, Bergsman & Co., LLP New York, New York June 8, 2001, except for Note 11(b) which is as of June 29,2001 F-1 INDEPENDENT AUDITORS' REPORT ---------------------------------------------- Board of Directors and Stockholders ADM Tronics Unlimited, Inc. Northvale, New Jersey We have audited the consolidated statements of operations, changes in stockholders' equity, and cash flows of ADM Tronics Unlimited, Inc. and subsidiaries for the year ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 results of operations and cash flows of ADM Tronics Unlimited, Inc. and subsidiaries for the year ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/KAUFMAN, ROSSIN & CO. Miami, Florida June 9, 2000 F-2 ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 2001 ASSETS Current assets: Cash and cash equivalents $ 113,458 Accounts receivable - trade, less allowance for doubtful accounts of $89,000 211,134 Inventories: Raw materials and supplies 186,550 Finished goods 43,478 Equipment held for sale or rental 792,244 Other current assets 38,492 Total current assets $1,385,356 Property and equipment, at cost, net accumulated depreciation of $369,447 101,143 Equipment in use and under lease agreements,- at cost net of accumulated depreciation of $391,272 581,782 Loan receivable from officer, bearing interest at 3% per annum, unsecured 58,991 Other assets 163,821 Escrow private placement subscription deposits - contra 210,500 Total assets $2,501,593 Liabilities and stockholders' equity: Current liabilities: Accounts payable - trade $ 186,118 Accrued expenses 102,706 Notes payable 73,229 Total current liabilities $ 362,053 Note payable, long-term portion 85,000 Escrow subscription deposits - contra 210,500 Commitments and contingencies Stockholders equity 1,844,040 Total liabilities and stockholders' equity $2,501,593 See accompanying notes to consolidated financial statements. F-3 ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 2001 2000 Revenues: Sales $1,780,201 $2,698,597 Interest and other income 164,652 126,864 Total revenues $1,944,853 $2,825,461 Costs and expenses: Cost of sales $ 883,932 $1,235,775 Selling, general and administrative 1,660,409 2,034,640 Total costs and expenses $2,544,341 $3,270,415 Loss before income taxes $ (599,488) $ (444,954) Income taxes - - Net loss $ (599,488) $ (444,954) Weghted average number of common shares outstanding 47,382,037 47,382,037 Net loss per share ($.01) ($.01) See accompanying notes to consolidated financial statements. F-4 ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED MARCH, 31, 2001 AND 2000
Preferred Common Shares Shares Capital 5,000,000 150,000,000 in Authorized Authorized excess $.01 Par $.0005 Par Par of Par Accumulated Value Value Value Value Deficit Total Balances-March 31, 1999 - 47,382,037 $23,691 $6,740,718 $(3,898,827) $2,865,582 Common stock options issued for certain tangible and intangible assets - - - 20,000 - 20,000 Common stock options issued for consulting services - - - 1,300 - 1,300 Net loss - - - - (444,954) (444,954) Balances - March 31, 2000 - 47,382,037 $23,691 $6,762,018 $(4,343,781) $2,441,928 Common stock options issued for consulting services - - - 1,600 - 1,600 Net loss - - - - (599,488) (599,488) Balances - March 31, 2001 - 47,382,037 $23,691 $6,763,618 $(4,943,269) $1,844,040 See accompanying notes to consolidated financial statements.
F-5 ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2001 2000 Cash flows from operating activities: Net loss $(599,488) $(444,954) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization $ 252,744 $ 258,534 Provision for losses on accounts receivable - 45,992 Common stock options issued as compensation 1,600 1,300 Changes in operating assets and liabilites: Accounts receivable - trade 48,804 48,046 Inventories 112,517 105,747 Other current assets (2,163) 66,271 Equipment in use and under lease agreements 4,860 (128,801) Equipment held for sale 56,382 (97,463) Other assets (17,502) 108 Accounts payable 49,937 (137,302) Accrued expenses and other 64,690 (21,369) Total adjustments $ 571,869 $ 141,063 Net cash used in operating activities $ (27,619) $(303,891) Cash flows from investing activities: Cash consideration paid for Needle Eater tangible and intangible assets $ - $ (48,820) Patents - (14,577) Purchase of property and equipment (2,310) (5,068) Repayments of loan by officer 4,200 2,000 Net cash provided by used in) investing activities $ 1,890 $ (66,465) Cash flows from financing activities: Borrowings on notes payable $ 150,000 $ 203,356 Payments on loan to a former shareholder of the newly acquired subsidiary - (7,197) Payments on notes payable (333,021) - Net cash (used in) provided by financing activities $(183,021) $ 196,159 Net decrease in cash and cash equivalents $(208,750) $(174,197) Cash and cash equivalents - beginning of year 322,208 496,405 Cash and cash equivalents - end of year 113,458 322,208 See accompanying notes to consolidated financial statements. F-6 ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd) YEARS ENDED MARCH 31, 2001 2000 Supplemental Disclosures: Interest paid $ 29,932 $ 23,868 Income taxes paid $ 4,948 $ - Funds raised from private placement offering and held in escrow $210,500 $ - Supplemental disclosure of non-cash investing and financing activities: Common stock options issued as consideration for consulting services $ 1,600 $ 1,300 Fair value of assets received in connection with Needle Eater purchase $ - $ 68,820 Common stock options issued in connection with Needle Eater purchase $ - $ 20,000 See accompanying notes to consolidated financial statements. F-7 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Consolidation The consolidated financial statements include the accounts of ADM Tronics Unlimited, Inc. and its subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. b) Business Activity The Company is a manufacturer and engineering concern whose principal lines of business are the production and sale of chemical products and manufacturing, selling and leasing of medical equipment and medical devices. The chemical product line is principally comprised of water-based chemical products used in the food packaging and converting industries. These products are sold to customers located in the United States, Australia and Europe. Medical equipment is manufactured in accordance with customer specification on a contract basis. The medical device product line consists principally of proprietary devices used in the treatment of joint pain, postoperative edema and tinnitus. These products are sold or leased to customers located in the United States and Asia. For the years ended March 31, 2001 and 2000, the chemical product line accounted for approximately 43% and 35% of sales and the medical device product line accounted for 57% and 65% respectively. c) Cash and Cash Equivalents The Company considers all highly-liquid investments with a remaining maturity of three months or less at the time of purchase and excess operating funds invested in cash management and money market accounts to be cash. The money market account (approximately $89,000 at March 31, 2001) is not insured by the FDIC. However, it is insured by the Securities Investor Protection Corporation (SIPC). d) Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. F-8 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) e) Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 10 years. Leasehold improvements are amortized over the lease term or useful lives, whichever is shorter. Expenditures for major betterments and additions are charged to the asset accounts while replacements, maintenance and repairs, which do not improve or extend the lives of their respective assets, are charged to expense currently. f) Sonotron Devices Sonotron Devices ("Devices") are held for sale or lease and are included in the consolidated balance sheet under "Equipment held for sale" and "Equipment in use and under lease agreements" on a specific identification basis. Unless and until clearance to market is obtained from the United States Food and Drug Administration (FDA), the Devices cannot be marketed in the United States for human applications, other than for research purposes, and may not be marketable in certain foreign countries. Included within equipment in use and under lease agreements are Devices used internally and Devices loaned out for marketing and testing. Devices in use and under lease agreements are depreciated over seven years commencing at the date placed in service. Revenues from leasing activities have not been significant. g) Sofpulse Units In connection with a business acquisition in May 1998, the Company acquired all rights to an FDA approved device (Sofpulse Unit or "Unit") and 418 Sofpulse Units. These Units (404 units at March 31, 2001) are held for sale or lease domestically and are included in the consolidated balance sheet under "Equipment held for sale" and "Equipment in use and under lease agreements," on a specific identification basis. Included in equipment in use and under lease agreements are SofPulse Units leased to third parties, Units used internally and Units loaned out for marketing and testing. These Units are F-9 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) depreciated over seven years commencing on the date placed in service. Revenues from leasing activities were approximately $140,000 and $280,000 for the years ended March 31, 2001 and 2000, respectively. h) Intangible Assets Goodwill, patents and patents assigned are stated at cost, are included in other assets and are amortized on a straight-line basis over the shorter of their legal or useful lives (10 years for goodwill, 15 to 17 years for patents and 2 years for patents assigned. i) Long-lived Assets Long-lived assets, including intangibles, to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. If required, impairment losses on assets to be held and used are recognized based on the excess of the asset's carrying value over its fair value. Long-lived assets to be sold are reported at the lower of carrying amount or fair value reduced by estimated disposal costs. j) Revenue Recognition Sales revenues are recognized when products are shipped and lease revenues are recognized in accordance with individual lease agreements. k) Advertising Advertising (approximately $14,000 and $31,000 in 2001 and 2000, respectively) is expensed as incurred and is included with selling, general and administrative expenses in the consolidated statement of operations. l) Income Taxes Deferred income taxes are provided for the estimated tax effect of temporary differences between financial and taxable income. F-10 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) m) Net Loss Per Share The Company applies Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128). Net loss per share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding during the reported periods. Diluted Net loss per share has not been presented for 2001 and 2000 as its results would be anti- dilutive. n) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts 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 reported period. Actual results could differ from those estimates. o) Fair Value of Financial Instruments The carrying values of cash, cash equivalents, accrued expenses and noted payable approximate their fair values due to the short maturity of these instruments. The fair value of the officer loan receivable is determined by calculating the present value of the note by a current market rate of interest as compared to the stated rate of interest. The difference between fair value and carrying value is not deemed to be significant. F-11 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment at March 31, 2001 consist of the following: Machinery and equipment $188,114 Office furniture and fixtures 96,991 Leasehold improvements 131,800 Computer equipment 53,685 $470,590 Less accumulated depreciation and amortization 369,447 $101,143 Depreciation and amortization on property and equipment for the years ended March 31, 2001 and 2000 aggregated $48,876 and $48,975, respectively. NOTE 3 - EQUIPMENT IN USE AND UNDER LEASE AGREEMENTS Equipment in use and under lease agreements at March 31, 2001 consist of the following: Sonotron Units $ 73,205 Sofpulse Units 886,250 Other Units 13,599 $973,054 Less accumulated depreciation $391,272 $581,782 Depreciation of equipment in use and under lease agreements for the years ended March 31, 2001 and 2000 aggregated $136,468 and $142,257, respectively. F-12 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 4 - OTHER ASSETS Other assets at March 31, 2001 consist of the following: Sonotron refinement costs, net of accumulated amortization of $116,276 $ 28,772 Goodwill, net of accumulated amortization of $23,637 47,275 Patents, net of accumulated amortization of $47,753 63,135 Deposits and other assets 24,639 $163,821 Sonotron refinement costs represent the cost incurred in connection with the improvement of the Sonotron devices. These costs are being amortized over five years, the expected benefit period. Amortization expense for the years ended March 31, 2001 and 2000, aggregated $67,400 and $67,302, respectively. NOTE 5 - NOTES PAYABLE Notes payable consist of the following at March 31, 2001: Current Long-Term Portion Portion 10% note payable to officer/stockholder - In February 2001, an officer/stockholder loaned the Company $150,000 at 10% interest repayable in monthly installments of $5,000, which began in March 2001. The proceeds of the note were used to pay the outstanding indebtedness due to a bank of $195,000, which was repaid in full in March 2001 $60,000 $85,000 8% note payable to the former shareholder of a subsidiary; interest and principal payable quarterly; matured January 1, 2000; unsecured; repaid in April 2001 $13,229 - Total $73,229 $85,000 For the years ended March 31, 2001 and 2000 interest expense on total indebtedness amounted to $29,932 and $23,868, respectively. F-13 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 6 - INCOME TAXES The differences between the income taxes and the amount computed by applying the federal statutory income tax rate of 34% to income before taxes are as follows: 2001 2000 Tax benefit at U.S. statutory rates $(204,000) $(151,000) Temporary differences 11,000 23,000 Change in valuation allowance 193,000 17,000 Expiration of capital loss carryforward - 111,000 Income taxes $ - $ - At March 31, 2001, the Company had deferred tax assets of approximately $1,376,000, comprised of $1,334,000 resulting from net operating loss carryforwards and $42,000 from other temporary differences. The deferred tax assets are offset by a valuation allowance in the amount of $1,376,000. Deferred tax assets, net of a valuation allowance, are recorded when management believes it is more likely than not that tax benefits will be realized. The change in the valuation allowance was based upon the consistent applications of management's valuation procedures and circumstances surrounding its future realization. The Company and its subsidiaries file consolidated income tax returns. As of March 31, 2001, the Company had consolidated net operating loss carryforwards of approximately $3,450,000 that will expire during the years 2005 through 2021. NOTE 7 - EMPLOYEE BENEFIT PLAN The Company has a 401(k) Plan covering substantially all employees. Employer matching contributions to the plan are at the discretion of management. Contributions to the plan for the year ended March 31, 2000 totaled $3,246. There were no contributions to the plan for the year ended March 31, 2001. F-14 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 8 - COMMITMENTS AND CONTINGENCIES a) Leases The Company leases its office and manufacturing facilities under non-cancelable operating leases. The approximate future minimum annual rental under these leases at March 31, 2001 are as follows: March 31, 2002 $134,000 March 31, 2003 136,000 March 31, 2004 134,000 March 31, 2005 85,000 March 31, 2006 85,000 Thereafter thru March 31, 2009 192,000 $766,000 Rent expense for all activities for the years ended March 31, 2001 and 2000 was approximately $157,000 and $149,000, respectively. b) Warranties Sonotron devices are sold under agreements providing for the repair or replacement of any devices in need of repair, at the Company's cost, for up to one year from the date of delivery, unless such need was caused by misuse or abuse of the device. At March 31, 2001, no amount has been accrued for potential warranty costs and such costs are expected to be nominal. c) Arthronix Settlement Agreement In March 1999, the Company and Arthronix, a former distributor of Sonotron Devices, entered into a settlement agreement providing for the resolution of all outstanding suits, counter suits, claims, arbitration awards and satisfaction of all amounts otherwise due upon the payment by Arthronix of $77,000 to the Company. This amount was received by the Company on June 30, 1999 and is included in interest and other revenue in the consolidated statement of operations for the year ended March 31, 2000. F-15 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 8 - COMMITMENTS AND CONTINGENCIES (Cont'd) d) Legal Action A subsidiary of the Company filed in August 2000 a lawsuit against a distributor of the Company's Sofpulse units claiming. among other matters, breach of the distribution agreement, seeking return of such units under lease, and an accounting of amounts due the subsidiary resulting from the subsidiary's termination of the agreement with the distributor. The distributor has counterclaimed, also alleging breach of the distribution agreement and other matters. The subsidiary is vigorously prosecuting the action seeking to recoup compensation for the rental of the units as well as their return. Management believes that all of the allegations of the counterclaim can be successfully defended. In June 2001, a former employee of a subsidiary filed a lawsuit against the Company, subsidiary and Thomas Petrie alleging breach of an oral employment contract. Management intends to vigorously defend this action, including the filing of a counterclaim for damages based on the employee's misrepresentations at the time of purchase of the assets of a company in which the employee was a shareholder and an employee. Management believes that the ultimate resolution of these matters will not have a material adverse impact on the Company's financial condition. NOTE 9 - STOCK OPTIONS From time to time, the Company grants stock options to directors, officers and outside consultants. Included in the consolidated statement of operations for the years ended March 31, 2001 and 2000 is $1,600 and $1,300, respectively of consulting services which represents the fair value of consideration paid in the form of non-employee stock options at the grant date. A summary of the Company's stock option activity and related information for the years ended March 31, 2001 and 2000, is as follows: F-16 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 9 - STOCK OPTIONS (Cont'd) Year Ended Year Ended March 31, 2001 March 31, 2000 Weighted Weighted Average Average Exercise Exercise Options Price Options Price Outstanding at beginning of year 9,392,819 $0.4152 9,292,819 $0.4373 Granted 100,000 0.1800 500,000 0.6250 Exercised - - - - Expired (500,000) (.4860) (400,000) (.4025) Outstanding at end of year 8,992,819 0.4087 9,392,819 0.4152 Exercisable at end of year 8,992,819 $0.4087 9,392,819 0.4152 The expiration dates and exercise prices of stock options, which were fully vested at March 31, 2001, were as follows: Expiration Number of Exercise Date Options Price June 2, 2001 700,000 $0.375 June 2, 2001 100,000 $0.180 November 1, 2001 3,000,000 $0.625 December 31, 2002 3,000,000 $0.500 February 3, 2003 2,192,819 $0.180 8,992,819 The options with expiration dates of June 2, 2001 were not exercised and have expired and were canceled. F-17 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 9 - STOCK OPTIONS (Cont'd) The weighted average fair value of options outstanding at March 31, 2001 were as follows: Weighted Average Fair Value at Number of Date of Options Grant Exercise price exceeded the market price at grant date 6,100,000 $0.0200 Exercise price equaled the market price at grant date 700,000 $0.0479 Exercise price was less than the market price at grant date 2,192,819 $0.0416 8,992,819 The determination of the fair value of all stock options granted was calculated using the Black-Scholes option - pricing model based on (i) a risk-free interest rate of 5.5%, (ii) an expected option life based on original life of each option, (iii) an expected volatility in the market price of the Company's common stock of 63%, and (iv) no expected dividends on the underlying stock. NOTE 10 - SEGMENT INFORMATION, GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS a) Segment Information The Company adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" effective April 1, 1999. The Company operates in two reportable segments, the production and sale of chemicals and the manufacture and sale or lease of medical products. The reportable segments are strategic business units that offer different products and services. They are managed separately based on differences in customer base, marketing strategies or regulatory environment. F-18 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 10 - SEGMENT INFORMATION, GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont'd) The accounting policies of the segments are the same as those described in Note 1. The Company evaluates performance on profit or loss from operations before income taxes. Information about segment operations follows: Chemical Medical Total Year Ended March 31, 2001 Revenues from external customers $ 697,195 $1,083,006 $1,780,201 Interest revenue 18,632 5,375 24,007 Interest expense 4,392 25,540 29,932 Depreciation and amortization 34,362 218,382 252,744 Segment loss (78,493) (520,995) (599,488) Segment assets 1,108,573 1,393,020 2,501,593 Expenditures for segment assets - 2,310 2,310 Year ended March 31, 2000 Revenues from external customers $ 950,947 $1,747,650 $2,698,597 Interest revenue 21,393 263 21,656 Interest expense - 23,868 23,868 Depreciation and amortization 62,222 196,312 258,534 Segment loss (297,567) (147,387) (444,954) Segment assets 1,192,843 1,764,532 2,957,357 Expenditures for segment assets 5,068 - 5,068 F-19 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 10 - SEGMENT INFORMATION, GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont'd) b) Geographical Information Sales to unaffiliated customers, based on location of customer, is as follows: Year Ended March 31, 2001 2000 Chemical Segment: United States $ 595,268 $ 892,969 England 41,536 - Australia 21,707 24,214 Other foreign countries 38,684 33,764 $ 697,195 $ 950,947 Medical Segment: United States $ 893,849 $1,558,731 Asia 168,877 115,425 Other foreign countries 20,280 73,494 $1,083,006 $1,747,650 c) Major Customers Sales to individual unaffiliated customers in excess of 10% of net sales to unaffiliated customers are shown below. Year Ended March 31, 2001 2000 Medical Segment: Customer A $690,078 $1,164,120 Individual accounts receivable balances at March 31, 2001 in excess of 10% of total accounts receivable are as follows: Year Ended March 31, 2001 2000 Medical Segment: Customer A $36,904 $90,146 Customer B $67,066 - F-20 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 10 - SEGMENT INFORMATION, GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont'd) d) Product Information The approximate percentage of sales to unaffiliated customers, based on products, is as follows: Year Ended March 31, 2001 2000 Chemical Segment: Adhesives and primers 65% 52% Resins and coatings 34% 42% Additives and others 1% 6% Medical Segment: Contract manufacturing 66% 82% Sofpulse units 11% 2% Sonotron devices 14% 8% Other medical devices 9% 8% NOTE 11 - SIGNIFICANT TRANSACTION AND EVENT a) Needle Eater In April 1999, the Company, pursuant to an asset purchase agreement, purchased certain tangible and intangible assets and certain operating rights relating to a device that grinds and disposes of syringes and other medical sharps. In connection therewith, the Company paid $48,826 in cash, granted stock options to purchase 500,000 shares of the Company's Common Stock at an exercise price of $.625 which expired in March 2001, and executed a consulting agreement providing for monthly payments of $750 for twenty-four months. Under this agreement, the Company received fifteen Needle Eater devices, related supplies and assignment of certain Patent rights. The Company intends to manufacture and sell Needle Eater devices nationally and via the internet. Additionally, the asset purchase agreement contains a provision for contingent consideration whereby on March 2001 and each year thereafter until March 2012, the Company must pay the seller the greater of $50,000 or 5% of net sales relating to the product for that year. If however, 5% of sales are less than $50,000, the Company has the option to only pay the 5% of sales amount and return all rights to the product acquired back to the seller. During the years ended March 31, 2001 and 2000, the Company sold approximately 50 and 60 Needle Eater devices resulting in revenues of approximately $56,000 and $64,000, respectively. F-21 ADM TRONICS UNLIMTED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NOTE 11 - SIGNIFICANT TRANSACTION AND EVENT (Cont'd) b) Private Placement During the year ended March 31, 2000, the Company, through its wholly owned subsidiary, Immuno-Therapy Corporation (ITC), continued research and development activities relating to the development of a blood irradiation device intended to be effective in the treatment of certain viral and bacterial infections in humans and animals. Through March 31, 2001, the Company spent approximately $313,000 in research and development expense. ITC intends to fund future research and development costs through a private placement offering which commenced on March 10, 2000. On February 21, 2001, such offering was replaced by another private placement offering in which the Company and ITC are offering to sell 125,000 units at $2.00 per unit (each unit consisting of one share of the Company's Preferred Stock and one share of ITC's common stock) on a "best efforts, all or none basis" and on a "best efforts" basis as to an additional 1,125,000 units. The offering period was to expire on June 30, 2001 which was subject to extension by the Board of Directors. On June 29, 2001, the Board extended the offering period for an additional 60 days. At March 31, 2001, the Company held in escrow $210,500 in subscription funds. The Company is authorized to issue 5,000,000 shares of Preferred Stock, $.01 par value. The Board of Directors shall determine the terms and conditions of such Preferred Stock to be issued. F-22 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 9. Directors and Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act I. (a) Identification of Executive Officers and Directors Name Age Position Dr. Alfonso Di Mino 81 President, Chief Executive Officer and Director Vincent Di Mino 75 Vice President of Production and Director Andre' Di Mino 45 Executive Vice President, Secretary, Treasurer, Chief Operating Officer and Director Dr. Harold Gelb 76 Director Dr. Alfonso Di Mino has been President and a Director of the Company since 1969. Vincent Di Mino has been Vice President of Production since 1969 and a Director of the Company since 1987. Andre' Di Mino has been Executive Vice President and Chief Operating Officer since 1987 and Secretary and Treasurer of the Company since 1978. Mr. Di Mino has been a Director of the Company since 1987. Dr. Harold Gelb has been a practicing dentist for more than 25 years. Dr. Harold Gelb is an expert in the diagnosis and treatment of craniomandibular disorders. He is an author of several texts on the subject of craniomandibular pain and has lectured worldwide on that area of practice. (b) Identify Significant Employees Thomas Petrie, age 56, may be deemed to be a significant employee. Thomas Petrie has been the President of PAC for approximately six years. 24 (c) Family Relationships Dr. Alfonso Di Mino is the father of Andre' Di Mino and the brother of Vincent Di Mino. There are no other family relationships between any of the Company's directors or executive officers. (d) Involvement in Certain Legal Proceedings During the last five years, none of the following events occurred with respect to any executive officer or director of the Company as of the date hereof. (i) Any bankruptcy petition was filed by or against any business of which such person was a general partner or an executive officer at or within two years before the time of such filing; (ii) Any conviction in a criminal proceeding or being subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (iii) Being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and (iv) Being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated. (g) Promoters and Control Persons Not Applicable. II. Section 16(a) Beneficial Ownership Reporting Compliance Based solely upon a review of any Forms 3 and 4 and amendments thereto furnished to the Company under Rule 16a-3(a) under the Exchange Act during its most recent fiscal year and any Forms 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, and any written representations referred to in subparagraph (b)(2)(i) of Item 405 of Regulation S-B, no person who at any time during the fiscal year ended March 31, 2001 was a director, officer, to the knowledge of the Company a beneficial owner of more than 10% of any class of equity securities of the Company registered pursuant to Section 12, failed to file on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years. 25 Item 10. Executive Compensation The following table (the "Summary Table") sets forth the salary, bonus and other annual compensation earned by (i) the Company's chief executive officer and (ii) the Company's four most highly compensated executive officers other than the chief executive officer who served as such on March 31, 2001 and whose total annual salary and bonus exceeded $100,000 (the "Named Officer"): Name and Annual Securities Principal Fiscal Year Compensation Underlying Position Ended March 31 Salary Options Dr. Alfonso 2001 $93,600 -0- Di Mino, President and Chief Executive Officer 2000 $93,600 -0- 1999 $93,600 -0- No individual grants of stock options were made during the fiscal year ended March 31, 2001 to the Named Officer. No options issued by the Company were exercised by the Named Officer during the fiscal year ended March 31, 2001. On that date, there were 715,741 shares of Common Stock underlying unexercised options held by the Named Officer all of which were exercisable and were out-of-the-money. The Company did not reprice any stock option or SAR previously awarded to the Named Officer. During the fiscal years ended March 31, 2001, 2000 and 1999, no other compensation not otherwise referred to herein was paid or awarded by the Company to the Named Officer, the aggregate amount of which compensation, with respect to any such person, exceeded the lesser of $50,000 or 10% of the annual salary and bonus reported in the Summary Table for such person. There are no standard or other arrangements pursuant to which any director of the Company is or was compensated during the Company's last fiscal year for services as a director, for committee participation or special assignments. The Company has no employment contract with any person other than Thomas Petrie. In November 1997, PAC entered into a five year Employment Agreement with Mr. Petrie pursuant to which Mr. Petrie has been employed as PAC's President and Chief Engineer. The Employment Agreement provides for an annual salary of $75,000 and a bonus ranging from 3% to 5% of Pac's net income. The Company does not have any compensatory plan or arrangement, including payments to be received from the Company with respect to any person named in the Summary Table, which plan or arrangement results 26 or will result from the resignation, retirement or any other termination of such person's employment with the Company and its subsidiaries or from a change in control of the Company or a change in such person's responsibilities following a change in control and the amount involved, including all periodic payments or installments, exceeds $100,000. Item 11. Security Ownership of Certain Beneficial Owners and Management (a), (b) The following table sets forth certain information as of June 26, 2001 with respect to any person who is known to the Company to be the beneficial owner of more than 5% of any class of its voting securities and as to each class of the Company's equity securities beneficially owned by its directors and directors and officers as a group: Title Name and Address Amount Approximate of of Beneficial of Percent Class Owner Beneficial of Ownership(1) Class (1) Common Dr. Alfonso Di Mino 3,049,980(2) 9%(2) Stock, 224-S Pegasus Ave. shares $.0005 Northvale, NJ 07647 par value Common Andre' Di Mino 8,249,774(3) 25%(3) Stock, 224-S Pegasus Ave. shares $.0005 Northvale, NJ 07647 par value 1,700,000(4) 5%(4) shares 3,400,000(5) 10%(5) shares Common Vincent Di Mino 2,587,928(6) 8%(6) Stock, 224-S Pegasus Ave. shares $.0005 Northvale, NJ 07647 par value 5,100,000(7) 15%(7) shares Common Burton Friedlander 6,313,900(8) 19%(8) Stock, 104 Field point Road. shares $.0005 Greenwich CT 06830 par value Common Dr. Harold Gelb 500,000(9) 2%(9) Stock, 425 E. 58 Street shares $.0005 New York, NY 10022 par value 27 Common Heiko H. Thieme 7,617,500(12) 23%(12) Stock, 1370 Ave of the Americas $.0005 New York, N.Y. 10019 par value Common Officers and Direc- 19,487,682(13) 58%(13) Stock, tors as a group shares $.0005 (4 persons) par value (1) Unless otherwise noted below, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. For purposes hereof, a person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options or the conversion of convertible securities. Each beneficial owner's percentage ownership is determined by assuming that any such warrants, options or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date hereof, have been exercised. (2) Represents (a) 1,004,239 shares of Common Stock directly owned by Dr. Di Mino, (b) 715,741 shares of Common Stock that may be acquired by Dr. Di Mino upon exercise of options, (c) 1,000,000 shares of Common Stock beneficially owned by the spouse of Dr. Di Mino, in which shares Dr. Di Mino disclaims any beneficial ownership, and (d) 1,330,000 shares of Common Stock, which includes the 1,000,000 shares described in (c) above, subject to an agreement dated July 8, 1987 pursuant to which Dr. Di Mino has the power to vote such shares. (3) Represents (a) 7,672,696 shares of Common Stock directly owned by Mr. Di Mino and (b) 577,078 shares of Common Stock that may be acquired by Mr. Di Mino upon exercise of options. (4) Represents 1,700,000 shares of Common Stock held by the Andre' Di Mino Irrevocable Trust, a Trustee and the beneficiary of which is Andre' Di Mino who may be deemed to be a beneficial owner of the shares held by such Trust. (5) Represents 1,700,000 shares of Common Stock held each by the Maria Elena Di Mino and Maurice Di Mino Irrevocable Trusts, a Trustee of which is Andre' Di Mino who may be deemed to be a beneficial owner of the shares held by such Trusts by reason of his power to vote such shares. (6) Represents (a) 1,287,928 shares of Common Stock directly owned by Mr. Di Mino, (b) 700,000 shares of Common Stock that may be acquired by Mr. Di Mino upon exercise of options, (c) 300,000 shares of Common Stock beneficially owned by the spouse of 28 Vincent Di Mino, and (d) 300,000 shares of Common Stock owned by the child of Mr. Di Mino who resides in his home, in all of which shares set forth in (c) and (d) of this Note Mr. Di Mino disclaims any beneficial ownership. (7) Represents 5,100,000 shares of Common Stock of which 1,700,000 such shares are held by each of the Andre' Di Mino Irrevocable Trust, the Maria Elena Di Mino Irrevocable Trust and the Maurice Di Mino Irrevocable Trust. Vincent Di Mino, a Trustee of each of such Trusts, may be deemed to be a beneficial owner of the shares held by such Trusts by reason of his power to vote such shares. (8) Represents (a) 417,300 shares of Common Stock directly owned by Mr. Friedlander, (b) 3,000,000 shares of Common Stock that may be acquired by Mr. Friedlander upon exercise of a warrant, and (c) 2,896,600 shares of Common Stock owned by Friedlander International Limited. (9) Represents shares of Common Stock that may be acquired by Dr. Gelb upon exercise of options. (10) Represents shares of Common Stock that may be acquired by Mr. Petrie upon exercise of options. (11) Less than 1%. (12) Represents (a) 3,000,000 shares of Common Stock that may be acquired upon exercise of a Warrant, (b) 2,000,000 shares of Common Stock owned by The American Heritage Fund, Inc., (c) 1,617,500 shares of Common Stock Owned by The Global Opportunity Fund Limited, and (d)1,000,000 shares of Common Stock that may be acquired by The Global Opportunity Fund Limited upon exercise of a Warrant. (13) See Notes above. (c) Changes in Control The Company is not aware of any arrangement which may result in a change in control of the Company. Item 12. Certain Relationships and Related Transactions (a) In February 2001, Dr. Alfonso Di Mino loaned the Company $150,000 at 10% interest repayable in monthly installments of $5,000, which began in March 2001. The proceeds of the note were used to pay the outstanding indebtedness due to a bank of $195,000, which was repaid in full in March 2001. From time to time, the Company has loaned money to Andre' Di Mino at an interest rate of 3% per annum. Reference is made to 29 the responses to Items 9 and 11 hereof. The largest aggregate amount of indebtedness, including interest, outstanding at any time since the beginning of the Company's fiscal year ended March 31, 2001 was approximately $87,900 and the approximate amount of principal and interest outstanding as of March 31, 2001 was $85,600. As payment for consulting services, on March 16, 1999 the Company issued a warrant to Heiko H. Thieme. The warrant expires on December 31, 2002 and permits the holder to purchase up to 3,000,000 shares of the Company's Common Stock at a price of $.375 per share until December 31, 2000 and at a price of $.50 per share thereafter. As payment for consulting services, on June 2, 2000 the Company issued to Dr. Harold Gelb an option to purchase 100,000 shares of the Company's Common Stock at $.18 per share. The option expired on June 2, 2001. Other than as otherwise set forth in this Annual Report on From 10-KSB, during the last two years there was no transaction or proposed transaction to which the Company was or is to be a party, in which any of the following persons had or is to have a direct or indirect material interest and the amount involved in the transaction or a series of similar transactions exceeded $60,000: (1) Any director or executive officer of the Company; (2) Any nominee for election as a director; (3) Any security holder named in response to Item 11 hereof; and (4) Any member of the immediate family (including spouse, parents, children, siblings and in-laws) of any person named in paragraphs (1), (2) or (3) of this Item 12(a). (b), (c), (d) Not applicable. Item 13. Exhibits and Reports of Form 8-K (a) Exhibits 3.1 Certificate of Incorporation and amendments thereto filed on August 9, 1976 and May 15, 1978. Exhibit 3(a) to the Company's Registration Statement on Form 10, File No. 0-17629 (the "Form 10"), is hereby incorporated by reference. 3.2 Certificate of Amendment to Certificate of Incorporation filed December 9, 1996. Exhibit 3(a) to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1997 is hereby incorporated by reference. 3.3 By-Laws. Exhibit 3(b) to the Form 10 is hereby incorporated by reference. 4.1 Warrant issued to the Global Opportunity Fund Inc. Exhibit 4.1 to Amendment No. 1 to the Company's Annual Report on Form 10 KSB for the fiscal year ended March 31, 1998 is hereby incorporated by reference. 30 4.2 Warrant issued to Heiko H. Thieme. Exhibit 4.2 to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999 is hereby incorporated by reference. 4.3 Warrant issued to Burton Friedlander. Exhibit 4.3 to the Company's Annual Report on Form 10KSB for the fiscal year ended March 31, 2000 is hereby incorporated by reference. 9.1 Trust Agreements of November 7, 1980 by and between Dr. Alfonso Di Mino et al. Exhibit 9 to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1993 is hereby incorporated by reference. 10.1 Memorandum of Lease by and between the Company and Cresskill Industrial Park III dated as of August 26, 1993. Exhibit 10(a) to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1994 is hereby incorporated by reference. 10.2 Agreement of July 8, 1987 by and between Donna Di Mino, Dr. Alfonso Di Mino, et al. Exhibit 10(q) to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1993 is hereby incorporated by reference. 10.3 Agreement of June 9, 1992 by and between Advent Medical Technology, Inc. and Arthritic Relief Centers, Inc. Exhibit 2 to the Company's Current Report on Form 8-K dated June 9, 1992 is hereby incorporated by reference. 10.4 Agreement of June 9, 1992 by and between Advent Medical Technology, Inc. and Vet Sonotron Systems, Inc. Exhibit 3 to the Company's Current Report on Form 8-K dated June 9, 1992 is hereby incorporated by reference. 10.5 Amendment to Agreement of March 16, 1993 by and between Arthritic Relief Centers, Inc. and Advent Medical Technology, Inc. Exhibit 10(k) to the Company's Annual Report on Form 10- KSB for the fiscal year ended March 31, 1993 is hereby incorporated by reference. 10.6 Voting Agreement of March 16, 1993 by and between Vet Sonotron Systems, Inc. and Advent Medical Technology, Inc. Exhibit 10(l) to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1993 is hereby incorporated by reference. 10.7 Voting Agreement of March 16, 1993 by and between Arthritic Relief Centers, Inc. and Advent Medical Technology, Inc. Exhibit 10(m) to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1993 is hereby incorporated by reference. 10.8 Employment Agreement of November 26, 1997 between Thomas Petrie and Precision Assembly Corp. Exhibit 10.11 to Amendment No. 1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1998 is hereby incorporated by reference. 21.1 Subsidiaries of the Company. * _________________________ * Filed herewith. (b) Reports on Form 8-K Not applicable 31 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADM TRONICS UNLIMITED, INC. By: /s/ Dr. Alfonso Di Mino, President ------------------- Dr. Alfonso Di Mino Dated: July 13, 2001 In accordance with the Exchange Act this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signatures Title Date /s/ Dr. Alfonso Di Mino Chief Executive Officer ------------------- and Director July 13, 2001 Dr. Alfonso Di Mino /s/ Andre' Di Mino Principal Financial ------------------- and Accounting Officer Andre' Di Mino and Director July 13, 2001 /s/ Vincent Di Mino Director July 13, 2001 ------------------- Vincent Di Mino ------------------- Director Dr. Harold Gelb EXHIBIT 21.1 SUBSIDIARIES Subsidiary Name State of Incorporation Sonotron Medical Systems, Inc. Delaware Vet-Sonotron Systems, Inc. Delaware Pegasus Laboratories, Inc. New Jersey AA Northvale Medical Associates, Inc. New Jersey Arthritic Relief Centers, Inc. Nevada ADM Medical Ventures, Inc. Nevada Enviro-Pack Development Corporation New Jersey Precision Assembly Corporation New Jersey Immuno-Therapy Corporation New Jersey (A subsidiary of Precision Assembly Corporation) 32